财务管理课件(2)(2).ppt

Chapter9NetPresentValueandOtherInvestmentCriteria,McGraw-Hill/Irwin,Copyright2013byTheMcGraw-HillCompanies,Inc.Allrightsreserved.,KeyConceptsandSkills,BeabletocomputepaybackanddiscountedpaybackandunderstandtheirshortcomingsUnderstandaccountingratesofreturnandtheirshortcomingsBeabletocomputeinternalratesofreturn(standardandmodified)andunderstandtheirstrengthsandweaknessesBeabletocomputethenetpresentvalueandunderstandwhyitisthebestdecisioncriterionBeabletocomputetheprofitabilityindexandunderstanditsrelationtonetpresentvalue,9-2,ChapterOutline,NetPresentValueThePaybackRuleTheDiscountedPaybackTheAverageAccountingReturnTheInternalRateofReturnTheProfitabilityIndexThePracticeofCapitalBudgeting,9-3,GoodDecisionCriteria,Weneedtoaskourselvesthefollowingquestionswhenevaluatingcapitalbudgetingdecisionrules:Doesthedecisionruleadjustforthetimevalueofmoney?Doesthedecisionruleadjustforrisk?Doesthedecisionruleprovideinformationonwhetherwearecreatingvalueforthefirm?,9-4,NetPresentValue,ThedifferencebetweenthemarketvalueofaprojectanditscostHowmuchvalueiscreatedfromundertakinganinvestment?Thefirststepistoestimatetheexpectedfuturecashflows.Thesecondstepistoestimatetherequiredreturnforprojectsofthisrisklevel.Thethirdstepistofindthepresentvalueofthecashflowsandsubtracttheinitialinvestment.,9-5,ProjectExampleInformation,Youarereviewinganewprojectandhaveestimatedthefollowingcashflows:Year0:CF=-165,000Year1:CF=63,120;NI=13,620Year2:CF=70,800;NI=3,300Year3:CF=91,080;NI=29,100AverageBookValue=72,000Yourrequiredreturnforassetsofthisrisklevelis12%.,9-6,NPVDecisionRule,IftheNPVispositive,accepttheprojectApositiveNPVmeansthattheprojectisexpectedtoaddvaluetothefirmandwillthereforeincreasethewealthoftheowners.Sinceourgoalistoincreaseownerwealth,NPVisadirectmeasureofhowwellthisprojectwillmeetourgoal.,9-7,ComputingNPVfortheProject,Usingtheformulas:NPV=-165,000+63,120/(1.12)+70,800/(1.12)2+91,080/(1.12)3=12,627.41Usingthecalculator:CF0=-165,000;C01=63,120;F01=1;C02=70,800;F02=1;C03=91,080;F03=1;NPV;I=12;CPTNPV=12,627.41Doweacceptorrejecttheproject?,9-8,DecisionCriteriaTest-NPV,DoestheNPVruleaccountforthetimevalueofmoney?DoestheNPVruleaccountfortheriskofthecashflows?DoestheNPVruleprovideanindicationabouttheincreaseinvalue?ShouldweconsidertheNPVruleforourprimarydecisionrule?,9-9,CalculatingNPVswithaSpreadsheet,SpreadsheetsareanexcellentwaytocomputeNPVs,especiallywhenyouhavetocomputethecashflowsaswell.UsingtheNPVfunctionThefirstcomponentistherequiredreturnenteredasadecimalThesecondcomponentistherangeofcashflowsbeginningwithyear1SubtracttheinitialinvestmentaftercomputingtheNPV,9-10,PaybackPeriod,Howlongdoesittaketogettheinitialcostbackinanominalsense?ComputationEstimatethecashflowsSubtractthefuturecashflowsfromtheinitialcostuntiltheinitialinvestmenthasbeenrecoveredDecisionRuleAcceptifthepaybackperiodislessthansomepresetlimit,9-11,ComputingPayback,Assumewewillaccepttheprojectifitpaysbackwithintwoyears.Year1:165,00063,120=101,880stilltorecoverYear2:101,88070,800=31,080stilltorecoverYear3:31,08091,080=-60,000projectpaysbackinyear3Doweacceptorrejecttheproject?,9-12,DecisionCriteriaTest-Payback,Doesthepaybackruleaccountforthetimevalueofmoney?Doesthepaybackruleaccountfortheriskofthecashflows?Doesthepaybackruleprovideanindicationabouttheincreaseinvalue?Shouldweconsiderthepaybackruleforourprimarydecisionrule?,9-13,AdvantagesandDisadvantagesofPayback,AdvantagesEasytounderstandAdjustsforuncertaintyoflatercashflowsBiasedtowardliquidity,DisadvantagesIgnoresthetimevalueofmoneyRequiresanarbitrarycutoffpointIgnorescashflowsbeyondthecutoffdateBiasedagainstlong-termprojects,suchasresearchanddevelopment,andnewprojects,9-14,DiscountedPaybackPeriod,ComputethepresentvalueofeachcashflowandthendeterminehowlongittakestopaybackonadiscountedbasisComparetoaspecifiedrequiredperiodDecisionRule:Accepttheprojectifitpaysbackonadiscountedbasiswithinthespecifiedtime,9-15,ComputingDiscountedPayback,Assumewewillaccepttheprojectifitpaysbackonadiscountedbasisin2years.ComputethePVforeachcashflowanddeterminethepaybackperiodusingdiscountedcashflowsYear1:165,00063,120/1.121=108,643Year2:108,64370,800/1.122=52,202Year3:52,20291,080/1.123=-12,627projectpaysbackinyear3Doweacceptorrejecttheproject?,9-16,DecisionCriteriaTestDiscountedPayback,Doesthediscountedpaybackruleaccountforthetimevalueofmoney?Doesthediscountedpaybackruleaccountfortheriskofthecashflows?Doesthediscountedpaybackruleprovideanindicationabouttheincreaseinvalue?Shouldweconsiderthediscountedpaybackruleforourprimarydecisionrule?,9-17,AdvantagesandDisadvantagesofDiscountedPayback,AdvantagesIncludestimevalueofmoneyEasytounderstandDoesnotacceptnegativeestimatedNPVinvestmentswhenallfuturecashflowsarepositiveBiasedtowardsliquidity,DisadvantagesMayrejectpositiveNPVinvestmentsRequiresanarbitrarycutoffpointIgnorescashflowsbeyondthecutoffpointBiasedagainstlong-termprojects,suchasRtimevalueofmoneyisignoredUsesanarbitrarybenchmarkcutoffrateBasedonaccountingnetincomeandbookvalues,notcashflowsandmarketvalues,9-22,InternalRateofReturn,ThisisthemostimportantalternativetoNPVItisoftenusedinpracticeandisintuitivelyappealingItisbasedentirelyontheestimatedcashflowsandisindependentofinterestratesfoundelsewhere,9-23,IRRDefinitionandDecisionRule,Definition:IRRisthereturnthatmakestheNPV=0DecisionRule:AccepttheprojectiftheIRRisgreaterthantherequiredreturn,9-24,ComputingIRR,Ifyoudonothaveafinancialcalculator,thenthisbecomesatrialanderrorprocessCalculatorEnterthecashflowsasyoudidwithNPVPressIRRandthenCPTIRR=16.13%12%requiredreturnDoweacceptorrejecttheproject?,9-25,NPVProfilefortheProject,IRR=16.13%,9-26,DecisionCriteriaTest-IRR,DoestheIRRruleaccountforthetimevalueofmoney?DoestheIRRruleaccountfortheriskofthecashflows?DoestheIRRruleprovideanindicationabouttheincreaseinvalue?ShouldweconsidertheIRRruleforourprimarydecisioncriteria?,9-27,AdvantagesofIRR,KnowingareturnisintuitivelyappealingItisasimplewaytocommunicatethevalueofaprojecttosomeonewhodoesntknowalltheestimationdetailsIftheIRRishighenough,youmaynotneedtoestimatearequiredreturn,whichisoftenadifficulttask,9-28,CalculatingIRRsWithASpreadsheet,YoustartwiththecashflowsthesameasyoudidfortheNPVYouusetheIRRfunctionYoufirstenteryourrangeofcashflows,beginningwiththeinitialcashflowYoucanenteraguess,butitisnotnecessaryThedefaultformatisawholepercentyouwillnormallywanttoincreasethedecimalplacestoatleasttwo,9-29,SummaryofDecisionsfortheProject,9-30,NPVvs.IRR,NPVandIRRwillgenerallygiveusthesamedecisionExceptionsNonconventionalcashflowscashflowsignschangemorethanonceMutuallyexclusiveprojectsInitialinvestmentsaresubstantiallydifferent(issueofscale)Timingofcashflowsissubstantiallydifferent,9-31,IRRandNonconventionalCashFlows,Whenthecashflowschangesignmorethanonce,thereismorethanoneIRRWhenyousolveforIRRyouaresolvingfortherootofanequation,andwhenyoucrossthex-axismorethanonce,therewillbemorethanonereturnthatsolvestheequationIfyouhavemorethanoneIRR,whichonedoyouusetomakeyourdecision?,9-32,AnotherExample:NonconventionalCashFlows,Supposeaninvestmentwillcost$90,000initiallyandwillgeneratethefollowingcashflows:Year1:132,000Year2:100,000Year3:-150,000Therequiredreturnis15%.Shouldweacceptorrejecttheproject?,9-33,NPVProfile,IRR=10.11%and42.66%,9-34,SummaryofDecisionRules,TheNPVispositiveatarequiredreturnof15%,soyoushouldAcceptIfyouusethefinancialcalculator,youwouldgetanIRRof10.11%whichwouldtellyoutoRejectYouneedtorecognizethattherearenon-conventionalcashflowsandlookattheNPVprofile,9-35,IRRandMutuallyExclusiveProjects,MutuallyexclusiveprojectsIfyouchooseone,youcantchoosetheotherExample:YoucanchoosetoattendgraduateschoolateitherHarvardorStanford,butnotbothIntuitively,youwouldusethefollowingdecisionrules:NPVchoosetheprojectwiththehigherNPVIRRchoosetheprojectwiththehigherIRR,9-36,ExampleWithMutuallyExclusiveProjects,Therequiredreturnforbothprojectsis10%.Whichprojectshouldyouacceptandwhy?,9-37,NPVProfiles,IRRforA=19.43%IRRforB=22.17%CrossoverPoint=11.8%,9-38,ConflictsBetweenNPVandIRR,NPVdirectlymeasurestheincreaseinvaluetothefirmWheneverthereisaconflictbetweenNPVandanotherdecisionrule,youshouldalwaysuseNPVIRRisunreliableinthefollowingsituationsNonconventionalcashflowsMutuallyexclusiveprojects,9-39,ModifiedIRR,Calculatethenetpresentvalueofallcashoutflowsusingtheborrowingrate.Calculatethenetfuturevalueofallcashinflowsusingtheinvestingrate.Findtherateofreturnthatequatesthesevalues.Benefits:singleanswerandspecificratesforborrowingandreinvestment,9-40,ProfitabilityIndex,Measuresthebenefitperunitcost,basedonthetimevalueofmoneyAprofitabilityindexof1.1impliesthatforevery$1ofinvestment,wecreateanadditional$0.10invalueThismeasurecanbeveryusefulinsituationsinwhichwehavelimitedcapital,9-41,AdvantagesandDisadvantagesofProfitabilityIndex,AdvantagesCloselyrelatedtoNPV,generallyleadingtoidenticaldecisionsEasytounderstandandcommunicateMaybeusefulwhenavailableinvestmentfundsarelimited,DisadvantagesMayleadtoincorrectdecisionsincomparisonsofmutuallyexclusiveinvestments,9-42,CapitalBudgetingInPractice,WeshouldconsiderseveralinvestmentcriteriawhenmakingdecisionsNPVandIRRarethemostcommonlyusedprimaryinvestmentcriteriaPaybackisacommonlyusedsecondaryinvestmentcriteria,9-43,SummaryDCFCriteria,NetpresentvalueDifferencebetweenmarketvalueandcostTaketheprojectiftheNPVispositiveHasnoseriousproblemsPreferreddecisioncriterionInternalrateofreturnDiscountratethatmakesNPV=0TaketheprojectiftheIRRisgreaterthantherequiredreturnSamedecisionasNPVwithconventionalcashflowsIRRisunreliablewithnonconventionalcashflowsormutuallyexclusiveprojectsProfitabilityIndexBenefit-costratioTakeinvestmentifPI1CannotbeusedtorankmutuallyexclusiveprojectsMaybeusedtorankprojectsinthepresenceofcapitalrationing,9-44,SummaryPaybackCriteria,PaybackperiodLengthoftimeuntilinitialinvestmentisrecoveredTaketheprojectifitpaysbackwithinsomespecifiedperiodDoesntaccountfortimevalueofmoney,andthereisanarbitrarycutoffperiodDiscountedpaybackperiodLengthoftimeuntilinitialinvestmentisrecoveredonadiscountedbasisTaketheprojectifitpaysbackinsomespecifiedperiodThereisanarbitrarycutoffperiod,9-45,SummaryAccountingCriterion,AverageAccountingReturnMeasureofaccountingprofitrelativetobookvalueSimilartoreturnonassetsmeasureTaketheinvestmentiftheAARexceedssomespecifiedreturnlevelSeriousproblemsandshouldnotbeused,9-46,QuickQuiz,Consideraninvestmentthatcosts$100,000andhasacashinflowof$25,000ev