Download related notes on the Net Present Value, Internal ：在净现值下载相关的注意事项内部.ppt

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1、The McGraw-Hill Companies,Inc.,20016-1Irwin/McGraw-HillIrwin/McGraw-HillChapter 6Fundamentals of Corporate FinanceThird EditionNet Present Value and Other Investment CriteriaBrealey Myers Marcusslides by Matthew WillIrwin/McGraw-HillThe McGraw-Hill Companies,Inc.,2001The McGraw-Hill Companies,Inc.,2

2、0016-2Irwin/McGraw-HillTopics CoveredNet Present ValueOther Investment CriteriaProject InteractionsCapital RationingThe McGraw-Hill Companies,Inc.,20016-3Irwin/McGraw-HillNet Present ValueOpportunity Cost of Capital-Expected rate of return given up by investing in a project.Net Present Value-Present

3、 value of cash flows minus initial investments.The McGraw-Hill Companies,Inc.,20016-4Irwin/McGraw-HillNet Present ValueExampleQ:Suppose we can invest$50 today&receive$60 later today.What is our increase in value?Initial InvestmentAdded Value$50$10A:Profit=-$50 +$60 =$10The McGraw-Hill Companies,Inc.

4、,20016-5Irwin/McGraw-HillNet Present ValueExampleSuppose we can invest$50 today and receive$60 in one year.What is our increase in value given a 10%expected return?This is the definition of NPVInitial InvestmentAdded Value$50$4.55The McGraw-Hill Companies,Inc.,20016-6Irwin/McGraw-HillNet Present Val

5、ueNPV=PV-required investmentThe McGraw-Hill Companies,Inc.,20016-7Irwin/McGraw-HillNet Present ValueTerminologyC=Cash Flowt=time period of the investmentr=“opportunity cost of capital”The Cash Flow could be positive or negative at any time period.The McGraw-Hill Companies,Inc.,20016-8Irwin/McGraw-Hi

6、llNet Present ValueNet Present Value RuleManagers increase shareholders wealth by accepting all projects that are worth more than they cost.Therefore,they should accept all projects with a positive net present value.The McGraw-Hill Companies,Inc.,20016-9Irwin/McGraw-HillNet Present ValueExampleYou h

7、ave the opportunity to purchase an office building.You have a tenant lined up that will generate$16,000 per year in cash flows for three years.At the end of three years you anticipate selling the building for$450,000.How much would you be willing to pay for the building?The McGraw-Hill Companies,Inc

8、.,20016-10Irwin/McGraw-HillNet Present Value0 1 2 3$16,000$16,000$16,000$450,000$466,000Example-continuedThe McGraw-Hill Companies,Inc.,20016-11Irwin/McGraw-HillNet Present Value0 1 2 3$16,000$16,000$16,000$450,000$466,000Present Value 14,953 14,953 380,395$409,323Example-continuedThe McGraw-Hill Co

9、mpanies,Inc.,20016-12Irwin/McGraw-HillNet Present ValueExample-continuedIf the building is being offered for sale at a price of$350,000,would you buy the building and what is the added value generated by your purchase and management of the building?The McGraw-Hill Companies,Inc.,20016-13Irwin/McGraw

10、-HillNet Present ValueExample-continuedIf the building is being offered for sale at a price of$350,000,would you buy the building and what is the added value generated by your purchase and management of the building?The McGraw-Hill Companies,Inc.,20016-14Irwin/McGraw-HillOther Investment CriteriaInt

11、ernal Rate of Return(IRR)-Discount rate at which NPV=0.The McGraw-Hill Companies,Inc.,20016-15Irwin/McGraw-HillOther Investment CriteriaInternal Rate of Return(IRR)-Discount rate at which NPV=0.Rate of Return Rule-Invest in any project offering a rate of return that is higher than the opportunity co

12、st of capital.The McGraw-Hill Companies,Inc.,20016-16Irwin/McGraw-HillInternal Rate of ReturnExampleYou can purchase a building for$350,000.The investment will generate$16,000 in cash flows(i.e.rent)during the first three years.At the end of three years you will sell the building for$450,000.What is

13、 the IRR on this investment?The McGraw-Hill Companies,Inc.,20016-17Irwin/McGraw-HillInternal Rate of ReturnExampleYou can purchase a building for$350,000.The investment will generate$16,000 in cash flows(i.e.rent)during the first three years.At the end of three years you will sell the building for$4

14、50,000.What is the IRR on this investment?The McGraw-Hill Companies,Inc.,20016-18Irwin/McGraw-HillInternal Rate of ReturnExampleYou can purchase a building for$350,000.The investment will generate$16,000 in cash flows(i.e.rent)during the first three years.At the end of three years you will sell the

