公司理财Chap07.ppt
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公司理财Chap07.ppt
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NetPresentValueandOtherInvestmentRulesChapter7McGraw-Hill/IrwinCopyright2009byTheMcGraw-HillCompanies,Inc.Allrightsreserved.KeyConceptsandSkillsoBeabletocomputepaybackanddiscountedpaybackandunderstandtheirshortcomingsoUnderstandaccountingratesofreturnandtheirshortcomingsoBeabletocomputetheinternalrateofreturnandprofitabilityindex,understandingthestrengthsandweaknessesofbothapproachesoBeabletocomputethenetpresentvalueandunderstandwhyitisthebestdecisioncriterion1ChapterOutline7.1WhyUseNetPresentValue?
7.2ThePaybackPeriodMethod7.3TheDiscountedPaybackPeriodMethod7.4TheAverageAccountingReturnMethod7.5TheInternalRateofReturn7.6ProblemswiththeIRRApproach7.7TheProfitabilityIndex7.8ThePracticeofCapitalBudgeting27.1WhyUseNetPresentValue?
oAcceptingpositiveNPVprojectsbenefitsshareholders.NPVusescashflowsNPVusesallthecashflowsoftheprojectNPVdiscountsthecashflowsproperlyoReinvestmentassumption:
theNPVruleassumesthatallcashflowscanbereinvestedatthediscountrate.3TheNetPresentValue(NPV)RuleoNetPresentValue(NPV)=TotalPVoffutureCFs+InitialInvestmentoEstimatingNPV:
1.Estimatefuturecashflows:
howmuch?
andwhen?
2.Estimatediscountrate3.EstimateinitialcostsoMinimumAcceptanceCriteria:
AcceptifNPV0oRankingCriteria:
ChoosethehighestNPV4CalculatingNPVwithSpreadsheetsoSpreadsheetsareanexcellentwaytocomputeNPVs,especiallywhenyouhavetocomputethecashflowsaswell.oUsingtheNPVfunction:
nThefirstcomponentistherequiredreturnenteredasadecimal.nThesecondcomponentistherangeofcashflowsbeginningwithyear1.nAddtheinitialinvestmentaftercomputingtheNPV.57.2ThePaybackPeriodMethod67.2ThePaybackPeriodMethodoHowlongdoesittaketheprojectto“payback”itsinitialinvestment?
oPaybackPeriod=numberofyearstorecoverinitialcostsoMinimumAcceptanceCriteria:
nSetbymanagementoRankingCriteria:
nSetbymanagement77.2ThePaybackPeriodMethod87.2ThePaybackPeriodMethod(c)10K22K37K47K54KPBPPBPPBP=a+(b-c)/d=a+(b-c)/d=3+(40-37)/10=3+(40-37)/10=3+(3)/10=3+(3)/10=3.3Years3.3Years3.3Yearsaccumulativecashflow(a)(-b)(d)0123459ThePaybackPeriodMethodoDisadvantages:
nIgnoresthetimevalueofmoneynIgnorescashflowsafterthepaybackperiodnBiasedagainstlong-termprojectsnRequiresanarbitraryacceptancecriterianAprojectacceptedbasedonthepaybackcriteriamaynothaveapositiveNPVoAdvantages:
nEasytounderstandnBiasedtowardliquidity107.3TheDiscountedPaybackPeriodoHowlongdoesittaketheprojectto“payback”itsinitialinvestment,takingthetimevalueofmoneyintoaccount?
oDecisionrule:
Accepttheprojectifitpaysbackonadiscountedbasiswithinthespecifiedtime.oBythetimeyouhavediscountedthecashflows,youmightaswellcalculatetheNPV.117.4AverageAccountingReturnoAnotherattractive,butfatallyflawed,approachoRankingCriteriaandMinimumAcceptanceCriteriasetbymanagement127.4AverageAccountingReturn13AverageAccountingReturnoDisadvantages:
nIgnoresthetimevalueofmoneynUsesanarbitrarybenchmarkcutoffratenBasedonbookvalues,notcashflowsandmarketvaluesoAdvantages:
nTheaccountinginformationisusuallyavailablenEasytocalculate147.5TheInternalRateofReturnoIRR:
thediscountratethatsetsNPVtozerooMinimumAcceptanceCriteria:
nAcceptiftheIRRexceedstherequiredreturnoRankingCriteria:
nSelectalternativewiththehighestIRRoReinvestmentassumption:
nAllfuturecashflowsassumedreinvestedattheIRR15InternalRateofReturn(IRR)i1i实i2DiscountedRateNPV10NPV2i计NPV16InternalRateofReturn(IRR)17InternalRateofReturn(IRR)oDisadvantages:
nDoesnotdistinguishbetweeninvestingandborrowingnIRRmaynotexist,ortheremaybemultipleIRRsnProblemswithmutuallyexclusiveinvestmentsoAdvantages:
nEasytounderstandandcommunicate18IRR:
ExampleConsiderthefollowingproject:
0123$50$100$150-$200Theinternalrateofreturnforthisprojectis19.44%19NPVPayoffProfileIfwegraphNPVversusthediscountrate,wecanseetheIRRasthex-axisintercept.IRR=19.44%20CalculatingIRRwithSpreadsheetsoYoustartwiththecashflowsthesameasyoudidfortheNPV.oYouusetheIRRfunction:
nYoufirstenteryourrangeofcashflows,beginningwiththeinitialcashflow.nYoucanenteraguess,butitisnotnecessary.nThedefaultformatisawholepercentyouwillnormallywanttoincreasethedecimalplacestoatleasttwo.217.6ProblemswithIRRqAreWeBorrowingorLendingqMultipleIRRsqTheScaleProblemqTheTimingProblem22MutuallyExclusivevs.IndependentoMutuallyExclusiveProjects:
onlyONEofseveralpotentialprojectscanbechosen,e.g.nRANKallalternatives,andselectthebestone.oIndependentProjects:
acceptingorrejectingoneprojectdoesnotaffectthedecisionoftheotherprojects.nMustexceedaMINIMUMacceptancecriteria23AreWeBorrowingorLe
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