版权说明:本文档由用户提供并上传,收益归属内容提供方,若内容存在侵权,请进行举报或认领
文档简介
TheCapitalBudgetingDecision
ChapterOutlineTheCapitalbudgetingdecisionCashflowsinCapitalbudgetingPaybackmethodNetPresentValueandInternalrateofReturnDiscountorcutoffrateasCostofCapitalCapitalBudgetingDecision–AdministrativeConsiderationsInvolvesplanningofexpendituresforaprojectwithaminimumperiodofayearorlongerCapitalexpendituredecisionrequires:ExtensiveplanningCoordinationofdifferentdepartmentsThesedecisionswouldbeaffectedbecauseofuncertaintiesinvolvedin:AnnualcostsandinflowsProductlifeInterestratesEconomicconditionsTechnologicalchangesCapitalBudgetingDecision–AdministrativeConsiderations(cont’d)Stepsinthedecision-makingprocess:SearchforanddiscoveryofinvestmentopportunitiesCollectionofdataEvaluationanddecisionmakingReevaluationandadjustmentCapitalBudgetingProceduresAccountingFlowsversus
CashFlowsIncapitalbudgetingdecisions,emphasisisoncashflowsratherthanearningsDepreciation(noncashexpenditure)isaddedbacktoprofittodeterminetheamountofcashflowgeneratedExampleprovidedinthefollowingslideEmphasisisonuseofproperevaluationtechniquestomakebesteconomicchoicesandassurelongtermwealthmaximizationCashFlowandRevisedCashFlowforAlstonCorporationNetearningsbeforeandaftertaxesarezero,butthecompanyhas$20,000cashinthebankMethodsofRanking
InvestmentProposalsThreemethodsused:PaybackmethodInternalrateofreturnNetpresentvaluePaybackMethodTimerequiredtorecoupinitialinvestmentfromTable12-3:InvestmentAisbetterInvestmentArecoups$10,000InitialInvestmentattheendofthesecondyear,whileInvestmentBtakeslonger
PaybackMethod(cont’d)Advantages:EasytounderstandEmphasizesliquidityUsefulinindustriescharacterizedbydynamictechnologicaldevelopmentsShortcomings:DoesnotconsiderTimeValueofMoneyIgnorescash-flowsafterthecutoffperiodFailstodiscernoptimumormosteconomicsolutiontocapitalbudgetingproblemInternalRateofReturn(EvenCash-Flows)Requiresthedeterminationoftheyieldonaninvestmentthatequatesthecashoutflows(cost)ofaninvestmentwithsubsequentcashinflowsAssumingthata$1,000investmentreturnsanannuityof$244perannumforfiveyearsProvidesaninternalrateofreturnof7%asindicated:
(Investment)=$1,000=4.1(PVIFA)(Annuity)$244Thepresentvalueofanannuity(giveninAppendixD)showsthatthefactorof4.1forfiveyearsindicatesayieldof7%InternalRateofReturn-UnevenCash-FlowsCashInflows(of$10,000investment)YearInvestmentAInvestmentB1………………$5,000$1,5002………………5,0002,0003………………2,0002,5004………………5,0005………………5,000Tofindabeginningvaluetostartthefirsttrial,theinflowsareaveragedoutasthoughannuitywasreallybeingreceived$5,0005,000
2,000$12,000÷3=$4,000InternalRateofReturn-UnevenCash-Flows(cont’d)Dividingtheinvestmentbythe‘assumed’annuityvalueinthepreviousstep,wehave:
(Investment)=$10,000=2.5(PVIFA)(Annuity)$4,000Thefirstapproximation(derivedfromAppendixD)oftheinternalrateofreturnusing: PVIFAfactor=2.5n(period)=3Thefactorfallsbetween9and10percentAveragingwouldeitherunderstateoroverstatetheIRRbymovingthecash-flowseithertotheendorbeginningoftheprojectCashflowsinearlyyearsareworthmoreandincreasethereturnInternalRateofReturn-UnevenCash-Flows(cont’d)Usingthetrialanderrorapproach,weuseboth10%and12%toarriveattheanswer:
Year10% 1…….$5,000X0.909=$4,545 2…….$5,000X0.826=4,130 3…….$2,000X0.751=1,502 $10,177At10%,thepresentvalueoftheinflowsexceeds$10,000–wethereforeuseahigherdiscountrate
