罗斯公司理财英文第九版Chap005PPT.ppt

NetPresentValueandOtherInvestmentRules Chapter5 Copyright 2010bytheMcGraw HillCompanies Inc Allrightsreserved McGraw Hill Irwin KeyConceptsandSkills BeabletocomputepaybackanddiscountedpaybackandunderstandtheirshortcomingsBeabletocomputetheinternalrateofreturnandprofitabilityindex understandingthestrengthsandweaknessesofbothapproachesBeabletocomputenetpresentvalueandunderstandwhyitisthebestdecisioncriterion ChapterOutline 5 1WhyUseNetPresentValue 5 2ThePaybackPeriodMethod5 3TheDiscountedPaybackPeriodMethod5 4TheInternalRateofReturn5 5ProblemswiththeIRRApproach5 6TheProfitabilityIndex5 7ThePracticeofCapitalBudgeting 5 1WhyUseNetPresentValue AcceptingpositiveNPVprojectsbenefitsshareholders NPVusescashflowsNPVusesallthecashflowsoftheprojectNPVdiscountsthecashflowsproperly TheNetPresentValue NPV Rule NetPresentValue NPV TotalPVoffutureCF s InitialInvestmentEstimatingNPV 1 Estimatefuturecashflows howmuch andwhen 2 Estimatediscountrate3 EstimateinitialcostsMinimumAcceptanceCriteria AcceptifNPV 0RankingCriteria ChoosethehighestNPV CalculatingNPVwithSpreadsheets SpreadsheetsareanexcellentwaytocomputeNPVs especiallywhenyouhavetocomputethecashflowsaswell UsingtheNPVfunction Thefirstcomponentistherequiredreturnenteredasadecimal Thesecondcomponentistherangeofcashflowsbeginningwithyear1 AddtheinitialinvestmentaftercomputingtheNPV 5 2ThePaybackPeriodMethod Howlongdoesittaketheprojectto payback itsinitialinvestment PaybackPeriod numberofyearstorecoverinitialcostsMinimumAcceptanceCriteria SetbymanagementRankingCriteria Setbymanagement ThePaybackPeriodMethod Disadvantages IgnoresthetimevalueofmoneyIgnorescashflowsafterthepaybackperiodBiasedagainstlong termprojectsRequiresanarbitraryacceptancecriteriaAprojectacceptedbasedonthepaybackcriteriamaynothaveapositiveNPVAdvantages EasytounderstandBiasedtowardliquidity 5 3TheDiscountedPaybackPeriod Howlongdoesittaketheprojectto payback itsinitialinvestment takingthetimevalueofmoneyintoaccount Decisionrule Accepttheprojectifitpaysbackonadiscountedbasiswithinthespecifiedtime Bythetimeyouhavediscountedthecashflows youmightaswellcalculatetheNPV 5 4TheInternalRateofReturn IRR thediscountratethatsetsNPVtozeroMinimumAcceptanceCriteria AcceptiftheIRRexceedstherequiredreturnRankingCriteria SelectalternativewiththehighestIRRReinvestmentassumption AllfuturecashflowsareassumedtobereinvestedattheIRR InternalRateofReturn IRR Disadvantages DoesnotdistinguishbetweeninvestingandborrowingIRRmaynotexist ortheremaybemultipleIRRsProblemswithmutuallyexclusiveinvestmentsAdvantages Easytounderstandandcommunicate IRR Example Considerthefollowingproject Theinternalrateofreturnforthisprojectis19 44 NPVPayoffProfile IfwegraphNPVversusthediscountrate wecanseetheIRRasthex axisintercept CalculatingIRRwithSpreadsheets YoustartwiththesamecashflowsasyoudidfortheNPV YouusetheIRRfunction Youfirstenteryourrangeofcashflows beginningwiththeinitialcashflow Youcanenteraguess butitisnotnecessary Thedefaultformatisawholepercent youwillnormallywanttoincreasethedecimalplacestoatleasttwo 