公司理财（英文版·第5版）课件 第8章　资本预算的基本原理

CorporateFinanceFifthEditionChapter8FundamentalsofCapitalBudgetingCopyright©2020,2017,2014PearsonEducation,Inc.

AllRightsReservedChapterOutline8.1

ForecastingEarnings8.2

DeterminingFreeCashFlowandN

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V8.3

ChoosingAmongAlternatives8.4FurtherAdjustmentstoFreeCashFlow8.5

AnalyzingtheProjectLearningObjectives(1of2)Givenasetoffacts,identifyrelevantcashflowsforacapitalbudgetingproblem.Explainwhyopportunitycostsmustbeincludedincashflows,whilesunkcostsandinterestexpensemustnot.Calculatetaxesthatmustbepaid,includingtaxlosscarryforwardsandcarrybacks.LearningObjectives(2of2)Calculatefreecashflowsforagivenproject.Illustratetheimpactofdepreciationexpenseoncashflows.Describetheappropriateselectionofdiscountrateforaparticularsetofcircumstances.Usebreakevenanalysis,sensitivityanalysis,orscenarioanalysistoevaluateprojectrisk.8.1ForecastingEarningsCapitalBudgetListstheinvestmentsthatacompanyplanstoundertakeCapitalBudgetingProcessusedtoanalyzealternateinvestmentsanddecidewhichonestoacceptIncrementalEarningsTheamountbywhichthefirm’searningsareexpectedtochangeasaresultoftheinvestmentdecisionRevenueandCostEstimates(1of2)ExampleLinksyshascompleteda$300,000feasibilitystudytoassesstheattractivenessofanewproduct,HomeNet.Theprojecthasanestimatedlifeoffouryears.RevenueEstimates

PerUnitPrice=$260RevenueandCostEstimates(2of2)ExampleCostEstimatesUp-FrontR&D=$15,000,000Up-FrontNewEquipment=$7,500,000Expectedlifeofthenewequipmentisfiveyears.HousedinexistinglabAnnualOverhead=$2,800,000PerUnitCost=$110IncrementalEarningsForecastBlankYear012345IncrementalEarningsForecast($000s)BlankBlankBlankBlankBlankBlankBlank1SalesBlankBlank26,00026,00026,00026,000Blank2CostofGoodsSoldBlankBlank(11,000)(11,000)(11,000)(11,000)Blank3

GrossProfitBlankBlank15,00015,00015,00015,000Blank4Selling,General,andAdministrativeBlankBlank(2,800)(2,800)(2,800)(2,800)Blank5ResearchandDevelopmentBlank(15,000)BlankBlankBlankBlankBlank6DepreciationBlankBlank(1,500)(1,500)(1,500)(1,500)(1,500)7EBITBlank(15,000)10,70010,70010,70010,700(1,500)8IncomeTaxat20%Blank3,000(2,140)(2,140)(2,140)(2,140)3009UnleveredNetIncomeBlank(12,000)8,5608,5608,5608,560(1,200)CapitalExpendituresandDepreciationThe$7.5millioninnewequipmentisacashexpense,butitisnotdirectlylistedasanexpensewhencalculatingearnings.Instead,thefirmdeductsafractionofthecostoftheseitemseachyearasdepreciation.StraightLineDepreciationTheasset’scostisdividedequallyoveritslife.AnnualDepreciationInterestExpenseIncapitalbudgetingdecisions,interestexpenseistypicallynotincluded.Therationaleisthattheprojectshouldbejudgedonitsown,notonhowitwillbefinanced.Taxes(1of2)MarginalCorporateTaxRateThetaxrateonthemarginalorincrementaldollarofpre-taxincomeNote:AnegativetaxisequaltoataxcreditTaxes(2of2)UnleveredNetIncomeCalculationTextbookExample8.1(1of2)TaxingLossesforProjectsinProfitableCompaniesProblemKelloggplanstolaunchanewlineofhigh-fiber,gluten-freebreakfastpastries.Theheavyadvertisingexpensesassociatedwiththeproductlaunchwillgenerateoperatinglossesof$20millionnextyear.Kelloggexpectstoearnpre-taxincomeof$460millionfromoperationsotherthanthenewpastriesnextyear.IfKelloggpaysa25%taxrateonitspre-taxincome,whatwillitoweintaxesnextyearwithoutthenewproduct?Whatwillitowewithit?TextbookExample8.1(2of2)SolutionWithoutthenewpastries,Kelloggwillowemillionincorporatetaxesnextyear.Withthenewpastries,Kellogg’spre-taxincomenextyearwillbeonlymillion,anditwillowemillionintax.Thus,launchingthenewproductreducesKellogg’staxesnextyearbywhichequalsthetaxrate(25%)timestheloss($20million).AlternativeExample8.1(1of3)ProblemN

