财务管理基础工业出版社13版Chap012-PPT

TheCapitalBudgetingDecision,12,1-2,ChapterOutline,CapitalbudgetingdecisionCashflowsandcapitalbudgetingMethodsforrankinginvestmentsPaybackmethodsInternalrateofreturnNetpresentvalueDiscountorcutoffrateAftertaxoperatingbenefitsandtaxshieldbenefitsofdepreciation,1-3,CapitalBudgetingDecision,InvolvesplanningofexpendituresforaprojectwithaminimumperiodofayearorlongerCapitalexpendituredecisionrequires:ExtensiveplanningandcoordinationofdifferentdepartmentsUncertaintiesarecommoninareassuchas:Annualcostsandinflows,productlife,interestrates,economicconditions,andtechnologicalchanges,1-4,AdministrativeConsiderations,Stepsinthedecision-makingprocess:SearchforanddiscoveryofinvestmentopportunitiesCollectionofdataEvaluationanddecisionmakingReevaluationandadjustment,1-5,CapitalBudgetingProcedures,1-6,AccountingFlowsversusCashFlows,Capitalbudgetingdecisions-emphasisremainsoncashflowDepreciation(noncashexpenditure)isaddedbacktoprofittodeterminetheamountofcashflowgeneratedExampleshowninthenextslideEmphasisisonuseofproperevaluationtechniquestomakebesteconomicchoicesandassurelongtermwealth,1-7,CashFlowforAlstonCorporation,1-8,RevisedCashFlowforAlstonCorporation,1-9,MethodsofRankingInvestmentProposals,Threemethodsused:Paybackmethodalthoughnotsoundconceptually,isoftenusedInternalrateofreturn-moreacceptableandcommonlyusedNetpresentvalue-moreacceptableandcommonlyused,1-10,PaybackMethod,TimerequiredtorecoupinitialinvestmentTable12-3,usingInvestmentA:ThereisnoconsiderationofinflowsafterthecutoffperiodThemethodfailstoconsidertheconceptofthetimevalueofmoneyYearEarlyReturnsLateReturns1.$9,000$1,0002.$1,000$9,0003.$1,000$1,000,1-11,InvestmentAlternatives,1-12,PaybackMethod(contd),Advantages:EasytounderstandandemphasizesliquidityMustrecoupinitialinvestmentquicklyoritwillnotqualifyRapidpaybackpreferredinindustriescharacterizedbydynamictechnologicaldevelopmentsShortcomings:Failstodiscernoptimumormosteconomicsolutiontocapitalbudgetingproblem,1-13,InternalRateofReturn,RequiresthedeterminationoftheyieldonaninvestmentwithsubsequentcashinflowsAssumingthata$1,000investmentreturnsanannuityof$244perannumforfiveyears,providesaninternalrateofreturnof7%:Dividingtheinvestment(presentvalue)bytheannuity:(Investment)=$1,000=4.1(PVIFA)(Annuity)$244Thepresentvalueofanannuity(giveninAppendixD)showsthatthefactorof4.1forfiveyearsindicatesayieldof7%,1-14,DeterminingInternalRateofReturn,CashInflows(of$10,000investment)YearInvestmentAInvestmentB1$5,000$1,5002$5,000$2,0003$2,000$2,5004$5,0005$5,000Tofindabeginningvaluetostartthefirsttrial,theinflowsareaveragedoutasthoughannuitywasreallybeingreceived$5,000$5,000$2,000$12,0003=$4,000,1-15,DeterminingInternalRateofReturn(contd),Dividingtheinvestmentbytheassumedannuityvalueinthepreviousstep,wehave:(Investment)=$10,000=2.5(PVIFA)(Annuity)$4,000Thefirstapproximation(derivedfromAppendixD)oftheinternalrateofreturnusing:PVIFAfactor=2.5n(period)=3Thefactorfallsbetween9and10percentAveragingunderstatesactualIRR,samemethodwouldoverstateIRRforInvestmentBCashflowsinearlyyearsareworthmoreandincreasethereturn,possibletogaugewhetherfirstapproximationisoverstatedorunderstated,1-16,DeterminingInternalRateofReturn(contd),Usingthetrialanderrorapproach,weuseboth10%and12%toarriveattheanswer:Year10%1.$5,000X0.909=$4,5452.$5,000X0.826=$4,1303.$2,000X0.751=$1,502$10,177(At10%,thepresentvalueoftheinflowsexceeds$10,000wethereforeuseahigherdiscountrate)Year12%1.$5,000X0.893=$4,4652.$5,000X0.797=$3,9853.