中級財務管理管理精品資料

1、 CAPITAL INVESTMENT DECISION編輯ppt3.1 Net Present Value ,Cash Flow Estimation3.2 The Cost of Capital 3.3 Capital Budgeting: Decision Criteria 3.4 Project Analysis and Evaluation編輯pptPresent Value and The Opportunity Cost of CapitalCash Flow Estimation編輯pptCompanies Invest in a variety of real assets.

2、 These include tangible assets such as plant and machineryand intangible assets such as management contracts and patents. The object of the investment or capital budgeting, decision is to find real assets that are worth more than they cost. All shareholders of a firm will be made better off if manag

3、ers follow the NPV ruleundertake positive NPV projects and reject negative NPV projects. 編輯pptWe can calculate how much better off in todays dollar the investment makes us by calculating the Net Present Value:.Cash inflowsTimeCash outflows01-$25,000$30,000編輯pptIn this chapter we will take the first,

4、 most basic steps toward understanding how assets are valued編輯pptthe first basic principle of financea dollar today is worth more than a dollar tomorrowbecause the dollar today can be invested to start earning interest immediately.Calculating Present Value編輯pptThe second basic financial principle: A

5、 safe dollar is worth more than a risky ernment securitiesinvestment in the stock market編輯pptPresent ValueValue today of a future cash flow.Discount RateInterest rate used to compute present values of future cash flows.Discount FactorPresent value of a $1 future payment.編輯ppt編輯pptDiscount Fac

6、tor = DF = PV of $1Discount Factors can be used to compute the present value of any cash flow.編輯pptinvestment in the stock marketPv=？government securitiesPv=？R=12%R=7%編輯pptinvestment in the stock marketPv=357government securitiesPv=374R=12%R=7%編輯pptStep 1: Forecast cash flowsCost of building = C0 =

7、350Sale price in Year 1 = C1 = 400Step 2: Estimate opportunity cost of capitalIf equally risky investments in the capital marketoffer a return of 7%, thenCost of capital = r = 7%編輯pptStep 3: Discount future cash flowsStep 4: Go ahead if PV of payoff exceeds investment編輯pptC0 is an investment and the

8、refore a cash outflow,will usually be a negative number.編輯pptAccept investments that have positive net present value編輯pptAccept investments that have positive net present valueExampleSuppose we can invest $50 today and receive $60 in one year. Should we accept the project given a 10% expected return

9、?編輯ppt編輯pptHigher risk projects require a higher rate of returnHigher required rates of return cause lower PVs編輯ppt編輯pptAccept investments that offer rates of return in excess of their opportunity cost of capital編輯pptTo calculate present value, we discount expected payoffs by the rate of return offe

10、red by equivalent investment alternatives in the capital market. This rate of return is often referred to as the discount rate, hurdle rate, or opportunity costof capital. It is called the opportunity cost because it is the return foregone by investing in the project rather than investing in securit

11、ies.編輯pptAccept investments that offer rates of return in excess of their opportunity cost of capitalExampleIn the project listed below, the foregone investment opportunity is 12%. Should we do the project?編輯pptIf the office building is as risky as investing in the stock market, the return foregonei

12、s 12 percent. Since the 14 percent return on the office building exceeds the 12 percent opportunity cost, you should go ahead with the project.編輯ppt編輯pptExampleYou may invest $100,000 today. Depending on the state of the economy, you may get one of three possible cash payoffs:編輯pptExample continuedY

13、ou search for a common stock with the same risk as the investment .Stock X turns out to be a perfect match. Xs price next year, given a normal economy, is forecastedat $110. The stock price will be higher in a boom and lower in a slump, but to the same degrees as your investment ($140 in a boom and

14、$80 in a slump). You conclude that the risks of stock X and your investment are identical.編輯pptThe stock is trading for $95.65. Next years price, given a normal economy, is forecast at $110編輯pptExample - continuedThe stocks expected payoff leads to an expected return.This is the expected return that

15、 you are giving up by investing in the project ratherthan the stock market. In other words, it is the projects opportunity cost of capital編輯pptExample - continuedDiscounting the expected payoff at the expected return leads to the PV of the projectthe sum that investors would be prepared to pay you f

