公司理财Chap7(46页PPT).pptx

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1、LOGOChapter 7Net Present Value and Other Investment RulesKey Concepts and SkillsvBe able to compute payback and discounted payback and understand their shortcomingsvUnderstand accounting rates of return and their shortcomingsvBe able to compute the internal rate of return and profitability index,und

2、erstanding the strengths and weaknesses of both approachesvBe able to compute the net present value and understand why it is the best decision criterionChapter Outline7.1 Why Use Net Present Value?7.2 The Payback Period Method7.3 The Discounted Payback Period Method7.4The Average Accounting Return M

3、ethod7.5 The Internal Rate of Return7.6 The Profitability Index7.7 The Practice of Capital Budgeting7.1 Why Use Net Present Value?vAccepting positive NPV projects benefits shareholders.NPV uses cash flowsNPV uses all the cash flows of the projectNPV discounts the cash flows properlyvReinvestment ass

4、umption:the NPV rule assumes that all cash flows can be reinvested at the discount rate.The Net Present Value(NPV)RuleThe Net Present Value(NPV)RulevNet Present Value(NPV)=Total PV of future CFs-Initial InvestmentvEstimating NPV:1.Estimate future cash flows:how much?and when?2.Estimate discount rate

5、3.Estimate initial costsvMinimum Acceptance Criteria:Accept if NPV 0vRanking Criteria:Choose the highest NPVConsider the following three projects available to a firm:A AB BC CNICFNICFNICF0(20000)(9000)(12000)1180011800(1800)1200600460023240132403000600060046003300060006004600The appropriate discount

6、 rate for the projects is 10%.Please calculate the NPV for each project.ExampleExample7.2 The Payback Period MethodvHow long does it take the project to“pay back”its initial investment?vPayback Period=number of years to recover initial costsvMinimum Acceptance Criteria:Set by managementvRanking Crit

7、eria:Set by managementConsider the following three projects available to a firm:A AB BC CNICFNICFNICF0(20000)(9000)(12000)1180011800(1800)1200600460023240132403000600060046003300060006004600Please calculate the payback period for each project.ExampleExamplevDisadvantages:Ignores the time value of mo

8、neyIgnores cash flows after the payback periodBiased against long-term projectsRequires arbitrary acceptance criteriaA project accepted based on the payback criteria may not have a positive NPVvAdvantages:Easy to understandBiased toward liquidityExampleExample ABC0-100-100-10012050502303030350202046

9、06060000payback period3337.3 The Discounted Payback PeriodvHow long does it take the project to“pay back”its initial investment,taking the time value of money into account?vDecision rule:Accept the project if it pays back on a discounted basis within the specified time.0123$50,000$50,000$20,000-$100

10、,000nPP=1+1=2 yearndiscount the cash follown(-100,000 45,454.55 41,322.31 15,026.3)nDPP=1+1+(100000-45454.55-41322.31)/15026.3 =2+0.88=2.88 year Example(discount rate=10%)Example(discount rate=10%)PVIFABCCFPVCFPVCFPV0(20000)(9000)(12000)10.90911180010727.3812001090.92 46004181.8620.82641324010941.54

11、60004958.446003801.4430.751360004507.846003455.98DPP=1+(20000-10727.38)/10941.54=1.85DPP=2+(9000-6049.32)/4507.8=2.65DPP3年年Example(discount rate=10%)Example(discount rate=10%)nPPA=1.62,PPB=2.3,PPC=2.617.4 Average Accounting ReturnvAnother attractive,but fatally flawed,approachvRanking Criteria and M

12、inimum Acceptance Criteria:Set by managementConsider the following three projects available to a firm:A AB BC CNICFNICFNICF0(20000)(9000)(12000)1180011800(1800)1200600460023240132403000600060046003300060006004600Please calculate the average accounting return for each project.ExampleExamplevDisadvant

13、ages:Ignores the time value of moneyUses an arbitrary benchmark cutoff rateBased on book values,not cash flows and market valuesvAdvantages:The accounting information is usually availableEasy to calculate 7.5 The Internal Rate of ReturnvIRR:the discount rate that sets NPV to zero vMinimum Acceptance

14、 Criteria:Accept if the IRR exceeds the required returnvRanking Criteria:Select alternative with the highest IRRvReinvestment assumption:All future cash flows assumed reinvested at the IRRExampleExampleConsider the following project:0123$50$100$150-$200The internal rate of return for this project is

15、 about 19.44%.If we graph NPV versus the discount rate,we can see the IRR as the x-axis intercept.IRR=19.44%Consider the following three projects available to a firm:A AB BC CNICFNICFNICF0(20000)(9000)(12000)1180011800(1800)1200600460023240132403000600060046003300060006004600Please calculate the int

16、ernal rate of return for each project.ExampleExampleProblems with IRRProblems with IRRqInvesting or Financing?qMultiple IRRsqThe Scale ProblemqThe Timing ProblemIndependent and Mutually Exclusive ProjectsMutually Exclusive vs.IndependentMutually Exclusive vs.IndependentvMutually Exclusive Projects:o

17、nly ONE of several potential projects can be chosenRANK all alternatives,and select the best one.vIndependent Projects:accepting or rejecting one project does not affect the decision of the other projectsMust exceed a MINIMUM acceptance criteriaTwo General Problems Affecting Both Independent Two Gen

18、eral Problems Affecting Both Independent and Mutually Exclusive Projectsand Mutually Exclusive ProjectsProblem1:Investing or Financing?Project AProject BProject CDates0101012Cash flows-100130100-130-100230-132IRR30%30%10%and 20%NPV(10%)18.2-18.20Accept if market rate30%10%but 1Ranking Criteria:Selec

19、t alternative with highest PIConsider the following three projects available to a firm:A AB BC CNICFNICFNICF0(20000)(9000)(12000)1180011800(1800)1200600460023240132403000600060046003300060006004600Please calculate the profitability index for each project.(NPVA=1669,NPVB=1557,NPVc=-560)ExampleExample

20、vDisadvantages:Problems with mutually exclusive investmentsvAdvantages:May be useful when available investment funds are limitedEasy to understand and communicateCorrect decision when evaluating independent projects7.7 The Practice of Capital BudgetingvVaries by industry:Some firms use payback,other

21、s use accounting rate of return.vThe most frequently used technique for large corporations is IRR or NPV.Summary Discounted Cash FlowSummary Discounted Cash FlowvNet present valueDifference between market value and costAccept the project if the NPV is positiveHas no serious problemsPreferred decisio

22、n criterionvInternal rate of returnDiscount rate that makes NPV=0Take the project if the IRR is greater than the required returnSame decision as NPV with conventional cash flowsIRR is unreliable with non-conventional cash flows or mutually exclusive projectsvProfitability IndexBenefit-cost ratioTake

23、 investment if PI 1Cannot be used to rank mutually exclusive projectsMay be used to rank projects in the presence of capital rationingSummary Payback CriteriaSummary Payback CriteriavPayback periodLength of time until initial investment is recoveredTake the project if it pays back in some specified

24、periodDoes not account for time value of money,and there is an arbitrary cutoff periodvDiscounted payback periodLength of time until initial investment is recovered on a discounted basisTake the project if it pays back in some specified periodThere is an arbitrary cutoff periodSummary Accounting Cri

25、terionSummary Accounting CriterionvAverage Accounting ReturnMeasure of accounting profit relative to book valueSimilar to return on assets measureTake the investment if the AAR exceeds some specified return levelSerious problems and should not be used1、每一个成功者都有一个开始。勇于开始，才能找到成功的路。11月-2211月-22Tuesday,

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