財務(wù)管理ppt英文課件Chapter-13

1、Chapter 13Capital Budgeting Techniques0Chapter ObjectivesDiscuss the various investment evaluation techniques, including their advantages and disadvantages.Apply these techniques to the evaluation of projects.Interpret the results of the application of these techniques in accordance with their respe

2、ctive decision rules.1Copyright 2001 Prentice-Hall, Inc. Payback Period (PP) Internal Rate of Return (IRR) Net Present Value (NPV) Profitability Index (PI)Project Evaluation: Alternative Methods2Copyright 2001 Prentice-Hall, Inc.Independent ProjectIndependent - A project whose acceptance (or rejecti

3、on) does not prevent the acceptance of other projects under consideration.Assume the project is independent of any other potential projects undertook.3Copyright 2001 Prentice-Hall, Inc.Payback PeriodPP is the period of time required for the cumulative expected cash flows from an investment project t

4、o equal the initial cash outflow.ComputationEstimate the cash flowsSubtract the future cash flows from the initial cost until the initial investment has been recoveredDecision Rule Accept if the payback period is less than some preset limit4Copyright 2001 Prentice-Hall, Inc.Payback Period Illustrate

5、d Initial outlay -$1 000 YearCash flow 1$400 2400 3400Accumulated YearCash flow1$400280031 200 Payback period = 2.5 years1000/400 =5Copyright 2001 Prentice-Hall, Inc.Payback Period Illustrated (con.) Initial outlay -$1 000 YearCash flow 1$200 2400 3600Accumulated YearCash flow1$200260031 200 Payback

6、 period = 2 2/3 years2+400/600=6Copyright 2001 Prentice-Hall, Inc.Advantages of Payback PeriodNo need for detailed analysis.Simple to calculate and understand.Adjusts for uncertainty of later cash flows.Biased towards liquidity.7Copyright 2001 Prentice-Hall, Inc.Disadvantages of Payback PeriodTime v

7、alue of money and risk ignored.Ad hoc determination of acceptable payback period.Ignores cash flows beyond the cut-off date.Biased against long-term and new projects.8Copyright 2001 Prentice-Hall, Inc.Discounted Payback PeriodDefined as the time it takes to recover the initial cash outlay (IO) on a

8、present value basisCompute the present value of each cash flow and then determine how long it takes to payback on a discounted basisCompare to a specified required periodDecision Rule - Accept the project if it pays back on a discounted basis within the specified time9Copyright 2001 Prentice-Hall, I

9、nc.Discounted Payback Example PV of Year Cash flow Cash flow 1$ 200$ 182 2400331 3700526 4300205 Accumulated Year discounted cash flow 1$ 182 2513 31,039 41,244Discounted payback period is just under 3 years Initial outlay -$1,000R = 10%10Copyright 2001 Prentice-Hall, Inc.Ordinary & Discounted Payba

10、ck Cash Flow Accumulated Cash Flow Year Undiscounted Discounted Undiscounted Discounted 1$100$89$100$89 210079200168 310070300238 410062400300 51005550035511Copyright 2001 Prentice-Hall, Inc.Advantages and Disadvantages of Discounted PaybackAdvantagesIncludes time value of moneyEasy to understandDoe

11、s not accept negative estimated NPV investmentsBiased towards liquidityDisadvantagesMay reject positive NPV investmentsRequires an arbitrary cutoff pointIgnores cash flows beyond the cutoff pointBiased against long-term projects, such as R&D and new products12Copyright 2001 Prentice-Hall, Inc.Net Pr

12、esent Value (NPV)Net present value (NPV) is the present value of an investment projects net cash flows minus the projects initial cash outflow (ICO).How much value is created from undertaking an investment?The first step is to estimate the expected future cash flows.The second step is to estimate th

13、e required return for projects of this risk level.The third step is to find the present value of the cash flows and subtract the initial investment.13Copyright 2001 Prentice-Hall, Inc.Net Present Value (NPV)Net present value is a measure of how much value is created by adding an investment.CF1 CF2 C

14、Fn (1+k)1 (1+k)2 (1+k)n+ . . . +- ICONPV =14Copyright 2001 Prentice-Hall, Inc.NPV Decision RuleIf the NPV is positive, accept the projectA positive NPV means that the project is expected to add value to the firm and will therefore increase the wealth of the owners.Since our goal is to increase owner

