罗斯公司理财英文第九版Chap005

1、编辑pptNet Present Value and Other Investment RulesChapter 5Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin5-1编辑pptKey Concepts and SkillsoBe able to compute payback and discounted payback and understand their shortcomingsoBe able to compute the internal rate of

2、 return and profitability index, understanding the strengths and weaknesses of both approachesoBe able to compute net present value and understand why it is the best decision criterion5-2编辑pptChapter Outline5.1 Why Use Net Present Value?5.2 The Payback Period Method5.3 The Discounted Payback Period

3、Method5.4 The Internal Rate of Return5.5 Problems with the IRR Approach5.6 The Profitability Index5.7 The Practice of Capital Budgeting5-3编辑ppt5.1 Why Use Net Present Value?oAccepting positive NPV projects benefits shareholders.NPV uses cash flowsNPV uses all the cash flows of the projectNPV discoun

4、ts the cash flows properly5-4编辑pptThe Net Present Value (NPV) RuleoNet Present Value (NPV) = Total PV of future CFs + Initial InvestmentoEstimating NPV:1. Estimate future cash flows: how much? and when?2. Estimate discount rate3. Estimate initial costsoMinimum Acceptance Criteria: Accept if NPV 0oRa

5、nking Criteria: Choose the highest NPV5-5编辑pptCalculating NPV with SpreadsheetsoSpreadsheets are an excellent way to compute NPVs, especially when you have to compute the cash flows as well.oUsing the NPV function:nThe first component is the required return entered as a decimal.nThe second component

6、 is the range of cash flows beginning with year 1.nAdd the initial investment after computing the NPV.5-6编辑ppt5.2 The Payback Period MethodoHow long does it take the project to “pay back” its initial investment?oPayback Period = number of years to recover initial costsoMinimum Acceptance Criteria: n

7、Set by managementoRanking Criteria: nSet by management5-7编辑pptThe Payback Period MethodoDisadvantages:nIgnores the time value of moneynIgnores cash flows after the payback periodnBiased against long-term projectsnRequires an arbitrary acceptance criterianA project accepted based on the payback crite

8、ria may not have a positive NPVoAdvantages:nEasy to understandnBiased toward liquidity5-8编辑ppt5.3 The Discounted Payback PeriodoHow long does it take the project to “pay back” its initial investment, taking the time value of money into account?oDecision rule: Accept the project if it pays back on a

9、discounted basis within the specified time.oBy the time you have discounted the cash flows, you might as well calculate the NPV.5-9编辑ppt 5.4 The Internal Rate of ReturnoIRR: the discount rate that sets NPV to zero oMinimum Acceptance Criteria: nAccept if the IRR exceeds the required returnoRanking C

10、riteria: nSelect alternative with the highest IRRoReinvestment assumption: nAll future cash flows are assumed to be reinvested at the IRR5-10编辑pptInternal Rate of Return (IRR)oDisadvantages:nDoes not distinguish between investing and borrowingnIRR may not exist, or there may be multiple IRRs nProble

11、ms with mutually exclusive investmentsoAdvantages:nEasy to understand and communicate5-11编辑pptIRR: ExampleConsider the following project:0123$50$100$150-$200The internal rate of return for this project is 19.44%32)1 (150$)1 (100$)1 (50$2000IRRIRRIRRNPV5-12编辑pptNPV Payoff ProfileIf we graph NPV versu

12、s the discount rate, we can see the IRR as the x-axis intercept.IRR = 19.44%5-13编辑pptCalculating IRR with SpreadsheetsoYou start with the same cash flows as you did for the NPV.oYou use the IRR function:nYou first enter your range of cash flows, beginning with the initial cash flow.nYou can enter a

13、guess, but it is not necessary.nThe default format is a whole percent you will normally want to increase the decimal places to at least two.5-14编辑ppt5.5 Problems with IRRqMultiple IRRsqAre We Borrowing or LendingqThe Scale ProblemqThe Timing Problem5-15编辑pptMutually Exclusive vs. IndependentoMutuall

