NetPresentValueandOtherInvestmentCriteria(英文版)VIP

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, In

2、c.,20016- 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 Val

3、ue - Present value of cash flows minus initial investments.The McGraw-Hill Companies, Inc.,20016- 4Irwin/McGraw-Hill本资料来源本资料来源The McGraw-Hill Companies, Inc.,20016- 5Irwin/McGraw-HillNet Present ValueExampleSuppose we can invest $50 today and receive $60 in one year. What is our increase in value gi

4、ven a 10% expected return?This is the definition of NPVProfit = -50+601.10 $4.55Initial InvestmentAdded Value$50$4.55The McGraw-Hill Companies, Inc.,20016- 6Irwin/McGraw-HillNet Present ValueNPV = PV - required investmentNPVCCrtt01()NPVCCrCrCrtt01122111()().()The McGraw-Hill Companies, Inc.,20016- 7

5、Irwin/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-HillNet Present ValueManagers increase shareholders wealth b

6、y 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 have the opportunity to purchase an office building. You have a tenant lined

7、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.,20016- 10Irwin/McGraw-HillNet Present Value0 1 2 3$16,000$16,000$16,

8、000$450,000$466,000Present Value 14,953 14,953 380,395$409,323Example - continuedThe McGraw-Hill Companies, Inc.,20016- 11Irwin/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 gene

9、rated by your purchase and management of the building?The McGraw-Hill Companies, 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

10、management of the building?NPVNPV 350 00016 00010716 000107466 000107323123,( .),( .),( .)$59,The McGraw-Hill Companies, Inc.,20016- 13Irwin/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

11、of return that is higher than the opportunity cost of capital.Rate of Return =C -investmentinvestment1The McGraw-Hill Companies, Inc.,20016- 14Irwin/McGraw-HillInternal Rate of ReturnExampleYou can purchase a building for $350,000. The investment will generate $16,000 in cash flows (i.e. rent) durin

12、g the first three years. At the end of three years you will sell the building for $450,000. What is the IRR on this investment?0350 00016 000116 0001466 0001123 ,(),(),()IRRIRRIRRIRR = 12.96%The McGraw-Hill Companies, Inc.,20016- 15Irwin/McGraw-HillInternal Rate of Return-200-150-100-500501001502000

13、5101520253035Discount rate (%)NPV (,000s)IRR=12.96%The McGraw-Hill Companies, Inc.,20016- 16Irwin/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

14、 specified cutoff period. The following example will demonstrate the absurdity of this statement.The McGraw-Hill Companies, Inc.,20016- 17Irwin/McGraw-HillPayback MethodExampleThe three project below are available. The company accepts all projects with a 2 year or less payback period. Show how this

15、decision will impact our 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- 18Irwin/McGraw-HillBook Rate of ReturnBook Rate of Return - Average income divided by average book value ov

16、er project life. Also called accounting rate of return.Managers rarely use this measurement to make decisions. The components reflect tax and accounting figures, not market values or cash flows. Book rate of return =book incomebook assetsThe McGraw-Hill Companies, Inc.,20016- 19Irwin/McGraw-HillProj

17、ect 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, choose the one whose NPV is highest.The McGraw-Hill Companies, Inc.,20016- 20Irwin/McGraw-HillMutually Exclus

18、ive 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- 21Irwin/McGraw-HillMutually Exclusive ProjectsExampleSelect one of the two following projects, based on highest NPV. Pr

19、oj01234NPVA-155.55.55.55.52.82 B-209992.78assume 9% discount rateThe McGraw-Hill Companies, Inc.,20016- 22Irwin/McGraw-HillInvestment TimingSometimes you have the ability to defer an investment and select a time that is more ideal at which to make the investment decision. A common example involves a

20、 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- 23Irwin/McGraw-HillInvestment TimingExampleYou may purchase a computer anytime within the next five years. While the computer will

21、 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 SavingsNPV at PurchaseNPV Today050702020.0145702522.7240703024.83367034Date to purchase 25.5433703725.3531703924.2The

22、 McGraw-Hill Companies, Inc.,20016- 24Irwin/McGraw-HillEquivalent Annual CostEquivalent Annual Cost - The cost per period with the same present value as the cost of buying and operating a machine.Equivalent annual cost =present value of costsannuity factorThe McGraw-Hill Companies, Inc.,20016- 25Irw

23、in/McGraw-HillEquivalent Annual CostExampleGiven the following costs of operating two machines and a 6% cost of capital, select the lower cost machine using equivalent 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- 26Irwin

24、/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.,20016- 27Irwin/McGraw-HillInternal Rate of ReturnExample Yo

25、u 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?ProjectC0C1C2C3IRRNPV7%H-35040014.29%24,000$ I-350161646612.96%59,000$ The McGraw-Hill Companies, Inc.,20016- 28Irwin/McGraw-HillInternal R

26、ate 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?%29.140)1 (4003501IRRNPV%96.120)1 (466)1 (16)1 (16350321IRRIRRIRRNPVThe McGraw-Hill Companies, Inc.,20016- 29Irwin/M

27、cGraw-HillInternal Rate of Return50403020100-10-20NPV $, 1,000sDiscount rate, %8 10 12 14 16Revised proposalInitial proposalThe McGraw-Hill Companies, Inc.,20016- 30Irwin/McGraw-HillInternal Rate of ReturnPitfall 1 - Mutually Exclusive Projects IRR sometimes ignores the magnitude of the project. The

28、 following two projects illustrate that problem.Pitfall 2 - Lending or Borrowing? With some cash flows (as noted 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 Return Cer

29、tain cash flows can generate NPV=0 at two different discount rates. The following cash flow generates NPV=0 at both (-50%) and 15.2%. The McGraw-Hill Companies, Inc.,20016- 31Irwin/McGraw-Hill內部報酬率法內部報酬率法內部報酬率(Internal Rate of Return Md.;簡稱 IRR)法方法: 內部報酬率:使淨現值(NPV)為0之折現率NPV= 或CFt：t 期淨現金流量 (即各期稅後現金入)IRR：內部報酬率(即投資人之報酬率)nnIRRCFIRRCFIRRCFC)1 (.)1 ()1 (22110)1 (0NPVRCFntttThe McGraw-Hill Companies, Inc.,20016- 32Irwin/McGraw-Hill內部報酬率法內部報酬率法( (續