高级投资项目管理和经济效益评价(ppt 75)bkoo

,单击此处编辑母版标题样式,单击此处编辑母版文本样式,第二级,第三级,第四级,第五级,*,厦门大学管理学院博士研究生课程报告八,高级投资项目管理和经济效益评价, 理论、方法和实践,厦门大学管理学院,吴世农,Advanced Capital Budgeting,Theory, Methods & Applications,Wu Shinong,School of Management,Xiamen University,Advanced Topics in Capital Budgeting,I. What is Capital Budgeting?,Capital=Fixed Assets used in production/service; Budgeting=Plan detailing projected cash inflows and outflows during some future period, thus “Capital Budgeting” outlines the planned expenditures on fixed assets.,1.,Multi-concepts for Capital Budgeting,(1) Capital Investment Analysis & Decision,(2) Economic Evaluation of Investment Projects,(3) Technological Economics,(4) Investment Feasibility Study,2. A Formal Definition of Capital Budgeting,Capital budgeting is,a filed of finance,concerned with,cost and benefit, and return and risk,derived from investment project undertaken by a firm.,The capital budgeting is a procedure,include a set of systematic techniques dealing with,how to evaluate and select investment projects under certainty or uncertainty,.,厦门大学管理学院吴世农,Market Research Investment Sources & Cost CBA,Expenditures of Capitals,Marketing Strategy,Costs & Income,R Profits Statement Risk,& Investment Analysis,D Management Assets & Balance,Liabilities Sheet,Production Finance,Cash Inflow & Cashflow Repayment,Opportunity Study Cash Outflow Statement Analysis,Preliminary Discussion Feasibility Discussion Final,Proposals Study Report,Exhibit 1: Diagram Suggested for Investment Projects Feasibility Study in Firms,厦门大学管理学院吴世农,Technological Macroeconomic,Feasibility Feasibility,Financial Implementation Operation,Feasibility,Social/Cultural Environmental,Feasibility Feasibility,Comprehensive Review Post-,Feasibility Report Assessment,Exhibit 1 (Continuos): Diagram Suggested for Investment Projects Feasibility Study in Firms,Advanced Topics in Capital Budgeting,II. Conflicts between NPV and IRR for Mutually Exclusive Projects,1. Size Effect of Investment Outlay on NPV and IRR,(1) ConflictWhich Maximizes Shareholders Wealth?,Suppose that there are two projects, A and B, n=1, K=10%, their investment outlays and NCF are presented in the following table.,Project I,0,NCF,1,NPV (k=10%) IRR PVI,A 5,000 8,000 2,273 60% 45.46%,B 50,000 75,000 18,182 50% 36.36%,Both projects are acceptable due to their positive values of NPV, however, given that the two projects are mutually exclusive, which one is preferred?,Also, because the size of investment outlays for A and B are different. By NPV, A is better than B; by IRR (or PVI) B is over A. This case is typical as a conflict raised from decision criteria by NPV or by IRR?,厦门大学吴世农,(2) Solution,Since K=10% is assumed to be fixed, we can solve this conflict by creating a differential project (B-A), if the differential project yields a positive NPV, it is obvious that B is better than A because not only a part of B will create a NPV equal to NPV,A, but also create a positive NPV for the differential project (B-A). Thus, we create a differential project (B-A), and then calculate its NPV and IRR,NPV,(B-A),= (75000-8000)/(1+10%)-(50000-5000)=$15909,(75000-8000)/(1+IRR,(B-A),)=(50000-5000), IRR,(B-A),=48.8%,No doubt, the results above suggests that the investors of the firm will be better off if project B is accepted.,Advanced Topics in Capital Budgeting,2. Trend Effect of NCF on NPV and IRR,(1),ConflictWhich One is a Sounding Decision Rule?,Suppose there are two mutually exclusive projects, A and B, the following graphs show that the trend of As NCFs and the trend of Bs NCFs are different. Obviously, graph 1 states that As NCFs are always larger than Bs NCFs over the periods, thus, NPV,A,NPV,B,; graph 2 states for the earlier periods As NCFs are larger than Bs NCFs, thus NPV,A, NPV,B, but for the later periods (after K*) As NCFs are smaller than Bs NCFs, thus NPV,A,NPV,B,B A,NPV,A,NPV,B,NPV,A,=NPV,B,K,NPV,A,NPV,B,K,k IRR,B,IRR,A,k* IRR,A,IRR,B,厦门大学吴世农,For graph 1, project A will be chosen for investment while project be will be given up. The decision is clear.,For graph 2, it is hard to say which one is better. The question can not be answered until we