taiwan财务管理_lecture6(ch6)

Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,The McGraw-Hill Companies, Inc.,2001,6-,35,Irwin/McGraw-Hill,Irwin/McGraw-Hill,Chapter 6,Fundamentals of Corporate Finance,Third Edition,Net Present Value and Other Investment Criteria,Brealey Myers Marcus,slides by Matthew Will,Irwin/McGraw-Hill,The McGraw-Hill Companies, Inc.,2001,Topics Covered,Net Present Value,Other Investment Criteria,Project Interactions,Capital Rationing,Net Present Value,Opportunity Cost of Capital,- Expected rate of return given up by investing in a project.,Net Present Value,- Present value of cash flows minus initial investments.,Net Present Value,Example,Suppose we can invest $50 today and receive $60 in one year. What is our increase in value given a 10% expected return?,This is the definition of NPV,Initial Investment,Added Value,$50,$4.55,Net Present Value,NPV = PV - required investment,Net Present Value,Terminology,C = Cash Flow,t = time period of the investment,r = “opportunity cost of capital”,The Cash Flow could be positive or negative at any time period.,Net Present Value,Net Present Value Rule,Managers increase shareholders wealth by accepting all projects that are worth more than they cost.,Therefore, they should accept all projects with a positive net present value.,Net Present Value,Example,You have the opportunity to purchase an office building. You have a tenant lined up that will generate $16,000 per year in cash flows for three years. At the end of three years you anticipate selling the building for $450,000. How much would you be willing to pay for the building?,Net Present Value,0 1 2 3,$16,000,$16,000,$16,000,$450,000,$466,000,Present Value,14,953,14,953,380,395,$409,323,Example,- continued,Net Present Value,Example,- continued,If the building is being offered for sale at a price of $350,000, would you buy the building and what is the added value generated by your purchase and management of the building?,Net Present Value,Example,- continued,If the building is being offered for sale at a price of $350,000, would you buy the building and what is the added value generated by your purchase and management of the building?,Other Investment Criteria,Internal Rate of Return (IRR),- Discount rate at which NPV = 0.,Rate of Return Rule,- Invest in any project offering a rate of return that is higher than the opportunity cost of capital.,Internal Rate of Return,Example,You can purchase a building for $350,000. The investment will generate $16,000 in cash flows (i.e. rent) during the first three years. At the end of three years you will sell the building for $450,000. What is the IRR on this investment?,IRR = 12.96%,Internal Rate of Return,IRR=12.96%,Payback Method,Payback Period,- Time until cash flows recover the initial investment of the project.,The,payback rule,specifies that a project be accepted if its payback period is less than the specified cutoff period. The following example will demonstrate the absurdity of this statement.,Payback Method,Example,The three project below are available. The company accepts all projects with a 2 year or less payback period. Show how this decision will impact our decision.,Cash Flows,Prj.,C,0,C,1,C,2,C,3,PaybackNPV,10%,A-2000+1000+1000+100002,+7,249,B-2000+1000+1000 02,- 264,C-2000 0+2000 02,- 347,Book Rate of Return,Book Rate of Return,- Average income divided by average book value over project life. Also called,accounting rate of return,.,Managers rarely use this measurement to make decisions. The components reflect tax and accounting figures, not market values or cash flows.,Project Interactions,When you need to choose between mutually exclusive projects, the decision rule is simple. Calculate the NPV of each project, and, from