公司理财(双语)npv

Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,5-,45,McGraw Hill/Irwin,Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved,Why Net Present Value Leads to Better Investment Decisions than Other Criteria,Corporate Finance,Chapter 9,McGraw Hill/Irwin,Topics Covered,NPV and its Competitors,The Payback Period,The Average Accounting Return,Internal Rate of Return,Capital Rationing,CFO Decision Tools,Survey Data on CFO Use of Investment Evaluation Techniques,SOURCE: Graham and Harvey, “The Theory and Practice of Finance: Evidence from the Field,” Journal of Financial Economics 61 (2001), pp. 187-243.,Good Decision Criteria,We need to ask ourselves the following questions when evaluating capital budgeting decision rules:,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,Net Present Value,The difference between the market value of a project and its cost.,Net Present Value (NPV) =,Initial Investment + Total PV of future CFs,9-,5,NPV Decision Rule,Estimating NPV:,1. Estimate future cash flows: how much? and when?,2. Estimate discount rate,3. Estimate initial costs,NPV Decision Rule,If the NPV is positive, accept the project,A positive NPV means that the project is expected to add value to the firm and will therefore increase the wealth of the owners.,Since our goal is to increase owner wealth, NPV is a direct measure of how well this project will meet our goal.,9-,7,NPV Decision Rule,Minimum Acceptance Criteria: Accept if NPV 0,Ranking Criteria: Choose the highest NPV,Example9.1 see page263,Payback,The payback period of a project is the number of years it takes before the cumulative forecasted cash flow equals the initial outlay.,The payback rule says only accept projects that “payback” in the desired time frame.,This method is very flawed, primarily because it ignores later year cash flows and the the present value of future cash flows.,Payback,Example,Examine 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.,Payback,Example,Examine 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.,Decision Criteria Test - Payback,Does the payback rule account for the time value of money?,Does the payback rule account for the risk of the cash flows?,Does the payback rule provide an indication about the increase in value?,Should we consider the payback rule for our primary decision rule?,9-,12,Advantages and Disadvantages of Payback,Advantages,Easy to understand,Adjusts for uncertainty of later cash flows,Biased toward liquidity,Disadvantages,Ignores the time value of money,Requires an arbitrary cutoff point,Ignores cash flows beyond the cutoff date,Biased against long-term projects, such as research and development, and new projects,9-,13,Discounted Payback Period,Compute the present value of each cash flow and then determine how long it takes to pay back on a discounted basis,Compare to a specified required period,Decision Rule -,Accept the project if it pays back on a discounted basis within the specified time,9-,14,Computing Discounted Payback for the Project,Assume we will accept the project if it pays back on a discounted basis in 2 years.,Compute the PV for each cash flow and determine the payback period using discounted cash flows,Year 1: 165,000 63,120/1.12,1,= 108,643,Year 2: 108,643 70,800/1.12,2,= 52,202,Year 3: 52,202 91,080/1.12,3,= -12,627 project pays back in year 3,Do we accept or reject the project?,9-,15,Advantages and Disadvantages of Discounted Payback,Advantages,Includes time value of money,Easy to understand,Does not accept negative estimated NPV investments when all future cash flows are positive,Biased towards liquidity,Disadvantages,May reject positive NPV investments,Requires an arbitrary cutoff point,Ignores cash flows beyond the cutoff point,Biased against long-term projects, such as R&D and new products,9-,16,Average Accounting Return,There are many different definitions for average accounting return,The one used in the book is:,Average net income / average book value,Note that the average book value depends on how the asset is depreciated.,Need to have a target cutoff rate,Decision Rule:,Accept the project if the AAR is greater than a preset rate,9-,17,Computing AAR for the Project,Assume we require an average accounting return of 25%,Average Net Income:,(13,620 + 3,300 + 29,100) / 3 = 15,340,AAR = 15,340 / 72,000 = .213 = 21.3%,Do we accept or reject the project?,9-,18,Decision Criteria Test - AAR,Does the AAR rule account for the time value of money?,Does the AAR rule account for the risk of the cash flows?,Does the AAR rule provide an indication about the increase in value?,Should we consider the AAR rule for our primary decision rule?,9-,19,Advantages and Disadvantages of AAR,Advantages,Easy to calculate,Needed information will usually be available,Disadvantages,Not a true rate of return; time value of money is ignored,Uses an arbitrary benchmark cutoff rate,Based on accounting net income and book values, not cash flows and market values,9-,20,IRR Definition and Decision Rule,Definition: IRR is the return that makes the NPV = 0,Decision Rule:,Accept the project if the IRR is greater than the required return,9-,21,Internal Rate of Return,Example,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 is the IRR on this investment?,Internal Rate of Return,Example,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 is the IRR on this investment?,Internal Rate of Return,Example,You can purchase a turbo powered machine tool gadget for $4,000. The investment will generate $2,000 and $4,000 in cash flows for two years, respectively. What is the IRR on this