财务管理英文Cha(9)课件

1、0 Chapter 13 Copyright 2001 Prentice-Hall, Inc. 1 Chapter Objectives lDiscuss the various investment evaluation techniques, including their advantages and disadvantages. lApply these techniques to the evaluation of projects. lInterpret the results of the application of these techniques in accordance

2、 with their respective decision rules. Copyright 2001 Prentice-Hall, Inc. 2 l Payback Period (PP) l Internal Rate of Return (IRR) l Net Present Value (NPV) l Profitability Index (PI) Project Evaluation: Alternative Methods Copyright 2001 Prentice-Hall, Inc. 3 Independent Project lIndependent - A pro

3、ject whose acceptance (or rejection) does not prevent the acceptance of other projects under consideration. lAssume the project is independent of any other potential projects undertook. Copyright 2001 Prentice-Hall, Inc. 4 Payback Period lPP is the period of time required for the cumulative expected

4、 cash flows from an investment project to equal the initial cash outflow. lComputation Estimate the cash flows Subtract the future cash flows from the initial cost until the initial investment has been recovered lDecision Rule Accept if the payback period is less than some preset limit Copyright 200

5、1 Prentice-Hall, Inc. 5 Payback Period Illustrated Initial outlay -$1 000 YearCash flow 1$400 2400 3400 Accumulated YearCash flow 1$400 2800 31 200 Payback period = 2.5 years1000/400 = Copyright 2001 Prentice-Hall, Inc. 6 Payback Period Illustrated (con.) Initial outlay -$1 000 YearCash flow 1$200 2

6、400 3600 Accumulated YearCash flow 1$200 2600 31 200 Payback period = 2 2/3 years2+400/600= Copyright 2001 Prentice-Hall, Inc. 7 Advantages of Payback Period lNo need for detailed analysis. lSimple to calculate and understand. lAdjusts for uncertainty of later cash flows. lBiased towards liquidity.

7、Copyright 2001 Prentice-Hall, Inc. 8 Disadvantages of Payback Period lTime value of money and risk ignored. lAd hoc determination of acceptable payback period. lIgnores cash flows beyond the cut-off date. lBiased against long-term and new projects. Copyright 2001 Prentice-Hall, Inc. 9 Discounted Pay

8、back Period lDefined as the time it takes to recover the initial cash outlay (IO) on a present value basis lCompute the present value of each cash flow and then determine how long it takes to payback on a discounted basis lCompare to a specified required period lDecision Rule - Accept the project if

9、 it pays back on a discounted basis within the specified time Copyright 2001 Prentice-Hall, Inc. 10 Discounted Payback Example PV of Year Cash flow Cash flow 1$ 200$ 182 2400331 3700526 4300205 Accumulated Year discounted cash flow 1$ 182 2513 31,039 41,244 Discounted payback period is just under 3

10、years Initial outlay -$1,000 R = 10% Copyright 2001 Prentice-Hall, Inc. 11 Ordinary & Discounted Payback Cash Flow Accumulated Cash Flow Year Undiscounted Discounted Undiscounted Discounted 1$100$89$100$89 210079200168 310070300238 410062400300 510055500355 Copyright 2001 Prentice-Hall, Inc. 12 Adva

11、ntages and Disadvantages of Discounted Payback lAdvantages Includes time value of money Easy to understand Does not accept negative estimated NPV investments Biased towards liquidity lDisadvantages May reject positive NPV investments Requires an arbitrary cutoff point Ignores cash flows beyond the c

12、utoff point Biased against long-term projects, such as R&D and new products Copyright 2001 Prentice-Hall, Inc. 13 Net Present Value (NPV) lNet present value (NPV) is the present value of an investment projects net cash flows minus the projects initial cash outflow (ICO). lHow much value is created f

13、rom undertaking an investment? The first step is to estimate the expected future cash flows. The second step is to estimate the required return for projects of this risk level. The third step is to find the present value of the cash flows and subtract the initial investment. Copyright 2001 Prentice-

14、Hall, Inc. 14 Net Present Value (NPV) lNet present value is a measure of how much value is created by adding an investment. CF1 CF2 CFn (1+k)1 (1+k)2 (1+k)n + . . . +- ICO NPV = Copyright 2001 Prentice-Hall, Inc. 15 NPV Decision Rule lIf the NPV is positive, accept the project lA positive NPV means

