财务管理英文版chapter

1、Unit 7 Capital budgetingMini caseMicrosoft and HP plan joint investment Microsoft Corp. and Hewlett-Packard Co. have agreed to invest jointly at least $300 million over three years and work more closely together to win over large business customers. The two companies ,the worlds largest makers of so

2、ftware and personal computers respectively, planned to work together to develop, test, validate or ensure that products conform to standards and deploy new products, while also collaborating on sales and marketing. HP and Microsoft plan to extend their partnership into new business areas to help lar

3、ge business customers incorporate new technology including internet-based communications, business intelligence and collaboration software. The companies will also work together to establish a sales and technical training program to certify more than 3,000 new Microsoft-trained consultants at HP.con

4、tents7.1 Capital Investment decisions7.2 Guidelines for Estimating Project Cash Flows7.3 Investment Rules 7.4 Business Practice7.5 Analyzing Project Risk7.6 Project Selection with Resource Constrains7.7 Qualitative Factors and the Selection of Projects7.8 The Post-Audit What is capital budgeting?Cap

5、ital budgeting, also known as constructive or investment budgeting ,it is the capital expenditure plans in order to attain the better of the businesss future development and more returns .It is a budgeting which to reflect the sources and applications of funds for construction。Should we build thispl

6、ant?Analysis of potential additions to fixed assets.Long-term decisions; involve large expenditures.Very important to firms future.The content of capital budgeting Steps to capital budgetingEstimate CFs (inflows & outflows).Assess riskiness of CFs.Determine the appropriate cost of capital.Find NPV a

7、nd/or IRR.Accept if NPV 0 and/or IRR WACC.7.1 Capital Investment decisions nature of capital budgeting1.Capital expenditure 资本支出 The fixed asset account on a firms balance sheet represents its net investment or capital expenditures in capital goods.2.Capital budgeting 资本预算 Capital budgeting is the p

8、rocess of planning, analyzing, and managing capital investment. The proper goal in making capital investment maximize value by selecting capital investments in which the value of the firm. Capital goods are business assets with an expected use of more than one year.7.1 Capital Investment decisions P

9、roject Classifications A capital budgeting project is a proposed long-term investment that ultimately results in a capital expenditure . Expansion Projects vs. Replacement Projects (扩充项目和更新项目) Independent Projects vs. Mutually Exclusive Projects （独立项目和互斥项目） Expansion Projects扩充项目 An expansion projec

10、ts is a capital investment designed primarily to enhance revenues by increasing operating capacity in existing products or markets or by focusing operations to expand into completely new products or markets. Expansion projects are especially important to young or growing firms that must buy new fixe

11、d assets to meet increased demand. 一个扩建项目是一个资本投资，它的目的主要是通过提高现有产品的经营或市场容量或通过集中行动，以拓展全新的产品或市场的收入。扩建项目对于年轻的或增长的公司是非常重要的，所以必须购买新的固定资产，以满足不断增长的需求Replacement project -更新项目 A replacement project is a capital investment designed to improve efficiency or to maintain or increase revenues by replacing deterior

12、ated or obsolete fixed assets. Replacing outdated equipment or facilities often benefits the firm by lowering its operating costs and preserving its efficiency. 更新项目是一项资本投资，旨在通过更新过时的或废弃的固定资产来提高效率或维持、增加收入。更新过时设备或设施往往有利于降低其经营成本，并保持其效率Independent projectsIndependent projects are those in which the acce

13、ptance or rejection of one project does not prevent the acceptance or rejection of other projects under consideration. That is ,implementing independent project is unrelated to each other. Analysis can evaluate effect of an independent project on a firms value without having to consider its effect o

14、n other investment opportunities.独立的项目是那些在其中接受或拒绝的一个项目并不妨碍接受或拒绝的其他正在审议之中的项目。也就是说，通过分析可以评估实施独立的项目的影响是彼此无关的。对一个企业的价值独立的项目，而不必考虑其他投资机会的影响。mutually exclusive projectsMutually exclusive projects are those in which the acceptance of one project precludes the acceptance of others.互斥项目是那些一旦接受就会妨碍到其他项目接受（的项目