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G,Inc.planstolaunchanewlineofenergydrinks.Themarketingexpensesassociatedwithlaunchingthenewproductwillgenerateoperatinglossesof$500millionnextyearfortheproduct.N

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Gexpectstoearnpre-taxincomeof$7billionfromoperationsotherthanthenewenergydrinksnextyear.N

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Gpaysa25%taxrateonitspre-taxincome.AlternativeExample8.1(2of3)ProblemWhatwillN

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Goweintaxesnextyearwithoutthenewenergydrinks?Whatwillitowewiththenewenergydrinks?AlternativeExample8.1(3of3)SolutionWithoutthenewenergydrinks,N

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Gwillowecorporatetaxesnextyearintheamountof:

Withthenewenergydrinks,N

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Gwillowecorporatetaxesnextyearintheamountof:

LaunchingthenewproductreducesN

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G’staxesnextyearby:

IndirectEffectsonIncrementalEarnings(1of4)OpportunityCostThevaluearesourcecouldhaveprovidedinitsbestalternativeuseIntheHomeNetprojectexample,spacewillberequiredfortheinvestment.Eventhoughtheequipmentwillbehousedinanexistinglab,theopportunitycostofnotusingthespaceinanalternativeway(e.g.,rentingitout)mustbeconsidered.TextbookExample8.2(1of2)TheOpportunityCostofHomeNet’sLabSpaceProblemSupposeHomeNet’snewlabwillbehousedinwarehousespacethatthecompanywouldhaveotherwiserentedoutfor$200,000peryearduringyears1–4.HowdoesthisopportunitycostaffectHomeNet’sincrementalearnings?TextbookExample8.2(2of2)SolutionInthiscase,theopportunitycostofthewarehousespaceistheforgonerent.ThiscostwouldreduceHomeNet’sincrementalearningsduringyears1–4bytheafter-taxbenefitofrentingoutthewarehousespace.AlternativeExample8.2(1of2)ProblemSupposeN

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G’snewenergydrinklinewillbehousedinafactorythatthecompanycouldhaveotherwiserentedoutfor$900millionperyear.HowwouldthisopportunitycostaffectN

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G’sincrementalearningsnextyear?AlternativeExample8.2(2of2)SolutionTheopportunitycostofthefactoryistheforgonerent.TheopportunitycostwouldreduceN

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G’sincrementalearningsnextyearby:

IndirectEffectsonIncrementalEarnings(2of4)ProjectExternalitiesIndirecteffectsoftheprojectthatmayaffecttheprofitsofotherbusinessactivitiesofthefirm.Cannibalizationiswhensalesofanewproductdisplacessalesofanexistingproduct.IndirectEffectsonIncrementalEarnings(3of4)ProjectExternalitiesIntheHomeNetprojectexample,25%ofsalescomefromcustomerswhowouldhavepurchasedanexistingLinksyswirelessrouterifHomeNetwerenotavailable.BecausethisreductioninsalesoftheexistingwirelessrouterisaconsequenceofthedecisiontodevelopHomeNet,wemustincludeitwhencalculatingHomeNet’sincrementalearnings.IndirectEffectsonIncrementalEarnings(4of4)BlankYear012345IncrementalEarningsForecast($000s)BlankBlankBlankBlankBlankBlankBlank1

SalesBlankBlank23,50023,50023,50023,500Blank2CostofGoodsSoldBlankBlank(9,500)(9,500)(9,500)(9,500)Blank3

