英文版罗斯公司理财习题答案Chap007

CHAPTER7NETPRESENTVALUEANDOTHERINVESTMENTCRITERIAAnswerstoConceptsReviewandCriticalThinkingQuestions1.Apaybackperiodlessthantheproject’slifemeansthattheNPVispositiveforazerodiscountrate,butnothingmoredefinitivecanbesaid.Fordiscountratesgreaterthanzero,thepaybackperiodwillstillbelessthantheproject’slife,buttheNPVmaybepositive,zero,ornegative,dependingonwhetherthediscountrateislessthan,equalto,orgreaterthantheIRR.Thediscountedpaybackincludestheeffectoftherelevantdiscountrate.Ifaproject’sdiscountedpaybackperiodislessthantheproject’slife,itmustbethecasethatNPVispositive.2.IfaprojecthasapositiveNPVforacertaindiscountrate,thenitwillalsohaveapositiveNPVforazerodiscountrate;thus,thepaybackperiodmustbelessthantheprojectlife.SincediscountedpaybackiscalculatedatthesamediscountrateasisNPV,ifNPVispositive,thediscountedpaybackperiodmustbelessthantheproject’slife.IfNPVispositive,thenthepresentvalueoffuturecashinflowsisgreaterthantheinitialinvestmentcost;thusPImustbegreaterthan1.IfNPVispositiveforacertaindiscountrateR,thenitwillbezeroforsomelargerdiscountrateR*;thus,theIRRmustbegreaterthantherequiredreturn.3.a.Paybackperiodissimplytheaccountingbreak-evenpointofaseriesofcashflows.Toactuallycomputethepaybackperiod,itisassumedthatanycashflowoccurringduringagivenperiodisrealizedcontinuouslythroughouttheperiod,andnotatasinglepointintime.Thepaybackisthenthepointintimefortheseriesofcashflowswhentheinitialcashoutlaysarefullyrecovered.Givensomepredeterminedcutoffforthepaybackperiod,thedecisionruleistoacceptprojectsthatpaybackbeforethiscutoff,andrejectprojectsthattakelongertopayback.Theworstproblemassociatedwithpaybackperiodisthatitignoresthetimevalueofmoney.Inaddition,theselectionofahurdlepointforpaybackperiodisanarbitraryexercisethatlacksanysteadfastruleormethod.Thepaybackperiodisbiasedtowardsshort-termprojects;itfullyignoresanycashflowsthatoccurafterthecutoffpoint.b.Theaverageaccountingreturnisinterpretedasanaveragemeasureoftheaccountingperformanceofaprojectovertime,computedassomeaverageprofitmeasureattributabletotheprojectdividedbysomeaveragebalancesheetvaluefortheproject.ThistextcomputesAARasaveragenetincomewithrespecttoaverage(total)bookvalue.GivensomepredeterminedcutoffforAAR,thedecisionruleistoacceptprojectswithanAARinexcessofthetargetmeasure,andrejectallotherprojects.AARisnotameasureofcashflowsandmarketvalue,butameasureoffinancialstatementaccountsthatoftenbearlittleresemblancetotherelevantvalueofaproject.Inaddition,theselectionofacutoffisarbitrary,andthetimevalueofmoneyisignored.Forafinancialmanager,boththerelianceonaccountingnumbersratherthanrelevantmarketdataandtheexclusionoftimevalueofmoneyconsiderationsaretroubling.Despitetheseproblems,AARcontinuestobeusedinpracticebecause(1)theaccountinginformationisusuallyavailable,(2)analystsoftenuseaccountingratiostoanalyzefirmperformance,and(3)managerialcompensationisoftentiedtotheattainmentoftargetaccountingratiogoals.c.TheIRRisthediscountratethatcausestheNPVofaseriesofcashflowstobeidenticallyzero.IRRcanthusbeinterpretedasafinancialbreak-evenrateofreturn;attheIRRdiscountrate,thenetvalueoftheprojectiszero.Theacceptanceandrejectioncriteriaare:IfC00andallfuturecashflowsarepositive,accepttheprojectiftheinternalrateofreturnisgreaterthanorequaltothediscountrate.IfC00andallfuturecashflowsarepositive,rejecttheprojectiftheinternalrateofreturnislessthanthediscountrate.IfC00andallfuturecashflowsarenegative,accepttheprojectiftheinternalrateofreturnislessthanorequaltothediscountrate.IfC00andallfuturecashflowsarenegative,rejecttheprojectiftheinternalrateofreturnisgreaterthanthediscountrate.IRRistheinterestratethatcausesNPVforaseriesofcashflowstobezero.NPVispreferredinallsituationstoIRR;IRRcanleadtoambiguousresultsiftherearenon-conventionalcashflows,anditalsoambiguouslyrankssomemutuallyexclusiveprojects.However,forstand-aloneprojectswithconventionalcashflows,IRRandNPVareinterchangeabletechniques.TheIRRdecisionruleforprojectsd.Theprofitabilityindexisthepresentvalueofcashinflowsrelativetotheprojectcost.Assuch,itisabenefit/costratio,providingameasureoftherelativeprofitabilityofaproject.TheprofitabilityindexdecisionruleistoacceptprojectswithaPIgreaterthanone,andtorejectprojectswithaPIlessthanone.Theprofitabilityindexcanbeexpressedas:PI=(NPV+cost)/cost=1+(NPV/cost).IfafirmhasabasketofpositiveNPVprojectsandissubjecttocapitalrationing,PImayprovideagoodrankingmeasureoftheprojects,indicatingthe“bangforthebuck”ofeachparticularproject.e.NPVissimplythepresentvalueofaproject’scashflows.NPVspecificallymeasures,afterconsideringthetimevalueofmoney,thenetincreaseordecreaseinfirmwealthduetotheproject.ThedecisionruleistoacceptprojectsthathaveapositiveNPV,andrejectprojectswithanegativeNPV.NPVissuperiortotheothermethodsofanalysispresentedinthetextbecauseithasnoseriousflaws.Themethodunambiguouslyranksmutuallyexclusiveprojects,andcandifferentiatebetweenprojectsofdifferentscaleandtimehorizon.TheonlydrawbacktoNPVisthatitreliesoncashflowanddiscountratevaluesthatareoftenestimatesandnotcertain,butthisisaproblemsharedby