$2,000X0.712=$1,424$9,874(At12%,thepresentvalueoftheinflowsislessthan$10,000thusthediscountrateistoohigh),1-17,InterpolationoftheResults,Theinternalrateofreturnisdeterminedwhenthepresentvalueoftheinflows(PVI)equalsthepresentvalueoftheoutflows(PVO)Thetotaldifferenceinpresentvaluesbetween10%and12%is$303$10,177PVI10%$10,177.PVI10%-$9,874.PVI12%-$10,000(cost)$303$177Thesolutionis($177/$303)percentofthewaybetween10and12percent.Duetoa2%difference,thefractionismultipliedby2%andtheanswerisaddedto10%forthefinalanswerof:10%+($177/$303)(2%)=11.17%IRRTheexactoppositeofthisconclusionisyieldedforInvestmentB(14.33%),1-18,InterpolationoftheResults(contd),UseofinternalrateofreturnrequirescalculatedselectionofInvestmentBinpreferencetoInvestmentA,theconclusionbeingexactlytheoppositeunderthepaybackmethodThefinalselectionofanyprojectwillalsodependonyieldexceedingsomeminimumcoststandard,suchascostofcapitaltothefirmInvestmentAInvestmentBSelectionPaybackmethod.2years3.8yearsQuickerpayback:InvestmentAInternalRateofReturn11.17%14.33%Higheryield:InvestmentB,1-19,NetPresentValue,DiscountingbacktheinflowsoverthelifeoftheinvestmenttodeterminewhethertheyequalorexceedtherequiredinvestmentBasicdiscountrateisusuallythecostofthecapitaltothefirmInflowsmustprovideareturnthatatleastequalsthecostoffinancingthosereturns,1-20,NetPresentValue(contd),$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.$1,414,1-21,CapitalBudgetingResults,1-22,SelectionStrategy,Foraprojecttobepotentiallyaccepted:ProfitabilitymustequalorexceedcostofcapitalProjectsthataremutuallyexclusive:SelectionofonealternativewillprecludeselectionofanyotheralternativeProjectsthatarenotmutuallyexclusive:Alternativesthatprovideareturninexcessofcostofcapitalwillbeselected,1-23,SelectionStrategy(contd),InthecaseofthepriorInvestmentAandB,assumingacapitalof10%,InvestmentBwouldbeacceptedifthealternativesweremutuallyexclusive,whilebothwouldclearlyqualifyiftheywerenotso,1-24,SelectionStrategy(contd),Assumptionused:InternalrateofreturnandnetpresentvaluemethodscallforthesamedecisionExceptionstothesegenerallycommonscenarioare:BothmethodswillacceptorrejectthesameinvestmentsThetwomethodsmaygivedifferentanswersinselectingthebestinvestmentfromarangeofacceptablealternatives,1-25,ReinvestmentAssumption,AllinflowscanbereinvestedattheyieldfromagiveninvestmentInvestmentswithveryhighIRRMaybeunrealistictoassumethatreinvestmentcanoccurataequallyhighrateUnderthenetpresentvaluemethod:Allowsforcertainconsistency,1-26,TheReinvestmentAssumptionNetPresentValue($10,000Investment),1-27,ModifiedInternalRateofReturn(MIRR),Combinesreinvestmentassumptionofthenetpresentvaluemethodwiththeinternalrateofreturn,1-28,ModifiedInternalRateofReturn(MIRR)(contd),Assuming$10,000producesthefollowinginflowsforthenextthreeyears:Thecostofcapitalis10%Determiningtheterminalvalueoftheinflowsatagrowthrateequaltothecostofcapital:TodeterminetheMIRR:PVIF=PV=$10,000=.641(AppendixB)FV$15,610,1-29,CapitalRationing,ArtificialrestraintsetontheusageoffundsthatcanbeinvestedinagivenperiodMaybeadoptedbecauseof:FearoftoomuchgrowthHesitationtouseexternalsourcesoffundingHindersafirmfromachievingmaximumprofitability,1-30,CapitalRationing,1-31,NetPresentValueProfile,AllowsgraphicalrepresentationofnetpresentvalueofaprojectatdifferentdiscountratesToapplythenetpresentvalueprofile,threecharacteristicsneedtobelookedinto:ThenetpresentvalueatazerodiscountrateThenetpresentvalueasdeterminedbyanormaldiscountrate(suchascostofcapital)Theinternalrateofreturnfortheinvestments,1-32,NetPresentValueProfileGraphicRepresentation,1-33,NetPresentValueProfilewithCrossover,1-34,TheRulesofDepreciation,AssetsareclassifiedaccordingtoninecategoriesDeterminetheallowablerateofdepreciationwrite-offModifiedacceleratedcostrecoverysystem(MACRS)representthecategoriesAssetdepreciationrange(ADR)istheexpectedphysicallifeoftheassetorclassofassets,1-35,CategoriesforDepreciationWrite-Off,1-36,DepreciationPercentages(ExpressedinDecimals),1-37,DepreciationSchedule,1-38,TheTaxRate,CorporatetaxratesaresubjecttochangesMaximumquotedfederalcorporatetaxrateisnowinthemid-30percentrangeSmallercorporationsandothersmaypaytaxesonlybetween1520%Largercorporationswithforeigntaxobligationsandspecialstateleviesmaypayeffectivetaxesof40%ormore,1-39,ActualInvestmentDecision,Assumption:$50,000depreciationanalysisallowspurchaseofmachinerywithasix-yearproductivelifeProducesanincomeof$18,500forfirstthreeyearsbeforedeductionsfordepreciationandtaxesInthelastthreeyears,incomebeforedepreciationandtaxeswillbe$12,000Corporatetaxratetakenat35%andcostofcapital10%Foreachyear: