Firms must make investment decisions every day. With the goal of maximizing value to the firm most firms measure investment values using the Net Present Value Decision Rule, that is in terms of cash today. When making an investment decision, take the alternative with the highest NPV, which is equivalent of receiving its NPV in cash today. Discuss the NPV rule and how it is applied, take it or leave it decisions, discount rates, internal rates of return (IRR) and the payback rule. When evaluating an investment which is best? The NPV Rule, the IRR Rule or the Payback Rule? Why?
Finally, how would you determine which project to choose between two mutually exclusive projects? What is the Crossover Point? Explain why choosing the option with the highest NPV is not always correct when the options have different lives.