财务管理课件chap008

1、mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwinnet present value and other investment criteriachapter 8mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.1key concepts and skillsnunderstand the payback rule and its shortcomi

2、ngsnunderstand accounting rates of return and their problemsnunderstand the internal rate of return and its strengths and weaknessesnunderstand the net present value rule and why it is the best decision criteriamcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.2

3、chapter outlinennet present valuenthe payback rulenthe average accounting returnnthe internal rate of returnnthe profitability indexnthe practice of capital budgetingmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.3good decision criterianwe need to ask ourselv

4、es the following questions when evaluating decision criteriandoes the decision rule adjust for the time value of money?ndoes the decision rule adjust for risk?ndoes the decision rule provide information on whether we are creating value for the firm?mcgraw-hill 2004 the mcgraw-hill companies, inc. al

5、l rights reserved.mcgraw-hill/irwin8.4project example informationnyou are looking at a new project and you have estimated the following cash flows:nyear 0: cf = -165,000nyear 1: cf = 63,120; ni = 13,620nyear 2: 70,800; ni = 3,300nyear 3: 91,080; ni = 29,100naverage book value = 72,000nyour required

6、return for assets of this risk is 12%.mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.5net present valuenthe difference between the market value of a project and its costnhow much value is created from undertaking an investment?nthe first step is to estimate t

7、he expected future cash flows.nthe second step is to estimate the required return for projects of this risk level.nthe third step is to find the present value of the cash flows and subtract the initial investment.mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8

8、.6npv decision rulenif the npv is positive, accept the projectna positive npv means that the project is expected to add value to the firm and will therefore increase the wealth of the owners.nsince our goal is to increase owner wealth, npv is a direct measure of how well this project will meet our g

9、oal.mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.7computing npv for the projectnusing the formulas:nnpv = 63,120/(1.12) + 70,800/(1.12)2 + 91,080/(1.12)3 165,000 = 12,627.42nusing the calculator:ncf0 = -165,000; c01 = 63,120; f01 = 1; c02 = 70,800; f02 = 1;

10、 c03 = 91,080; f03 = 1; npv; i = 12; cpt npv = 12,627.42ndo we accept or reject the project?mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.8decision criteria test - npvndoes the npv rule account for the time value of money?ndoes the npv rule account for the r

11、isk of the cash flows?ndoes the npv rule provide an indication about the increase in value?nshould we consider the npv rule for our primary decision criteria?mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.9calculating npvs with a spreadsheetnspreadsheets are

12、an excellent way to compute npvs, especially when you have to compute the cash flows as well.nusing the npv functionnthe first component is the required return entered as a decimalnthe second component is the range of cash flows beginning with year 1nsubtract the initial investment after computing t

13、he npvmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.10payback periodnhow long does it take to get the initial cost back in a nominal sense?ncomputationnestimate the cash flowsnsubtract the future cash flows from the initial cost until the initial investment

14、has been recoveredndecision rule accept if the payback period is less than some preset limitmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.11computing payback for the projectnassume we will accept the project if it pays back within two years.nyear 1: 165,000

15、63,120 = 101,880 still to recovernyear 2: 101,880 70,800 = 31,080 still to recovernyear 3: 31,080 91,080 = -60,000 project pays back in year 3ndo we accept or reject the project?mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.12decision criteria test - payback

16、ndoes the payback rule account for the time value of money?ndoes the payback rule account for the risk of the cash flows?ndoes the payback rule provide an indication about the increase in value?nshould we consider the payback rule for our primary decision criteria?mcgraw-hill 2004 the mcgraw-hill co

17、mpanies, inc. all rights reserved.mcgraw-hill/irwin8.13advantages and disadvantages of paybacknadvantagesneasy to understandnadjusts for uncertainty of later cash flowsnbiased towards liquidityndisadvantagesnignores the time value of moneynrequires an arbitrary cutoff pointnignores cash flows beyond

18、 the cutoff datenbiased against long-term projects, such as research and development, and new projectsmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.14average accounting returnnthere are many different definitions for average accounting returnnthe one used in

19、 the book is:naverage net income / average book valuennote that the average book value depends on how the asset is depreciated.nneed to have a target cutoff ratendecision rule: accept the project if the aar is greater than a preset rate.mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights res

