财务管理培训课件lecture6(ch6)

©TheMcGraw-HillCompanies,Inc.,20016-1Irwin/McGraw-HillIrwin/McGraw-HillChapter6FundamentalsofCorporateFinanceThirdEditionNetPresentValueandOtherInvestmentCriteriaBrealeyMyersMarcusslidesbyMatthewWillIrwin/McGraw-Hill©TheMcGraw-HillCompanies,Inc.,2001©TheMcGraw-HillCompanies,Inc.,20016-2Irwin/McGraw-HillTopicsCoveredNetPresentValueOtherInvestmentCriteriaProjectInteractionsCapitalRationing©TheMcGraw-HillCompanies,Inc.,20016-3Irwin/McGraw-HillNetPresentValueOpportunityCostofCapital-Expectedrateofreturngivenupbyinvestinginaproject.NetPresentValue-Presentvalueofcashflowsminusinitialinvestments.©TheMcGraw-HillCompanies,Inc.,20016-4Irwin/McGraw-HillNetPresentValueExampleSupposewecaninvest$50todayandreceive$60inoneyear.Whatisourincreaseinvaluegivena10%expectedreturn?ThisisthedefinitionofNPVProfit=-50+601.10$4.55InitialInvestmentAddedValue$50$4.55©TheMcGraw-HillCompanies,Inc.,20016-5Irwin/McGraw-HillNetPresentValueNPV=PV-requiredinvestmentNPVCCrtt01()NPVCCrCrCrtt01122111()()...()©TheMcGraw-HillCompanies,Inc.,20016-6Irwin/McGraw-HillNetPresentValueTerminologyC=CashFlowt=timeperiodoftheinvestmentr=“opportunitycostofcapital”TheCashFlowcouldbepositiveornegativeatanytimeperiod.©TheMcGraw-HillCompanies,Inc.,20016-7Irwin/McGraw-HillNetPresentValueNetPresentValueRuleManagersincreaseshareholders’wealthbyacceptingallprojectsthatareworthmorethantheycost.Therefore,theyshouldacceptallprojectswithapositivenetpresentvalue.©TheMcGraw-HillCompanies,Inc.,20016-8Irwin/McGraw-HillNetPresentValueExampleYouhavetheopportunitytopurchaseanofficebuilding.Youhaveatenantlinedupthatwillgenerate$16,000peryearincashflowsforthreeyears.Attheendofthreeyearsyouanticipatesellingthebuildingfor$450,000.Howmuchwouldyoubewillingtopayforthebuilding?©TheMcGraw-HillCompanies,Inc.,20016-9Irwin/McGraw-HillNetPresentValue0123$16,000$16,000$16,000$450,000$466,000PresentValue14,95314,953380,395$409,323Example-continued©TheMcGraw-HillCompanies,Inc.,20016-10Irwin/McGraw-HillNetPresentValueExample-continuedIfthebuildingisbeingofferedforsaleatapriceof$350,000,wouldyoubuythebuildingandwhatistheaddedvaluegeneratedbyyourpurchaseandmanagementofthebuilding?©TheMcGraw-HillCompanies,Inc.,20016-11Irwin/McGraw-HillNetPresentValueExample-continuedIfthebuildingisbeingofferedforsaleatapriceof$350,000,wouldyoubuythebuildingandwhatistheaddedvaluegeneratedbyyourpurchaseandmanagementofthebuilding?NPVNPV3500001600010716000107466000107323123,,(.),(.),(.)$59,©TheMcGraw-HillCompanies,Inc.,20016-12Irwin/McGraw-HillOtherInvestmentCriteriaInternalRateofReturn(IRR)-DiscountrateatwhichNPV=0.RateofReturnRule-Investinanyprojectofferingarateofreturnthatishigherthantheopportunitycostofcapital.RateofReturn=C-investmentinvestment1©TheMcGraw-HillCompanies,Inc.,20016-13Irwin/McGraw-HillInternalRateofReturnExampleYoucanpurchaseabuildingfor$350,000.Theinvestmentwillgenerate$16,000incashflows(i.e.rent)duringthefirstthreeyears.Attheendofthreeyearsyouwillsellthebuildingfor$450,000.WhatistheIRRonthisinvestment?03500001600011600014660001123,,(),(),()IRRIRRIRRIRR=12.96%©TheMcGraw-HillCompanies,Inc.,20016-14Irwin/McGraw-HillInternalRateofReturn-200-150-100-5005010015020005101520253035Discountrate(%)NPV(,000s)IRR=12.96%©TheMcGraw-HillCompanies,Inc.,20016-15Irwin/McGraw-HillPaybackMethodPaybackPeriod-Timeuntilcashflowsrecovertheinitialinvestmentoftheproject.Thepaybackrulespecifiesthataprojectbeacceptedifitspaybackperiodislessthanthespecifiedcutoffperiod.Thefollowingexamplewilldemonstratetheabsurdityofthisstatement.©TheMcGraw-HillCompanies,Inc.,20016-16Irwin/McGraw-HillPaybackMethodExampleThethreeprojectbelowareavailable.Thecompanyacceptsallprojectswitha2yearorlesspaybackperiod.Showhowthisdecisionwillimpactourdecision.CashFlowsPrj.C0C1C2C3PaybackNPV@10%A-2000+1000+1000+100002+7,249B-2000+1000+100002-264C-20000+200002-347©TheMcGraw-HillCompanies,Inc.,20016-17Irwin/McGraw-HillBookRateofReturnBookRateofReturn-Averageincomedividedbyaveragebookvalueoverprojectlife.Alsocalledaccountingrateofreturn.Managersrarelyusethismeasurementtomakedecisions.Thecomponentsreflecttaxandaccountingfigures,notmarketvaluesorcashflows.Bookrateofreturn=bookincomebookassets©TheMcGraw-HillCompanies,Inc.,20016-18Irwin/McGraw-HillProjectInteractionsWhenyouneedtochoosebetweenmutuallyexclusiveprojects,thedecisionruleissimple.CalculatetheNPVofeachproject,and,fromthoseoptionsthathaveapositiveNPV,choosetheonewhoseNPVishighest.©TheMcGraw-HillCompanies,Inc.,20016-19Irwin/McGraw-HillMutuallyExclusiveProjectsExampleSelectoneofthetwofollowingprojects,basedonhighestNPV.Proj01234NPVA-155.55.55.55.5B-20999assume9%discountrate©TheMcGraw-HillCompanies,Inc.,20016-20Irwin/McGraw-HillMutuallyExclusiveProjectsExampleSelectoneofthetwofollowingprojects,basedonhighestNPV.Proj01234NPVA-155.55.55.55.52.82B-209992.78assume9%discountrate©TheMcGraw-HillCompanies,Inc.,20016-21Irwin/McGraw-HillInvestmentTimingSometimesyouhavetheabilitytodeferaninvestmentandselectatimethatismoreidealatwhichtomaketheinvestmentdecision.Acommonexampleinvolvesa