《金融学》（第二版） 课件 （英文） Chapter06 The Analysis of Investment Projects

Chapter6:

TheAnalysisof InvestmentProjectsObjectiveExplainCapitalBudgetingDevelopCriteria1Chapter6Contents6.1TheNatureofProjectAnalysis6.2WheredoInvestmentIdeascomefrom?6.3TheNetPresentValueInvestmentRule6.4EstimatingaProject’sCashFlows6.5CostofCapital6.6SensitivityAnalysisUsingSpreadsheets6.7AnalyzingCost-ReducingProjects6.8ProjectswithDifferentLives6.9RankingMutuallyExclusiveProjects6.10Inflation&CapitalBudgeting2ObjectivesToshowhowtousediscountedcashflowanalysistomakedecisionssuchas:WhethertoenteranewlineofbusinessWhethertoinvestinequipmenttoreducecosts3ThreeElementsofCapitalBudgetingcomingupwithproposalsforinvestmentprojectsevaluatingthemdecidingwhichonestoacceptandwhichtoreject4IntroductionRecalltheobjectiveofafirmMaximizationofthemarketvalueofshareholders’equityThetheoryofhowtodothiswasprovidedinthepriortwochaptersComputethenetpresentvalueoftheproject’sexpectedcashflows,andundertakeonlythosewithpositiveNPV56.1TheNatureofProjectAnalysisBasicunitofanalysistheindividualinvestmentproject6ProceduralOutline

Formideasonhowtoincreaseshareholders’equityPlanhowtoimplementtheideasGatherinformationontimingandmagnitudeofcostsandbenefitsApplyNPVcriterion7Generatingaforecast

Informationisoftenbiasedtowardsitsprovider’sgoal(agencyproblem)TherearemanywaystoimplementagoalSomeinformationisnotfullyquantifiableImpactonshareholderwealthdifficulttoevaluatewhencashflowsarerisky8TheNatureofProjectAnalysisWewillpostponediscussionofriskycashflowstoavoidthecomplexissueofhowtheyaffectshareholderwealthThecriterionusedfindthepresentvalueofallfuturecashflows,andsubtracttheinitialinvestmenttoobtainthenetpresentvalue(NPV)96.2WheredoInvestmentIdeasComeFrom?monitorexisting&potentialcustomersneedsmonitorexisting&potentialtechnologicalcapacityofthefirmmonitorthecompetition’smarketing,investment,patents,andtechnicalrecruitingmonitorproduction&distributionfunctionsforrevenueenhancement/costsavingsrewardemployeesforinnovativeideas10CashFlowForecastsfortheProtojeanProject116.3NetPresentValueInvestmentRule

Aproject’snetpresentvalueistheamountbywhichtheprojectisexpectedtoincreasethewealthofthefirm’scurrentshareholdersAsacriterionInvestinproposedprojectswithpositiveNPV12IllustrationThefollowingtablesshowthecomputationofNPVToshowtheaffectofthediscountrate,threetablesareshownbasedondifferentrates13DoProjectDCFPayback14Don’tDoProject15IndifferentInternalRateofReturn16CommonErrorItisacommonmistaketostarttheinvestmentinyear1ratherthanyear0(whenthiswasnotintended)Nowistime0Likeachild,aprojectisnotone-yearolduntilayearhaspassed17SummaryThediscountrateinthefirstscenarioitwasassumedtobe10%,andtheresultingNPVwas$20Inthesecondscenarioitwasassumedtobe15%,andtheNPVwas-$69Inthethirdscenario,thediscountratethatresultedinazeroNPVwasfound18196.4EstimatingaProject’sCashFlows

Itisimportanttorememberthatwhenmakingfinancialdecisionsonlytimedcashflowsareuseddepreciationisanexpense,butisnotacashexpense,andmustbeexcludedthetaxbenefitofdepreciation,however,isacashflow,andmustbeincluded20WorkingCapital&CashFlowsSomecashflowsdonotoccurontheincomestatement,butinvolvetimingworkingcapitaladditionsandreductionsarecashflowsattheendofaproject,thesumofthenominalchangesinworkingcapitaliszero21Accruals&DeferralsTakeextracareifyouareprovidedwithnetincomeinformationbyanaccountanttheflowsformingnetincomemayincludeaccrualsdeferralsthesearetypicallysmall,andmaysome-timesbeignored22IncrementalCashFlows