20、erved.mcgraw-hill/irwin8.15computing aar for the projectnassume we require an average accounting return of 25%naverage net income:n(13,620 + 3,300 + 29,100) / 3 = 15,340naar = 15,340 / 72,000 = .213 = 21.3%ndo we accept or reject the project?mcgraw-hill 2004 the mcgraw-hill companies, inc. all right

21、s reserved.mcgraw-hill/irwin8.16decision criteria test - aarndoes the aar rule account for the time value of money?ndoes the aar rule account for the risk of the cash flows?ndoes the aar rule provide an indication about the increase in value?nshould we consider the aar rule for our primary decision

22、criteria?mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.17advantages and disadvantages of aarnadvantagesneasy to calculatenneeded information will usually be availablendisadvantagesnnot a true rate of return; time value of money is ignorednuses an arbitrary b

23、enchmark cutoff ratenbased on accounting net income and book values, not cash flows and market valuesmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.18internal rate of returnnthis is the most important alternative to npvnit is often used in practice and is int

24、uitively appealingnit is based entirely on the estimated cash flows and is independent of interest rates found elsewheremcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.19irr definition and decision rulendefinition: irr is the return that makes the npv = 0ndeci

25、sion rule: accept the project if the irr is greater than the required returnmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.20computing irr for the projectnif you do not have a financial calculator, then this becomes a trial and error processncalculatornenter

26、the cash flows as you did with npvnpress irr and then cptnirr = 16.13% 12% required returnndo we accept or reject the project?mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.21npv profile for the projectirr = 16.13%mcgraw-hill 2004 the mcgraw-hill companies, i

27、nc. all rights reserved.mcgraw-hill/irwin8.22decision criteria test - irrndoes the irr rule account for the time value of money?ndoes the irr rule account for the risk of the cash flows?ndoes the irr rule provide an indication about the increase in value?nshould we consider the irr rule for our prim

28、ary decision criteria?mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.23advantages of irrnknowing a return is intuitively appealingnit is a simple way to communicate the value of a project to someone who doesnt know all the estimation detailsnif the irr is hig

29、h enough, you may not need to estimate a required return, which is often a difficult taskmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.24summary of decisions for the projectsummarynet present valueacceptpayback periodrejectaverage accounting returnrejectinte

30、rnal rate of returnacceptmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.25calculating irrs with a spreadsheetnyou start with the cash flows the same as you did for the npvnyou use the irr functionnyou first enter your range of cash flows, beginning with the i

31、nitial cash flownyou can enter a guess, but it is not necessarynthe default format is a whole percent you will normally want to increase the decimal places to at least twomcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.26npv vs. irrnnpv and irr will generally

32、give us the same decisionnexceptionsnnon-conventional cash flows cash flow signs change more than oncenmutually exclusive projectsninitial investments are substantially differentntiming of cash flows is substantially differentmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgra

33、w-hill/irwin8.27irr and nonconventional cash flowsnwhen the cash flows change sign more than once, there is more than one irrnwhen you solve for irr 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 equationni

34、f you have more than one irr, which one do you use to make your decision?mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.28another example nonconventional cash flowsnsuppose an investment will cost $90,000 initially and will generate the following cash flows:n

35、year 1: 132,000nyear 2: 100,000nyear 3: -150,000nthe required return is 15%.nshould we accept or reject the project?mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.29npv profileirr = 10.11% and 42.66%mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights

36、reserved.mcgraw-hill/irwin8.30summary of decision rulesnthe npv is positive at a required return of 15%, so you should acceptnif you use the financial calculator, you would get an irr of 10.11% which would tell you to rejectnyou need to recognize that there are non-conventional cash flows and look a

37、t the npv profilemcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.31irr and mutually exclusive projectsnmutually exclusive projectsnif you choose one, you cant choose the othernexample: you can choose to attend graduate school next year at either harvard or sta

38、nford, but not bothnintuitively you would use the following decision rules:nnpv choose the project with the higher npvnirr choose the project with the higher irrmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.32example with mutually exclusive projectsperiodpro

39、ject a project b0-500-40013253252325200irr19.43%22.17%npv64.0560.74the required return for both projects is 10%.which project should you accept and why?mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.33npv profilesirr for a = 19.43%irr for b = 22.17%crossover

40、point = 11.8%mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.34conflicts between npv and irrnnpv directly measures the increase in value to the firmnwhenever there is a conflict between npv and another decision rule, you should always use npvnirr is unreliable in the following situationsnnon-conventional cash flowsnmutually exclusive projectsmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin8.35profitability indexnmeasures the benefit per unit cost, based on the time