do a further study.,(2) Solution,To illustrate the case shown in graph 2, the following table contains necessary information for making the accept/reject decision.,Project I,0,NCF,1,NCF,2,NPV(K=10%) IRR NPV(K=20%),A 1000 1000 310 165.3 24.8% 48.6,B 1000 200 1200 173.6 20% 0,To answer the question for the case of graph 2, we has to create a differential project (B-A), we regard the difference of Bs NCF and ANCF in the first year (NCF,1B,-NCF,1A,) as I,1, which is a negative value (or cash outflow). Also we treated the difference of Bs NCF and ANCF in the second year (NCF,2B,-NCF,1A,) as NCF,1, which is a positive value (or cash inflow). Thus the differential projects NPV and IRR can be shown as follows:,Advanced Topics in Capital Budgeting,NPV,(B-A),= 890/(1+10%) - 800 = $9.1,890/(1+IRR,(B-A),) - 800; IRR,(B-A),= 11.23%,By the calculations above, it suggests that project B is better than project A。,3. Sign Effect of NCFs on NPV and IRR,(1) ConflictWhich One is Applicable?,We one discussed a classification of cash flows: conventional NCF and non-conventional NCF, the rational behind this classification is to identify applicability of capital budgeting techniques, particularly for NPV and IRR.,If a projects stream of estimated NCFs changes sign more than once, the stream of NCFs is non-conventional. In this case, IRR is not applicable because it can result in multiple rates of return!,Why? A simple answer to this question is that if the stream of NCFs changes sign more than one time, mathematically, solving the equation of IRR will results in more than one solutionsMultiple Rates of Returns.,厦门大学吴世农,Geometrically, the multiple rates of return can be shown in the following graph.,NPV,0 K,Some Studies show that cash flows of investment projects were highly associated with economic environment, market competition, management ability and many others. In practice, it is common that NCF changes sign many times during its entire life as the influential factors change. Thus, IRR is ineffective to the case of non-conventional cash flows.,Advanced Topics in Capital Budgeting,(2) Solution,Oil-well Pump Investment is a typical case in capital budgeting to show the problem of multiple rates of return if IRR is employed to evaluate this projects IRR.,A oil company is trying to decide whether or not to install a high-speed pump on an oil-well which is already in operation. The pump will cost $1,600 to install. The pump will, for the first year, generate $10,000 more oil than the pump used now, but for the second year the new pump will generate $10,000 less oil because the well has been depleted. Should the oil company install the high-speed pimp?,We summarize the estimated incremental cash flows and present them in the following table.,Year 0 1 2,NCF -1,600 10,000 -10,000,(a) Confusing Solution Resulted from IRR,1600=10000/(1+IRR),1,+-10000/(1+IRR),2,-1600/(1+IRR)+10000/(1+IRR),1,+-10000/(1+IRR),2,=0,厦门大学吴世农,Because this equation shows that NCF change its sign from “+” to “-” one time, the solution to this equation produces two alternative results:,IRR=25% IRR=400%,Obviously, the results are confusing and hard to interpreted.,NPV,IRR=25% IRR=400%,1000,500,100200300400 500K(%),-500,-1000,-1500,Advanced Topics in Capital Budgeting,(b) Alternative Solution Offered by,Teichrow,(1964),Teichrow,thought the Oil-well Pump Investment in a different wayadd the cash flows of two adjacent periods (period 0 and period 1) together by a logically economic way to make NCFs sign change to conventional.,Assume put money into the investment twice: $-1600 at the time of the initial investment, and $-10000 in the second time period. The project can be thought of as lending +$10000 at 10% (cost of capital) to the firm in the first time period. So, the first, the firm invests $-1600 now and expects to earn the IRR at the end of the first period, that is,1600(1+IRR),厦门大学吴世农,In the second period, the difference between this result 1600(1+IRR) and the amount of money (+10000), which the project lends to the firm at 10%, is the amount borrowed at 10%, the future value of this difference at the end of the second time period is,10000-1600(1+IRR)(1+10%),Thus, we can establish an new equation to solve IRR,10000-1600(1+IRR)(1+10%) = $10000,IRR=-43.18%,This answer suggests that he project must be rejected.,(c) Simple Solution Resulted from NPV,NPV=10000/(1+10%),1,+-10000/(1+10%),2, - 1600,= 466.41-1600=$-1133.59,This solution provided by NPV suggests that this project must be rejected, this is consistent with the conclusion by Teichrows.,Advanced Topics in Capital Budgeting,III. Capital Budgeting with Inflation,1. Inflation Effect on Cost of Capital,Inflation must considered in capital budgeting since investors will incorporated expectation about inflation into their required rate of return. In fact, Nominal Rate of Return, which we usually see, consists of real rate of return and inflation rate.,Nominal Rate of Return (K,n,) is a real rate of return (K) plus inflation rate (f), but we can not simply add these two components together, nominal rate of return is lager than a result from an addition of K and i. More precisely,(1+K,n,) = (1+K)(1+f),K,n,= K+f+K,f,2. Capital Budgeting by NPV under Inflation,(1) Cash Inflows and Outflows Grow with the Same Inflation Rate,NPV= , NCF,i,(1+f),i,/(1+K),i,(1+f),i,-I,0, NCF,i,/(1+K+f),i,-I,0,厦门大学吴世农,Thus, if the inflation is reflected in both the cash flows and in the required rate of return, the resulting NPV will be free of inflation bias.,(2) Different Inflation on Cash Inflows and Outflows,CIF,i,(1+f,1,),i,-COF,i,(1+f,2,),i,(1-T) + DepreciationT,NPV=, -,I,0,(1+K),i,(1+f ),i,where CIF=cash inflows;,COF=cash outflows;,f,1,and f,2,=,inflation rates for CIF and COF, respectively;,f= average inflation rate;,T= tax rate.,Advanced Topics in Capital Budgeting,IV. Capital Budgeting for Projects with Unequal Lives,1. Mutually Exclusive Projects with Different Lives,(1) Problem Raised from the Assumption on Equal Life,Usually, capital budgeting assumes that all mutually exclusive projects have the same life (and scale). In practice, this assumption many not be hold. Given that a set of mutually exclusive projects have different lives, how to evaluate and comparing their NPVs?,Suppose that there are two mutually exclusive projects, A and B, K=10% and their NCFs are presented in the following table.,Year 0 1 2 3 n NPV(K=10%),Project A -1000 600 600 2 41,Project B -1000 400 400 475 3 50,By calculation, NPV,A,= 41; NPV,B,= 50. Will be project B better than project A? No, In fact, they are not comparable!,厦门大学吴世农,(2) Solution,To make project A and project B comparable, it is reasonable to assume that project A and project Bcan be replicated at a constant scale. Thus, project A should be superior to project B because it recovers cash flows faster.,How? In order to compare projects with unequal lives, we need to assume that the projects can be replicated at constant scale and compute the NPV of infinite stream of constant replications. By doing so, we finally have the following formula to compute NPV for project A and project B, assuming that both A and B are replicated at constant scale forever.,(1+K),n,NPV( n, ) = NPN(n),(1+K),n,-1,By employing the formula above to project A and project B, we find that,NPVA ( n, ),= $ 236 NPVB ( n, ) = $ 202,The results suggest that project A is superior to project B, thus, the firm must accept project A instead of project B!,Advanced Topics in Capital Budgeting,2. Important Notices,(1) Reasonable Judgement on Replication,Simple NPV rule, if misused, also can lead to wrong decision. For mutually exclusive projects with unequal lives, correct usage of simple NPV depends on whether or not the projects can be,reasonably assumed to be replicable,.,(2) Implication of NPV with Infinite Replication at Constant Scale,Infinite Replication at Constant Scale implies that the projects will be,repeated at a constant scale every n years,. Such an implication is applicable to some cases in practice such as forestry operation, Xmas tree planting and harvesting, raising pigs or chickens, and so on.,(3) A Problem Remained UnsolvedDuration,We may try to find out an optimal lifeduration of a project. This optimal problem can be solved with different criteria: (a) Use