15、that the project is expected to add value to the firm and will therefore increase the wealth of the owners. lSince our goal is to increase owner wealth, NPV is a direct measure of how well this project will meet our goal. Copyright 2001 Prentice-Hall, Inc. 16 NPV Illustrated 01 2 Initial outlay ($1

16、100) Revenues$1 000 Expenses500 Cash flow$500 Revenues$2 000 Expenses1 000 Cash flow$1 000 $1 100.00 +454.55 +826.45 +$181.00 1 $500 x 1.10 1 $1 000 x 1.10 2 NPV Copyright 2001 Prentice-Hall, Inc. 17 NPV Pro The Project IRR = 16.13% Copyright 2001 Prentice-Hall, Inc. 18 Advantages and Disadvantages

17、of NPV lAdvantages Discounts cash flows (uses TVM and r) Includes all cash flows Accepting NPV0 projects is equivalent to increasing firm value lDisadvantages Requires forecasting OCFs for life of the project Must determine correct discount rate(s), rt Copyright 2001 Prentice-Hall, Inc. 19 Internal

18、Rate of Return (IRR) lIRR is the discount rate that equates the present value of the future net cash flows from an investment project with the projects initial cash outflow. CF1 CF2 CFn (1+IRR)1 (1+IRR)2 (1+IRR)n + . . . + ICO = lA project is accepted if its IRR is the required rate of return (hurdl

19、e rate). Copyright 2001 Prentice-Hall, Inc. 20 IRR Example Initial outlay = -$200 Year Cash flow 1$ 50 2100 3150 nFind the IRR such that NPV = 0 50 100 150 0 = -200 + + + (1+IRR)1 (1+IRR)2 (1+IRR)3 50 100 150 200 = + + (1+IRR)1 (1+IRR)2 (1+IRR)3 Copyright 2001 Prentice-Hall, Inc. 21 IRR Example (con

20、tinued) Trial and Error Discount ratesNPV 0%$100 5%68 10%41 15%18 20%-2 IRR is just under 20% - about 19.44% Copyright 2001 Prentice-Hall, Inc. 22 NPV Profile Year Cash flow 0 $275 1100 2100 3100 4100 Discount rate 2%6% 10%14% 18% 120 100 80 60 40 20 Net present value 0 20 40 22% IRR Copyright 2001

21、Prentice-Hall, Inc. 23 Advantages of IRR lKnowing a return is intuitively appealing. lIt is a simple way to communicate the value of a project to someone who doesnt know all the estimation details. lIf the IRR is high enough, you may not need to estimate a required return, which is often a difficult

22、 task. Copyright 2001 Prentice-Hall, Inc. 24 Problems with IRR lMore than one negative cash flow multiple rates of return. lProject is not independent mutually exclusive investments. Copyright 2001 Prentice-Hall, Inc. 25 NPV Vs. IRR lNPV and IRR will generally give us the same decision lExceptions N

23、on-conventional cash flows cash flow signs change more than once Mutually exclusive projects |Initial investments are substantially different |Timing of cash flows is substantially different Copyright 2001 Prentice-Hall, Inc. 26 IRR and Non-conventional Cash Flows lWhen the cash flows change sign mo

24、re than once, there is more than one IRR lWhen you solve for IRR you are solving for the root of an equation and when you cross the x- axis more than once, there will be more than one return that solves the equation lIf you have more than one IRR, which one do you use to make your decision? Copyrigh

25、t 2001 Prentice-Hall, Inc. 27 Multiple Rates of Return Assume you are considering a project for which the cash flows are as follows: Year Cash flows 0 -$252 1 1 431 2 -3 035 3 2 850 4 -1 000 Copyright 2001 Prentice-Hall, Inc. 28 Multiple Rates of Return $0.06 $0.04 $0.02 $0.00 ($0.02) NPV ($0.04) ($

26、0.06) ($0.08) 0.20.280.360.440.520.60.68 IRR = 25% IRR = 33.33% IRR = 42.86% IRR = 66.67% Discount rate Copyright 2001 Prentice-Hall, Inc. 29 Another Example Non-conventional Cash Flows lSuppose an investment will cost $90,000 initially and will generate the following cash flows: Year 1: 132,000 Yea

27、r 2: 100,000 Year 3: -150,000 lThe required return is 15%. lShould we accept or reject the project? Copyright 2001 Prentice-Hall, Inc. 30 NPV Profile IRR = 10.11% and 42.66% Copyright 2001 Prentice-Hall, Inc. 31 Decisions lThe NPV is positive at a required return of 15%, so you should Accept lIf you

