Chapter 14 pt 2

Profitability (ROI) Analysis

Return on investment (ROI) analysis focuses on a project’s financial return.

Return on investment (ROI) analysis focuses on a project’s financial _____.

As with any investment, returns can be measured either in dollar terms or in rate of return (percentage) terms.

As with any investment, returns can be measured either in ____ terms or in rate of ____ (percentage) terms.

Net present value (NPV) measures a project’s time value adjusted dollar return. Internal rate of return (IRR) measures a project’s rate of (percentage) return. Modified IRR (MIRR) also measures percentage return. which 2 measures the percentage return?

which one measures adjusted dollar return?

NPV measures return on investment (ROI) in dollar terms.

NPV measures return on investment (ROI) in ____ terms.

NPV is merely the sum of the present values of the project’s net cash flows.

NPV is merely the sum of the ____ values of the project’s net cash flows.

the discount rate used is called the _______________. Recall that this is also the opportunity cost of capital, which depends on the riskiness of the investment.

The discount rate used is called the project cost of capital. Recall that this is also the ''opportunity cost of capital'', which depends on the riskiness of the investm

NPV is the dollar contribution of the project to the equity value of the business.

NPV is the ---- contribution of the project to the equity value of the business.

NPV is the dollar contribution of the project to the --- value of the business.

A positive NPV signifies that the project will enhance the financial condition of the business. The greater the NPV, the more attractive the project financially.

A positive NPV signifies that the project will enhance the financial condition of the business. The greater the NPV, the more --------- the project financially.

IRR measures ROI in percentage (rate of return) terms. It is the discount rate that forces the PV of the inflows to equal the cost of the project. In other words, it is the discount rate that forces the project’s NPV to equal $0. IRR is the project’s expected rate of return.

IRR measures ROI in percentage (rate of return) terms. It is the discount rate that forces the PV of the inflows to equal the cost of the project. In other words, it is the discount rate that forces the project’s NPV to equal $----. IRR is the project’s expected rate of return.

IRR measures ROI in percentage (rate of return) terms. It is the ------- rate that forces the PV of the inflows to equal the cost of the project. In other words, it is the discount rate that forces the project’s NPV to equal $0. IRR is the project’s expected rate of return.

IRR measures ROI in percentage (rate of return) terms. It is the discount rate that forces the PV of the inflows to equal the cost of the project. In other words, it is the discount rate that forces the project’s NPV to equal $0. IRR is the project’s -------- rate of return.

If a project’s IRR is greater than its cost of capital, then there is an “excess” return that contributes to the equity value of the business. In our example, IRR = 29.7% and the project cost of capital is 10%, so the project is expected to enhance Midtown Clinic’s financial condition.

If a project’s IRR is greater than its cost of capital, then there is an “------” return that contributes to the equity value of the business. In our example, IRR = 29.7% and the project cost of capital is 10%, so the project is expected to enhance Midtown Clinic’s financial condition.

Both NPV and IRR require a reinvestment rate assumption. NPV assumes it is the cost of capital. IRR assumes it is the IRR rate. Of the two, reinvestment at the cost of capital is the better assumption since NPV measures profit in dollars. MIRR forces reinvestment at the cost of capital. ________ Both NPV and IRR require a

Both NPV and IRR require a reinvestment rate assumption. NPV assumes it is the ------------- IRR assumes it is the --------- Of the two, reinvestment at the cost of capital is the better assumption since NPV measures profit in dollars. MIRR forces reinvestment at the cost of capital.

NPV assumes it is the cost of capital. IRR assumes it is the IRR rate. Of the two, reinvestment at the cost of capital is the better assumption since NPV measures profit in dollars.

MIRR is interpreted in the same way as is IRR. In our example, MIRR = 21.4% and the project cost of capital is 10%, so the project is expected to contribute to shareholder wealth (or enhance the financial condition of a NFP business). Note that the value of the MIRR for any project falls in between the project cost of capital and IRR values. _______ MIRR is interpreted in the same way as is ------

MIRR is interpreted in the same way as is IRR. In our example, MIRR = 21.4% and the project cost of capital is 10%, so the project is expected to contribute to shareholder wealth (or enhance the financial condition of a NFP business). Note that the value of the MIRR for any project falls in between the project cost of capital and IRR values. ________ MIRR is interpreted in the same way as is IRR. In our example, MIRR = 21.4% and the project cost of capital is 10%, so the project is expected to_____ or ______

Note that the value of the MIRR for any project falls in between the project cost of capital and IRR values.

Although NPV and IRR generally are perfect substitutes, there are yet other ROI measures that can be used; i.e., the Profitability Index.

Although NPV and IRR generally are perfect substitutes, there are yet other ROI measures that can be used; i.e., the _________________

A thorough analysis will consider all profitability measures, plus examine input variable breakevens. However, the key to effective project analysis is the ability to forecast the cash flows with some confidence.

A thorough analysis will consider all profitability measures, plus examine -------- variable breakevens. However, the key to effective project analysis is the ability to forecast the cash flows with some --------. 2

Presumably, not-for-profit providers have important goals besides financial ones. Other considerations can be incorporated into the analysis by using: The net present social value model. Project scoring.

Presumably, not-for-profit providers have important --------- besides financial ones. Other considerations can be incorporated into the analysis by using: The net present social value model. Project scoring.

Presumably, not-for-profit providers have important goals besides financial ones. Other considerations can be incorporated into the analysis by using: 1 The net present social value model. 2 ------------------

The net present social value (NPSV) model is based on the fact that the total value of a project equals its economic value (NPV) plus its social value. Thus, the present value of the future annual social values is added to the NPV to estimate the project’s total value. TNPV = NPV + NPSV TNPV>=0, accepted! But NPSV >= 0!!

TNPV>=0--------------------,! But NPSV >= 0!!

The net present social value (NPSV) model is based on the fact that the total value of a project ---------------------- (NPV) plus its social value.

Project scoring uses a matrix to create a numerical “score” for projects that incorporates both financial and nonfinancial factors. Note the scores attached to projects are non-linear in the sense that a project with a score of 14 is not necessarily twice as good a project with a score of 7.

Project scoring uses a ------- to create a numerical “score” for projects that incorporates both financial and nonfinancial factors. Note the scores attached to projects are non-linear in the sense that a project with a score of 14 is not necessarily twice as good a project with a score of 7.

Project scoring uses a matrix to create a numerical “score” for projects that incorporates both ----- and ------l factors. Note the scores attached to projects are non-linear in the sense that a project with a score of 14 is not necessarily twice as good a project with a score of 7.

Note the scores attached to projects are non-linear in the sense that a project with a score of 14 is not necessarily twice as good a project with a score of 7.

Post Audit The post audit is a formal process for monitoring a project’s performance over time. It has several purposes: Improve forecasts Develop historical risk data Improve operations Reduce losses

Post Audit monitoring a project’s performance over time. 4