the simple NPV rule; (b) Use the IRR rule; (c) Use NPV rule with constant scale replication.,厦门大学吴世农,For the same problem, you may find that the solutions from the three approaches will yield different answers. However, a key to achieving the correct answer is to maximize NPV of a stream of projects replicated at constant scale.,Advanced Topics in Capital Budgeting,V. Capital Budgeting Under Uncertainty,1. Expected NPV and Variance of NPV,(1) NCF,i,with probability Distribution,In many cases in practice, a firm is faced with an investment project which NCFs are uncertain, for each period of n periods, there may be more than one possible values of NCF associated with probabilities。,To determine NPV under uncertainty, it is necessary to identify whether NCFs in each period are independent or dependent.,(a) Independent NCF,i,If NCF in each Period is independent to each others, then, then the expected NCF in each period will be equal an averaged NCF, and the,expected NPV of a project will be equal to a cumulative sum from the average of discounted expected NCF of each period minus I,0,.,Similarly, we can calculate a variance of NCF for each period and a variance of a project.,厦门大学吴世农,Year State NCF,ij,P,ij,=(Probability),Expected NCF,1 1 5000 80%,2 6000 20% 5200,2 1 8000 70%,2 10000 30% 5900,3 1 10000 80%,2 9000 20% 9800,4 1 10000 60%,2 12000 40% 10800,For example, a firm will invest $300,000 million to produce Green-battery, K=10, n=4, and the projects NCFs are independent one period to others, as presented in above table.,Expected NCF,i,Expected NPV=E(NPV)=,- - I,0,(1+K),n,Advanced Topics in Capital Budgeting,(a) Dependent NCF,i,Dependent NCF,i,is defined as NCF in one period will influence NCF in next period, or how much NCF in the next period is will be related with NCF in the previous period.,For example, A firm wants to invest $1000 million to produce auto-glass, the equipment of project is expected to have 3-year life, K=10%. After the project is in operation, NCFs appear in the first year, the second year, , the fifth year are different, in addition, in each year, there may be many values of NCF associated with probabilities. The following graph presents a situation where NCF is a random variable and the NCF in one period is dependent to NCF in other period.,厦门大学吴世农,Auto-glass Projects NCFs and Probability Distribution ($ million),Period 1 Period 2 Period 3,1200 (60%),1200 (50%) NCF,3,1000 (60%) NCF,2,1000 (40%),900 (70%),NCF,1,1000 (50%) NCF,3,600 (30%),3000 (50%),2500 (60%) NCF,3,2000 (40%) NCF,2,2600 (50%),2200 (50%),2200 (40%) NCF,3,2000 (50%),Advanced Topics in Capital Budgeting,(2) Expected NPV and Variance for Dependent NCFs,Suppose that a project needs an investment outlay $10000, n=2, K=10%. The project is risky and its NCFs are uncertain. The following table indicates the projects NCFs and probabilities associated with NCFs.,Obviously, in the first period, it is possible for the project to have either NCF=$7000 with 90% probability or NCF=$2000 with 10% probability. In the second period, given that state 1 in the first period happens, it is possible for the project to have either NCF=$10000 with 70% probability or NCF=$9000 with 30% probability; given that state 2 in the first period happens, it is possible for the project to have either NCF=$2000 with 50% probability or NCF=$1000 with 50% probability. The questions is that under such a uncertainty, what is expected NPV and its risk (standard deviation)?,Period State NCF Probability Period State NCF Probability,1 10000 70%,1 7000 90% 2 9000 30%,1 2 1 2000 50%,2 2000 10% 2 1000 50%,厦门大学吴世农,(a) Find possible combinations of NCFs,Combination of NCFs Probability for Combination,$7000, $10000 (90%)(70%)=63%,$7000, $9000 (90%)(30%)=27%,$2000, $2000 (10%)(50%)=5%,$2000, $1000 (10%)(50%)=5%,Total 100%,(b) Determine possible NPV for each combination,State NPVj Probability,1 -1000+7000(0.909)+10000(0.826)=4624 0.63,2 -1000+7000(0.909)+ 9000(0.826)=3797 0.27,3 -1000+2000(0.909)+ 2000(0.826)=-6530 0.05,4 -1000+2000(0.909)+ 1000(0.826)=-7356 0.05,Total 1.00,(c) Compute Expected NPV and Variance,E(NPV)=4623(63%)+3797(27%)+(-6