复件+Net+Present+Value+and+Capital+Budgeting.ppt

1、Net Present Value and Capital Budgeting,Chapter 8,Key Concepts and Skills,Understand how to determine the relevant cash flows for various types of capital investments Be able to compute depreciation expense for tax purposes Incorporate inflation into capital budgeting Understand the various methods

2、for computing operating cash flow Apply the Equivalent Annual Cost approach,Chapter Outline,8.1 Incremental Cash Flows 8.2 The Baldwin Company: An Example 8.3 Inflation and Capital Budgeting 8.4 Alternative Definitions of Cash Flow 8.5 Investments of Unequal Lives: The Equivalent Annual Cost Method,

3、8.1 Incremental Cash Flows(增量现金流）,Cash flows matternot accounting earnings. Sunk costs（沉没成本） dont matter. Opportunity costs （机会成本） matter. Side effects （关联效应） like erosion matter. Taxes matter: we want incremental after-tax cash flows. Inflation matters.,Cash FlowsNot Accounting,Techniques in corpor

4、ate finance generally use cash flows, whereas financial accounting generally stresses income or earnings numbers. Certainly, our text has followed this tradition since our net present value techniques discounted cash flows, not earnings. When considering a single project, we discounted the cash flow

5、s that the firm receives from the project. When valuing the firm as a whole, we discounted dividendsnot earningsbecause dividends are the cash flows that an investor receives.,Sunk costs（沉没成本）,A sunk cost is a cost that has already occurred. Because sunk costs are in the past, they cannot be changed

6、 by the decision to accept or reject the project.,Opportunity costs （机会成本）,Your firm may have an asset that it is considering selling, leasing, or employing elsewhere in the business. If the asset is used in a new project, potential revenues from alternative uses are lost. These lost revenues can me

7、aningfully be viewed as costs. They are called opportunity costs because, by taking the project, the firm forgoes other opportunities for using the assets.,Side effects （关联效应）,Erosion is a bad thing. If our new product causes existing customers to demand less of current products, we need to recogniz

8、e that. If, however, synergies(协同）result that create increased demand of existing products, we also need to recognize that.,8.2 The Baldwin Company,Costs of test marketing (already spent): $250,000 Current market value of proposed factory site (which we own): $150,000 Cost of bowling ball machine: $

9、100,000 (depreciated according to MACRS 5-year) Increase in net working capital: $10,000 Production (in units) by year during 5-year life of the machine: 5,000, 8,000, 12,000, 10,000, 6,000,The Baldwin Company,Price during first year is $20; price increases 2% per year thereafter. Production costs d

10、uring first year are $10 per unit and increase 10% per year thereafter. Annual inflation rate: 5% Working Capital: initial $10,000 changes with sales,The Baldwin Company,Year 0Year 1Year 2Year 3Year 4 Year 5 Investments: (1) Bowling ball machine100.00 21.76* (2) Accumulated 20.0052.0071.2082.72 94.2

11、4 depreciation (3)Adjusted basis of 80.0048.0028.8017.28 5.76 machine after depreciation (end of year) (4)Opportunity cost150.00 150.00(warehouse) (5)Net working capital 10.00 10.0016.3224.9721.22 0 (end of year) (6)Change in net 10.006.32 8.653.75 21.22 working capital (7)Total cash flow of260.00 6

12、.32 8.653.75 192.98 investment(1) + (4) + (6),($ thousands) (All cash flows occur at the end of the year.),The Baldwin Company,At the end of the project, the warehouse is unencumbered, so we can sell it if we want to.,Year 0Year 1Year 2Year 3Year 4 Year 5 Investments: (1) Bowling ball machine100.00

13、21.76* (2) Accumulated 20.0052.0071.2082.72 94.24 depreciation (3)Adjusted basis of 80.0048.0028.8017.28 5.76 machine after depreciation (end of year) (4)Opportunity cost150.00 150.00(warehouse) (5)Net working capital 10.00 10.0016.3224.9721.22 0 (end of year) (6)Change in net 10.006.32 8.653.75 21.

