ACCA F9 课件 part D investment appraisal.ppt

PartDInvestmentAppraisal,DCFmethodsandvaluationcriteria,CapitalInvestmentAppraisal,Interestisthepricethattheborrowerpaystothelenderforthetemporaryuseofmoney-thereforemoneyhasatimevalue(i.e.theeconomicvalueofagivenamountofmoneydependsonwhenthemoneywasreceivedordisbursed)Thefinancialmarketandthesupplyofsavingsandthedemandforloansintheeconomydetermineinterestratelevel.,Interest,TheinterestrateistheopportunitycostofwhatthemoneyinvestedcouldearninthebestalternativeofthesameriskclassSince$100todaydoesNOTequal$100inoneyear,weneedamethodtocomparemoneyacrossdifferenttimeperiods.,SimpleInterest(I=Pi)iswhenonlytheoriginalamountinvestedearnsinterest.CompoundInterestiswhenthesubsequentlyaccruedinterestearnsinteresttoo(notjusttheoriginalamount).,Compoundingcomputesthefuturevalueofcashflowsfromthepast.Futurevalueofalumpsum:Compound-interestfactor=,Discountingcomputesthepresentvalueoffuturecashflows.Presentvalueofalumpsum:Discountfactor=,anannuityisseriesofequal,fixedcashpaymenttobepaidorreceivedataregularperiods.,Perpetuities,TheDeterminantsofInterestRates,Theinterestrateonaparticularsecurityisdeterminedbyfourmainfactors:1.Currentinvestmentopportunitiesandconsumerspreferences(short-termriskfreeinterestrateorrealinterestrate)2.Investortimepreferencesandfutureinvestmentopportunities(thetermstructureofinterestrates)3.Expectedinflation(nominalversusrealinterestrate)4.Risklevelofthesecurity(premiumforrisk),1.Short-term,risk-free,realinterestrate,Isthepriceofmoneyatwhichthedemandforinvestmentisequaltothesupplyofcapital.Thisistheequilibriummarketrate(supply=demand).“Loanablefunds”theory:frameworkforinterestratedetermination.,“LoanableFunds”,“LoanableFunds”,Thesupplyofcapitalisupwardsloping.Saversarewillingtosavemoreasinterestratesincrease.Greatersupplyoffundsavailableathigherinterestrates.Thedemandforinvestmentisdownwardsloping.Atlowerinterestrates,investorscanaffordtoborrowandmakemoreprofits.wherethesupplyslopeanddemandslopemeet,isthepointwherethedemandforinvestmentisequaltothesupplyofcapital.Thisistheequilibriummarketrate.,2.Thetermstructureofinterestrates,Thetermstructuredefinestherelationshipbetweentheannualizedinterestratesonsecuritieswithdifferentmaturities.(1+kn)=(1+r1)(1+r2).(1+rn),Wherekn=currentinterestrateonaloanwithnyearstomaturity.,n,Onaverage,long-terminterestratesareshort-terminterestrates.Saverssupplylessfundsforlong-termloansbecausetheyprefershort-termloanssotheycancashinsooner(i.E.Liquiditypreference).Thusahigherinterestrateisneededtogetsaverstolendforlongerterms.Borrowershaveagreaterdemandtoborrowlong-termtoreduceuncertaintyintheirfinancing.Saverssupplymoremoneyforshort-termsandborrowersdemandmorefundsforlong-terms.Interestrateissetattheequilibriumpointwherethesupplyoffundsequalsthedemandoffunds.,Longer-termbondsaremoresensitivetochangesinmarketinterestratesthanshorter-termbonds(PVconcept).Thelongeritistomaturity,thelowerthepresentvalue.Recallweusethemarketinterestratetocalculatethepresentvalue,thusithasadirecteffectonthepriceofthebond.,Classexample1:,Interestrateis10%forthisyearand20%fornextyear.Ifyouinvest$1today,a)whatisyourrateofreturnat2years?b)Whatistheannualinterestrate?Timeline:yr0yr1r1=10%yr2r2=20%llltoday$1.10$1.32,a)(1+kn)=(1+r1)(1+r2)(1+k2)=(1+0.10)(1+0.20)=b)Recallr=(1+i)1=,n,2,n,a)(1+kn)=(1+r1)(1+r2)(1+k2)=(1+0.10)(1+0.20)=1.32b)Recallr=(1+i)1=14.89%Proof:$1x1.1489=$1.1489attheendofyear1.