公司理财及财务管理知识分析(双语)(powerpoint 45页)

1、Why Net Present Value Leads to Better Investment Decisions than Other CriteriaCorporate FinanceChapter 9McGraw Hill/Irwin第一页，共四十七页。5- 2McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Topics Coveredw NPV and its Competitorsw The Payback Periodw The Average Accou

2、nting Returnw Internal Rate of Returnw Capital Rationing第二页，共四十七页。5- 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: Evi

3、dence from the Field,” Journal of Financial Economics 61 (2001), pp. 187-243.第三页，共四十七页。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:

4、Does the decision rule adjust 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?9-4第四页，共四十七页。5- 5McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Net Presen

5、t Valuew The difference between the market value of a project and its cost.w Net Present Value (NPV) = Initial Investment + Total PV of future CFs9-5第五页，共四十七页。5- 6McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved NPV Decision Rulew Estimating NPV:1. Estimate futu

6、re cash flows: how much? and when?2. Estimate discount rate3. Estimate initial costs第六页，共四十七页。5- 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

7、 add value to the firm and will therefore increase the wealth 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.9-7第七页，共四十七页。5- 8McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved NPV De

8、cision Rulew Minimum Acceptance Criteria: Accept if NPV 0w Ranking Criteria: Choose the highest NPVw Example9.1 see page263第八页，共四十七页。5- 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 bef

9、ore the cumulative forecasted cash flow equals the initial outlay.w The payback 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.第九页，共四十七页。5- 10McGr

10、aw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. 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.050018002000-C018005002000-B50005005002000-A10% NPVPeriodPayb

11、ackCCCCProject3210第十页，共四十七页。5- 11McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. 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-C58-2018

12、005002000-B2,624350005005002000-A10% NPVPeriodPaybackCCCCProject3210第十一页，共四十七页。5- 12McGraw Hill/IrwinCopyright 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 t

13、he risk of the cash flows?w Does the payback rule provide an indication about the increase in value?w Should we consider the payback rule for our primary decision rule?9-12第十二页，共四十七页。5- 13McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Advantages and Disadvanta

14、ges of Paybackw AdvantagesEasy to understandAdjusts for uncertainty of later cash flowsBiased toward liquidityw DisadvantagesIgnores the time value of moneyRequires an arbitrary cutoff pointIgnores cash flows beyond the cutoff dateBiased against long-term projects, such as research and development,

15、and new projects9-13第十三页，共四十七页。5- 14McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Discounted 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 pe

16、riodw Decision Rule - Accept the project if it pays back on a discounted basis within the specified time9-14第十四页，共四十七页。5- 15McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Computing Discounted Payback for the Projectw Assume we will accept the project if it pay

17、s 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: 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

18、 the project?9-15第十五页，共四十七页。5- 16McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Advantages and Disadvantages of Discounted Paybackw AdvantagesIncludes time value of moneyEasy to understandDoes not accept negative estimated NPV investments when all future cash

19、flows are positiveBiased towards liquidityw DisadvantagesMay reject positive NPV investmentsRequires an arbitrary cutoff pointIgnores cash flows beyond the cutoff pointBiased against long-term projects, such as R&D and new products9-16第十六页，共四十七页。5- 17McGraw Hill/IrwinCopyright 2003 by The McGraw

20、-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:Average net income / average book valueNote that the average book value depends on how the asset is depreciated.w Need to have a target

21、 cutoff ratew Decision Rule: Accept the project if the AAR is greater than a preset rate9-17第十七页，共四十七页。5- 18McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Computing AAR for the Projectw Assume we require an average accounting return of 25%w Average Net Income:

22、(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?9-18第十八页，共四十七页。5- 19McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Decision Criteria Test - AARw Does the AAR rule account for the time value of mo

23、ney?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 decision rule?9-19第十九页，共四十七页。5- 20McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reser

24、ved 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 arbitrary benchmark cutoff rateBased on accounting net income and book values, not cash flows and market val

25、ues9-20第二十页，共四十七页。5- 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 Rule: Accept the project if the IRR is greater than the required return9-21第二十一页，共四十七页。5- 22M

26、cGraw 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 $4,000 in cash flows for two years, respectively. What is the IRR on this inves

27、tment?第二十二页，共四十七页。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 $2,000 and $4,000 in cash flows for two years, respectively. What

28、 is the IRR on this investment?0)1 (000, 4)1 (000, 2000, 421IRRIRRNPV第二十三页，共四十七页。5- 24McGraw 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 $2

29、,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%08.28IRR第二十四页，共四十七页。5- 25McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Internal Rate of Return-2000-1500-1000-5000500100015002

30、0002500102030405060708090100Discount rate (%)NPV (,000s)IRR=28%第二十五页，共四十七页。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 account for the risk of the c