15、）。7.2 Guidelines for Estimating Project Cash FlowsIdentify Incremental Cash Flows Focus on After-tax Cash Flows Postpone Considering Financing Costs Other Cash Flow ConsiderationsSunk CostsOpportunity CostsAllocated OverheadResidual ValueSide Effects 7.2.1 Identify Incremental Cash Flows The most im

16、portant guideline is to consider only changes in a firms cash flows that result from a firms undertaking a project. This requires comparing a firms cash flow with and without a proposed project. Managers are interested in the incremental cash flows generated by a project, not its total cash flows.7.

17、2.2 Focus on After-tax Cash Flows Some more common tax provisions influencing cash flows involve depreciation expense as well as gains and losses from the sale of existing fixed assets. As a general principle, capital budgeting analyses require separating investment (capital budgeting ) and financin

18、g decisions. That is, analysts should evaluate a capital budgeting project independently of the source of funds used to finance the project.7.2.3 Postpone Considering Financing Costs Sunk costs（沉没成本）:-an outlay incurred before making an investment decision and represents an historical cost. Post exp

19、enditures on a project should not influence the decision whether to undertake, continue, or end a project because they are not incremental cash flows. Thus, sunk costs are not part of the evaluation process. 沉没成本是作出投资决策前发生的支出并且代表了历史成本。一个项目的支出不应该影响其决定是否展开，继续或结束，因为他们没有增量现金流量。因此，沉没成本不属于评估过程的一部分。7.2.4 O

20、ther Cash Flow ConsiderationsOpportunity costs（机会成本）: Estimating project cash flows requires considering both direct outlays and opportunity costsmost valuable alternative use of a resource or an asset that the firms gives up by accepting a project. 估计项目的现金流量需要考虑直接支出和机会成本。机会成本是一个资源或资产，该公司放弃了接受一个项目最有

21、价值的其他用途。7.2.4 Other Cash Flow Considerations By using the asset or resource in the proposed project, the firm forgoes the opportunity to employ the asset in its alternative use. The cash flows that the firm forgoes represent an opportunity cost to the proposed project. 通过使用资产或拟建项目的资源，该公司采纳使用的机会抛弃在其他

22、用途的资产。公司放弃的现金流代表了计划的项目的机会成本。Allocated Overhead（分配制造费用）: If the firms current overhead remains unchanged by accepting a project, the firm should exclude this allocated overhead from the projects cash flows in the capital budgeting analysis.7.2.4 Other Cash Flow ConsiderationsResidual value（残余价值）: A p

23、rojects residual value will be the disposal value of the projects assets, less any dismantling and removal costs associated with the termination of projects.7.2.4 Other Cash Flow ConsiderationsSide effect（附加效应）: Side effects are complements if they enhance the cash flows of existing assets and subst

24、itutes if the effect is negative.7.2.4 Other Cash Flow Considerations7.3 Investment Rules Net Present Value (NPV) Profitability Index (PI)Internal Rate of Return (IRR) Payback Period (PP)Discounted Payback Period (DPP)What is the payback period? The number of years required to recover a projects cos

25、t, or how long does it take to get our money back?That is:Payback for Project L(Long: Large CFs in later years)10600123-100=CFtCumulative-100-90-3050PaybackL2+30/80 = 2.375 years02.480Project S (Short: CFs come quickly)7020500123-100CFtCumulative-100-302040PaybackS1 + 30/50 = 1.6 years01.6=Strengths

26、 of Payback:1.Provides an indication of a projects risk and liquidity.2.Easy to calculate and understand.Weaknesses of Payback:1.Ignores the TVM.2.Ignores CFs occurring after the payback period.What is the difference between independent and mutually exclusive projects?Projects are:independent, if th