16、or your project.編輯pptTo calculate net present value, deduct the initial investment:NPV = 95,650 - 100,000 =-$4,350The project is worth $4,350 less than it costs. It is not worth unde rtaking.編輯pptThe 10 percent expected return on the project is less than the 15 percent return Investors could expect

17、to earn by investing in the stock market, so the project is not worthwhile.編輯pptThe discount rate is determined by rates of return prevailing in capital markets.If the future cash flow is absolutely safe, then the discount rate is the interest rate on safe securities such as United States government

18、 debt. If the size of the future cash flow is uncertain, then the expected cash flow should be is counted at the expected rate of return offered by equivalent-risk securities編輯pptNPV(rate,value1,value2, .)編輯ppt編輯ppt編輯pptCAPITAL INVESTMENT DECISION編輯pptThe Cost of Capital編輯ppt1.Weighted Average Cost

19、of Capital2.Component Costs3.Marginal Cost of Capital編輯pptCost of capitalWhat the firm must pay for capitalThe return required by investorsMinimum rate of return required on new investmentsDetermined in the capital marketsDepends on the risk associated with the firms activitiesEqual to the equilibri

20、um rate of return demanded by investors in the capital markets for securities of that degree of risk編輯pptWeighted Average Cost of Capital: kaDiscount rate used when computing the NPV of a project of average riskHurdle rate used in conjunction with the IRRBased on the after-tax cost of capitalObtaine

21、d from the weighted costs of the individual componentsWeights equal to the proportion of each of the components in the target capital structure編輯ppt編輯ppt編輯ppt編輯ppt編輯ppt編輯ppt1.Key terms and concepts in capital budgeting2.Basic framework for capital budgeting3.Generating capital investment project pro

22、posals4.Calculation of cash flow編輯ppt編輯pptAvailability of funds: fund constraint /capital rationing Setting limits on Capital expenditures Reason: Most companies have a limited amount of dollars available for investment編輯ppt編輯ppt編輯pptPrinciples of Estimating Cash Flows Cash flow should be measured o

23、n an incremental basisCash flow should be measured on an after-tax basisAll the indirect effects of a project should be included in the cash flow calculationsSunk costs should not be consideredThe value of resources used in a project should be measured in terms of their opportunity costs編輯ppt編輯pptTa

24、x Consequences at the End of a Project s Life Project編輯pptComputing the Net Investment(NINV)The key is to focus on marginal cash flows, so pay attention to the difference between the CF with the investment and the CF without the investment編輯pptComputing Terminal Cash FlowsRecovery of after-tax salva

25、ge valueRecovery of net working capital: all recovered in the last year of the project在壽命期結束時要考慮殘值的回收和凈營運資本的回收有關殘值征稅問題，各國均有不同的規(guī)定。因此，在做資本預算時應根據(jù)具體情況來確定編輯pptInterest charges and net cash flowsinterest charges should not be deducted from the estimated cash flowsInvestment and financing decisions normall

26、y should be made independently of one anotherDouble counting of interest cost can be avoidedDepreciationsystematic allocation of the cost of an asset over more than one yearnoncash expense and has effect on income tax to payhigher depreciation ratehigher depreciation lower taxable incomelower tax ca

27、sh outflowhigher cash inflow編輯pptCapital Budgeting: Decision Criteria 編輯pptFive key methods are used to rank projects and to decide whether or not theyshould be accepted for inclusion in the capital budget: (1) payback Period, (2) Book Rate of Return, (3) net present value (NPV), (4) internal rate o

28、f return (IRR),and (5) modified internal rate of return (MIRR).We will explain how each ranking criterion is calculated, and then we will evaluate how well each performs in terms of identifying those projects that will maximize the firms stock price.編輯pptThe payback period of a project is the number

29、 of years it takes before the cumulative forecasted cash flow equals the initial outlay.The payback rule says only accept projects that “payback” in the desired time frame. .編輯pptExampleExamine the three projects and note the mistake we would make if we insisted on only taking projects with a paybac