GrossProfitBlankBlank14,00014,00014,00014,000Blank4Selling,General,andAdministrativeBlankBlank(3,000)(3,000)(3,000)(3,000)Blank5ResearchandDevelopmentBlank(15,000)BlankBlankBlankBlankBlank6DepreciationBlankBlank(1,500)(1,500)(1,500)(1,500)(1,500)7EBITBlank(15,000)9,5009,5009,5009,5009,5008IncomeTaxat20%Blank3,000(1,900)(1,900)(1,900)(1,900)3009UnleveredNetIncomeBlank(12,000)7,6007,6007,6007,600(1,200)SunkCostsandIncrementalEarnings(1of4)Sunk

costsarecoststhathavebeenorwillbepaidregardlessofthedecisionwhetherornottheinvestmentisundertakenSunkcostsshouldnotbeincludedintheincrementalearningsanalysisSunkCostsandIncrementalEarnings(2of4)FixedOverheadExpensesTypicallyoverheadcostsarefixedandnotincrementaltotheprojectandshouldnotbeincludedinthecalculationofincrementalearnings.SunkCostsandIncrementalEarnings

(3of4)PastResearchandDevelopmentExpendituresMoneythathasalreadybeenspentonR&Disasunkcostandthereforeirrelevant.Thedecisiontocontinueorabandonaprojectshouldbebasedonlyontheincrementalcostsandbenefitsoftheproductgoingforward.SunkCostsandIncrementalEarnings(4of4)UnavoidableCompetitiveEffectsWhendevelopinganewproduct,firmsmaybeconcernedaboutthecannibalizationofexistingproducts.However,ifsalesarelikelytodeclineinanycaseasaresultofnewproductsintroducedbycompetitors,thentheselostsalesshouldbeconsideredasunkcost.Real-WorldComplexitiesTypically,saleswillchangefromyeartoyeartheaveragesellingpricewillvaryovertimetheaveragecostperunitwillchangeovertimeTextbookExample8.3(1of3)ProductAdoptionandPriceChangesProblemSupposesalesofHomeNetwereexpectedtobe100,000unitsinyear1,125,000unitsinyears2and3,and50,000unitsinyear4.SupposealsothatHomeNet’ssalepriceandmanufacturingcostareexpectedtodeclineby10%peryear,aswithothernetworkingproducts.Bycontrast,selling,general,andadministrativeexpensesareexpectedtorisewithinflationby4%peryear.UpdatetheincrementalearningsforecastinthespreadsheetinTable8.2toaccountfortheseeffects.TextbookExample8.3(2of3)SolutionHomeNet’sincrementalearningswiththesenewassumptionsareshowninthespreadsheetbelow:Year012345IncrementalEarningsForecast($000s)BlankBlankBlankBlankBlankBlank1SalesBlank23,50026,43823,7948,566Blank2CostofGoodsSoldBlank(9,500)(10,688)(9,619)(3,463)Blank3

GrossProfitBlank14,00015,75014,1755,103Blank4

Selling,General,andAdministrativeBlank(3,000)(3,120)(3,245)(3,375)Blank5 ResearchandDevelopment(15,000)BlankBlankBlankBlankBlank6DepreciationBlank(1,500)(1,500)(1,500)(1,500)(1,500)7EBIT(15,000)9,50011,1309,430228(1,500)8IncomeTaxat20%3,000(1,900)(2,226)(1,886)(46)3009UnleveredNetIncome(12,000)7,6008,9047,544183(1,200)TextbookExample8.3(3of3)Forexample,salepricesinyear2willbeperunitforHomeNet,andforthecannibalizedproduct.Thus,incrementalsalesinyear2areequalto8.2DeterminingFreeCashFlowandNPVTheincrementaleffectofaprojectonafirm’savailablecashisitsfreecashflow.CalculatingtheFreeCashFlowfromEarnings(1of4)CapitalExpendituresandDepreciationCapitalExpendituresaretheactualcashoutflowswhenanassetispurchasedThesecashoutflowsareincludedincalculatingfreecashflowDepreciationisanon-cashexpenseThefreecashflowestimateisadjustedforthisnon-cashexpenseCalculatingtheFreeCashFlowfromEarnings(2of4)CalculatingtheFreeCashFlowfromEarnings(3of4)NetWorkingCapital(NWC)Mostprojectswillrequireaninvestmentinnetworkingcapital.Tradecreditisthedifferencebetweenreceivables

andpayables.TheincreaseinnetworkingcapitalisdefinedasCalculatingtheFreeCashFlowfromEarnings