14、y Exclusive Projects: only ONE of several potential projects can be chosen, e.g., acquiring an accounting system. nRANK all alternatives, and select the best one.oIndependent Projects: accepting or rejecting one project does not affect the decision of the other projects.nMust exceed a MINIMUM accept

15、ance criteria5-16编辑pptMultiple IRRsThere are two IRRs for this project: 0 1 2 3$200 $800-$200- $800100% = IRR20% = IRR1Which one should we use? 5-17编辑pptModified IRRoCalculate the net present value of all cash outflows using the borrowing rate.oCalculate the net future value of all cash inflows usin

16、g the investing rate.oFind the rate of return that equates these values.oBenefits: single answer and specific rates for borrowing and reinvestment5-18编辑pptThe Scale ProblemWould you rather make 100% or 50% on your investments?What if the 100% return is on a $1 investment, while the 50% return is on

17、a $1,000 investment?5-19编辑pptThe Timing Problem0 1 2 3$10,000 $1,000$1,000-$10,000Project A0 1 2 3$1,000 $1,000 $12,000-$10,000Project B5-20编辑pptThe Timing Problem10.55% = crossover rate16.04% = IRRA12.94% = IRRB5-21编辑pptCalculating the Crossover RateCompute the IRR for either project “A-B” or “B-A”

18、10.55% = IRR5-22编辑pptNPV versus IRRoNPV and IRR will generally give the same decision.oExceptions:nNon-conventional cash flows cash flow signs change more than oncenMutually exclusive projectsoInitial investments are substantially differentoTiming of cash flows is substantially different5-23编辑ppt5.6

19、 The Profitability Index (PI)oMinimum Acceptance Criteria: nAccept if PI 1oRanking Criteria: nSelect alternative with highest PIInvestent InitialFlowsCash Future of PV TotalPI 5-24编辑pptThe Profitability IndexoDisadvantages:nProblems with mutually exclusive investmentsoAdvantages:nMay be useful when

20、available investment funds are limitednEasy to understand and communicatenCorrect decision when evaluating independent projects5-25编辑ppt5.7 The Practice of Capital BudgetingoVaries by industry:nSome firms use payback, others use accounting rate of return.oThe most frequently used technique for large

21、 corporations is either IRR or NPV.5-26编辑pptExample of Investment RulesCompute the IRR, NPV, PI, and payback period for the following two projects. Assume the required return is 10%. Year Project A Project B0-$200-$1501$200$502$800$1003-$800$1505-27编辑pptExample of Investment RulesProject AProject BC

22、F0-$200.00-$150.00PV0 of CF1-3$241.92$240.80NPV =$41.92$90.80IRR = 0%, 100% 36.19%PI =1.20961.6053 5-28编辑pptExample of Investment RulesPayback Period:Project AProject B Time CF Cum. CFCF Cum. CF0-200-200-150-1501200050-100280080010003-8000150150Payback period for project B = 2 years.Payback period f

23、or project A = 1 or 3 years?5-29编辑pptNPV and IRR RelationshipDiscount rate NPV for A NPV for B-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%-18.93-92.525-30编辑pptProject AProject B($200)($100)$0$100$200$300$400-15%0%15%30%45%70%100%130%160%190%Dis

24、count ratesNPVIRR 1(A)IRR (B)NPV ProfilesIRR 2(A)Cross-over Rate5-31编辑pptSummary Discounted Cash FlowoNet present valuenDifference between market value and costnAccept the project if the NPV is positivenHas no serious problemsnPreferred decision criterionoInternal rate of returnnDiscount rate that m

25、akes NPV = 0nTake the project if the IRR is greater than the required returnnSame decision as NPV with conventional cash flowsnIRR is unreliable with non-conventional cash flows or mutually exclusive projectsoProfitability IndexnBenefit-cost rationTake investment if PI 1nCannot be used to rank mutually exclusive projectsnMay be used to rank projects in the presence of capital rationing5-32编辑pptSummary Pa