4-analyzinginvestmentproject投资净现值分析ppt课件

1、1111Chapter FourAnalyzing Investment project .222ContentsThe concept of capital budgetingThe steps of investment analysisEstimation of cost of capitalMeasure cash flowsThe approaches of capital budgeting .33What is a investment or a project?Any decision that requires the use of resources (financial

2、or otherwise) is a project. Broad strategic decisionsEntering new areas of businessEntering new marketInvesting in equipment to reduce costsAcquiring other companies.4What is Corporate Finance talking aboutBalance Sheet Current AssetsFixed AssetsTotal AssetsCurrent LiabilitiesLong-term Liabilities S

3、hareholders EquityTotal Liabilities and Shareholders EquityInvestment decision(Capital Budgeting Financing decision(Capital Structure)Cash Management4.555Capital budgetingThe process of analyzing investment decisions for a firm is called capital budgeting.Well look at how to use discounted cash flow

4、 (DCF) analysis and net present value (NPV) and other rules in capital budgeting decision making.66Steps in Investment AnalysisEstimate a hurdle rate for the project, based upon the riskiness of the investmentEstimate revenues and accounting earnings on the investment.Convert accounting earnings int

5、o cash flowsUse the cash flows to evaluate whether the investment is a good investment.Time weight the cash flowsUse the time-weighted cash flows to evaluate whether the investment is a good investment.Evaluate investment and make decisions.77Estimating the Hurdle Rate for an InvestmentIf a firm is

6、in only one business, and all of its investments are homogeneous:Use the companys costs of capital to evaluate its investments.If the firm is in more than one business, but investments within each of business are similar:Use the divisional costs of capital to evaluate investments made by that divisi

7、on.88 Example： Suppose that a firm 100% equity funded, it has three divisions: (1) electronics which is occupied 30% of the firms market value, the cost of capital is 22%; (2) chemical department which has 40% of market value, its cost of capital is 17%; (3) nature gas transmission division has 30%

8、of market value, the cost of capital is 14%. the weighted average cost of capital of the firm = 0.322%+0.417%+0.314% =17.6% when we conduct capital budgeting for a project, assume its similar to electronic industry, if we use 17.6% as hurdle rate of the new investment, no doubt we would over value t

9、he investment, would make worry decision in the consequence. How we estimate the appropriate discount rate then?.9Estimating the Hurdle Rate for an InvestmentIf a firm is planning on entering a new business:Estimate a cost of equity for the investment, based upon the riskiness of the investmentEstim

10、ate a cost of debt and debt ratio for the investment based upon the costs of debt and debt ratios of other firms in the business.9.10Estimating the Hurdle Rate for an InvestmentThe hurdle rate of a particular project based upon the riskness of it. The risk that is relevant in computing a projects co

11、st of capital is the risk of the projects cash flows and not the risk of the financing instruments the firm issues to finance the project. 10.1111Example: suppose that Compusell Corporation is planning to finance $5 million outlay required to undertake a new project by issuing bonds. Suppose Compuse

12、ll can issue bonds at an interest rate of 6% per year. Can we adopts 6% as the cost of capital to evaluate the new project? Why? .1212Estimating the Hurdle Rate for an InvestmentFinancing mix of a project or a firmOwners funds (equity)Borrowed money (debt)Cost of debt? rBCost of equity？rECAPMAfter t

13、ax of interests/actual money funded The Weighted Average Cost of Capital：.1313Estimating the Hurdle Rate for an Investment Investor and InvesteeRequire a rate of returnCost of capitalStep 2.14Step 2: Estimate revenues and accounting earnings on the investment.Step 3: Convert accounting earnings into

14、 cash flows14Measure Cash Flows .151515The features of cash flows in capital budgetingCash flows from operating activities After tax cash flows Incremental cash flows operating + after tax + incremental.161616Incremental cash flowsIn calculating the NPV of a project, incremental cash flows should be