(4of4)Table8.4SpreadsheetHomeNet’sNetWorkingCapitalRequirementsYear012345NetWorkingCapitalForecast($000s)BlankBlankBlankBlankBlankBlank1CashRequirementsBlankBlankBlankBlankBlankBlank2InventoryBlankBlankBlankBlankBlankBlank3

Receivables(15%ofSales)Blank3,5253,5253,5253,525Blank4Payables(15%ofCOGS)Blank(1,425)(1,425)(1,425)(1,425)Blank5NetWorkingCapitalBlank2,1002,1002,1002,100BlankTextbookExample8.4(1of2)NetWorkingCapitalwithChangingSalesProblemForecasttherequiredinvestmentinnetworkingcapitalforHomeNetunderthescenarioinExample8.3.TextbookExample8.4(2of2)SolutionRequiredinvestmentsinnetworkingcapitalareshownbelow:Inthiscase,workingcapitalchangeseachyear.Alargeinitialinvestmentinworkingcapitalisrequiredinyear1,followedbyasmallinvestmentinyear2assalescontinuetogrow.Workingcapitalisrecoveredinyears3–5assalesdecline.AlternativeExample8.4(1of2)ProblemRisingStarIncisforecastingthattheirsaleswillincreaseby$250,000nextyear,$275,000thefollowingyear,and$300,000inthethirdyear.Thecompanyestimatesthatadditionalcashrequirementswillbe5%ofthechangeinsales,inventorywillincreaseby7%ofthechangeinsales,receivableswillincreaseby10%ofthechangeinsales,andpayableswillincreaseby8%oftheincreaseinsales.ForecasttheincreaseinnetworkingcapitalforRisingStaroverthenextthreeyears.AlternativeExample8.4(2of2)SolutionTherequiredincreaseinnetworkingcapitalisshownbelow:blankYear0Year1Year2Year3SalesForecast(increase)blank$2,50,000$2,75,000$3,00,000NetWorkingCapitalForecastblankblankblankblankCashRequirements(5%ofsales)blank$12,500$13,750$15,000Inventory(7%ofsales)blank$17,500$19,250$21,000Receivables

(10%ofsales)blank$25,000$27,500$30,000Payables(8%ofsales)blank$20,000$22,000$24,000NetWorkingCapitalblank$35,000$38,500$42,000CalculatingFreeCashFlowDirectlyFreeCashFlowThetermiscalledthedepreciationtaxshieldCalculatingtheNPV

(1of2)HomeNetN

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V(WACC=12%)CalculatingtheNPV

(2of2)Table8.5SpreadsheetComputingHomeNet’sN

P

VblankYear012345NetPresentValue($000s)BlankBlankBlankBlankBlankBlankBlank1FreeCashFlowBlank(19,500)7,0009,1009,1009,1002,4002ProjectCostofCapital12%BlankBlankBlankBlankBlankBlank3

DiscountFactorBlank1.0000.8930.7970.7120.6360.5674PVofFreeCashFlowBlank(19,500)6,2507,2546,4775,7831,3625NPVBlank7,627BlankBlankBlankBlankBlank6IRRBlank27.9%BlankBlankBlankBlankBlank8.3ChoosingAmongAlternatives(1of6)LaunchingtheHomeNetprojectproducesapositiveN

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V,whilenotlaunchingtheprojectproducesa0N

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V.8.3ChoosingAmongAlternatives(2of6)EvaluatingManufacturingAlternativesIntheHomeNetexample,assumethecompanycouldproduceeachunitin-housefor$95ifitspends$5millionupfronttochangetheassemblyfacility(versus$110perunitifoutsourced).Thein-housemanufacturingmethodwouldalsorequireanadditionalinvestmentininventoryequaltoonemonth’sworthofproduction.8.3ChoosingAmongAlternatives(3of6)EvaluatingManufacturingAlternativesOutsource

Investmentin

millioninYear1andwillincreaseby$1.65millioninYear5NWCfallssincethisA/Pisfinancedbysuppliers8.3ChoosingAmongAlternatives(4of6)EvaluatingManufacturingAlternativesIn-HouseCostperunit=$95Up-frontcostof$5,000,000InvestmentinA/P=15%ofCOGS