Year12% 1…….$5,000X0.893=$4,464 2…….$5,000X0.797=3,986 3…….$2,000X0.712=1,424 $9,874At12%,thepresentvalueoftheinflowsislessthan$10,000–thusthediscountrateistoohighInterpolationoftheResultsTheinternalrateofreturnisdeterminedwhenthepresentvalueoftheinflows(PVI)equalsthepresentvalueoftheoutflows(PVO)Thetotaldifferenceinpresentvaluesbetween10%and12%is$303 $10,177……PVI@10%$10,177…….PVI@10%
-9,874…....PVI@12%-10,000……(cost)$303$177Thesolutionis($177/$303)percentofthewaybetween10and12percent.Duetoa2%difference,thefractionismultipliedby2%andtheanswerisaddedto10%forthefinalanswerof:
10%+($177/$303)(2%)=11.17%IRRInInvestmentBthesameprocesswillyieldananswerof14.33percent.InterpolationoftheResults(cont’d)UseofinternalrateofreturnrequirescalculatedselectionofInvestmentBinpreferencetoInvestmentA,theconclusionbeingexactlytheoppositeunderthepaybackmethodThefinalselectionofanyprojectwillalsodependonyieldexceedingsomeminimumcoststandard,suchascostofcapitaltothefirm
InvestmentAInvestmentBSelection Payback method……. 2years3.8yearsQuickerpayback:“A” Internal Rateof Return………11.17%14.33% Higheryield:”B”NetPresentValueDiscountingbacktheinflowsoverthelifeoftheinvestmenttodeterminewhethertheyequalorexceedtherequiredinvestmentBasicdiscountrateisusuallythecostofthecapitaltothefirmInflowsmustprovideareturnthatatleastequalsthecostoffinancingthosereturnsNetPresentValue(cont’d) $10,000Investment,10%DiscountRateYearInvestmentAYearInvestmentB1………$5,000X0.909=$4,5451……….$1,500X0.909=$1,3642………$5,000X0.826=4,1302……….$2,000X0.826=1,6523………$2,000X0.751=1,5023……….$2,500X0.751=1,878$10,1774……….$5,000X0.683=3,4155……….$5,000X0.621=3,105$11,414Presentvalueofinflows…..$10,177Presentvalueofinflows…..$11,414Presentvalueofoutflows-10,000Presentvalueofoutflows-10,000Netpresentvalue…………$177Netpresentvalue…………...$1,414ComparisonofCapitalBudgetingResultsAsummaryofthevariousconclusionsreachedunderthethreemethodsispresentedinthefollowingtable:SelectionStrategyForaprojecttobepotentiallyaccepted:ProfitabilitymustequalorexceedcostofcapitalProjectsthataremutuallyexclusive:SelectionofonealternativewillprecludeselectionofanyotheralternativeProjectsthatarenotmutuallyexclusive:AlternativesthatprovideareturninexcessofcostofcapitalwillbeselectedSelectionStrategy(cont’d)InthecaseofpriorInvestmentAandB,assumingacapitalof10%,InvestmentBwouldbeacceptedifthealternativesweremutuallyexclusive,whilebothwouldclearlyqualifyiftheywerenotso,asdepictedbelow:TheIRRandNPVmethodswillcallforthesamedecisionwithsomeexceptionsTworules:IfaninvestmenthasapositiveNPV,itsIRRwillbeinexcessofthecostofcapitalIncertainlimitedcases,however,thetwomethodsmaygivedifferentanswersinselectingthebestinvestmentReinvestmentAssumptionIRRAllinflowsfromagiveninvestmentcanbereinvestedattheInternalRateofReturn(IRR)MaybeunrealistictoassumethatreinvestmentcanoccurataequallyhighrateNPVMakesthemoreconservativeassumptionthateachinflowcanbereinvestedatthecostofcapitalordiscountrateAllowsforcertainconsistencyasinflowsfromeachprojectareassumedtohavethesameinvestmentopportunityTheReinvestmentAssumption–IRRandNPVModifiedInternalRateofReturn(MIRR)CombinesreinvestmentassumptionoftheNPVmethodwiththeIRRmethodMIRRisthediscountratethatequatestheterminal(final)valueoftheinflowswiththeinvestmentIntermsofaformula:ModifiedInternalRateofReturn(cont’d)Assuming$10,000producesthefollowinginflowsforthenextthreeyears:Thecostofcapitalis10%Determiningtheterminalvalueoftheinflowsatagrowthrateequaltothecostofcapital:TodeterminetheMIRR:PVIF=PV=$10,000=.641(AppendixB)FV$15,610ModifiedInternalRateofReturn(cont’d)AppendixBshows:Foratabularvalueof.641,theYieldorMIRRis16percentTheconventionalIRRcomputedwouldhavebeen21percentMIRRusesamorerealisticassumptionofre-investmentatthecostofcapitalCapitalRationingArtificialconstraintsetontheusageoffundsthatcanbeinvestedinagivenperiodbyManagementOnlythoseprojectswiththehighestpositiveNPVareaccepted.Reasonsforcapitalrationing:FearoftoomuchgrowthHesitationtouseexternalsourcesoffinancingCapitalrationingcanhinderafirmfromachievingmaximumprofitabilityNetPresentValueProfileAgraphicalrepresentationofnetpresentvalueofaprojectatdifferentdiscountratesToapplytheNPVprofile,thefollowingaspectsneedtobeconsidered:NPVatazerodiscountrateNPVasdeterminedbyanormaldiscountrate(suchascostofcapital)IRRfortheprojectNetPresentValueProfile–
GraphicRepresentationInvestmentBispreferredasbothNPVandIRRarehigherincaseofInvestmentBascomparedtoInvestmentANetPresentValueProfile
withCrossoverBelowthecrossoverpointof8.7%InvestmentBispreferredAbovethecrossoverpointof8.7%InvestmentCispreferredTheRulesofDepreciation
AssetsareclassifiedintoninecategoriestodetermineallowabledepreciationEachclassisreferredtoasModifiedAcceleratedCostRecoverySystem(MACRS)categorySomereferencesarealsomadetoAssetDepreciationRange(ADR),ortheexpectedphysicallifeoftheassetorclassofassetsCategoriesfor
DepreciationWrite-OffDepreciationPercentages
(ExpressedinDecimals)Table12–9DepreciationScheduleTable12–10ActualInvestmentDecision-ExampleAssumption:$50,000depreciation(Table12–10)ofmachinerywithasix-yearproductivelifeProducesanincomeof$18,500forfirstthreeyearsbeforedeductionsfordepreciationandtaxesInthelastthreeyears,incomebeforedepreciationandtaxeswillbe$12,000Corporatetaxratetakenat35%andcostofcapital10%Foreachyear:Thedepreciationissubtractedfrom“Earningsbeforedepreciationandtaxes”toarriveatEarningsbeforeTaxesTaxesthensubtractedtodetermineEarningsafterTaxesDepreciationisaddedtoearningstoarriveatCashFlowsActualInvestmentDecision–Example(cont’d)ActualInvestmentDecision–Example(cont’d)Netpre
温馨提示
- 1. 本站所有资源如无特殊说明,都需要本地电脑安装OFFICE2007和PDF阅读器。图纸软件为CAD,CAXA,PROE,UG,SolidWorks等.压缩文件请下载最新的WinRAR软件解压。
- 2. 本站的文档不包含任何第三方提供的附件图纸等,如果需要附件,请联系上传者。文件的所有权益归上传用户所有。
- 3. 本站RAR压缩包中若带图纸,网页内容里面会有图纸预览,若没有图纸预览就没有图纸。
- 4. 未经权益所有人同意不得将文件中的内容挪作商业或盈利用途。
- 5. 人人文库网仅提供信息存储空间,仅对用户上传内容的表现方式做保护处理,对用户上传分享的文档内容本身不做任何修改或编辑,并不能对任何下载内容负责。
- 6. 下载文件中如有侵权或不适当内容,请与我们联系,我们立即纠正。
- 7. 本站不保证下载资源的准确性、安全性和完整性, 同时也不承担用户因使用这些下载资源对自己和他人造成任何形式的伤害或损失。
最新文档
- 2022年江西省上饶二中学中考化学押题试卷含解析
- 2022届内蒙古巴彦淖尔市临河区八校联盟中考化学模拟试题含解析
- 全国2021年上半年自考本科电子商务概论00896考试试题含解析
- 2021-2022学年河南省南阳市邓州市张村乡中学中考化学适应性模拟试题含解析
- 2021年春4月全国自考电子商务概论模拟试题含解析
- 贵州省重点中学2022年中考化学模拟预测题含解析
- 北京市昌平二中学南校区2021-2022学年中考猜题化学试卷含解析
- 江苏省常熟市第三中学2021-2022学年中考化学押题试卷含解析
- 2021-2022学年山西省晋城市名校中考一模化学试题含解析
- 湖南省江华瑶族自治县2022年中考适应性考试化学试题含解析
- 5S管理考核办法细则
- Section在地质制图中的具体应用
- 塑胶制品公司注塑管理工作手册
- 矿渣立磨系统操作作业指导书1
- 三相异步电动机在各种运行状态下的机械特性版本
- 《汉服文化》PPT课件
- (高清正版)JJF(浙)1144-2018交流高压试验装置校准规范
- 呼气末二氧化碳的监测
- 消防维保月检季检年检表格
- 洗煤厂工艺标准经过流程附图
- ISOIEC38505-1中文版
评论
0/150
提交评论