公司理财及财务管理知识分析(双语)(共45页).ppt

1、Why Net Present Value Leads to Better Investment Decisions than Other CriteriaCorporate FinanceChapter 9McGraw Hill/Irwin5- 2McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Topics Coveredw NPV and its Competitorsw The Payback Periodw The Average Accounting Retu

2、rnw Internal Rate of Returnw Capital Rationing5- 3McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved CFO Decision ToolsSurvey Data on CFO Use of Investment Evaluation TechniquesSOURCE: Graham and Harvey, “The Theory and Practice of Finance: Evidence from the Field

3、,” Journal of Financial Economics 61 (2001), pp. 187-243.5- 4McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Good Decision Criteriaw We need to ask ourselves the following questions when evaluating capital budgeting decision rules:Does the decision rule adjust

4、for the time value of money?Does the decision rule adjust for risk?Does the decision rule provide information on whether we are creating value for the firm?9-45- 5McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Net Present Valuew The difference between the mark

5、et value of a project and its cost.w Net Present Value (NPV) = Initial Investment + Total PV of future CFs9-55- 6McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved NPV Decision Rulew Estimating NPV:1. Estimate future cash flows: how much? and when?2. Estimate disc

6、ount rate3. Estimate initial costs5- 7McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved NPV Decision Rulew If the NPV is positive, accept the projectw A positive NPV means that the project is expected to add value to the firm and will therefore increase the wealt

7、h of the owners.w Since our goal is to increase owner wealth, NPV is a direct measure of how well this project will meet our goal.9-75- 8McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved NPV Decision Rulew Minimum Acceptance Criteria: Accept if NPV 0w Ranking Cri

8、teria: Choose the highest NPVw Example9.1 see page2635- 9McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Paybackw The payback period of a project is the number of years it takes before the cumulative forecasted cash flow equals the initial outlay.w The payback

9、rule says only accept projects that “payback” in the desired time frame. w This method is very flawed, primarily because it ignores later year cash flows and the the present value of future cash flows.5- 10McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Payback

10、ExampleExamine the three projects and note the mistake we would make if we insisted on only taking projects with a payback period of 2 years or less.050018002000-C018005002000-B50005005002000-A10% NPVPeriodPaybackCCCCProject32105- 11McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc.

11、All rights reserved PaybackExampleExamine the three projects and note the mistake we would make if we insisted on only taking projects with a payback period of 2 years or less.502050018002000-C58-2018005002000-B2,624350005005002000-A10% NPVPeriodPaybackCCCCProject32105- 12McGraw Hill/IrwinCopyright

12、2003 by The McGraw-Hill Companies, Inc. All rights reserved Decision Criteria Test - Paybackw Does the payback rule account for the time value of money?w Does the payback rule account for the risk of the cash flows?w Does the payback rule provide an indication about the increase in value?w Should we

13、 consider the payback rule for our primary decision rule?9-125- 13McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Advantages and Disadvantages of Paybackw AdvantagesEasy to understandAdjusts for uncertainty of later cash flowsBiased toward liquidityw Disadvanta

14、gesIgnores the time value of moneyRequires an arbitrary cutoff pointIgnores cash flows beyond the cutoff dateBiased against long-term projects, such as research and development, and new projects9-135- 14McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Discounted

15、 Payback Periodw Compute the present value of each cash flow and then determine how long it takes to pay back on a discounted basisw Compare to a specified required periodw Decision Rule - Accept the project if it pays back on a discounted basis within the specified time9-145- 15McGraw Hill/IrwinCop

16、yright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Computing Discounted Payback for the Projectw Assume we will accept the project if it pays back on a discounted basis in 2 years.w Compute the PV for each cash flow and determine the payback period using discounted cash flowsYear 1:

17、165,000 63,120/1.121 = 108,643Year 2: 108,643 70,800/1.122 = 52,202Year 3: 52,202 91,080/1.123 = -12,627 project pays back in year 3w Do we accept or reject the project?9-155- 16McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Advantages and Disadvantages of Dis

