公司理财原版英文课件Chap006

1、making capital investment decisionschapter 6copyright 2010 by the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin6-1key concepts and skillsounderstand how to determine the relevant cash flows for various types of capital investmentsobe able to compute depreciation expense for tax p

2、urposesoincorporate inflation into capital budgetingounderstand the various methods for computing operating cash flowoapply the equivalent annual cost approach6-2chapter outline6.1 incremental cash flows6.2 the baldwin company: an example6.3 inflation and capital budgeting6.4 alternative definitions

3、 of cash flow6.5 investments of unequal lives: the equivalent annual cost method6-36.1 incremental cash flowsocash flows matternot accounting earnings.osunk costs do not matter.oincremental cash flows matter.oopportunity costs matter.oside effects like cannibalism and erosion matter.otaxes matter: w

4、e want incremental after-tax cash flows. oinflation matters.6-4cash flowsnot accounting incomeoconsider depreciation expense. nyou never write a check made out to “depreciation.”omuch of the work in evaluating a project lies in taking accounting numbers and generating cash flows.6-5incremental cash

5、flowsosunk costs are not relevantnjust because “we have come this far” does not mean that we should continue to throw good money after bad.oopportunity costs do matter. just because a project has a positive npv, that does not mean that it should also have automatic acceptance. specifically, if anoth

6、er project with a higher npv would have to be passed up, then we should not proceed.6-6incremental cash flowsoside effects matter.nerosion is a “bad” thing. if our new product causes existing customers to demand less of our current products, we need to recognize that.nif, however, synergies result t

7、hat create increased demand of existing products, we also need to recognize that.6-7estimating cash flowsocash flow from operationsnrecall that:ocf = ebit taxes + depreciationonet capital spendingndo not forget salvage value (after tax, of course).ochanges in net working capitalnrecall that when the

8、 project winds down, we enjoy a return of net working capital.6-8interest expenseolater chapters will deal with the impact that the amount of debt that a firm has in its capital structure has on firm value.ofor now, it is enough to assume that the firms level of debt (and, hence, interest expense) i

9、s independent of the project at hand.6-96.2 the baldwin companyqcosts of test marketing (already spent): $250,000qcurrent market value of proposed factory site (which we own): $150,000qcost of bowling ball machine: $100,000 (depreciated according to macrs 5-year)qincrease in net working capital: $10

10、,000qproduction (in units) by year during 5-year life of the machine: 5,000, 8,000, 12,000, 10,000, 6,0006-10the baldwin companyqprice during first year is $20; price increases 2% per year thereafter.qproduction costs during first year are $10 per unit and increase 10% per year thereafter.qannual in

11、flation rate: 5%qworking capital: initial $10,000 changes with sales6-11the baldwin companyyear 0year 1year 2year 3year 4 year 5 investments:(1) bowling ball machine100.00 21.77*(2) accumulated 20.0052.0071.2082.70 94.20 depreciation(3) adjusted basis of 80.0048.0028.8017.30 5.80 machine after depre

12、ciation (end of year)(4) opportunity cost150.00 150.00(warehouse)(5) net working capital 10.00 10.0016.3224.9721.22 0 (end of year)(6) change in net 10.006.32 8.653.75 21.22 working capital(7) total cash flow of260.00 6.32 8.653.75 193.00 investment(1) + (4) + (6)($ thousands) (all cash flows occur

13、at the end of the year.)6-12the baldwin companyat the end of the project, the warehouse is unencumbered, so we can sell it if we want to.year 0year 1year 2year 3year 4 year 5 investments:(1) bowling ball machine100.00 21.77(2) accumulated 20.0052.0071.2082.70 94.20 depreciation(3) adjusted basis of

14、80.0048.0028.8017.30 5.80 machine after depreciation (end of year)(4) opportunity cost150.00 150.00(warehouse)(5) net working capital 10.00 10.0016.3224.9721.22 0 (end of year)(6) change in net 10.006.32 8.653.75 21.22 working capital(7) total cash flow of260.00 6.32 8.653.75 193.00 investment(1) +

15、(4) + (6)6-13the baldwin companyyear 0year 1year 2year 3year 4 year 5income: (8) sales revenues100.00163.20249.70212.24 129.89 recall that production (in units) by year during the 5-year life of the machine is given by: (5,000, 8,000, 12,000, 10,000, 6,000).price during the first year is $20 and inc

