公司理财Chap07优质PPT.ppt

1、the NPV rule assumes that all cash flows can be reinvested at the discount rate.3The Net Present Value（NPV）RuleoNet Present Value（NPV）=Total PV of future CFs+Initial InvestmentoEstimating NPV:1.Estimate future cash flows:how much?and when?2.Estimate discount rate3.Estimate initial costsoMinimum Acce

2、ptance Criteria:Accept if NPV 0oRanking Criteria:Choose the highest NPV4Calculating NPV with SpreadsheetsoSpreadsheets are an excellent way to compute NPVs,especially when you have to compute the cash flows as well.oUsing the NPV function:nThe first component is the required return entered as a deci

3、mal.nThe second component is the range of cash flows beginning with year 1.nAdd the initial investment after computing the NPV.57.2 The Payback Period Method67.2 The Payback Period MethodoHow long does it take the project to“pay back”its initial investment?oPayback Period=number of years to recover

4、initial costsoMinimum Acceptance Criteria:nSet by managementoRanking Criteria:nSet by management77.2 The Payback Period Method87.2 The Payback Period Method（c）10 K 22 K 37 K 47 K 54 KPBPPBPPBP =a+（b-c）/d=a+（b-c）/d=3+（40-37）/10=3+（40-37）/10=3+（3）/10=3+（3）/10 =3.3 Years3.3 Years3.3 Yearsaccumulative c

5、ash flow（a）（-b）（d）0 1 2 3 4 59The Payback Period MethodoDisadvantages:nIgnores the time value of moneynIgnores cash flows after the payback periodnBiased against long-term projectsnRequires an arbitrary acceptance criterianA project accepted based on the payback criteria may not have a positive NPVo

6、Advantages:nEasy to understandnBiased toward liquidity107.3 The Discounted Payback PeriodoHow long does it take the project to“pay back”its initial investment,taking the time value of money into account?oDecision rule:Accept the project if it pays back on a discounted basis within the specified time

7、.oBy the time you have discounted the cash flows,you might as well calculate the NPV.117.4 Average Accounting ReturnoAnother attractive,but fatally flawed,approachoRanking Criteria and Minimum Acceptance Criteria set by management127.4 Average Accounting Return13Average Accounting ReturnoDisadvantag

8、es:nIgnores the time value of moneynUses an arbitrary benchmark cutoff ratenBased on book values,not cash flows and market valuesoAdvantages:nThe accounting information is usually availablenEasy to calculate14 7.5 The Internal Rate of ReturnoIRR:the discount rate that sets NPV to zero oMinimum Accep

9、tance Criteria:nAccept if the IRR exceeds the required returnoRanking Criteria:nSelect alternative with the highest IRRoReinvestment assumption:nAll future cash flows assumed reinvested at the IRR15Internal Rate of Return（IRR）i1 i实 i 2 Discounted RateNPV 1 0NPV 2i计 NPV16Internal Rate of Return（IRR）1

10、7Internal Rate of Return（IRR）oDisadvantages:nDoes not distinguish between investing and borrowingnIRR may not exist,or there may be multiple IRRs nProblems with mutually exclusive investmentsoAdvantages:nEasy to understand and communicate18IRR:ExampleConsider the following project:0123$50$100$150-$2

11、00The internal rate of return for this project is 19.44%19NPV Payoff ProfileIf we graph NPV versus the discount rate,we can see the IRR as the x-axis intercept.IRR=19.44%20Calculating IRR with SpreadsheetsoYou start with the cash flows the same as you did for the NPV.oYou use the IRR function:nYou f

12、irst enter your range of cash flows,beginning with the initial cash flow.nYou can enter a guess,but it is not necessary.nThe default format is a whole percent you will normally want to increase the decimal places to at least two.217.6 Problems with IRRqAre We Borrowing or LendingqMultiple IRRs qThe

13、Scale ProblemqThe Timing Problem22Mutually Exclusive vs.IndependentoMutually Exclusive Projects:only ONE of several potential projects can be chosen,e.g.nRANK all alternatives,and select the best one.oIndependent Projects:accepting or rejecting one project does not affect the decision of the other projects.nMust exceed a MINIMUM acceptance criteria23Are We Borrowing or Le