$1.1489x1.1489=$1.32attheendofyear2.Whydoweannualizeinterestrates?,n,2,n,ClassExample2:,Theinterestrateona1-yearbondis6%andona2-yearbondis10%.Assumingyouareindifferentbetweeninvestinginthe2-yearbondorinvestinginthe1-yearbondandreinvestingattheendofoneyearforanotheryear.Whatistheexpectedinterestrateforyear2?1stWhatisthequestionasking?Indifferentmeansyouwouldreceivethesamereturn.Sowewanttoknowwhatisr2?Formula:(1+kn)=(1+r1)(1+r2),n,Sentence:Ifinterestrateis14.15%inyear2,wewouldbeindifferenttoinvestinthe1-yearor2-yearbond,asthereturnattheendofyear2,$1.21,isthesame.,3.Expectedinflation,Istherateofchangeinpricesofarepresentative“basket”ofcommodities(acommonyardstickisthechangeinConsumerPriceIndex)Nominalinterestrate,k,iscomposedofrealrisk-freeinterestrate,r,plusaninflationcomponent,i;k=r+i,4.Risk,Theinterestratethatafirmmustcommittoontheirdebtincreaseswiththeriskofdefaultasperceivedbyinvestors.Riskofdefaulthas2effects:1.Inordertoreceiveagivenexpectedreturn,thenominalinterestratemustbetheexpectedreturntoadjustforthepossibilityofnon-payment.2.Sinceinvestorsarerisk-averse,theywilldemandariskpremiumonriskysecurities.,Classexample4:,Afirmborrows$1,000foroneyearandthelenderrequiresa9%return.Thereisa5%chanceofdefault.Whatinterestratewillthelenderrequire?1stWhatistheinterestrequired?$1,000 x9%Interestrequired=Probability(interest):0.95(I)+.05(0)=$90;Outof100loans,95willearn$94.74and5willearn$0.Thusaveraging$90Proof:(95x$94.74)/100=$90.,2ndTogetinterestof$94.74on$1,000originalinvestment,Interestrate=interest/originalinvestment=$94.74/$1,000=9.474%,BasicPrinciplesRequiredandTested,SimpleVcompoundinterestNominalVeffectiveinterestrates-D/05CompoundinganddiscountingPVr=10%;n=12years(30-18);Formulamethod:100,000=A(1-(1+0.1)-12)/0.1A=100,000/6.8137=$14,676.31Sentence:Thesoncantakeout$14,676.33attheendofeachyear.,b)Whatarewetryingtodetermine?Atendsoordinaryannuityandwewanttodeterminethetime,n.Inthiscase,the$100,000istheFV.Formulamethod:100,000=A(1+0.1)18-1)/0.1A=100,000/45.5992=$2,193.02Sentence:Theparentswouldhaveinvested$2,193.02attheendofeachyear.back,Thecostofcapitalistheminimumafter-taxrateofreturnthefirmmustearnonnewinvestment(initsownriskclass)tojustcompensatethefirmsinvestorswiththeirrequiredratesofreturn.Thecostofcapitalisanopportunitycost.back,Investment,Investmentisanyexpenditureintheexpectationoffuturebenefits-capitalexpenditureIncurtoacquireandimproveearningcapacityofanon-currentasset.-revenueexpenditureForthepurposeofthetradeofthebusinessortomaintaintheexistingearningcapacityofthenon-currentassets,Thecapitalbudgetingdecisionprocess,TheprocessofIdentifyingAnalysingSelectinginvestmentprojectsThecapitalbudgetingentailsdecisionsonhowtoallocatefundsacrosspotentialnewcapitalassets(ex:newproducts,plants,equipment).,Theinvestmentdecision-makingprocess,OriginationofproposalsProjectscreeningAnalysisandacceptanceMonitoringandreview,Relevantcashflowstoevaluateincapitalbudgeting,FourRuleswhenestimatingprojectcashflows:1.Actualcashflows,notaccountingincome