investment?,Internal Rate of Return,IRR=28%,Decision Criteria Test - IRR,Does the IRR rule account for the time value of money?,Does the IRR rule account for the risk of the cash flows?,Does the IRR rule provide an indication about the increase in value?,Should we consider the IRR rule for our primary decision criteria?,9-,26,Summary of Decisions for the Project,Summary,Net Present Value,Accept,Payback Period,Reject,Discounted Payback Period,Reject,Average Accounting Return,Reject,Internal Rate of Return,Accept,9-,27,NPV vs. IRR,NPV and IRR will generally give us the same decision,Exceptions,Nonconventional cash flows cash flow signs change more than once,Mutually exclusive projects,Initial investments are substantially different (issue of scale),Timing of cash flows is substantially different,9-,28,Internal Rate of Return,Pitfall 1 - Lending or Borrowing?,With some cash flows (as noted below) the NPV of the project increases s the discount rate increases.,This is contrary to the normal relationship between NPV and discount rates.,Internal Rate of Return,Pitfall 1 - Lending or Borrowing?,With some cash flows (as noted below) the NPV of the project increases s the discount rate increases.,This is contrary to the normal relationship between NPV and discount rates.,Discount Rate,NPV,Internal Rate of Return,Pitfall 2 - Multiple Rates of Return,Certain cash flows can generate NPV=0 at two different discount rates.,The following cash flow generates NPV=$A 3.3 million at both IRR% of (-44%) and +11.6%.,Cash Flows (millions of Australian dollars),Internal Rate of Return,Pitfall 2 - 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%.,1000,NPV,500,0,-500,-1000,Discount Rate,IRR=15.2%,IRR=-50%,IRR and Mutually Exclusive Projects,Mutually exclusive projects,If you choose one, you cant choose the other,Example: You can choose to attend graduate school at either Harvard or Stanford, but not both,Intuitively, you would use the following decision rules:,NPV choose the project with the higher NPV,IRR choose the project with the higher IRR,9-,33,Example With Mutually Exclusive Projects,Period,Project A,Project B,0,-500,-400,1,325,325,2,325,200,IRR,19.43%,22.17%,NPV,64.05,60.74,The required return for both projects is 10%.,Which project should you accept and why?,9-,34,NPV Profiles,IRR for A = 19.43%,IRR for B = 22.17%,Crossover Point = 11.8%,9-,35,Conflicts Between NPV and IRR,NPV directly measures the increase in value to the firm,Whenever there is a conflict between NPV and another decision rule, you should,always,use NPV,IRR is unreliable in the following situations,Nonconventional cash flows,Mutually exclusive projects,9-,36,Advantages and Disadvantages of internal rate of return,Advantages,Closely related to NPV, generally leading to identical decisions,Easy to understand and communicate,Disadvantages,May lead to incorrect decisions in comparisons of mutually exclusive investments,May result in multiple answers or not deal with nonconventional cash flows.,9-,37,Profitability Index,When resources are limited, the profitability index (PI) provides a tool for selecting among various project combinations and alternatives,A set of limited resources and projects can yield various combinations.,The highest weighted average PI can indicate which projects to select.,Profitability Index,Example,We only have $300,000 to invest. Which do we select?,ProjNPV InvestmentPI,A230,000200,0001.15,B141,250125,0001.13,C194,250175,0001.11,D162,000150,0001.08,Profitability Index,Example - continued,ProjNPV InvestmentPI,A230,000200,0001.15,B141,250125,0001.13,C194,250175,0001.11,D162,000150,0001.08,Select projects with highest Weighted Avg PI,WAPI (BD) = 1.13(125) + 1.08(150) + 0.0 (25),(300) (300) (300),= 1.01,Profitability Index,Example - continued,ProjNPV InvestmentPI,A230,000200,0001.15,B141,250125,0001.13,C194,250175,0001.11,D162,000150,0001.08,Select projects with highest Weighted Avg PI,WAPI (BD) = 1.01,WAPI (A) = 0.77,WAPI (BC) = 1.12,Advantages and Disadvantages of Profitability Index,Advantages,Closely related to NPV, generally leading to identical decisions,Easy to understand and communicate,May be useful when available investment funds are limited,Disadvantages,May lead to incorrect decisions in comparisons of mutually exclusive investments,9-,42,Summary DCF Criteria,Net present value,Difference between market value and cost,Take the project if the NPV is positive,Has no serious problems,Preferred decision criterion,Internal rate of return,Discount rate that makes NPV = 0,Take the project if the IRR is greater than the required return,Same decision as NPV with conventional cash flows,IRR is unreliable with nonconventional cash flows or mutually exclusive projects,Profitability Index,Benefit-cost ratio,Take investment if PI 1,Cannot be used to rank mutually exclusive projects,May be used to rank projects in the presence of capital rationing,9-,43,Summary Payback Criteria,Payback period,Length of time until initial investment is recovered,Take the project if it pays back within some specified period,Doesnt account for time value of money, and there is an arbitrary cutoff period,Discounted payback period,Length of time until initial investment is recovered on a discounted basis,Take the project if it pays back in some specified period,There is an arbitrary cutoff period,9-,44,Summary Accounting Criterion,Average Accounting Return,Measure of accounting profit relative to book value,Similar to return on assets measure,Take the investment if the AAR exceeds some specified return level,Serious problems and should not be used,9-,45,