15、building for$450,000.What is the IRR on this investment?IRR=12.96%The McGraw-Hill Companies,Inc.,20016-19Irwin/McGraw-HillInternal Rate of ReturnIRR=12.96%The McGraw-Hill Companies,Inc.,20016-20Irwin/McGraw-HillInternal Rate of ReturnCalculating the IRR can be a laborious task.Fortunately,financial

16、calculators can perform this function easily.Note the previous example.The McGraw-Hill Companies,Inc.,20016-21Irwin/McGraw-HillInternal Rate of ReturnCalculating the IRR can be a laborious task.Fortunately,financial calculators can perform this function easily.Note the previous example.HP-10BEL-733A

17、BAII Plus-350,000CFj-350,000CFiCF16,000CFj16,000CFfi2ndCLR Work16,000CFj16,000CFi-350,000 ENTER466,000CFj466,000CFi 16,000 ENTERIRR/YRIRR16,000 ENTER466,000 ENTERIRRCPT All produce IRR=12.96The McGraw-Hill Companies,Inc.,20016-22Irwin/McGraw-HillPayback MethodPayback Period-Time until cash flows rec

18、over the initial investment of the project.The McGraw-Hill Companies,Inc.,20016-23Irwin/McGraw-HillPayback MethodPayback Period-Time until cash flows recover the initial investment of the project.The payback rule specifies that a project be accepted if its payback period is less than the specified c

19、utoff period.The following example will demonstrate the absurdity of this statement.The McGraw-Hill Companies,Inc.,20016-24Irwin/McGraw-HillPayback MethodExampleThe three project below are available.The company accepts all projects with a 2 year or less payback period.Show how this decision will imp

20、act our decision.The McGraw-Hill Companies,Inc.,20016-25Irwin/McGraw-HillPayback MethodExampleThe three project below are available.The company accepts all projects with a 2 year or less payback period.Show how this decision will impact our decision.Cash FlowsPrj.C0 C1 C2 C3 Payback NPV10%A-2000+100

21、0+1000+10000B-2000+1000+1000 0C-2000 0+2000 0The McGraw-Hill Companies,Inc.,20016-26Irwin/McGraw-HillPayback MethodExampleThe three project below are available.The company accepts all projects with a 2 year or less payback period.Show how this decision will impact our decision.Cash FlowsPrj.C0 C1 C2

22、 C3 Payback NPV10%A-2000+1000+1000+100002B-2000+1000+1000 02C-2000 0+2000 02The McGraw-Hill Companies,Inc.,20016-27Irwin/McGraw-HillPayback MethodExampleThe three project below are available.The company accepts all projects with a 2 year or less payback period.Show how this decision will impact our

23、decision.Cash FlowsPrj.C0 C1 C2 C3 Payback NPV10%A-2000+1000+1000+100002+7,249B-2000+1000+1000 02-264C-2000 0+2000 02-347The McGraw-Hill Companies,Inc.,20016-28Irwin/McGraw-HillBook Rate of ReturnBook Rate of Return-Average income divided by average book value over project life.Also called accountin

24、g rate of return.The McGraw-Hill Companies,Inc.,20016-29Irwin/McGraw-HillBook Rate of ReturnBook Rate of Return-Average income divided by average book value over project life.Also called accounting rate of return.Managers rarely use this measurement to make decisions.The components reflect tax and a

25、ccounting figures,not market values or cash flows.The McGraw-Hill Companies,Inc.,20016-30Irwin/McGraw-HillProject InteractionsWhen you need to choose between mutually exclusive projects,the decision rule is simple.Calculate the NPV of each project,and,from those options that have a positive NPV,choo

26、se the one whose NPV is highest.The McGraw-Hill Companies,Inc.,20016-31Irwin/McGraw-HillMutually Exclusive ProjectsExampleSelect one of the two following projects,based on highest NPV.Proj01234NPVA-155.55.55.55.5 B-20999assume 9%discount rateThe McGraw-Hill Companies,Inc.,20016-32Irwin/McGraw-HillMu

27、tually Exclusive ProjectsExampleSelect one of the two following projects,based on highest NPV.Proj01234NPVA-155.55.55.55.52.82 B-209992.78assume 9%discount rateThe McGraw-Hill Companies,Inc.,20016-33Irwin/McGraw-HillInvestment TimingSometimes you have the ability to defer an investment and select a

28、time that is more ideal at which to make the investment decision.A common example involves a tree farm.You may defer the harvesting of trees.By doing so,you defer the receipt of the cash flow,yet increase the cash flow.The McGraw-Hill Companies,Inc.,20016-34Irwin/McGraw-HillInvestment TimingExampleY