14、22 working capital (7)Total cash flow of260.00 6.32 8.653.75 192.98 investment(1) + (4) + (6),The Baldwin Company,Year 0Year 1Year 2Year 3Year 4 Year 5 Income: (8) Sales Revenues100.00163.20249.72212.20 129.90,Recall that production (in units) by year during the 5-year life of the machine is given b

15、y: (5,000, 8,000, 12,000, 10,000, 6,000). Price during the first year is $20 and increases 2% per year thereafter. Sales revenue in year 3 = 12,000$20(1.02)2 = 12,000$20.81 = $249,720.,The Baldwin Company,Year 0Year 1Year 2Year 3Year 4 Year 5 Income: (8) Sales Revenues100.00163.20249.72212.20 129.90

16、 (9) Operating costs 50.00 88.00145.20 133.10 87.84,Again, production (in units) by year during 5-year life of the machine is given by: (5,000, 8,000, 12,000, 10,000, 6,000). Production costs during the first year (per unit) are $10, and they increase 10% per year thereafter. Production costs in yea

17、r 2 = 8,000$10(1.10)1 = $88,000,The Baldwin Company,Year 0Year 1Year 2Year 3Year 4 Year 5 Income: (8) Sales Revenues100.00163.20249.72212.20 129.90 (9) Operating costs 50.00 88.00145.20 133.10 87.84 (10) Depreciation 20.00 32.00 19.20 11.52 11.52,Depreciation is calculated using the Accelerated Cost

18、 Recovery System (shown at right). Our cost basis is $100,000. Depreciation charge in year 4 = $100,000(.1152) = $11,520.,The Baldwin Company,Year 0Year 1Year 2Year 3Year 4 Year 5 Income: (8) Sales Revenues100.00163.20249.72212.20 129.90 (9) Operating costs 50.00 88.00145.20 133.10 87.84 (10) Deprec

19、iation 20.00 32.00 19.20 11.52 11.52 (11) Income before taxes 30.00 43.20 85.32 67.58 30.54 (8) (9) - (10) (12) Tax at 34 percent 10.20 14.69 29.01 22.98 10.38 (13) Net Income 19.80 28.51 56.31 44.60 20.16,Incremental After Tax Cash Flows,Other Methods for Computing OCF,Bottom-Up Approach Works only

20、 when there is no interest expense OCF = NI + depreciation Top-Down Approach OCF = Sales Costs Taxes Dont subtract non-cash deductions Tax Shield Approach OCF = (Sales Costs)(1 T) + Depreciation*T,8.3 Inflation and Capital Budgeting,Inflation is an important fact of economic life and must be conside

21、red in capital budgeting. Consider the relationship between interest rates and inflation, often referred to as the Fisher equation: (1 + Nominal Rate) = (1 + Real Rate) (1 + Inflation Rate),Inflation and Capital Budgeting,For low rates of inflation, this is often approximated: Real Rate Nominal Rate

22、 Inflation Rate While the nominal rate in the U.S. has fluctuated with inflation, the real rate has generally exhibited far less variance than the nominal rate.,Cash Flow and Inflation,Like interest rates, cash flows can be expressed in either nominal or real terms. A cash flow is expressed in nomin

23、al terms if the actual dollars to be received (or paid out) are given. A cash flow is expressed in real terms if the current or date 0 purchasing power of the cash flow is given.,Discounting: Nominal or Real?,Financial practitioners correctly stress the need to maintain consistency between cash flow

24、s and discount rates. That is, Nominal cash flows must be discounted at the nominal rate. Real cash flows must be discounted at the real rate.,Example,Shields Electric forecasts the following nominal cash flows on a particular project:,The nominal interest rate is 14 percent, and the inflation rate

25、is forecast to be 5 percent. What is the value of the project?,Example,Using Nominal Quantities The NPV can be calculated as: $26.47=-1000+600/1.14+650/1.142 The project should be accepted.,Example,Using Real Quantities The real cash flows are:,The real interest rate is 8.57143 percent (1.14/1.05-1)

26、. The NPV can be calculated as $26.47=-1000+571.43/1.0857143+589.57/1.08571432,8.5 Investments of Unequal Lives: the equivalent annual cost method(不同生命周期的投资：约当年均成本法),Suppose a firm must choose between two machines of unequal lives. Both machines can do the same job, but they have different operating

27、 costs and will last for different time periods. A simple application of the NPV rule suggests that we should take the machine whose costs have the lower present value. This could lead to the wrong decision, though, because the lower-cost machine may need to be replaced before the other one. the pro

28、jects must be evaluated on an equal-life basis.,Example,Downtown Athletic Club must choose between two mechanical tennis ball throwers. Machine A costs less than machine B but will not last as long. The cash outflows from the two machines are:,Revenues per year are assumed to be the same, regardless

29、 of machine, so they are ignored in the analysis.,Example,To get a handle on the decision, we take the present value of the costs of each of the two machines: Machine A: $798.42=500+120/1.1+120/1.12+120/1.13 Machine B: $916.99=600+100/1.1+100/1.12+100/1.13+100/1.14,Matching Cycles(循环匹配),Suppose that we run the example for 12 years. Machine A would have four complete cycles in this case and machine B would have three, so a comparison would be appropriate. Present Value of Costs of Machine A over 12 Years: $2188=798.42+798.42/1.13+798.42/1.16+798.42/1.19 Present Value of Costs of Mach