《金融学教学课件》bodie2e-cha课件.ppt

Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,1,Chapter 6:The Analysis of Investment Projects,ObjectiveExplain Capital BudgetingDevelop Criteria,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,2,Objectives,To show how to use discounted cash flow analysis to make decisions for business firms such as:Whether to enter a new line of businessWhether to invest in equipment to reduce costsRecall chapter 1,the process of analyzing such decisions is called capital budgeting.,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,3,Three Elements of Capital Budgeting,coming up with proposals for investment projectsevaluating themdeciding which ones to accept and which to reject,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,4,The criteria of capital budgeting,Recall the objective of a firmMaximization of the market value of shareholders equityThe theory of how to do this was provided in the prior two chaptersCompute the net present value of the projects expected cash flows,and undertake only those with positive NPV,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,5,Chapter 6 Contents,6.1 The Nature of Project Analysis6.2 Where do Investment Ideas come from?6.3 The Net Present Value Investment Rule6.4 Estimating a Projects Cash Flows6.5 Cost of Capital6.6 Sensitivity Analysis Using Spreadsheets,6.7 Analyzing Cost-Reducing Projects6.8 Projects with Different Lives6.9 Ranking Mutually Exclusive Projects6.10 Inflation&Capital Budgeting,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,6,6.1 The Nature of Project Analysis,Basic unit of analysisthe individual investment projectProcedural OutlineForm ideas on how to increase shareholders equityPlan how to implement the ideasGather information on timing and magnitude of costs and benefitsApply NPV criterion,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,7,6.2 Where do Investment Ideas Come From?,monitor existing&potential customers needsmonitor existing&potential technological capacity of the firmmonitor the competitions marketing,investment,patents,and technical recruitingmonitor production&distribution functions for revenue enhancement/cost savingsreward employees for innovative ideas,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,8,6.3 Net Present Value Investment Rule,A projects net present value isthe amount by which the project is expected to increase the wealth of the firms current shareholdersAs a criterionInvest in proposed projects with positive NPV,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,9,Illustration,The following tables show the computation of NPVTo show the effect of the discount rate,three tables are shown based on different rates,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,10,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,11,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,12,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,13,Summary,The discount rate in the first scenario it was assumed to be 10%,and the resulting NPV was$20In the second scenario it was assumed to be 15%,and the NPV was-$69In the third scenario,the discount rate that resulted in a zero NPV was found,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,14,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,15,6.4 Estimating a Projects Cash Flows,It is important to remember that when making financial decisions only timed cash flows are useddepreciation is an expense,but is not a cash expense,and must be excludedthe tax benefit of depreciation,however,is a cash flow,and must be included,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,16,Working Capital&Cash Flows,Some cash flows do not occur on the income statement,but involve timingworking capital additions and reductions are cash flowsat the end of a project,the sum of the nominal changes in working capital is zero,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,17,Accruals&Deferrals,Take extra care if you are provided with net income information by an accountantthe flows forming net income may includeaccrualsdeferralsthese are typically small,and may some-times be ignored,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,18,Incremental Cash Flows,Only the incremental cash flows should form part of an investment decisionEvaluate the projected cash flows,by(category and)timing,both with and without the project,and find the differenceThis difference is a collection of timed cash flows,and this is what affects the wealth of the shareholders,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,19,Illustration,A proposed project will generate$10,000 in revenue,but will causes another product line to lose$3,000 in revenuesThe incremental cash flow is only$7,000,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,20,Sunk Costs,Shareholders are interested in the timing and magnitude of cash flowsFrom an investors vantage,a project gives rise to an alternative cash flowIf(alternative cash flows)-(original cash flows)is valuable to shareholders,do projectA sunk cost has no impact on future cash flows:it is irrelevant to shareholders,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,21,Illustration,R&D expenses are$10,000 to-date for your project,and you plan to spend another$20,000,making$30,000 in allThe$10,000 is a sunk cost.The decision whether to undertake the project will not change this expenditureOnly the$20,000 is an incremental cost,and the$10,000 should be excluded,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,22,Example 1,P174-175,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,23,Example 2,PCs Forever is a company that produces personal computers.It has been in operation for two years and is at capacity.It is considering an investment project to expand its production capacity.The project requires an initial outlay of$1,000,000:$800,000 for new equipment with an expected life of four years and$200,000 for additional working capital.The selling price of its PCs is$1,800 per unit,and annual sales are expected to increase by 1,000 units as a result of the proposed expansion.Annual fixed costs(excluding depreciation of the new equipment)will increase by$100,000,and variable costs are$1,400 per unit.The new equipment will be depreciated over four years using the straight line method with a zero salvage value.The hurdle rate for the project is 12%per year,and the company pays income tax at the rate of 40%.,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,24,Example 2,What is the accounting break-even point for this project?What is the projects NPV?At what volume of sales would the NPV be zero?,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,25,6.5 The Cost of Capital,Cost of capital is the risk-adjusted discount rate(k)to use in computing a projects NPV.The standard way of dealing with uncertainty about future cash flows is to use a larger discount rate.When determining the cost of capitalthe risk of the project is,in general,different from the risk of the firms existing assetsonly the market-related risk is relevantonly the risk from a projects cash flows is relevant(not that of financing instruments),Illustration of point 1,A firm whose average cost of capital for its existing assets