5 5ProblemswithIRR MultipleIRRsAreWeBorrowingorLendingTheScaleProblemTheTimingProblem MutuallyExclusivevs Independent MutuallyExclusiveProjects onlyONEofseveralpotentialprojectscanbechosen e g acquiringanaccountingsystem RANKallalternatives andselectthebestone IndependentProjects acceptingorrejectingoneprojectdoesnotaffectthedecisionoftheotherprojects MustexceedaMINIMUMacceptancecriteria MultipleIRRs TherearetwoIRRsforthisproject Whichoneshouldweuse ModifiedIRR Calculatethenetpresentvalueofallcashoutflowsusingtheborrowingrate Calculatethenetfuturevalueofallcashinflowsusingtheinvestingrate Findtherateofreturnthatequatesthesevalues Benefits singleanswerandspecificratesforborrowingandreinvestment TheScaleProblem Wouldyourathermake100 or50 onyourinvestments Whatifthe100 returnisona 1investment whilethe50 returnisona 1 000investment TheTimingProblem TheTimingProblem CalculatingtheCrossoverRate ComputetheIRRforeitherproject A B or B A NPVversusIRR NPVandIRRwillgenerallygivethesamedecision Exceptions Non conventionalcashflows cashflowsignschangemorethanonceMutuallyexclusiveprojectsInitialinvestmentsaresubstantiallydifferentTimingofcashflowsissubstantiallydifferent 5 6TheProfitabilityIndex PI MinimumAcceptanceCriteria AcceptifPI 1RankingCriteria SelectalternativewithhighestPI TheProfitabilityIndex Disadvantages ProblemswithmutuallyexclusiveinvestmentsAdvantages MaybeusefulwhenavailableinvestmentfundsarelimitedEasytounderstandandcommunicateCorrectdecisionwhenevaluatingindependentprojects 5 7ThePracticeofCapitalBudgeting Variesbyindustry Somefirmsusepayback othersuseaccountingrateofreturn ThemostfrequentlyusedtechniqueforlargecorporationsiseitherIRRorNPV ExampleofInvestmentRules ComputetheIRR NPV PI andpaybackperiodforthefollowingtwoprojects Assumetherequiredreturnis10 YearProjectAProjectB0 200 1501 200 502 800 1003 800 150 ExampleofInvestmentRules ProjectAProjectBCF0 200 00 150 00PV0ofCF1 3 241 92 240 80NPV 41 92 90 80IRR 0 100 36 19 PI 1 20961 6053 ExampleofInvestmentRules PaybackPeriod ProjectAProjectBTimeCFCum CFCFCum CF0 200 200 150 1501200050 100280080010003 8000150150PaybackperiodforprojectB 2years PaybackperiodforprojectA 1or3years NPVandIRRRelationship DiscountrateNPVforANPVforB 10 87 52234 770 0 00150 0020 59 2647 9240 59 48 8 6060 42 19 43 0780 20 85 65 64100 0 00 81 25120 18 93 92 52 200 100 0 100 200 300 400 15 0 15 30 45 70 100 130 160 190 Discountrates NPV NPVProfiles IRR2 A Cross overRate Summary DiscountedCashFlow NetpresentvalueDifferencebetweenmarketvalueandcostAccepttheprojectiftheNPVispositiveHasnoseriousproblemsPreferreddecisioncriterionInternalrateofreturnDiscountratethatmakesNPV 0TaketheprojectiftheIRRisgreaterthantherequiredreturnSamedecisionasNPVwithconventionalcashflowsIRRisunreliablewithnon conventionalcashflowsormutuallyexclusiveprojectsProfitabilityIndexBenefit costratioTakeinvestmentifPI 1CannotbeusedtorankmutuallyexclusiveprojectsMaybeusedtorankprojectsinthepresenceofcapitalrationing Summary PaybackCriteria Paybackperiod