16、reases 2% per year thereafter.sales revenue in year 2 = 8,000$20(1.02)1 = 8,000$20.40 = $163,200.6-14the baldwin companyyear 0year 1year 2year 3year 4 year 5income: (8) sales revenues100.00163.20249.70212.24 129.89 (9) operating costs 50.00 88.00145.20 133.10 87.85again, production (in units) by yea

17、r during 5-year life of the machine is given by: (5,000, 8,000, 12,000, 10,000, 6,000).production costs during the first year (per unit) are $10, and they increase 10% per year thereafter.production costs in year 2 = 8,000$10(1.10)1 = $88,0006-15the baldwin companyyear 0year 1year 2year 3year 4 year

18、 5income: (8) sales revenues100.00163.20249.70212.24 129.89 (9) operating costs 50.00 88.00145.20 133.10 87.85(10) depreciation 20.00 32.00 19.20 11.50 11.50depreciation is calculated using the modified accelerated cost recovery system (shown at right).our cost basis is $100,000.depreciation charge

19、in year 4 = $100,000(.115) = $11,500. yearacrs % 120.0% 232.0%319.2%411.5%511.5%6 5.8% total 100.00%6-16the baldwin companyyear 0year 1year 2year 3year 4 year 5income: (8) sales revenues100.00163.20249.70212.24 129.89 (9) operating costs 50.00 88.00145.20 133.10 87.85(10) depreciation 20.00 32.00 19

20、.20 11.50 11.50(11) income before taxes 30.00 43.20 85.30 67.64 30.55 (8) (9) - (10)(12) tax at 34 percent 10.20 14.69 29.00 23.00 10.39(13) net income 19.80 28.51 56.30 44.64 20.166-17incremental after tax cash flows year 0year 1year 2year 3year 4year 5(1) sales revenues $100.00$163.20$249.70$212.2

21、4$129.89(2) operating costs -50.00-88.00-145.20133.10-87.85(3) taxes -10.20-14.69-29.00-23.00-10.39(4) ocf(1) (2) (3) 39.8060.5175.5056.1431.66(5) total cf of investment260. 6.328.653.75193.00(6) iatcf(4) + (5)260. 39.8054.1966.8559.89224.6659.51$)10. 1 (66.224$)10. 1 (89.59$)10. 1 (85.66$)10. 1 (19

22、.54$)10. 1 (80.39$260$5432npvnpv6-18npv of baldwin company139.8051.59260cf1f1cf0inpv10154.19cf2f2166.85cf3f3159.89cf4f41224.66cf5f56-197.3 inflation and capital budgetingoinflation is an important fact of economic life and must be considered in capital budgeting.oconsider the relationship between in

23、terest rates and inflation, often referred to as the fisher equation:(1 + nominal rate) = (1 + real rate) (1 + inflation rate)6-20inflation and capital budgetingofor low rates of inflation, this is often approximated: real rate nominal rate inflation rateowhile the nominal rate in the u.s. has fluct

24、uated with inflation, the real rate has generally exhibited far less variance than the nominal rate.oin capital budgeting, one must compare real cash flows discounted at real rates or nominal cash flows discounted at nominal rates.6-216.4 other methods for computing ocfobottom-up approachnworks only

25、 when there is no interest expensenocf = ni + depreciationotop-down approachnocf = sales costs taxesndo not subtract non-cash deductionsotax shield approachnocf = (sales costs)(1 t) + depreciation*t6-226.5 investments of unequal livesothere are times when application of the npv rule can lead to the

26、wrong decision. consider a factory that must have an air cleaner that is mandated by law. there are two choices:nthe “cadillac cleaner” costs $4,000 today, has annual operating costs of $100, and lasts 10 years.nthe “cheapskate cleaner” costs $1,000 today, has annual operating costs of $500, and las

27、ts 5 years.oassuming a 10% discount rate, which one should we choose?6-23investments of unequal livesat first glance, the cheapskate cleaner has a higher npv.101004,614.46 4,000cf1f1cf0inpv1055002,895.391,000cf1f1cf0inpv10cadillac air cleanercheapskate air cleaner6-24investments of unequal livesothis overlooks the fact that the cadillac cleaner lasts twice as long.owhen w