:Accountingincomeincludesnon-cashexpenses(ex:amortization)andincludesallocatedoverheadcost(ignoreifnotincremental):Shareholdersonlyconcernedwithactualcashflowbecausethatiswhatisusedtopaydividendsandinvestments,2.Incrementalcashflows:IgnoresunkcostsanyexpendituresmadePRIORtocapitalbudgetingdecisionandcannotbereclaimed:Includeopportunitycostschargeresourcesthatsitidleand/orhavealternativeusestothenewproject(lostopportunitycost),3.Nominalcashflows:Inflationmustbeincorporatedinboththeestimateoffuturecashflowsgeneratedfromtheprojectandthediscountrateusedtodeterminecostofcapitalforpropercomparison:Thus,usenominalratesandmarketyieldsthatreflectexpectedinflation,4.After-taxcashflows:Shareholderscanonlybenefitfromafter-taxcashflows(dividends,capitalgains):Differentprojectshavedifferenttaxexposures(ex:taxcredits,Govtgrantstoencouragecertaininvestments):Donotincludefinancialchargesassociatedwithfinancingofaprojectastheyareincorporatedinthediscountrate(avoiddoublecounting),Capitalbudgetingevaluationcriteria,1.NetPresentValue(NPV):NPVisadiscountcashflowmethod.Itmeetstwocriticalrequirementsforanycapitalbudgetingrule:1.Accountsforthetimevalueofmoney2.Considersallrelevantcashflows,NPVisthesumofalldiscountedcashflowsgeneratedbyaproject.Itrepresentstheeconomicgainfromtheprojectandthusitmeasurestheincreaseinvaluetothefirm.,AcceptedpositiveNPVproject,Theobjectiveofafinancialexecutiveistomaximizeshareholderwealth/shareprice.Giventhisobjective,thefinancialexecutiveshouldchoosenewinvestmentsthatincreaseshareprice.ProjectswithpositiveNPVstranslateintoanincreaseinfirmsvalueequaltotheamountoftheNPV.Thus,NPVrule(acceptpositiveNPVprojects,subjecttocapitalrationingconstraints)isthecorrectcapitalbudgetingcriterionsinceitcoincideswiththeobjectiveofmaximizingshareholderwealth.,Classexample:Anewprojectwillpayarisk-free,perpetualaftertaxcashflowof$500/yrandthecurrentcostofthisprojectis$9,500.Iffirmsvalueis$100,000andrisk-freerateis5%,isthisagoodproject?Recallperpetualformula:PV=return/interest=$500/0.05=$10,000.ThustheNPV=9,500(cost)+10,000(PVoffuturecashflow)=500,Note:asaDCFmethod,itistheNPVatsomelevelofdiscountrate(marketinterestrate,costofcapital,etc.),2.TheInternalRateofReturn(IRR)isanotherdiscountcashflowmethodthatcalculatesthebreak-evenrateofreturnontheprojectsuchthattheNPV=0.Inotherwords,bydefinition,theIRRistherateofdiscountthatwhenappliedtothecashflowsofaninvestment,willyieldanetPVofZERO.,TheIRRcriterionistoacceptaprojectiftheIRRtheprojectedriskadjusteddiscountrate,k.IRRistheinterestrateatwhichNPVequalszero.,Inequationform,IRRistherateatwhichwhereCisthecostoftheprojecttisthetimeframekistheinterestrate=IRR,UsuallyNPVandIRRcriteriaareconsistent.Advantage:easytounderstandapercentagereturn.,TwocomplicationsthatoccurwhenusingIRRare:1.MultipleIRRswhichonedoyouuse?NeitherEx:2IRRs:15%&50%bothsolveequation(NPV=0),k=13%,bothkbutNPV1,rejectedifPI$200thusthrowout.,Thereturnoncapitalemployed,ThepilotpaperstatestheROCEshouldbebasedontheaverageinvestmentPage189,Advantages:QuickandsimplePercentagereturn,easytounderstandLooksattheentireprojectlifeDisadvantages:Basedonaccountingprofits,notcashflowsRelativemeasureTakenoaccountoftime,soIgnoretimevalueofthemoney,DCFmethod,ThecostofcapitalAfirmscostofcapitalisthecostofraisingadditionalinvestmentcapital,intermsofrequiredpaymentstoinvestments.,Twoviewpoints:,fromtheviewpointofthefinancingfirmsthecostofcapitalisthecostintermsofrequiredpaymentstoinvestorsofraisingadditionalinvestmentcapital.Thatis,Managementofthefirmsetthecostofcapitaltoinducetheinvestorstoinvestinthefirm.,fromtheviewpointoftheinvestorsthecostofcapitalisanopportunitycost.Thatisinvestorsdeterminewhattheycouldearniftheydidnotinvestinthefirmanddemandatleastthesamereturnfromthefirmthattheycangetelsewhere.,Thecostofcapitalistherequiredreturnonadollarcontributedtoday,thus,itreflectscurrentmarketcostsandvalues.Thecostofcapitalistheafter-taxcost,intermsofrequiredpaymentstoinvestors,ofraisingnewfunds.thatthecostofcapitalisanappropriatehurdleratefornewcapitalbudgetingprojects.,SummaryThecostofcapitalistheminimumafter-taxrateofreturnthefirmmustearnonnewinvestment(initsownriskclass)tojustcompensatethefirmsinvestorswiththeirrequiredratesofreturn.Thecostofcapitalisanopportunitycost.,ProjectAppraisalAllowingforInflationandTaxation,Therealrateofreturn,isthereturninconstantpriceleveltermIninflatingenvironment,usethemoneyrateofreturn(nominalrateofreturn)Ex.Invest1000foroneyear,requiredrateofreturnis20%,theinflationisexpectedtobe10%Thenafteroneyear,theinitialinvestmentmustincreaseto1200,intodaysvalueterm,equalsto1091(1200/1.10),sotherealrateofreturnis9.1%,wevegot(1+moneyrate)=(1+realrate)(1+inflationrate),(1+moneyrate)=(1+realrate)(1+inflationrate)EqualstoMoneyrate=realrate+inflationrate+realrateinflationrate,Whichrateisusedforcashflows?,Therulesasfollows:-Thecashflowsexpressedintermsoftheactualnumberofdollarsonfuturedates,usenominalrate-Thecashflowsexpressedintermsofthevalueofdollarsattime0(inconstantpricelevelterms),userealrate,CapitalAllowances,Whatarecapitalallowances?Areusedtoreducetaxableprofits,resultsinthereductionoftaxpayment,soitshouldbetreatedasacashsavingwhenaccepttheproject.Depreciationinaccounting,allowance(WDA)intaxationWhentheassetissoldSalepricereducingbalance=taxableprofit(balancingcharge)Salepricereducingbalance=taxallowableloss(balancingallowance),Howdocapitalallowancesaffectcashflows?-Capitalallowancesreducetaxpayment,consideredascashflowin.DoNOTEthat:CapitalallowanceisnotacashflowinNPVcalculation,itisthetaxbenefitofcapitalallowanceincludedinNPVcalculation.Costsavingswillarisetaxpayment,WhentaxationisignoredinDCFcalculations,thediscountrateusePRE-taxrateofreturnWhentaxationisincludedin,useaPOST-taxrequiredrateofrate,ProjectAppraisalAllowingforRisk,RiskVSuncertainty-d/04-TXp228SystematicriskVSunsystematicrisk-Interestratesetbythecentralbankvsrateofreturnofeachstock,Methodsofdealingwithdecision-makingunderriskanduncertainty,Sensitivityanalysis-computation,strengthandweaknessJ/03,D/04Probabilitiesandexpectedvalues-advantagesandlimitationsPrecisemeasureofrisk-standarddeviationandcoefficientofvariationSimulationmodels,SensitivityAnalysis,Uncertainindependentvariables:-Sellingprice-Salesvolume-Costofcapital-Initialcost-Operatingcosts-benefitsBeforeNPVturntonegative,theextentofthosevariablesmaychange,Sensitivity=NPVpresentvalueofprojectvariableThelowerthepercentage,themoresensitiveistheNPVtothevariable.(c