金融学概论讲义(北大光华管理学院)lecture03

1PrinciplesofFinanceLecture03HowtoAnalyzeInvestmentProjects2ObjectivesToshowhowtousediscountedcashflowanalysistomakedecisionssuchasWhethertoenteranewlineofbusinessWhethertoinvestinequipmenttoreducecosts3ContentsTheNPVruleEstimatingaproject’scashflowsCostofcapitalSensitivityAnalysisCost-reducingprojectsProjectswithdifferentlivesMutuallyexclusiveprojectsInflationandcapitalbudgeting4TheNatureofProjectAnalysisBasicunitofanalysisIndividualinvestmentprojectThecriterionusedFindthepresentvalueofallfuturecashflows,andsubtracttheinitialinvestmenttoobtainthenetpresentvalue(NPV)InvestinproposedprojectwithpositiveNPVThewealthofthefirm’sshareholderswillincreasebyNPV5NPVofaProjectDiscountrate(costofcapital)10%YearCashFlowPVCum_PV01000100010001450409591235028930232501881144150102115503120ProjectNPV20Decision:Accepttheproject6NPVofaProjectDiscountrate(costofcapital)15%YearCashFlowPVCum_PV0100010001000145039160923502653443250164180415086945502569ProjectNPV69Decision:Rejecttheproject7NPVofaProjectDiscountrate(costofcapital)11.04%YearCashFlowPVCum_PV010001000100014504055952350284311325018312841509930550300ProjectNPV08NPVasaFunctionofDiscountRate-200-150-100-500501001502002500%5%10%15%20%DiscountRateNPV9WhereDoInvestmentIdeasComeFrom?MonitorexistingandcustomerneedsMonitorexistingandpotentialtechnologicalcapacityofthefirmMonitormaincompetitors’marketing,investment,patent,andtechnicalrecruitmentMonitorproductionanddistributionfunctionsforrevenueenhancement/costsavingsRewardemployeesforinnovativeideas10ExamplesofInvestmentIdeasLaunchanewlineofbusinessReplaceexistingequipmentwithmoreefficientoneClosealossmakingsubsidiary11EstimatingAProject’sCashFlowsEstimatethecashflowswithouttheinvestmentEstimatethecashflowswiththeinvestmentTakethedifferenceThiswillyieldonlyfutureincrementalcashflowstotheinvestment12DepreciationandCashFlowsItisimportanttorememberthatwhenmakingfinancialdecisionsonlytimedcashflowsareusedDepreciationisanexpense,butnotacashflow,andmustbeexcludedThetaxbenefitofdepreciation,however,iscashflow,andmustbeincluded.13WorkingCapitalandCashFlowsSomecashflowsdonotoccurontheincomestatement,butinvolvetiming.WorkingcapitaladditionsandreductionsarecashflowsAttheendoftheproject,thesumofnominalchangesinworkingcapitaliszero14IncrementalCashFlows:Illustration1Aproposedprojectwillgenerate$10millioninrevenue,butwillcausesanotherproductlinetolose$3millioninrevenuesTheincrementalcashflowisonly$7million15IncrementalCashFlows:Illustration2R&Dexpensesare$10,000to-dateforyourproject,andyouplantospendanother$20,000,making$30,000inallThe$10,000isasunkcost.ThedecisionwhethertoundertaketheprojectwillnotchangethisexpenditureAsunkcosthasnoimpactonfuturecashflowsOnly$20,000isanincrementalcost,andthe$10,000shouldbeexcluded16IncrementalCashFlows:Illustration3Aproposedprojectusesanexisting(non-cancelable)leasedwarehousewithtotalannualrentof$100,000Thewarehouseisprojectedtoremain50%utilized,unlesstheprojectisundertakenTheleaseprohibitssub-leasingTheproposedprojectwilluse25%ofthewarehouseThecurrentmarketratewillbe$150,000torentthewarehouseHowshouldtheprojectbecharged?17IncrementalCashFlows:Illustration3TheprojectshouldbechargednothingThewarehouseexpenditurewilloccurwhethertheprojectisundertakenornot.ItisthereforenotanincrementalcashflowWithdifferentassumptions,e.g.alternativeusageorleaserenegotiation,theanswerwouldbedifferent.18TheCostofCapitalTheriskoftheprojectis,ingeneral,differentfromtheriskoftheexistingprojects/assetsOnlythemarket-relatedriskisrelevantOnlytheriskfromaproject’scashflowisrelevant(notthatoffinancinginstruments)19EstimatingCashFlows:PC1000Capitalinvestmentof$2.8millions,andtheequipmentwillbedepreciatedover7yearsusingthestraight-linemethodwithazerosalvagevalueRevenue:4000units$5000perunit$20millionFixedcostsinc.depreciation:$3.5millionVariablecosts:4000units$3750perunit$15millionWorkingcapital:$2.2millionthroughoutyears1to7Corporatetaxrate:40%20EstimatingCashFlows:PC1000CostofCapital:15%Netoperatingcashflowscanbecalculatedintwoequivalentways:(1)CashFlowRevenueCashExpenses(exc.depreciation)Taxes(2)CashFlow=RevenueTotalExpenses(inc.depreciation)Taxes+NoncashExpenses21EstimatingCashFlows:PC1000Year012345671Capitalinvestment(2.8)2ChangesinWC(2.2)2.23Revenue202020202020204CashExpenses18.118.118.118.118.118.118.15Operatingprofits1.91.91.91.91.91.91.96Taxesat40%(0.76)(0.76)(0.76)(0.76)(0.76)(0.76)(0.76)7Dep.TaxShields0.160.160.160.160.160.160.168Netop.cashflows1.31.31.31.31.31.31.39NetCashFlows(5.0)1.31.31.31.31.31.33.522EstimatingCashFlows:PC1000Year012345671Capitalinvestment(2.8)2ChangesinWC(2.2)2.23Revenue202020202020204CashExpenses18.118.118.118.118.118.118.15Depreciation0.40.40.40.40.40.40.46Operatingprofits1.51.51.51.51.51.51.57Taxesat40%(0.6)(0.6)(0.6)(0.6)(0.6)(0.6)(0.6)8AfterTaxProfits0.90.90.90.90.90.90.99Netop.cashflows1.31.31.31.31.31.31.310NetCashFlows(5.0)1.31.31.31.31.31.33.5million236.1$15.15.315.13.115.13.115.13.10.5762NPV23Sensi