OnlytheincrementalcashflowsshouldformpartofaninvestmentdecisionEvaluatetheprojectedcashflows,by(categoryand)timing,bothwithandwithouttheproject,andfindthedifferenceThisdifferenceisacollectionoftimedcashflows,andthisiswhataffectsthewealthoftheshareholders23Illustration:Cannibalism

Aproposedprojectwillgenerate$10,000inrevenue,butwillcausesanotherproductlinetolose$3,000inrevenuesTheincrementalcashflowisonly$7,00024Illustration:PriorExpenses

R&Dexpensesare$10,000to-dateforyourproject,andyouplantospendanother$20,000,making$30,000inallThe$10,000isasunkcost.ThedecisionwhethertoundertaketheprojectwillnotchangethisexpenditureOnlythe$20,000isanincrementalcost,andthe$10,000shouldbeexcluded25SunkCostsShareholdersareinterestedinthetimingandmagnitudeofcashflowsFromaninvestor’svantage,aprojectgivesrisetoanalternativecashflowIf(alternativecashflows)-(originalcashflows)isvaluabletoshareholders,doprojectAsunkcosthasnoimpactonfuturecashflows:itisirrelevanttoshareholders26Illustration:UnderutilizedResourcesAprojectusesanexisting(non-cancelable)leasedwarehousewitharemaininglifeof20years,andtotalannualrentof$100,000Thewarehouseisprojectedtoremain50%utilized,unlessyourprojectisundertakenTheleaseprohibitssub-leasingThecurrentprojectismakingalossYourprojectwilluse25%ofthewarehouseWhatshouldtheprojectbecharged?27ProposedSolution1Theoriginalprojectcurrentlyusingthewarehouseismakingaloss:“Chargethefull$100,000/yearsothecompanycanrecovertheveryrealwarehousingcosts.”28ProposedSolution2Halfthewarehouseisavailable:“Theprojectshouldbechargedthefull$50,000/yearifitneedstouseit.Aportionofthewarehousingcostswillnotbecharged-outotherwise.”29ProposedSolution3Theprojectshouldbechargedforitsshareoftheusedspace:“Charge$33,333/year.”30ProposedSolution4Theprojectisgoingtouseonly25%ofthespace.“Charge$25,000/year.”31ProposedSolution5Thechargeshouldbeproportionedaccordingtorevenuesgeneratedbyeachproject--thatisfair,isn’tit?“Theoldproject’srevenues=$9,000,000,andthenewprojecthasprojectedrevenues=$1,000,000,sothechargeis10%,or$10,000/year.”32ProposedSolution6Thereisasuitablenew(smaller)warehouseavailableonthemarketfor$27,000/year.“Chargetheprojectthemarketrateofthespace,$27,000.”33ProposedSolution7Theoriginalleasewasenteredintowhenwarehousespacewascheap,butnowspaceistwicewhatitwas:“Themarketvalueoftheleasedwarehouseisnow$200,000,andtheprojectshouldtakeitspropershareofthatamount.”34ProposedSolution8Thisisanewproject,sogiveitasportingchance:“Theprojectshouldbechargednothing.”35WarehouseIllustrationThesolutioninthiscaseisproposedsolution#8,(butforanotherreason):TheprojectshouldbechargednothingThewarehouseexpenditurewilloccurwhethertheprojectisdoneornot.ItisthereforenotanincrementalcashflowWithdifferentfacts(alternativeusageorleasere-negotiation)theanswerwouldbedifferent366.5TheCostofCapitalWhendeterminingthecostofcapitaltheriskoftheprojectis,ingeneral,differentfromtheriskofexistingprojectsonlythemarket-relatedriskisrelevantonlytheriskfromaproject’scashflowsisrelevant(notthatoffinancinginstruments)37ComputingtheAverageCostofCapitalofaCorporationDeterminethereturntosecurityholdersofeachclassofsecurityissuedDeterminethemarketvalueofeachclassofthecompany’ssecurities,andcomputetheweightofeachAfteradjustingfortax,computetheweightedsumofreturns38AverageCostofCapital:Examplewith3-SecuritiesLetkebethereturnonequitykdbethereturnondebtkpbethereturnonpreferredVebethemarketvalueofissuedequityVdbetheMarketvalueofissuedbondsVpbethemarketvalueofissuedpreferredtbethetaxrate39AverageCostofCapital:Examplewith3-Securitiesk=ke*Ve+kp*Vp+kd*Vd*(1-t)Theaveragecostofcapitalisalsothecostofcapitalforeachofthefirmsbusinessdivisionsweightedaccordingtotheirmarketvalue406.6SensitivityAnalysisUsingSpreadsheetsWilltheprojectstillbeeconomicalifsomeoftheunderlyingvariablesareinaccurate?Spreadsheetsareanexcellenttoolforexploringtheinfluenceofestimationerrorsonfinancialdecisions41BaseCaseThefollowingisanembeddedExcelworksheetforthecashflowofafirmItisgenerallyagoodpracticetodividetheworksheetintotwosegments,onecontainingonlydata,andtheothercontainingonlyformulaeThispracticeincreasesflexibility&reducesthechanceoferrorItisalsoagoodpracticetonamevariablesusingInsert:Name:CreateinExcel4243AModifiedScenarioInthiscasethecashispilingup(WatchoutforIRSpenaltiesinthiscase!)Theassumptionisnowmadethatsalesunitsgrowby+2%,unitpricesby-3%,andfixedcostsby+8%(No,Victor:Fixedcostsmayvarywithtime.Yes,Valerie:Fixedcostsdonotvarywithsales.)Assumeadividendof$1,000,000/year4445AdditionalScenariosThefollowinggraphsarevariationsoffromthebasicmodelconstructedbychangingonevariableatatime:46Was15%47Was40%48Was0%49Was75%50Was$3,100,00051ConsequencesNoticethatthereducedlong-termviabilityoftheproduct,togetherwiththedividendfordemands,willcause:acashflowcrisisearlyinyear5,negativeaccountingprofitsinyear6,andaseriousnegativeoperatingcashflowinyear8whenthetaxbenefitsofdepreciationarefinallyconsumed.52GraphsGraphsareausefulsupplementtospreadsheetsastheymayillustratebehaviorofthemodeltocontinuingchangesinaselectedindependentvariableThefollowinggraphsexploreamodel53Table6.4ProjectSensitivitytoSalesVolume54555657SpreadsheetPlanningConclusions:Spreadsheetspermitmanagementtoexploreperturbationscausedbyrandomnessinthemodel’sinputsThisshouldleadtomanagementcorrectlyprioritizingtimetothevariablesofthemodelManagementwillrecognizedangerssooner,andwillcreatecontingencyplanstoavoidtheirworstconsequences586.7AnalyzingCost-ReducingProjects