18、counted Paybackw AdvantagesIncludes time value of moneyEasy to understandDoes not accept negative estimated NPV investments when all future cash flows are positiveBiased towards liquidityw DisadvantagesMay reject positive NPV investmentsRequires an arbitrary cutoff pointIgnores cash flows beyond the

19、 cutoff pointBiased against long-term projects, such as R&D and new products9-165- 17McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Average Accounting Returnw There are many different definitions for average accounting returnw The one used in the book is:A

20、verage net income / average book valueNote that the average book value depends on how the asset is depreciated.w Need to have a target cutoff ratew Decision Rule: Accept the project if the AAR is greater than a preset rate9-175- 18McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. Al

21、l rights reserved Computing AAR for the Projectw Assume we require an average accounting return of 25%w Average Net Income:(13,620 + 3,300 + 29,100) / 3 = 15,340w AAR = 15,340 / 72,000 = .213 = 21.3%w Do we accept or reject the project?9-185- 19McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Comp

22、anies, Inc. All rights reserved Decision Criteria Test - AARw Does the AAR rule account for the time value of money?w Does the AAR rule account for the risk of the cash flows?w Does the AAR rule provide an indication about the increase in value?w Should we consider the AAR rule for our primary decis

23、ion rule?9-195- 20McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Advantages and Disadvantages of AARw AdvantagesEasy to calculateNeeded information will usually be availablew DisadvantagesNot a true rate of return; time value of money is ignoredUses an arbitra

24、ry benchmark cutoff rateBased on accounting net income and book values, not cash flows and market values9-205- 21McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved IRR Definition and Decision Rulew Definition: IRR is the return that makes the NPV = 0w Decision Rul

25、e: Accept the project if the IRR is greater than the required return9-215- 22McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Internal Rate of ReturnExampleYou can purchase a turbo powered machine tool gadget for $4,000. The investment will generate $2,000 and $

26、4,000 in cash flows for two years, respectively. What is the IRR on this investment?5- 23McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Internal Rate of ReturnExample You can purchase a turbo powered machine tool gadget for $4,000. The investment will generate

27、 $2,000 and $4,000 in cash flows for two years, respectively. What is the IRR on this investment?0)1 (000, 4)1 (000, 2000, 421IRRIRRNPV5- 24McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Internal Rate of ReturnExample You can purchase a turbo powered machine t

28、ool gadget for $4,000. The investment will generate $2,000 and $4,000 in cash flows for two years, respectively. What is the IRR on this investment?0)1 (000, 4)1 (000, 2000, 421IRRIRRNPV%08.28IRR5- 25McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Internal Rate

29、 of Return-2000-1500-1000-50005001000150020002500102030405060708090100Discount rate (%)NPV (,000s)IRR=28%5- 26McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Decision Criteria Test - IRRw Does the IRR rule account for the time value of money?w Does the IRR rule

30、 account for the risk of the cash flows?w Does the IRR rule provide an indication about the increase in value?w Should we consider the IRR rule for our primary decision criteria?9-265- 27McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Summary of Decisions for t

31、he ProjectSummaryNet Present ValueAcceptPayback PeriodRejectDiscounted Payback PeriodRejectAverage Accounting ReturnRejectInternal Rate of ReturnAccept9-275- 28McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved NPV vs. IRRw NPV and IRR will generally give us the s

32、ame decisionw ExceptionsNonconventional cash flows cash flow signs change more than onceMutually exclusive projects Initial investments are substantially different (issue of scale) Timing of cash flows is substantially different9-285- 29McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, I

33、nc. All rights reserved Internal Rate of ReturnPitfall 1 - Lending or Borrowing?w With some cash flows (as noted below) the NPV of the project increases s the discount rate increases. w This is contrary to the normal relationship between NPV and discount rates. 364%50500, 1000, 1364%50500, 1000, 1%1