31、ash 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?9-26第二十六页，共四十七页。5- 27McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Summary of Decisions for the ProjectSummaryN

32、et Present ValueAcceptPayback PeriodRejectDiscounted Payback PeriodRejectAverage Accounting ReturnRejectInternal Rate of ReturnAccept9-27第二十七页，共四十七页。5- 28McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved NPV vs. IRRw NPV and IRR will generally give us the same de

33、cisionw 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 different9-28第二十八页，共四十七页。5- 29McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Compan

34、ies, 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 normal relationship between NPV and discount rates. 364%50500, 1000, 1364%50500, 100

35、0, 1%10Project10BANPVIRRCC第二十九页，共四十七页。5- 30McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Internal Rate of ReturnPitfall 1 - Lending or Borrowing?wWith some cash flows (as noted below) the NPV of the project increases s the discount rate increases. wThis is co

36、ntrary to the normal relationship between NPV and discount rates. Discount RateNPV第三十页，共四十七页。5- 31McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Internal Rate of ReturnPitfall 2 - Multiple Rates of ReturnwCertain cash flows can generate NPV=0 at two different

37、discount rates.wThe following cash flow generates NPV=$A 3.3 million at both IRR% of (-44%) and +11.6%. 150120120600.10910CCCCCash Flows (millions of Australian dollars)第三十一页，共四十七页。5- 32McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Internal Rate of ReturnPitf

38、all 2 - Multiple Rates of ReturnwCertain cash flows can generate NPV=0 at two different discount rates.wThe following cash flow generates NPV=0 at both (-50%) and 15.2%. 1000NPV5000-500-1000Discount RateIRR=15.2%IRR=-50%第三十二页，共四十七页。5- 33McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, I

39、nc. All rights reserved IRR and Mutually Exclusive 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 pr

40、oject with the higher NPVIRR choose the project with the higher IRR9-33第三十三页，共四十七页。5- 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 requi

41、red return for both projects is 10%.Which project should you accept and why?9-34第三十四页，共四十七页。5- 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%9-35第三十五页，共四十七页。5- 36McGraw Hill/IrwinCopyrig

42、ht 2003 by The McGraw-Hill Companies, Inc. All rights reserved Conflicts Between NPV 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 situationsNonconven

43、tional cash flowsMutually exclusive projects9-36第三十六页，共四十七页。5- 37McGraw Hill/IrwinCopyright 2003 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 understan

44、d and communicatew DisadvantagesMay lead to incorrect decisions in comparisons of mutually exclusive investmentsMay result in multiple answers or not deal with nonconventional cash flows.9-37第三十七页，共四十七页。5- 38McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Profi

45、tability Indexw When resources are limited, the profitability index (PI) provides a tool for selecting among 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.第

46、三十八页，共四十七页。5- 39McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Profitability IndexExampleWe only have $300,000 to invest. Which do we select?ProjNPV InvestmentPIA230,000200,0001.15B141,250125,0001.13C194,250175,0001.11D162,000 150,000 1.08InvestmentNPVIndexity

47、 Profitabil第三十九页，共四十七页。5- 40McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. 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 (B

48、D) = 1.13(125) + 1.08(150) + 0.0 (25) (300) (300) (300) = 1.01第四十页，共四十七页。5- 41McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Profitability IndexExample - continuedProjNPV InvestmentPIA230,000200,0001.15B141,250125,0001.13C194,250 175,000 1.11D162,000150,0001.0

49、8Select projects with highest Weighted Avg PIWAPI (BD) = 1.01WAPI (A) = 0.77WAPI (BC) = 1.12第四十一页，共四十七页。5- 42McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Advantages and Disadvantages of Profitability Indexw AdvantagesClosely related to NPV, generally leading

50、 to identical decisionsEasy to understand and communicateMay be useful when available investment funds are limitedw DisadvantagesMay lead to incorrect decisions in comparisons of mutually exclusive investments9-42第四十二页，共四十七页。5- 43McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All

51、 rights reserved Summary DCF Criteriaw Net present valueDifference between market value and costTake the project if the NPV is positiveHas no serious problemsPreferred decision criterionw Internal rate of returnDiscount rate that makes NPV = 0Take the project if the IRR is greater than the required

52、returnSame decision as NPV with conventional cash flowsIRR is unreliable with nonconventional cash flows or mutually exclusive projectsw Profitability IndexBenefit-cost ratioTake investment if PI 1Cannot be used to rank mutually exclusive projectsMay be used to rank projects in the presence of capital rationing9-43第四十三页，共四十七页。5- 44McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Summary Payback Criteriaw Payback periodLength of time until initial investment is recoveredTake the project if it pays back within some specified periodDoesnt account for time