27、e cash flows of one are unaffected by the acceptance of the other.mutually exclusive, if the cash flows of one can be adversely impacted by the acceptance of the other.An Example of Mutually Exclusive ProjectsBRIDGE vs. BOAT to get products across a river.Normal Cash Flow Project:Cost (negative CF)

28、followed by aseries of positive cash inflows. One change of signs.Nonnormal Cash Flow Project:Two or more changes of signs.Most common: Cost (negativeCF), then string of positive CFs,then cost to close project.Nuclear power plant, strip mine.Inflow (+) or Outflow (-) in Year012345NNN-+N-+-NN-+N+-N-+

29、-+-NNnormalnonnormalDiscounted Payback: Uses discountedrather than raw CFs.1080600123CFtCumulative-100-90.91-41.3218.79Discountedpayback2 + 41.32/60.11 = 2.7 yearsPVCFt-100-10010%9.0949.5960.11=Recover invest. + cap. costs in 2.7 years.Project L:NPV:Sum of the PVs of inflows and outflows.Whats the N

30、PV of a project?Whats Project Ls NPV?108060012310%Project L:-100.009.0949.5960.1118.79 = NPVLNPVS = $19.98.Calculator SolutionEnter in CFLO for L:-10010608010CF0CF1NPVCF2CF3I= 18.78 = NPVLRationale for the NPV MethodNPV= PV inflows Cost= Net gain in wealth.Accept project if NPV 0.Choose between mutu

31、ally exclusive projects on basis ofhigher NPV. Adds most value.Using NPV method, which project(s) should be accepted?If Projects S and L are mutually exclusive, accept S because NPVs NPVL .If S & L are independent, accept both; NPV 0.Internal Rate of Return: IRR0123CF0CF1CF2CF3CostInflowsIRR is the

32、discount rate that forces PV inflows = cost. This is the same as forcing NPV = 0.NPV: Enter k, solve for NPV.IRR: Enter NPV = 0, solve for IRR.Whats Project Ls IRR?1080600123IRR = ?-100.00PV3PV2PV10 = NPVEnter CFs in CFLO, then press IRR:IRRL = 18.13%.IRRS = 23.56%.Rationale for the IRR MethodIf IRR

33、 WACC, then the projects rate of return is greater than its cost-some return is left over to boost stockholders returns.Example:WACC = 10%, IRR = 15%. Profitable.IRR Acceptance CriteriaIf IRR k, accept project.If IRR k = 10%.If S and L are mutually exclusive, accept S because IRRS IRRL .Construct NP

34、V ProfilesEnter CFs in CFLO and find NPVL andNPVS at different discount rates: k 05101520NPVL50 33197-4 NPVS402920125 -4-100102030405060510152023.6NPV ($)Discount Rate (%)IRRL = 18.1%IRRS = 23.6%Crossover Point = 8.7%k 05101520NPVL5033197-4 NPVS402920125 SL.NPV and IRR always lead to the same accept

35、/reject decision for independent projects:k IRRand NPV kand NPV 0Accept. Large firms should and do use the procedures we commend. Managers of small firms, especially managers with aspirations for future growth, should at least understand DCF procedures well enough to make rational decisions about us

36、ing or not using them.可以从这些研究中得出一个普遍结论，就是大公司应该并且能够使用我们推荐的程序，而那些小公司的管理者，尤其是考虑远期发展的管理者，应该至少懂得折现现金流方法足以做出关于使不使用它们的合理的决定7.4 Business Practice 7.5 Analyzing Project Risk Sensitivity AnalysisSensitivity analysis involves assessing the effect of changes or errors in the estimated variables on the net prese

37、nt value of a project. 敏感性分析包含评估在这个项目中净现值的改变量或者误差所产生的影响Break-even Analysisa form of sensitivity analysis. The break-even point is the sales volume at which the present values of the projects cash inflows and outflows are equal, so that its net present value is zero. 盈亏平衡点就是在项目的现金流入和流出量的现值相等时的销售量，此时净现值为0。Sensitivity analysis generally involves finding answers to “what if” questions as: what will be the net present value of the project if sales are