34、0Project10BANPVIRRCC5- 30McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Internal Rate of ReturnPitfall 1 - Lending or Borrowing?w With some cash flows (as noted below) the NPV of the project increases s the discount rate increases. w This is contrary to the no

35、rmal relationship between NPV and discount rates. Discount RateNPV5- 31McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Internal Rate of ReturnPitfall 2 - Multiple Rates of Returnw Certain cash flows can generate NPV=0 at two different discount rates.w The follo

36、wing cash flow generates NPV=$A 3.3 million at both IRR% of (-44%) and +11.6%. 150120120600.10910CCCCCash Flows (millions of Australian dollars)5- 32McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Internal Rate of ReturnPitfall 2 - Multiple Rates of Returnw Cer

37、tain cash flows can generate NPV=0 at two different discount rates.w The following cash flow generates NPV=0 at both (-50%) and 15.2%. 1000NPV5000-500-1000Discount RateIRR=15.2%IRR=-50%5- 33McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved IRR and Mutually Exclus

38、ive Projectsw Mutually exclusive projectsIf you choose one, you cant choose the otherExample: You can choose to attend graduate school at either Harvard or Stanford, but not bothw Intuitively, you would use the following decision rules:NPV choose the project with the higher NPVIRR choose the project

39、 with the higher IRR9-335- 34McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Example With Mutually Exclusive ProjectsPeriodProject AProject B0-500-40013253252325200IRR19.43% 22.17%NPV64.0560.74The required return for both projects is 10%.Which project should yo

40、u accept and why?9-345- 35McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved NPV ProfilesIRR for A = 19.43%IRR for B = 22.17%Crossover Point = 11.8%9-355- 36McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Conflicts Between NP

41、V and IRRw NPV directly measures the increase in value to the firmw Whenever there is a conflict between NPV and another decision rule, you should always use NPVw IRR is unreliable in the following situationsNonconventional cash flowsMutually exclusive projects9-365- 37McGraw Hill/IrwinCopyright 200

42、3 by The McGraw-Hill Companies, Inc. All rights reserved Advantages and Disadvantages of internal rate of returnw AdvantagesClosely related to NPV, generally leading to identical decisionsEasy to understand and communicatew DisadvantagesMay lead to incorrect decisions in comparisons of mutually excl

43、usive investmentsMay result in multiple answers or not deal with nonconventional cash flows.9-375- 38McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Profitability Indexw When resources are limited, the profitability index (PI) provides a tool for selecting amon

44、g various project combinations and alternativesw A set of limited resources and projects can yield various combinations.w The highest weighted average PI can indicate which projects to select.5- 39McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Profitability In

45、dexExampleWe only have $300,000 to invest. Which do we select?ProjNPV InvestmentPIA230,000200,0001.15B141,250125,0001.13C194,250175,0001.11D162,000150,0001.08InvestmentNPVIndexity Profitabil5- 40McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Profitability Inde

46、xExample - continuedProjNPV InvestmentPIA230,000200,0001.15B141,250125,0001.13C194,250175,0001.11D162,000150,0001.08Select projects with highest Weighted Avg PIWAPI (BD) = 1.13(125) + 1.08(150) + 0.0 (25) (300) (300) (300) = 1.015- 41McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc.

47、 All rights reserved Profitability IndexExample - continuedProjNPV InvestmentPIA230,000200,0001.15B141,250125,0001.13C194,250175,0001.11D162,000150,0001.08Select projects with highest Weighted Avg PIWAPI (BD) = 1.01WAPI (A) = 0.77WAPI (BC) = 1.125- 42McGraw Hill/IrwinCopyright 2003 by The McGraw-Hil

48、l Companies, Inc. All rights reserved Advantages and Disadvantages of Profitability Indexw AdvantagesClosely related to NPV, generally leading to identical decisionsEasy to understand and communicateMay be useful when available investment funds are limitedw DisadvantagesMay lead to incorrect decisions in com