29、ou may purchase a computer anytime within the next five years.While the computer will save your company money,the cost of computers continues to decline.If your cost of capital is 10%and given the data listed below,when should you purchase the computer?The McGraw-Hill Companies,Inc.,20016-35Irwin/Mc

30、Graw-HillInvestment TimingExampleYou may purchase a computer anytime within the next five years.While the computer will save your company money,the cost of computers continues to decline.If your cost of capital is 10%and given the data listed below,when should you purchase the computer?YearCostPV Sa

31、vingsNPV at PurchaseNPV Today050702020.0145702522.7240703024.83367034Date to purchase 25.5433703725.3531703924.2The McGraw-Hill Companies,Inc.,20016-36Irwin/McGraw-HillEquivalent Annual CostEquivalent Annual Cost-The cost per period with the same present value as the cost of buying and operating a m

32、achine.The McGraw-Hill Companies,Inc.,20016-37Irwin/McGraw-HillEquivalent Annual CostEquivalent Annual Cost-The cost per period with the same present value as the cost of buying and operating a machine.The McGraw-Hill Companies,Inc.,20016-38Irwin/McGraw-HillEquivalent Annual CostExampleGiven the fol

33、lowing costs of operating two machines and a 6%cost of capital,select the lower cost machine using equivalent annual cost method.The McGraw-Hill Companies,Inc.,20016-39Irwin/McGraw-HillEquivalent Annual CostExampleGiven the following costs of operating two machines and a 6%cost of capital,select the

34、 lower cost machine using equivalent annual cost method.YearMach.1234PV6%Ann.CostD-15-4-4-4E-10-6-6The McGraw-Hill Companies,Inc.,20016-40Irwin/McGraw-HillEquivalent Annual CostExampleGiven the following costs of operating two machines and a 6%cost of capital,select the lower cost machine using equi

35、valent annual cost method.YearMach.1234PV6%Ann.CostD-15-4-4-4-25.69-9.61E-10-6-6-21.00-11.45The McGraw-Hill Companies,Inc.,20016-41Irwin/McGraw-HillEquivalent Annual CostExample(with a twist)Select one of the two following projects,based on highest“equivalent annual annuity”(r=9%).Proj01234NPVEq.Ann

36、A-155.55.55.55.5B-20999The McGraw-Hill Companies,Inc.,20016-42Irwin/McGraw-HillEquivalent Annual CostExample(with a twist)Select one of the two following projects,based on highest“equivalent annual annuity”(r=9%).Proj01234NPVEq.AnnA-155.55.55.55.52.82.87 B-209992.781.10The McGraw-Hill Companies,Inc.

37、,20016-43Irwin/McGraw-HillInternal Rate of ReturnExample You have two proposals to choice between.The initial proposal(H)has a cash flow that is different than the revised proposal(I).Using IRR,which do you prefer?The McGraw-Hill Companies,Inc.,20016-44Irwin/McGraw-HillInternal Rate of ReturnExample

38、 You have two proposals to choice between.The initial proposal(H)has a cash flow that is different than the revised proposal(I).Using IRR,which do you prefer?The McGraw-Hill Companies,Inc.,20016-45Irwin/McGraw-HillInternal Rate of Return50403020100-10-20NPV$,1,000sDiscount rate,%8 10 12 14 16Revised

39、 proposalInitial proposalThe McGraw-Hill Companies,Inc.,20016-46Irwin/McGraw-HillInternal Rate of ReturnPitfall 1-Mutually Exclusive ProjectsIRR sometimes ignores the magnitude of the project.The following two projects illustrate that problem.Pitfall 2-Lending or Borrowing?With some cash flows(as no

40、ted below)the NPV of the project increases s the discount rate increases.This is contrary to the normal relationship between NPV and discount rates.Pitfall 3-Multiple Rates of ReturnCertain cash flows can generate NPV=0 at two different discount rates.The following cash flow generates NPV=0 at both

41、(-50%)and 15.2%.The McGraw-Hill Companies,Inc.,20016-47Irwin/McGraw-HillCapital RationingCapital Rationing-Limit set on the amount of funds available for investment.Soft Rationing-Limits on available funds imposed by management.Hard Rationing-Limits on available funds imposed by the unavailability o

42、f funds in the capital market.The McGraw-Hill Companies,Inc.,20016-48Irwin/McGraw-HillProfitability IndexThe McGraw-Hill Companies,Inc.,20016-49Irwin/McGraw-HillWeb Resourceswww.nacubo.org/website/members/bomag/cbg396.htmla good article showing how capital budgeting is used in decision makingasbdc.ualr.edu/fod/1518.htmHow NPV analysis helps answer business questionswww.eastcentral.ab.ca/Courses/budgeting.htmlPutting project cost analysis in perspectiveClick to access web sitesClick to access web sitesInternet connection requiredInternet connection required