15、 used. These cash flow are the changes in the firms cash flows that occur as a direct consequence of accepting the project.The difference between the cash flows of the firm with the project and the cash flows of the firm without the project.1717From Cash Flows to Incremental Cash FlowsThe Key Questi

16、ons to determine whether a cash flow is incremental:What will happen to this cash flow item if I accept the investment?What will happen to this cash flow item if I do not accept the investment?If the cash flow will occur whether you take this investment or reject it, it is not an incremental cash fl

17、ow.1818Sunk CostsAny expenditure that has already been incurred, and cannot be recovered (even if a project is rejected) is called a sunk cost.When analyzing a project, sunk costs should not be considered since they are not incremental.By this definition, market testing expenses and R&D expenses are

18、 both likely to be sunk costs before the projects that are based upon them are analyzed. If sunk costs are not considered in project analysis, how can a firm ensure that these costs are covered?.1919Side Effects - Costs and BenefitsMost projects considered by any business create side costs and benef

19、its for that business. The side costs include the costs created by the use of resources that the business already owns (opportunity costs) and lost revenues for other projects that the firm may have.The benefits that may not be captured in the traditional capital budgeting analysis include project s

20、ynergies (where cash flow benefits may accrue to other projects) and options embedded in projects (including the options to delay, expand or abandon a project).2020Opportunity CostAn opportunity cost arises when a project uses a resource that may already have been paid for by the firm. When a resour

21、ce that is already owned by a firm is being considered for use in a project, this resource has to be priced on its next best alternative use, which may bea sale of the asset renting or leasing the asset outuse elsewhere in the business .2121Case 1: Opportunity CostsAssume that Boeing owns the land t

22、hat will be used to build the plant for the Super Jumbo Jet. This land is undeveloped and was acquired several years ago for $40 million. The land currently can be sold for $ 100 million, though that would create a capital gain (which will be taxed at 20%). In assessing the Boeing Super Jumbo, which

23、 of the following would you do:Ignore the cost of the land, since Boeing owns its alreadyUse the book value of the land, which is $ 40 millionUse the market value of the land, which is $ 100 millionOther: .22Case 2: Excess CapacityIn the Boeing example, assume that the firm will use its existing sto

24、rage facilities, which have excess capacity, to hold inventory associated with the Super Jumbo. The project analyst argues that there is no cost associated with using these facilities, since they have been paid for already and cannot be sold or leased to a competitor (and thus has no competing curre

25、nt use). Do you agree?YesNo22.2323Product and Project CannibalizationWhen a firm makes a new investment, some of the revenues may come from existing investments of the firm. This is referred to as cannibalization (erosion). Examples would be:A New Starbucks that is opening four blocks away from an e

26、xisting StarbucksA personal computer manufacturer like Apple or Dell introducing a new and more powerful PCA motor manufacturer determine to produce a new convertible sports car. .2424Product and Project Cannibalization: A Real Cost?Assume that in the Starbucks analysis, 20% of the revenues at the s

27、tore are expected to come from people who would have gone to a existing store nearby. In doing the analysis of the store, would youLook at only incremental revenues (i.e. 80% of the total revenue)Look at total revenues of the new storeChoose an intermediate number .2525Project SynergiesA project may

28、 provide benefits for other projects within the firm. If this is the case, these benefits have to be valued and shown in the initial project analysis.For instance, the Home Depot, when it considers opening a new restaurant at one of its stores, will have to examine the additional revenues that may a

29、ccrue to this store from people who come to the restaurant.26Depreciation and incremental cash flowIn accounting, the capital expense will be spread over assets life time and treat the spreading as operating expense for each year. The point is depreciation can reduce taxable income therefore have ta

30、xes benefit. When a firm undertake a new project, the benefit would change arise cash flows changed.Depreciation effect should be considered in project analysis.26.2727Depreciation MethodsBroadly categorizing, depreciation methods can be classified as straight line and accelerated methods.In straigh

31、t line depreciation, the capital expense is spread evenly over time, In accelerated depreciation, the capital expense is depreciated more in earlier years and less in later years. Declining Balance Depreciation MethodSum of the Years Digits.28Straight Line Method-exampleSL = Cost / LifeExample: A ma

32、chine is purchased for $10000. The expected life is 5 years. Calculate the annual depreciation as follows: 10000 / 5 = 2000Each year for 5 years $2000 would be expensed. 28.29Accelerated Methods - examplesDeclining Balance Depreciation MethodExample: A copy machine is purchased for $3500. The expect

33、ed life is 5 years. Using double declining balance the depreciation would be calculated as follows: factor = 2 * (1/5) = 0.4029YearDepreciable BasisDepreciationCalculationDepreciation ExpenseAccumulatedDepreciation11000010000*0.4040004000260006000*0.4024006400336003600*0.4014407840421602160*0.408648

34、704512961296*0.40518.49222.4.30Accelerated Methods - examplesSum of the Years DigitsThe first step is to sum the digits or numbers starting with the life and going back to one. For example, an asset with a life of 5 would have a sum of digits as follows: 5+ 4+ 3 +2 + 1 = 15To find the percentage for

35、 each year divide the years digit by the sum.30Year 15 / 15 = 33.34%Year 24 / 15 = 26.67%Year 33 / 15 = 20 %Year 42 / 15 = 13.33 %Year 51/ 15 = 6.67%YearDepreciationCalculationDepreciationExpense110000 * 33.33%3333210000*26.67%2667310000* 20 %2000410000 * 13.33 %1333510000 * 6.67 %667.3131 Depreciat

36、ionAssume that you made a large investment this year, and that you are choosing between straight line and accelerated depreciation methods. Which will result in higher net income this year?Straight Line DepreciationAccelerated DepreciationWhich will result in higher cash flows this year?Straight Lin

37、e DepreciationAccelerated Depreciation.32Incremental cash flows in project analysisEstimate incremental cash flows when conduct project analysis consider:Sunk costSide effectOpportunity costCannibalization (erosion)Project synergyEmbedded optionsNon-cash working capitalDepreciation effect on taxes32

38、*.33Investments in Non-Cash Working CapitalThe difference between current assets and current liabilities is often titled working capital by accountants.We modify that definition to make it the difference between non-cash current assets and non-debt current liabilities and call it non-cash working ca

39、pital.We eliminate cash from current assets because large cash balances today earn a fair market return. Thus, they cannot be viewed as a wasting asset.We eliminate debt from current liabilities because we consider debt to be part of our financing and include it in our cost of capital calculations.3

40、3.3434Non-Cash Working Capital EffectIntuitively, money invested in inventory or in accounts receivable cannot be used elsewhere. It, thus, represents a drain on cash flows.To the degree that some of these investments can be financed using suppliers credit (accounts payable) the cash flow drain is r

41、educed.3535Non-Cash Working Capital EffectInvestments in non-cash working capital are thus cash outflowsAny increase in non-cash working capital reduces cash flows in that yearAny decrease in non-cash working capital increases cash flows in that yearTo provide closure, working capital investments ne

42、ed to be salvaged at the end of the project life.36ExerciseDetermine which of the following cash flows are incremental cash flows that should be incorporated into a NPV calculation.The sale of an old machine, when a company is replacing property, plant, and equipment for a new product launch.The cos

43、t of research and development for a new product concept that was conducted over the past year that is now being put into production.Potential rental income that was forgone from a previously unused warehouse owned by the company, which is now being used as part of a new product launch.New equipment

44、purchased for a project.The annual depreciation expense on new equipment purchased for a project.Net working capital expenditures of $10 million in year 0, $12 million in year 1 and $5million in year 2.A dividend payment that was funded in part by a given projects contribution to the net income for