those options that have a positive NPV, choose the one whose NPV is highest.,Mutually Exclusive Projects,Example,Select one of the two following projects, based on highest NPV.,Proj01234NPV,A-155.55.55.55.5,B-20999,assume 9% discount rate,Mutually Exclusive Projects,Example,Select one of the two following projects, based on highest NPV.,Proj01234NPV,A-155.55.55.55.5,2.82,B-20999,2.78,assume 9% discount rate,Investment Timing,Sometimes you have the ability to defer an investment and select a time that is more ideal at which to make the investment decision. A common example involves a tree farm. You may defer the harvesting of trees. By doing so, you defer the receipt of the cash flow, yet increase the cash flow.,Investment Timing,Example,You may purchase a computer anytime within the next five years. While the computer will save your company money, the cost of computers continues to decline. If your cost of capital is 10% and given the data listed below, when should you purchase the computer?,YearCostPV SavingsNPV at PurchaseNPV Today,050702020.0,145702522.7,240703024.8,3367034,Date to purchase,25.5,433703725.3,531703924.2,Equivalent Annual Cost,Equivalent Annual Cost,- The cost per period with the same present value as the cost of buying and operating a machine.,Equivalent Annual Cost,Example,Given the following costs of operating two machines and a 6% cost of capital, select the lower cost machine using equivalent annual cost method.,Year,Mach,.,1234PV,6%,Ann. Cost,D-15-4-4-4-25.69,-9.61,E-10-6-6-21.00,-11.45,Equivalent Annual Cost,Example (with a twist),Select one of the two following projects, based on highest “equivalent annual annuity” (r=9%).,Proj01234NPVEq. Ann,A-155.55.55.55.5,2.82,.87,B-209992.78,1.10,Internal Rate of Return,Example,You have two proposals to choice between. The initial proposal (H) has a cash flow that is different than the revised proposal (I). Using IRR, which do you prefer?,Internal Rate of Return,Example,You have two proposals to choice between. The initial proposal (H) has a cash flow that is different than the revised proposal (I). Using IRR, which do you prefer?,Internal Rate of Return,50,40,30,20,10,0,-10,-20,NPV $, 1,000s,Discount rate, %,8 10 12 14 16,Revised proposal,Initial proposal,Internal Rate of Return,Pitfall 1 - Mutually Exclusive Projects,IRR sometimes ignores the magnitude of the project.,The following two projects illustrate that problem.,Pitfall 2 - Lending or Borrowing?,With some cash flows (as noted below) the NPV of the project increases s the discount rate increases.,This is contrary to the normal relationship between NPV and discount rates.,Pitfall 3 - Multiple Rates of Return,Certain cash flows can generate NPV=0 at two different discount rates.,The following cash flow generates NPV=0 at both (-50%) and 15.2%.,內部報酬率法,內部報酬率,(,Internal Rate of Return Md.;,簡稱,IRR),法,方法:,內部報酬率:使淨現值(,NPV),為0之折現率,NPV=,或,CF,t,：t,期淨現金流量 (即各期稅後現金入),IRR,：,內部報酬率(即投資人之報酬率),內部報酬率法(續),決策準則 :,單一計劃 :,IRR R;,互斥計劃:,Max(IRR,1, IRR,2,) R,優劣,:,缺: (1)複雜 (2),某些狀況未符合價值最大化原則,(3)可能無解或(4)有多重解(5)再投資報酬率問題,優點: (1)考慮風險因素 （2）考慮整時間價值因素,(3）考慮投資人之機會成本,（4）考慮整個投資期間之現金流量,(5)考慮整個投資期末處分資產之現金流量,修正內部報酬率法,修正內部報酬率,(,Modified Internal Rate of Return Md.;,簡稱,MIRR),法,方法:,修正,內部報酬率:,使各期淨現金流出現值之和等於未來各期現金流入現值之和之折現率,PV cost = PV (terminal value),修正內部報酬率法(續),決策準則 :,單一計劃 :,MIRR R;,互斥計劃:,Max(MIRR,1, MIRR,2,) R,優劣,:,缺: (1)複雜 (2),某些狀況未符合價值最大化原則,優點: (1)考慮風險因素 （2）考慮整時間價值因素,(3）考慮投資人之機會成本,（4）考慮整個投資期間之現金流量,(5)考慮整個投資期末處分資產之現金流量,Capital Rationing,Capital Rationing,- Limit set on the amount of funds available for investment.,Soft Rationing,- Limits on available funds imposed by management.,Hard Rationing,- Limits on available funds imposed by the unavailability of funds in the capital market.,Profitability Index,