28、 use the financial calculator, you would get an IRR of 10.11% which would tell you to Reject lYou need to recognize that there are non- conventional cash flows and look at the NPV profile Copyright 2001 Prentice-Hall, Inc. 32 IRR and Mutually Exclusive Projects lMutually exclusive projects If you ch

29、oose one, you cant choose the other Example: You can choose to attend graduate school next year at either Harvard or Stanford, but not both lIntuitively you would use the following decision rules: NPV choose the project with the higher NPV IRR choose the project with the higher IRR Copyright 2001 Pr

30、entice-Hall, Inc. 33 Example With Mutually Exclusive Projects PeriodProject AProject B 0-500-400 1325325 2325200 IRR19.43%22.17% NPV64.0560.74 The required return for both projects is 10%. Which project should you accept and why? Copyright 2001 Prentice-Hall, Inc. 34 NPV Profiles IRR for A = 19.43%

31、IRR for B = 22.17% Crossover Point = 11.8% Copyright 2001 Prentice-Hall, Inc. 35 Profitability Index (PI) lPI is the ratio of the present value of a projects future net cash flows to the projects initial cash outflow. lExpresses a projects benefits relative to its initial cost. lAccept a project wit

32、h a PI 1.0. cost Initial inflows of PV PVI Copyright 2001 Prentice-Hall, Inc. 36 PI Example Assume you have the following information on Project X: Initial outlay -$1 100Required return = 10% Annual cash revenues and expenses are as follows: Year Revenues Expenses 1 $1 000 $500 2 2 000 1 000 Copyrig

33、ht 2001 Prentice-Hall, Inc. 37 PI Example (continued) 1.1645 100 1 100 1 181 PVI $181 100 1 - 1.10 000 1 1.10 500 NPV 2 Copyright 2001 Prentice-Hall, Inc. 38 PI Example (continued) Is this a good project? If so, why? ? This is a good project because the present value of the inflows exceeds the outla

34、y. ? Each dollar invested generates $1.1645 in value or $0.1645 in NPV. Copyright 2001 Prentice-Hall, Inc. 39 Capital Budgeting In Practice lWe should consider several investment criteria when making decisions. lNPV and IRR are the most commonly used primary investment criteria lPayback is a commonl

35、y used secondary investment criteria. Copyright 2001 Prentice-Hall, Inc. 40 SUMMARY Discounted Cash Flow Criteria lNet present value Difference between market value and cost Take the project if the NPV is positive Has no serious problems Preferred decision criterion lInternal rate of return Discount

36、 rate that makes NPV = 0 Take the project if the IRR is greater than required return Same decision as NPV with conventional cash flows IRR is unreliable with non-conventional cash flows or mutually exclusive projects lProfitability Index Benefit-cost ratio Take investment if PI 1 Cannot be used to r

37、ank mutually exclusive projects May be used to rank projects in the presence of capital rationing Copyright 2001 Prentice-Hall, Inc. 41 SUMMARY Payback Criteria lPayback period Length of time until initial investment is recovered Take the project if it pays back in some specified period Doesnt accou

38、nt for time value of money and there is an arbitrary cutoff period lDiscounted payback period Length of time until initial investment is recovered on a discounted basis Take the project if it pays back in some specified period There is an arbitrary cutoff period Copyright 2001 Prentice-Hall, Inc. 42

39、 Capital Rationing lCapital Rationing occurs when a constraint (or budget ceiling) is placed on the total size of capital expenditures during a particular period. Copyright 2001 Prentice-Hall, Inc. 43 Capital Rationing Example Julie Miller must determine what investment opportunities to undertake fo

40、r Basket Wonders (BW). She is limited to a maximum expenditure of $32,500 only for this capital budgeting period. Copyright 2001 Prentice-Hall, Inc. 44 Available Projects for BW Project ICO IRR NPV PI A $ 500 18% $ 50 1.10 B 5,000 25 6,500 2.30 C 5,000 37 5,500 2.10 D 7,500 20 5,000 1.67 E12,500 26 500 1.04 F15,000 28 21,000 2.40 G17,500 19 7,500 1.43 H25,000 15 6,000 1.24 Copyright 2001 Prentice-Hall, Inc. 45 Choosing by IRRs for BW Project ICO IRR NPV PI C $ 5,00037% $ 5,500 2.10 F15,000 28 21,000 2.40 E12,5