is 16%per year gets an opportunity to purchase riskless U.S.T-bonds at below-market prices.Suppose that 25-year U.S.T-bonds paying$100 per year are selling in the market at$1000,and the firm could buy$1 million worth of these bonds for$950 each.If these cash flows are discounted at the firms cost of capital 16%per year,the present value of each bond is$634,and the NPV of the project would be-$315,830,which means it should be rejected.Common sense:you can buy something for$950 and sell it immediately for$1,000,would you do it?,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,27,Illustration of point 3,Dell is planning to finance the$10 million outlay to undertake the PC1000 project by issuing bonds,and Dell can issue$10 million worth of bonds at an interest rate of 6%per year.Could we use 6%as the cost of capital in computing the NPV of the PC1000 project?If could,Dell would actually be able to do almost any projects,because of a super-low cost of capital;and all these projects cost of capital would be identically 6%!,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,28,6.6 Sensitivity Analysis Using Spreadsheets,Will the project still be economical if some of the underlying variables are inaccurate,or astray from estimation?Spreadsheets are an excellent tool for exploring the influence of estimation errors on financial decisions,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,29,Base Case,The following is an embedded Excel worksheet for the cash flow of a firmIt is generally a good practice to divide the worksheet into two segments,one containing only data,and the other containing only formulaeThis practice increases flexibility&reduces the chance of errorIt is also a good practice to name variables using Insert:Name:Create in Excel,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,30,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,31,A Modified Scenario,In this case the cash is piling up(Watch out for IRS penalties in this case!)The assumption is now made that sales units grow by+2%,unit prices by-3%,and fixed costs by+8%(No,Victor:Fixed costs may vary with time.Yes,Valerie:Fixed costs do not vary with sales.)Assume a dividend of$1,000,000/year,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,32,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,33,Additional Scenarios,The following graphs are variations from the basic model constructed by changing one variable at a time:,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,34,Was 15%,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,35,Was 40%,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,36,Was 0%,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,37,Was 75%,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,38,Was$3,100,000,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,39,Consequences,Notice that the reduced long-term viability of the product,together with the dividend for demands,will cause:a cash flow crisis early in year 5,negative accounting profits in year 6,and a serious negative operating cash flow in year 8 when the tax benefits of depreciation are finally consumed.,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,40,Graphs,Graphs are a useful supplement to spreadsheets as they may illustrate behavior of the model to continuing changes in a selected independent variableThe following graphs explore a model,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,41,Table 6.4 Project Sensitivity to Sales Volume,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,42,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,43,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,44,Sensitivity Analysis,Example 3:House Inc.has purchased a building for$1 million dollars.The economic life of the building is thirty years and it will be fully depreciated over thirty years using the straight-line depreciation method.The discount rate is 14%and the corporate tax rate is 35%.Assume there is no inflation.What is the minimum lease payment the company should ask for?,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,45,6.7 Analyzing Cost-Reducing Projects,Break-even point is number of sales resulting in a NPV=0IRR is discount rate resulting in NPV=0Price B/E is unit price resulting in NPV=0Payback period is the project life resulting in NPV=0,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,46,Analyzing Cost-Reducing Projects,Example 4:Suppose a firm is considering a cost saving project.It can invest$2 million now in equipment and thereby save$700,000 per year in pretax labor costs.If the equipment has an expected life of five years and if the firm pays income tax at the rate of 33.3%,is this a worthwhile investment?Assume the discount rate is 10%.,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,47,Analyzing Cost-Reducing Projects,Example 5:A firm is considering investing$10 million in equipment which is expected to have a useful life of four years and is expected to reduce the firms labor costs by$4 million per year.Assume the firm pays a 40%tax rate on accounting profits and uses the straight line depreciation method.What is the after-tax cash flow from the investment in years 1 through 4?If the firms hurdle rate for this investment is 15%per year,is it worthwhile?What are the investments IRR and NPV?,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,48,6.8 Projects with Different Lives,Suppose in the example 4 there are two different types of equipment with different economic lives:Long-lived equipment:$4 million initial capital outlay,can last for 10 yearsShort-lived equipment:$2 million initial capital outlay,can last for 5 yearsAssume the discount rate is 15%.Which one should you choose?,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,49,Projects with Different Lives,Example 6:Electricity,Inc.is choosing between two pieces of equipment.The first choice costs$500,000 and will last five years.It will be depreciated using the straight line depreciation method and will have no salvage value.It will have an annual maintenance cost of$50,000.The second choice will cost$600,000 and will last eight years.It will also be depreciated using the straight line depreciation method and will have no salvage value.It will have an annual maintenance cost of$55,000.The discount rate is 11%and the tax rate is 35%.Which machine should be chosen and what assumptions underlie that choice?,Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,50,6.9 Ranking Mutually Exclusive Projects,Using the NPV method,you are unlikely to encounter any serious problemsSome managers,particularly those with an engineering background,prefer to use the IRR methodThe IRR method may be made to give the correct answer,but this requires considerable skill.Avoid it(unless your boss an engineer),Copyright 2009 Pearson Education,Inc.Publishing as Prentice Hall,51,Ranking Mutually Exclusive Projects,Example 7:You own a parcel of land and have two alternatives for developing it.You can construct an office building,requiring an initial outlay of$20 million,or you can make a parking lot,requiring an initial outlay of$10,000.If you build an office building,you estimate that you will be able to sell it in one year for$24 mi