NWCwillfallby$0.633millioninYear1andincreaseby$0.633millioninYear5.8.3ChoosingAmongAlternatives(5of6)EvaluatingManufacturingAlternativesTable8.6SpreadsheetNPVCostofOutsourcedVersusIn-HouseAssemblyofHomeNet8.3ChoosingAmongAlternatives(6of6)ComparingFreeCashFlowsCisco’sAlternativesOutsourcingisthelessexpensivealternative8.4FurtherAdjustmentstoFreeCashFlowOtherNon-cashItemsAmortizationTimingofCashFlowsCashflowsareoftenspreadthroughouttheyearAcceleratedDepreciationModifiedAcceleratedCostRecoverySystem(M

A

C

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S)depreciationTextbookExample8.5(1of3)ComputingAcceleratedDepreciationProblemWhatdepreciationdeductionwouldbeallowedforHomeNet’sequipmentusingtheM

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C

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Smethod,assumingtheequipmentisputintousebytheendofyear0anddesignatedtohaveafive-yearrecoveryperiod?TextbookExample8.5(2of3)SolutionTable8A.1intheappendixprovidesthepercentageofthecostthatcanbedepreciatedeachyear.Basedonthetable,theallowabledepreciationexpenseforthelabequipmentisshownbelow(inthousandsofdollars):TextbookExample8.5(3of3)Aslongastheequipmentisputintousebytheendofyear0,thetaxcodeallowsustotakeourfirstdepreciationexpenseinthesameyear.Comparedwithstraight-linedepreciation,theM

A

C

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Smethodallowsforlargerdepreciationdeductionsearlierintheasset’slife,whichincreasesthepresentvalueofthedepreciationtaxshieldandsowillraisetheproject’sN

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V(seeProblem8.17).Bonusdepreciationwouldallowustodeductthefull$7.5millioncostoftheequipmentinyear0,acceleratingthetaxshieldandincreasingN

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Vevenfurther.AlternativeExample8.5(1of2)ProblemCanyonMoldingisconsideringpurchasinganewmachinetomanufacturefinishedplasticproducts.Themachinewillcost$50,000andfallsintotheM

A

C

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Sthree-yearassetclass.WhatdepreciationdeductionwouldbeallowedforthemachineusingtheM

A

C

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Smethod,assumingtheequipmentisputintouseinyear0?AlternativeExample8.5(2of2)SolutionBasedonthepercentagesinTable8A.1,theallowabledepreciationexpenseforthelabequipmentisshownbelow:BlankYear0Year1Year2Year3MACRSDepreciationBlankBlankBlankBlankPlasticMoldingMachine$50,000BlankBlankBlankMACRSDepreciationRate33.33%44.45%14.81%7.41%DepreciationExpense$16,665$22,225$7,405$3,705FurtherAdjustmentstoFreeCashFlow

(1of3)LiquidationorSalvageValueTextbookExample8.6(1of3)AddingSalvageValuetoFreeCashFlowProblemSupposethatinadditiontothe$7.5millioninnewequipmentrequiredforHomeNet,someequipmentwillbetransferredtothelabfromanotherCiscofacility.Thisequipmenthasaresalevalueof$2millionandabookvalueof$1million.Iftheequipmentiskeptratherthansold,itsremainingbookvaluecanbedepreciatednextyear.Whenthelabisshutdowninyear5,theequipmentwillhaveasalvagevalueof$800,000.WhatadjustmentsmustwemaketoHomeNet’sfreecashflowinthiscase?TextbookExample8.6(2of3)SolutionTheexistingequipmentcouldhavebeensoldfor$2million.Theafter-taxproceedsfromthissaleareanopportunitycostofusingtheequipmentintheHomeNetlab.Thus,wemustreduceHomeNet’sfreecashflowinyear0bythesalepricelessanytaxesthatwouldhavebeenowedhadthesaleoccurred:Inyear1,theremaining$1millionbookvalueoftheequipmentcanbedepreciated,creatingadepreciationtaxshieldofInyear5,thefirmwillselltheequipmentforasalvagevalueof$800,000.Becausetheequipmentwillbefullydepreciatedatthattime,theentireamountwillbetaxableasacapitalgain,sotheafter-taxcashflowfromthesaleisThespreadsheetbelowshowstheseadjustmentstothefreecashflowfromthespreadsheetinTable8.3andrecalculatesHomeNet’sfreecashflowandNPVinthiscase.TextbookExample8.6(3of3)blankYear012345FreeCashFlowandNPV($000s)BlankBlankBlankBlankBlankBlankBlank1 FreeCashFloww/oequipmentAdjustmentsforuseofexistingequipmentBlank(19,500)7,0009,1009,1009,1002,4002After-TaxSalvageValueBlank(1,800)BlankBlankBlankBlank6403