Break-evenpointisnumberofsalesresultinginaNPV=0IRRisdiscountrateresultinginNPV=0PriceB/EisunitpriceresultinginNPV=0PaybackperiodistheprojectliferesultinginNPV=0596.8ProjectswithDifferentLives

Whendoyoureplaceasalescar?Asacaragesitsresalepricedecreasestheannualrepairbillsincreasesalespeoplebecomediscontentedpeoplewholiveintheircarsdemandreliabilitycustomersareinfluencedbysalespeople’scarsanicecarispartoftheirunofficialremuneration60DataCollectionAcarusesaboutthesameamountofoil,gasoline,cleaning,tireusage,etcetera,nomatterhowolditisThisdataneednotbecollected,becauseweareinterestedonlyinincrementalcashflowsassumethatthedegreeoftiresweariscompensatedbyacreditonsale61DataCollectionInordertosimplifythisexample,itwillbeassumedthatallcashflowsareinrealtermsAssumedthattherequiredrateofreturnoncarsisareal10%(Excitedalready?)62DataCollectionSalespeopleusetheBdellaSedan.ThemarketpricesfornewandusedBdellasisgivenonthenextslideTheexpectedannualmaintenancechargesbyyeararealsogivenIntangiblelosseshavebeenlisted6364CarReplacementFirstcomputetheNPVofpurchasinginyear0,andsellinginyear1,purchasinginyear0,andsellinginyear2,…purchasinginyear0,andsellinginyear10Thesefiguresareshownincol.PV_Proj6566InterpretationWeseethattheincrementalcostofreplacingthecareveryyearis$3810,replacingiteverytwoyearsis$7,619…Youarenotyettemptedtoselect“replaceeveryyear”becausethisoptiondoesnotprovideaBdellaSedanaf