15、 wealth, NPV is a direct measure of how well this project will meet our goal.15Copyright 2001 Prentice-Hall, Inc.NPV Illustrated012Initial outlay($1 100)Revenues$1 000Expenses500Cash flow$500Revenues$2 000Expenses1 000Cash flow$1 000 $1 100.00+454.55+826.45+$181.00 1$500 x 1.10 1$1 000 x 1.10 2NPV16

16、Copyright 2001 Prentice-Hall, Inc.NPV Profile For The ProjectIRR = 16.13%17Copyright 2001 Prentice-Hall, Inc.Advantages and Disadvantages of NPVAdvantagesDiscounts cash flows (uses TVM and r)Includes all cash flowsAccepting NPV0 projects is equivalent to increasing firm valueDisadvantagesRequires fo

17、recasting OCFs for life of the projectMust determine correct discount rate(s), rt 18Copyright 2001 Prentice-Hall, Inc.Internal Rate of Return (IRR)IRR is the discount rate that equates the present value of the future net cash flows from an investment project with the projects initial cash outflow.CF

18、1 CF2 CFn (1+IRR)1 (1+IRR)2 (1+IRR)n+ . . . +ICO =A project is accepted if its IRR is the required rate of return (hurdle rate).19Copyright 2001 Prentice-Hall, Inc.IRR Example Initial outlay = -$200Year Cash flow1$ 5021003150nFind the IRR such that NPV = 0 50 100 150 0 = -200 + + + (1+IRR)1 (1+IRR)2

19、 (1+IRR)3 50 100 150 200 = + + (1+IRR)1 (1+IRR)2 (1+IRR)320Copyright 2001 Prentice-Hall, Inc.IRR Example (continued)Trial and Error Discount ratesNPV 0%$100 5%68 10%41 15%18 20%-2IRR is just under 20% - about 19.44%21Copyright 2001 Prentice-Hall, Inc.NPV ProfileYear Cash flow 0 $275 1100 2100 3100 4

20、100Discount rate2%6%10%14%18%12010080604020Net present value0 20 4022%IRR22Copyright 2001 Prentice-Hall, Inc.Advantages of IRRKnowing a return is intuitively appealing.It is a simple way to communicate the value of a project to someone who doesnt know all the estimation details.If the IRR is high en

21、ough, you may not need to estimate a required return, which is often a difficult task.23Copyright 2001 Prentice-Hall, Inc.Problems with IRRMore than one negative cash flow multiple rates of return.Project is not independent mutually exclusive investments.24Copyright 2001 Prentice-Hall, Inc.NPV Vs. I

22、RRNPV and IRR will generally give us the same decisionExceptionsNon-conventional cash flows cash flow signs change more than onceMutually exclusive projectsInitial investments are substantially differentTiming of cash flows is substantially different25Copyright 2001 Prentice-Hall, Inc.IRR and Non-co

23、nventional Cash FlowsWhen the cash flows change sign more than once, there is more than one IRRWhen you solve for IRR you are solving for the root of an equation and when you cross the x-axis more than once, there will be more than one return that solves the equationIf you have more than one IRR, wh

24、ich one do you use to make your decision?26Copyright 2001 Prentice-Hall, Inc.Multiple Rates of ReturnAssume you are considering a project forwhich the cash flows are as follows: Year Cash flows 0 -$252 1 1 431 2 -3 035 3 2 850 4 -1 00027Copyright 2001 Prentice-Hall, Inc.Multiple Rates of Return$0.06

25、$0.04$0.02$0.00($0.02)NPV($0.04)($0.06)($0.08)0.20.280.360.440.520.60.68IRR = 25%IRR = 33.33%IRR = 42.86%IRR = 66.67%Discount rate28Copyright 2001 Prentice-Hall, Inc.Another Example Non-conventional Cash FlowsSuppose an investment will cost $90,000 initially and will generate the following cash flow

26、s:Year 1: 132,000Year 2: 100,000Year 3: -150,000The required return is 15%.Should we accept or reject the project?29Copyright 2001 Prentice-Hall, Inc.NPV ProfileIRR = 10.11% and 42.66%30Copyright 2001 Prentice-Hall, Inc.DecisionsThe NPV is positive at a required return of 15%, so you should AcceptIf