DepreciationTaxShieldBlankBlank(200)BlankBlankBlankBlank4 FreeCashFlowwithequipmentBlank(21,300)6,8009,1009,1009,1003,0405NPV

at12%Blank6,011BlankBlankBlankBlankBlankAlternativeExample8.6(1of3)ProblemPlentixisconsideringreplacingitssomeoldequipmentthathasamarketvalueof$1millionbutabookvalueofonly$200,000.Iftheequipmentisnotsold,thefirmwilldepreciatetheremainingbookvalueinthecomingyear.Thefirm’smarginaltaxrateis34%.Howwouldthefirm’sfreecashflowbeaffectedifthefirmkeepstheequipmentversussellingtheoldequipment?AlternativeExample8.6(2of3)SolutionIftheequipmentiskept,thefirmwillhave$200,000ofadditionaldepreciation,whichwillreducethefirm’staxableincomeby$200,000.Witha34%marginaltaxrate,thiswillreducethefirm’staxesbyBecausethefirmwillpay$68,000lessintaxes,freecashflowwillincreasebythesameamountfortheyear.AlternativeExample8.6(3of3)SolutionIftheequipmentissold,thefirmreceive$1millionincashbutwillhavetopaytaxesonthegainabovethebookvalue,orThetaxesdueonthesalewillbeThus,thefirm’sfreecashflowwillincreasebyfortheyear.FurtherAdjustmentstoFreeCashFlow

(2of3)TerminalorContinuationValueThisamountrepresentsthemarketvalueofthefreecashflowfromtheprojectatallfuturedates.TextbookExample8.7(1of3)ProblemBaseHardwareisconsideringopeningasetofnewretailstores.Thefreecashflowprojectionsforthenewstoresareshownbelow(inmillionsofdollars):Afteryear4,BaseHardwareexpectsfreecashflowfromthestorestoincreaseatarateof5%peryear.Iftheappropriatecostofcapitalforthisinvestmentis10%,whatcontinuationvalueinyear4capturesthevalueoffuturefreecashflowsinyear5andbeyond?WhatistheN

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Vofthenewstores?TextbookExample8.7(2of3)SolutionBecausethefuturefreecashflowbeyondyear4isexpectedtogrowat5%peryear,thecontinuationvalueinyear4ofthefreecashflowinyear5andbeyondcanbecalculatedasaconstantgrowthperpetuity:Noticethatundertheassumptionofconstantgrowth,wecancomputethecontinuationvalueasamultipleoftheproject’sfinalfreecashflow.TextbookExample8.7(3of3)Wecanrestatethefreecashflowsoftheinvestmentasfollows(inthousandsofdollars):Year01234FreecashFlow(years0-4)(10,500)(5,500)8001,2001,300ContinuationvalueBlankBlankBlankBlank27,300Freecashflow(10,500)(5,500)8001,20028,600TheN

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Voftheinvestmentinthenewstoresisor$5.597millionAlternativeExample8.7(1of3)ProblemNowassumePlentixisconsideringanewprojectthatcosts$200millionandwillgeneratefreecashflowsinitsfirstthreeyearsof$10million,$15million,and$20million,respectively.Afterthethirdyear,freecashflowsareexpectedtogrowatanannualrateof7%.Plentixhasdeterminedthattheappropriatecostofcapitalforthisprojectis16%.Whatistheyear3continuationvalue?WhatistheN

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Voftheproject?AlternativeExample8.7(2of3)SolutionTheyear3continuationvalueiscalculatedas:AlternativeExample8.7(3of3)SolutionTheN

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VoftheprojectisFurtherAdjustmentstoFreeCashFlow

