公司理财及财务管理知识分析(双语)(46页PPT).pptx

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1、Why Net Present Value Leads to Better Investment Decisions than Other CriteriaCorporate FinanceChapter 9McGraw Hill/Irwin5-2McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Topics CoveredwNPV and its CompetitorswThe Payback PeriodwThe Average Accounting ReturnwInt

2、ernal Rate of ReturnwCapital Rationing5-3McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved CFO Decision ToolsSurvey Data on CFO Use of Investment Evaluation TechniquesSOURCE:Graham and Harvey,“The Theory and Practice of Finance:Evidence from the Field,”Journal of F

3、inancial Economics 61(2001),pp.187-243.5-4McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Good Decision CriteriawWe need to ask ourselves the following questions when evaluating capital budgeting decision rules:Does the decision rule adjust for the time value of

4、money?Does the decision rule adjust for risk?Does the decision rule provide information on whether we are creating value for the firm?9-45-5McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Net Present ValuewThe difference between the market value of a project and

5、its cost.wNet Present Value(NPV)=Initial Investment+Total PV of future CFs9-55-6McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved NPV Decision RulewEstimating NPV:1.Estimate future cash flows:how much?and when?2.Estimate discount rate3.Estimate initial costs5-7McGr

6、aw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved NPV Decision RulewIf the NPV is positive,accept the projectwA positive NPV means that the project is expected to add value to the firm and will therefore increase the wealth of the owners.wSince our goal is to increase

7、owner wealth,NPV is a direct measure of how well this project will meet our goal.9-75-8McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved NPV Decision RulewMinimum Acceptance Criteria:Accept if NPV 0wRanking Criteria:Choose the highest NPVwExample9.1 see page2635-9M

8、cGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved PaybackwThe payback period of a project is the number of years it takes before the cumulative forecasted cash flow equals the initial outlay.wThe payback rule says only accept projects that“payback”in the desired tim

9、e frame.wThis method is very flawed,primarily because it ignores later year cash flows and the the present value of future cash flows.5-10McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved PaybackExampleExamine the three projects and note the mistake we would make i

10、f we insisted on only taking projects with a payback period of 2 years or less.5-11McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved PaybackExampleExamine the three projects and note the mistake we would make if we insisted on only taking projects with a payback pe

11、riod of 2 years or less.5-12McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Decision Criteria Test-PaybackwDoes the payback rule account for the time value of money?wDoes the payback rule account for the risk of the cash flows?wDoes the payback rule provide an in

12、dication about the increase in value?wShould we consider the payback rule for our primary decision rule?9-125-13McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Advantages and Disadvantages of PaybackwAdvantagesEasy to understandAdjusts for uncertainty of later ca

13、sh flowsBiased toward liquiditywDisadvantagesIgnores the time value of moneyRequires an arbitrary cutoff pointIgnores cash flows beyond the cutoff dateBiased against long-term projects,such as research and development,and new projects9-135-14McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Compani

14、es,Inc.All rights reserved Discounted Payback PeriodwCompute the present value of each cash flow and then determine how long it takes to pay back on a discounted basiswCompare to a specified required periodwDecision Rule-Accept the project if it pays back on a discounted basis within the specified t

15、ime9-145-15McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Computing Discounted Payback for the ProjectwAssume we will accept the project if it pays back on a discounted basis in 2 years.wCompute the PV for each cash flow and determine the payback period using di

16、scounted cash flowsYear 1:165,000 63,120/1.121=108,643Year 2:108,643 70,800/1.122=52,202Year 3:52,202 91,080/1.123=-12,627 project pays back in year 3wDo we accept or reject the project?9-155-16McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Advantages and Disadv

17、antages of Discounted PaybackwAdvantagesIncludes time value of moneyEasy to understandDoes not accept negative estimated NPV investments when all future cash flows are positiveBiased towards liquiditywDisadvantagesMay reject positive NPV investmentsRequires an arbitrary cutoff pointIgnores cash flow

18、s beyond the cutoff pointBiased against long-term projects,such as R&D and new products9-165-17McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Average Accounting ReturnwThere are many different definitions for average accounting returnwThe one used in the book is

19、:Average net income/average book valueNote that the average book value depends on how the asset is depreciated.wNeed to have a target cutoff ratewDecision Rule:Accept the project if the AAR is greater than a preset rate9-175-18McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All righ

20、ts reserved Computing AAR for the ProjectwAssume we require an average accounting return of 25%wAverage Net Income:(13,620+3,300+29,100)/3=15,340wAAR=15,340/72,000=.213=21.3%wDo we accept or reject the project?9-185-19McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserv

21、ed Decision Criteria Test-AARwDoes the AAR rule account for the time value of money?wDoes the AAR rule account for the risk of the cash flows?wDoes the AAR rule provide an indication about the increase in value?wShould we consider the AAR rule for our primary decision rule?9-195-20McGraw Hill/IrwinC

22、opyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Advantages and Disadvantages of AARwAdvantagesEasy to calculateNeeded information will usually be availablewDisadvantagesNot a true rate of return;time value of money is ignoredUses an arbitrary benchmark cutoff rateBased on accounti

23、ng net income and book values,not cash flows and market values9-205-21McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved IRR Definition and Decision RulewDefinition:IRR is the return that makes the NPV=0wDecision Rule:Accept the project if the IRR is greater than th

24、e required return9-215-22McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Internal Rate of ReturnExampleYou 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

25、 IRR on this investment?5-23McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Internal Rate of ReturnExample 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

26、 the IRR on this investment?5-24McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Internal Rate of ReturnExample 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.Wha

27、t is the IRR on this investment?5-25McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Internal Rate of ReturnIRR=28%5-26McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Decision Criteria Test-IRRwDoes the IRR rule account for the