30、k period of 2 years or less.編輯pptExampleExamine the three projects and note the mistake we would make if we insisted on only taking projects with a payback period of 2 years or less.編輯ppt9-64AdvantagesEasy to understandAdjusts for uncertainty of later cash flowsBiased towards liquidityDisadvantagesI

31、gnores the time value of moneyRequires an arbitrary cutoff pointIgnores cash flows beyond the cutoff dateBiased against long-term projects, such as research and development, and new projects編輯ppt9-65Compute the present value of each cash flow and then determine how long it takes to payback on a disc

32、ounted basisCompare to a specified required periodDecision Rule - Accept the project if it pays back on a discounted basis within the specified time編輯ppt9-66You are looking at a new project and you have estimated the following cash flows:Year 0:CF = -165,000Year 1:CF = 63,120; NI = 13,620Year 2:CF =

33、 70,800; NI = 3,300Year 3:CF = 91,080; NI = 29,100Average Book Value = 72,000Your required return for assets of this risk is 12%.編輯ppt9-67Assume we will accept the project if it pays back on a discounted basis in 2 years.Compute the PV for each cash flow and determine the payback period using discou

34、nted cash flowsYear 1: 165,000 63,120/1.121 = 108,643Year 2: 108,643 70,800/1.122 = 52,202Year 3: 52,202 91,080/1.123 = -12,627 project pays back in year 3Do we accept or reject the project?編輯ppt9-68AdvantagesIncludes time value of moneyEasy to understandDoes not accept negative estimated NPV invest

35、ments when all future cash flows are positiveBiased towards liquidityDisadvantagesMay reject positive NPV investmentsRequires an arbitrary cutoff pointIgnores cash flows beyond the cutoff pointBiased against long-term projects, such as R&D and new products編輯ppt9-69There are many different definition

36、s for average accounting returnThe one used in the book is:Average net income / average book valueNote that the average book value depends on how the asset is depreciated.Need to have a target cutoff rateDecision Rule: Accept the project if the AAR is greater than a preset rate.編輯ppt9-70Assume we re

37、quire an average accounting return of 25%Average Net Income:(13,620 + 3,300 + 29,100) / 3 = 15,340AAR = 15,340 / 72,000 = .213 = 21.3%Do we accept or reject the project?編輯ppt9-71AdvantagesEasy to calculateNeeded information will usually be availableDisadvantagesNot a true rate of return; time value

38、of money is ignoredUses an arbitrary benchmark cutoff rateBased on accounting net income and book values, not cash flows and market values編輯pptBook Rate of Return - Average income divided by average book value over project life. Also called accounting rate of return.Managers rarely use this measurem

39、ent to make decisions. The components reflect tax and accounting figures, not market values or cash flows. 編輯ppt編輯pptExampleYou can purchase a turbo powered machine tool gadget for $4,000. The investment will generate $2,000 and $4,000 in cash flows for two years, respectively. What is the IRR on th

40、is investment?編輯pptExample You can purchase a turbo powered machine tool gadget for $4,000. The investment will generate $2,000 and $4,000 in cash flows for two years, respectively. What is the IRR on this investment?編輯pptIRR=28%編輯ppt9-77編輯ppt9-78NPV and IRR will generally give us the same decisionE

41、xceptionsNon-conventional cash flows cash flow signs change more than onceMutually exclusive projectsInitial investments are substantially differentTiming of cash flows is substantially different編輯ppt9-79When the cash flows change sign more than once, there is more than one IRRWhen you solve for IRR

42、 you are solving for the root of an equation and when you cross the x-axis more than once, there will be more than one return that solves the equationIf you have more than one IRR, which one do you use to make your decision?編輯ppt9-80Suppose an investment will cost $90,000 initially and will generate

43、 the following cash flows:Year 1: 132,000Year 2: 100,000Year 3: -150,000The required return is 15%.Should we accept or reject the project?編輯ppt9-81IRR = 10.11% and 42.66%編輯ppt9-82The NPV is positive at a required return of 15%, so you should AcceptIf you use the financial calculator, you would get an IRR of 10.11% which would tell you to RejectYou need to recognize that there are non-conventional cash flows and look at the NPV profileIntuitively you would use the following decision rules:NPV choose the project wi