(3of3)TaxCarryforwardsTaxlosscarryforwardsandcarrybacksallowcorporationstotakelossesduringitscurrentyearandoffsetthemagainstgainsinnearbyyears.TextbookExample8.8(1of3)TaxLossCarryforwardsProblemVerianIndustrieshasanetoperatinglossof$140millionthisyear.IfVerianearns$50millionperyearinpre-taxincomefromnowon,whatwillitstaxableincomebeoverthenext4years?IfVerianearnsanextra$10millioninthecomingyear,inwhichyearswillitstaxableincomeincrease?TextbookExample8.8(2of3)SolutionWithpre-taxincomeof$50millionperyear,Verianwillbeabletouseitstaxlosscarryforwardstoreduceitstaxableincomebymillioneachyear:BlankYear012345Pre-taxIncomeBlank(140)5050505050TaxLossCarryforwardBlankBlank(40)(40)(40)(20)BlankTaxableIncomeBlankBlank1010103050TextbookExample8.8

(3of3)IfVerianearnsanadditional$10millionthefirstyear,itwillowetaxesonanextra$2millionnextyearand$8millioninyear4:BlankYear012345Pre-taxIncomeBlank(140)6050505050TaxLossCarryforwardBlankBlank(48)(40)(40)(12)BlankTaxableIncomeBlankBlank1210103850Thus,whenafirmhastaxlosscarryforwards,thetaximpactofaportionofcurrentearningswillbedelayeduntilthecarryforwardsareexhausted.Thisdelayreducesthepresentvalueofthetaximpact,andfirmssometimesapproximatetheeffectoftaxlosscarryforwardsbyusingalowermarginaltaxrate.8.5AnalyzingtheProject(1of2)Break-EvenAnalysisThebreak-evenlevelofaninputisthelevelthatcausestheN

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Voftheinvestmenttoequalzero.HomeNetI

R

RCalculationTable8.7SpreadsheetHomeNetI

R

RCalculationYear012345NPV

($000s)andIRRBlankBlankBlankBlankBlankBlank1Freecashflow(19,500)7,0009,1009,1009,1002,4002NPVat12%7,627BlankBlankBlankBlankBlank3IRR27.9%BlankBlankBlankBlankBlank8.5AnalyzingtheProject(2of2)Break-EvenAnalysisBreak-EvenLevelsforHomeNetTable8.8Break-EvenLevelsforHomeNetParameterBreak-EvenLevelUnitssold77,121unitsperyearWholesaleprice$228perunitCostofgoods$142perunitCostofcapital27.9%EBITBreak-EvenofSalesLevelofsaleswhereE

B

I

TequalszeroSensitivityAnalysis(1of2)SensitivityAnalysisshowshowtheN

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Vvarieswithachangeinoneoftheassumptions,holdingtheotherassumptionsconstant.SensitivityAnalysis(2of2)Table8.9Best-andWorst-CaseParameterAssumptionsforHomeNetParameterInitialAssumptionWorstCaseBestCaseUnitssold(thousands)10070130Saleprice($/unit)260240280Costofgoods($/unit)110120100NWC($thousands)210030001600Cannibalization25%40%10%Costofcapital12%15%10%Figure8.1HomeNet’sN

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VUnderBest-andWorst-CaseParameterAssumptionsTextbookExample8.9(1of2)SensitivitytoMarketingandSupportCostsProblemThecurrentforecastforHomeNet’smarketingandsupportcostsis$2.8millionperyearduringyears1–4.Supposethemarketingandsupportcostsmaybeashighas$3.8millionperyear.WhatisHomeNet’sNPVinthiscase?TextbookExample8.9

(2of2)SolutionWecananswerthisquestionbyincreasingtheselling,general,andadministrativeexpenseby$1millioninthespreadsheetinTable8.3andcomputingtheNPVoftheresultingfreecashflow.Wecanalsocalculatetheimpactofthischangeasfollows:A$1millionincreaseinmarketingandsupportcostswillreduceEBITby$1millionandwill,therefore,decreaseHomeNet’sfreecashflowbyanafter-taxamountofperyear.ThepresentvalueofthisdecreaseisHomeNet’sNPVwouldfalltoAlternativeExample8.9(1of4)ProblemAssumeN

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Goriginally