45、that year.36.3737From Accounting Earnings to Cash Flows Cash Flow from OperationsOCF = EBIT Taxes + DepreciationNet Capital SpendingDo not forget salvage value.Changes in Net Working Capitalwhen the project winds down, we enjoy a return of net working capital.Cash flow = OCF + net working capital. O

46、ther Methods for Computing OCFBottom-Up ApproachWorks only when there is no interest expenseOCF = NI + depreciationTop-Down ApproachOCF = Sales Costs TaxesDo not subtract non-cash deductionsTax Shield ApproachOCF = (Sales Costs)(1 T) + Depreciation*T.3939To Time-Weighted Cash FlowsIncremental cash f

47、lows in the earlier years are worth more than incremental cash flows in later years.In fact, cash flows across time cannot be added up. They have to be brought to the same point in time before aggregation.This process of moving cash flows through time isdiscounting, when future cash flows are brough

48、t to the presentcompounding, when present cash flows are taken to the futureThe discount rate is the mechanism that determines how cash flows across time will be weighted.40Example: The Baldwin CompanyCosts of test marketing (already spent): $250,000Current market value of proposed factory site (whi

49、ch we own): $150,000Cost of bowling ball machine: $100,000 (depreciated according to MACRS 5-year)Increase in net working capital: $10,000Production (in units) by year during 5-year life of the machine: 5,000, 8,000, 12,000, 10,000, 6,000.41The Baldwin CompanyPrice during first year is $20; price in

50、creases 2% per year thereafter.Production costs during first year are $10 per unit and increase 10% per year thereafter.Annual inflation rate: 5%Working Capital: initial $10,000 changes with sales.42The Baldwin CompanyAt the end of the project, the warehouse is unencumbered, so we can sell it if we

51、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 80.0048.0028.8017.30 5.80 machine after depreciation (end of year)(4)Opportunity cost 150.00 150.00(warehouse)(5)Net working capit

52、al 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 of 260.00 6.32 8.653.75 193.00 investment(1) + (4) + (6)($ thousands) (All cash flows occur at the end of the year.).43The Baldwin CompanyYear 0Year 1Year 2Year 3Year 4 Year 5Inco

53、me: (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 increases 2% per year thereafter.Sales revenue in year 2 = 8,000$20(1.02)1 =

54、 8,000$20.40 = $163,200.44The 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 year during 5-year life of the machine is given by: (5,000, 8,000, 12,000, 10,

55、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 = $88,000.45The Baldwin CompanyYear 0Year 1Year 2Year 3Year 4 Year 5Income: (8) Sales Revenues100.00163.20249.70212.24 129.89 (9) Operating co

56、sts 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 in year 4 = $100,000(.115) = $11,500. YearACRS % 120.0% 232.0%319.2%411.5%51

57、1.5%6 5.8% Total 100.00%.46The 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 11.50 11.50(11) Income before taxes 30.00 43.20 85.30 67.64 30.55 (8) (9)

58、 - (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 20.16.47Incremental After Tax Cash Flows Year 0Year 1Year 2Year 3Year 4Year 5(1) Net income$19.80$28.51$56.30$44.64(2) Depreciation$20.0032.0019.2011.5011.50(3) OCF (1) + (2) 39.8060.5175.5056.1431.66(

59、5) Total CF of Investment260.6.328.653.75193.00(6) IATCF(4) + (5)260. 39.8054.1966.8559.89224.66$20.16(4) Change in net Working Capital0-6.32-8.65 3.7521.22$-10.48ExerciseYou are in the finance department of a firm and you are evaluating a project proposal. You have developed the following financial

60、 projections and you are calculating:The incremental cash flows of the project. The corporate tax rate is 34% and the financial projections are in thousands.48Year 0Year 1Year 2Year 3Year 4Year 5Sales 1000010000100001000010000Operating costs30003000300030003000Investment 17500Depreciation 3500350035