27、 you use the financial calculator, you would get an IRR of 10.11% which would tell you to RejectYou need to recognize that there are non-conventional cash flows and look at the NPV profile31Copyright 2001 Prentice-Hall, Inc.IRR and Mutually Exclusive ProjectsMutually exclusive projectsIf you choose

28、one, you cant choose the otherExample: You can choose to attend graduate school next year at either Harvard or Stanford, but not bothIntuitively you would use the following decision rules:NPV choose the project with the higher NPVIRR choose the project with the higher IRR32Copyright 2001 Prentice-Ha

29、ll, Inc.Example With Mutually Exclusive ProjectsPeriodProject AProject B0-500-40013253252325200IRR19.43%22.17%NPV64.0560.74The required return for both projects is 10%.Which project should you accept and why?33Copyright 2001 Prentice-Hall, Inc.NPV ProfilesIRR for A = 19.43%IRR for B = 22.17%Crossove

30、r Point = 11.8%34Copyright 2001 Prentice-Hall, Inc.Profitability Index (PI)PI is the ratio of the present value of a projects future net cash flows to the projects initial cash outflow.Expresses a projects benefits relative to its initial cost.Accept a project with a PI 1.0.35Copyright 2001 Prentice

31、-Hall, Inc.PI Example Assume you have the following information on Project X:Initial outlay -$1 100Required return = 10%Annual cash revenues and expenses are as follows: Year Revenues Expenses 1 $1 000 $500 2 2 000 1 00036Copyright 2001 Prentice-Hall, Inc.PI Example (continued)37Copyright 2001 Prent

32、ice-Hall, Inc.PI Example (continued) Is this a good project? If so, why? This is a good project because the present value of the inflows exceeds the outlay. Each dollar invested generates $1.1645 in value or $0.1645 in NPV.38Copyright 2001 Prentice-Hall, Inc.Capital Budgeting In PracticeWe should co

33、nsider several investment criteria when making decisions.NPV and IRR are the most commonly used primary investment criteriaPayback is a commonly used secondary investment criteria.39Copyright 2001 Prentice-Hall, Inc.SUMMARY Discounted Cash Flow CriteriaNet present valueDifference between market valu

34、e and costTake the project if the NPV is positiveHas no serious problemsPreferred decision criterionInternal rate of returnDiscount rate that makes NPV = 0Take the project if the IRR is greater than required returnSame decision as NPV with conventional cash flowsIRR is unreliable with non-convention

35、al cash flows or mutually exclusive projectsProfitability IndexBenefit-cost ratioTake investment if PI 1Cannot be used to rank mutually exclusive projectsMay be used to rank projects in the presence of capital rationing40Copyright 2001 Prentice-Hall, Inc.SUMMARY Payback CriteriaPayback periodLength

36、of time until initial investment is recoveredTake the project if it pays back in some specified periodDoesnt account for time value of money and there is an arbitrary cutoff periodDiscounted payback periodLength of time until initial investment is recovered on a discounted basisTake the project if i

37、t pays back in some specified periodThere is an arbitrary cutoff period41Copyright 2001 Prentice-Hall, Inc.Capital RationingCapital Rationing occurs when a constraint (or budget ceiling) is placed on the total size of capital expenditures during a particular period.42Copyright 2001 Prentice-Hall, In

38、c.Capital Rationing Example Julie Miller must determine what investment opportunities to undertake for Basket Wonders (BW). She is limited to a maximum expenditure of $32,500 only for this capital budgeting period.43Copyright 2001 Prentice-Hall, Inc.Available Projects for BW Project ICO IRR NPV PIA

39、$ 500 18% $ 50 1.10 B 5,000 25 6,500 2.30 C 5,000 37 5,500 2.10 D 7,500 20 5,000 1.67 E12,500 26 500 1.04 F15,000 28 21,000 2.40 G17,500 19 7,500 1.43 H25,000 15 6,000 1.2444Copyright 2001 Prentice-Hall, Inc.Choosing by IRRs for BW Project ICO IRR NPV PIC $ 5,00037% $ 5,500 2.10 F15,000 28 21,000 2.40 E12,50026 500 1.04 B 5,00025 6,500 2.30 Projects C, F, and E hav