公司理财Chap07.ppt

公司理财Chap07.ppt

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NetPresentValueandOtherInvestmentRulesChapter7McGraw-Hill/IrwinCopyright2009byTheMcGraw-HillCompanies,Inc.Allrightsreserved.KeyConceptsandSkillsoBeabletocomputepaybackanddiscountedpaybackandunderstandtheirshortcomingsoUnderstandaccountingratesofreturnandtheirshortcomingsoBeabletocomputetheinternalrateofreturnandprofitabilityindex,understandingthestrengthsandweaknessesofbothapproachesoBeabletocomputethenetpresentvalueandunderstandwhyitisthebestdecisioncriterion1ChapterOutline7.1WhyUseNetPresentValue?

7.2ThePaybackPeriodMethod7.3TheDiscountedPaybackPeriodMethod7.4TheAverageAccountingReturnMethod7.5TheInternalRateofReturn7.6ProblemswiththeIRRApproach7.7TheProfitabilityIndex7.8ThePracticeofCapitalBudgeting27.1WhyUseNetPresentValue?

oAcceptingpositiveNPVprojectsbenefitsshareholders.NPVusescashflowsNPVusesallthecashflowsoftheprojectNPVdiscountsthecashflowsproperlyoReinvestmentassumption:

theNPVruleassumesthatallcashflowscanbereinvestedatthediscountrate.3TheNetPresentValue（NPV）RuleoNetPresentValue（NPV）=TotalPVoffutureCFs+InitialInvestmentoEstimatingNPV:

1.Estimatefuturecashflows:

howmuch?

andwhen?

2.Estimatediscountrate3.EstimateinitialcostsoMinimumAcceptanceCriteria:

AcceptifNPV0oRankingCriteria:

ChoosethehighestNPV4CalculatingNPVwithSpreadsheetsoSpreadsheetsareanexcellentwaytocomputeNPVs,especiallywhenyouhavetocomputethecashflowsaswell.oUsingtheNPVfunction:

nThefirstcomponentistherequiredreturnenteredasadecimal.nThesecondcomponentistherangeofcashflowsbeginningwithyear1.nAddtheinitialinvestmentaftercomputingtheNPV.57.2ThePaybackPeriodMethod67.2ThePaybackPeriodMethodoHowlongdoesittaketheprojectto“payback”itsinitialinvestment?

oPaybackPeriod=numberofyearstorecoverinitialcostsoMinimumAcceptanceCriteria:

nSetbymanagementoRankingCriteria:

nSetbymanagement77.2ThePaybackPeriodMethod87.2ThePaybackPeriodMethod（c）10K22K37K47K54KPBPPBPPBP=a+（b-c）/d=a+（b-c）/d=3+（40-37）/10=3+（40-37）/10=3+（3）/10=3+（3）/10=3.3Years3.3Years3.3Yearsaccumulativecashflow（a）（-b）（d）0123459ThePaybackPeriodMethodoDisadvantages:

nIgnoresthetimevalueofmoneynIgnorescashflowsafterthepaybackperiodnBiasedagainstlong-termprojectsnRequiresanarbitraryacceptancecriterianAprojectacceptedbasedonthepaybackcriteriamaynothaveapositiveNPVoAdvantages:

nEasytounderstandnBiasedtowardliquidity107.3TheDiscountedPaybackPeriodoHowlongdoesittaketheprojectto“payback”itsinitialinvestment,takingthetimevalueofmoneyintoaccount?

oDecisionrule:

Accepttheprojectifitpaysbackonadiscountedbasiswithinthespecifiedtime.oBythetimeyouhavediscountedthecashflows,youmightaswellcalculatetheNPV.117.4AverageAccountingReturnoAnotherattractive,butfatallyflawed,approachoRankingCriteriaandMinimumAcceptanceCriteriasetbymanagement127.4AverageAccountingReturn13AverageAccountingReturnoDisadvantages:

nIgnoresthetimevalueofmoneynUsesanarbitrarybenchmarkcutoffratenBasedonbookvalues,notcashflowsandmarketvaluesoAdvantages:

nTheaccountinginformationisusuallyavailablenEasytocalculate147.5TheInternalRateofReturnoIRR:

thediscountratethatsetsNPVtozerooMinimumAcceptanceCriteria:

nAcceptiftheIRRexceedstherequiredreturnoRankingCriteria:

nSelectalternativewiththehighestIRRoReinvestmentassumption:

nAllfuturecashflowsassumedreinvestedattheIRR15InternalRateofReturn（IRR）i1i实i2DiscountedRateNPV10NPV2i计NPV16InternalRateofReturn（IRR）17InternalRateofReturn（IRR）oDisadvantages:

nDoesnotdistinguishbetweeninvestingandborrowingnIRRmaynotexist,ortheremaybemultipleIRRsnProblemswithmutuallyexclusiveinvestmentsoAdvantages:

nEasytounderstandandcommunicate18IRR:

ExampleConsiderthefollowingproject:

0123$50$100$150-$200Theinternalrateofreturnforthisprojectis19.44%19NPVPayoffProfileIfwegraphNPVversusthediscountrate,wecanseetheIRRasthex-axisintercept.IRR=19.44%20CalculatingIRRwithSpreadsheetsoYoustartwiththecashflowsthesameasyoudidfortheNPV.oYouusetheIRRfunction:

nYoufirstenteryourrangeofcashflows,beginningwiththeinitialcashflow.nYoucanenteraguess,butitisnotnecessary.nThedefaultformatisawholepercentyouwillnormallywanttoincreasethedecimalplacestoatleasttwo.217.6ProblemswithIRRqAreWeBorrowingorLendingqMultipleIRRsqTheScaleProblemqTheTimingProblem22MutuallyExclusivevs.IndependentoMutuallyExclusiveProjects:

onlyONEofseveralpotentialprojectscanbechosen,e.g.nRANKallalternatives,andselectthebestone.oIndependentProjects:

acceptingorrejectingoneprojectdoesnotaffectthedecisionoftheotherprojects.nMustexceedaMINIMUMacceptancecriteria23AreWeBorrowingorLe