28、 time value of money?wDoes the IRR rule account for the risk of the cash flows?wDoes the IRR rule provide an indication about the increase in value?wShould we consider the IRR rule for our primary decision criteria?9-265-27McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights r

29、eserved Summary of Decisions for the ProjectSummaryNet Present ValueAcceptPayback PeriodRejectDiscounted Payback PeriodRejectAverage Accounting ReturnRejectInternal Rate of ReturnAccept9-275-28McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved NPV vs.IRRwNPV and IRR

30、 will generally give us the same decisionwExceptionsNonconventional cash flows cash flow signs change more than onceMutually exclusive projectsInitial investments are substantially different(issue of scale)Timing of cash flows is substantially different9-285-29McGraw Hill/IrwinCopyright 2003 by The

31、McGraw-Hill Companies,Inc.All rights reserved Internal Rate of ReturnPitfall 1-Lending or Borrowing?wWith some cash flows(as noted below)the NPV of the project increases s the discount rate increases.wThis is contrary to the normal relationship between NPV and discount rates.5-30McGraw Hill/IrwinCop

32、yright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Internal Rate of ReturnPitfall 1-Lending or Borrowing?wWith some cash flows(as noted below)the NPV of the project increases s the discount rate increases.wThis is contrary to the normal relationship between NPV and discount rates.Disco

33、unt RateNPV5-31McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Internal Rate of ReturnPitfall 2-Multiple Rates of ReturnwCertain cash flows can generate NPV=0 at two different discount rates.wThe following cash flow generates NPV=$A 3.3 million at both IRR%of(-44

34、%)and+11.6%.Cash Flows(millions of Australian dollars)5-32McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Internal Rate of ReturnPitfall 2-Multiple Rates of ReturnwCertain cash flows can generate NPV=0 at two different discount rates.wThe following cash flow gene

35、rates NPV=0 at both (-50%)and 15.2%.1000NPV5000-500-1000Discount RateIRR=15.2%IRR=-50%5-33McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved IRR and Mutually Exclusive ProjectswMutually exclusive projectsIf you choose one,you cant choose the otherExample:You can cho

36、ose to attend graduate school at either Harvard or Stanford,but not bothwIntuitively,you would use the following decision rules:NPV choose the project with the higher NPVIRR choose the project with the higher IRR9-335-34McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights rese

37、rved Example With Mutually Exclusive ProjectsPeriodProject AProject B0-500-40013253252325200IRR19.43%22.17%NPV64.0560.74The required return for both projects is 10%.Which project should you accept and why?9-345-35McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved NP

38、V ProfilesIRR for A=19.43%IRR for B=22.17%Crossover Point=11.8%9-355-36McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Conflicts Between NPV and IRRwNPV directly measures the increase in value to the firmwWhenever there is a conflict between NPV and another decis

39、ion rule,you should always use NPVwIRR is unreliable in the following situationsNonconventional cash flowsMutually exclusive projects9-365-37McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Advantages and Disadvantages of internal rate of returnwAdvantagesClosely

40、related to NPV,generally leading to identical decisionsEasy to understand and communicatewDisadvantagesMay lead to incorrect decisions in comparisons of mutually exclusive investmentsMay result in multiple answers or not deal with nonconventional cash flows.9-375-38McGraw Hill/IrwinCopyright 2003 by

41、 The McGraw-Hill Companies,Inc.All rights reserved Profitability IndexwWhen resources are limited,the profitability index(PI)provides a tool for selecting among various project combinations and alternativeswA set of limited resources and projects can yield various combinations.wThe highest weighted

42、average PI can indicate which projects to select.5-39McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Profitability IndexExampleWe only have$300,000 to invest.Which do we select?ProjNPV InvestmentPIA230,000 200,000 1.15B141,250125,0001.13C194,250175,0001.11D162,00

43、0150,0001.085-40McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Profitability IndexExample-continuedProjNPV InvestmentPIA230,000200,0001.15B141,250 125,000 1.13C194,250175,0001.11D162,000150,0001.08Select projects with highest Weighted Avg PIWAPI(BD)=1.13(125)+1.

44、08(150)+0.0(25)(300)(300)(300)=1.015-41McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Profitability IndexExample-continuedProjNPV InvestmentPIA230,000200,0001.15B141,250125,0001.13C194,250175,0001.11D162,000150,0001.08Select projects with highest Weighted Avg PI

45、WAPI(BD)=1.01WAPI(A)=0.77WAPI(BC)=1.125-42McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Advantages and Disadvantages of Profitability IndexwAdvantagesClosely related to NPV,generally leading to identical decisionsEasy to understand and communicateMay be useful

46、when available investment funds are limitedwDisadvantagesMay lead to incorrect decisions in comparisons of mutually exclusive investments9-425-43McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Summary DCF CriteriawNet present valueDifference between market value

47、and costTake the project if the NPV is positiveHas no serious problemsPreferred decision criterionwInternal rate of returnDiscount rate that makes NPV=0Take the project if the IRR is greater than the required returnSame decision as NPV with conventional cash flowsIRR is unreliable with nonconvention

48、al cash flows or mutually exclusive projectswProfitability IndexBenefit-cost ratioTake investment if PI 1Cannot be used to rank mutually exclusive projectsMay be used to rank projects in the presence of capital rationing9-435-44McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rig

49、hts reserved Summary Payback CriteriawPayback periodLength of time until initial investment is recoveredTake the project if it pays back within some specified periodDoesnt account for time value of money,and there is an arbitrary cutoff periodwDiscounted payback periodLength of time until initial in

50、vestment is recovered on a discounted basisTake the project if it pays back in some specified periodThere is an arbitrary cutoff period9-445-45McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Summary Accounting CriterionwAverage Accounting ReturnMeasure of account