公司理财Chap7

LOGOChapter7NetPresentValueandOtherInvestmentRulesKeyConceptsandSkillsBeabletocomputepaybackanddiscountedpaybackandunderstandtheirshortcomingsUnderstandaccountingratesofreturnandtheirshortcomingsBeabletocomputetheinternalrateofreturnandprofitabilityindex,understandingthestrengthsandweaknessesofbothapproachesBeabletocomputethenetpresentvalueandunderstandwhyitisthebestdecisioncriterionChapterOutline7.1WhyUseNetPresentValue?7.2ThePaybackPeriodMethod7.3TheDiscountedPaybackPeriodMethod7.4TheAverageAccountingReturnMethod7.5TheInternalRateofReturn7.6TheProfitabilityIndex7.7ThePracticeofCapitalBudgeting7.1WhyUseNetPresentValue?AcceptingpositiveNPVprojectsbenefitsshareholders.NPVusescashflowsNPVusesallthecashflowsoftheprojectNPVdiscountsthecashflowsproperlyReinvestmentassumption:theNPVruleassumesthatallcashflowscanbereinvestedatthediscountrate.TheNetPresentValue(NPV)RuleNetPresentValue(NPV)=TotalPVoffutureCFs-InitialInvestmentEstimatingNPV:1.Estimatefuturecashflows:howmuch?andwhen?2.Estimatediscountrate3.EstimateinitialcostsMinimumAcceptanceCriteria:AcceptifNPV0RankingCriteria:ChoosethehighestNPVnkkknkkkioiINPV00)1()1(Considerthefollowingthreeprojectsavailabletoafirm:ABCNICFNICFNICF0(20000)(9000)(12000)1180011800(1800)1200600460023240132403000600060046003300060006004600Theappropriatediscountratefortheprojectsis10%.PleasecalculatetheNPVforeachproject.Example166920000%)101(13240%101118002ANPV15579000%)101(6000%)101(6000%101120032BNPV56012000%)101(4600%)101(4600%101460032CNPV7.2ThePaybackPeriodMethodHowlongdoesittaketheprojectto“payback”itsinitialinvestment?PaybackPeriod=numberofyearstorecoverinitialcostsMinimumAcceptanceCriteria:SetbymanagementRankingCriteria:SetbymanagementnttCOCI10)(Considerthefollowingthreeprojectsavailabletoafirm:ABCNICFNICFNICF0(20000)(9000)(12000)1180011800(1800)1200600460023240132403000600060046003300060006004600Pleasecalculatethepaybackperiodforeachproject.ExampleyearPPyearPPyearPPCBA61.24600120003.2600072009000262.11324011800200001Disadvantages:IgnoresthetimevalueofmoneyIgnorescashflowsafterthepaybackperiodBiasedagainstlong-termprojectsRequiresarbitraryacceptancecriteriaAprojectacceptedbasedonthepaybackcriteriamaynothaveapositiveNPVAdvantages:EasytounderstandBiasedtowardliquidityExampleABC0-100-100-1001205050230303035020204606060000paybackperiod3337.3TheDiscountedPaybackPeriodHowlongdoesittaketheprojectto“payback”itsinitialinvestment,takingthetimevalueofmoneyintoaccount?Decisionrule:Accepttheprojectifitpaysbackonadiscountedbasiswithinthespecifiedtime.CrCTttt01)1(0123$50,000$50,000$20,000-$100,000PP=1+1=2yeardiscountthecashfollow(-100,00045,454.5541,322.3115,026.3)DPP=1+1+(100000-45454.55-41322.31)/15026.3=2+0.88=2.88yearExample(discountrate=10%)PVIFABCCFPVCFPVCFPV0(20000)(9000)(12000)10.90911180010727.3812001090.9246004181.8620.82641324010941.5460004958.446003801.4430.751360004507.846003455.98DPP=1+(20000-10727.38)/10941.54=1.85DPP=2+(9000-6049.32)/4507.8=2.65DPP3年Example(discountrate=10%)PPA=1.62,PPB=2.3,PPC=2.617.4AverageAccountingReturnAnotherattractive,butfatallyflawed,approachRankingCriteriaandMinimumAcceptanceCriteria:SetbymanagementInvestmentofValueBookAverageIncomeNetAverageAARConsiderthefollowingthreeprojectsavailabletoafirm:ABCNICFNICFNICF0(20000)(9000)(12000)1180011800(1800)1200600460023240132403000600060046003300060006004600Pleasecalculatetheaverageaccountingreturnforeachproject.Example%512000600%6.1590003300030001800%6.1220000232401800CBAAARAARAARDisadvantages:IgnoresthetimevalueofmoneyUsesanarbitrarybenchmarkcutoffrateBasedonbookvalues,notcashflowsandmarketvaluesAdvantages:TheaccountinginformationisusuallyavailableEasytocalculate7.5TheInternalRateofReturnIRR:thediscountratethatsetsNPVtozeroMinimumAcceptanceCriteria:AcceptiftheIRRexceedstherequiredreturnRankingCriteria:SelectalternativewiththehighestIRRReinvestmentassumption:AllfuturecashflowsassumedreinvestedattheIRR000)1()(NPVCIRRCOCITtttExampleConsiderthefollowingproject:0123$50$100$150-$200Theinternalrateofreturnforthisprojectisabout19.44%.3,2,1,3215010050200)1(150$)1(100$)1(50$2000IRRIRRIRRPVIFPVIFPVIFIRRIRRIRRNPV0%$100.004%$73.888%$51.1112%$31.1316%$13.5220%($2.08)24%($15.97)28%($28.38)32%($39.51)36%($49.54)40%($58.60)44%($66.82)IfwegraphNPVversusthediscountrate,wecanseetheIRRasthex-axisintercept.IRR=19.44%($100.00)($50.00)$0.00$50.00$100.00$150.00-1%9%19%29%39%DiscountrateNPVConsiderthefollowingthreeprojectsavailabletoafirm:ABCNICFNICFNICF0(20000)(9000)(12000)1180011800(1800)1200600460023240132403000600060046003300060006004600Pleasecalculatetheinternalrateofreturnforeachproject.Example%04.16020000)1(132401118002IRRIRRIRRNPVA%88.1709000)1(6000)1(60001120032IRRIRRIRRIRRNPVB%33.701200046003,IRRPVIFANPVIRRCProblemswithIRRInvestingorFinancing?MultipleIRRsTheScaleProblemTheTimingProblemIndependentandMutuallyExclusiveProjectsMutuallyExclusivevs.IndependentMutuallyExclus