公司理财(双语)npv.ppt

,Why Net Present Value Leads to Better Investment Decisions than Other Criteria,Corporate Finance,Chapter 9,McGraw Hill/Irwin,Topics Covered,NPV and its CompetitorsThe Payback PeriodThe Average Accounting ReturnInternal Rate of ReturnCapital 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 rate3.Estimate initial costs,NPV Decision Rule,If the NPV is positive,accept the projectA 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 0Ranking Criteria:Choose the highest NPVExample9.1 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,ExampleExamine 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,ExampleExamine 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,AdvantagesEasy to understandAdjusts for uncertainty of later cash flowsBiased toward liquidity,DisadvantagesIgnores 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 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 basisCompare to a specified required periodDecision 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 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 3Do we accept or reject the project?,9-15,Advantages and Disadvantages of Discounted Payback,AdvantagesIncludes time value of moneyEasy to understandDoes not accept negative estimated NPV investments when all future cash flows are positiveBiased towards liquidity,DisadvantagesMay reject positive NPV investmentsRequires an arbitrary cutoff pointIgnores cash flows beyond the cutoff pointBiased against long-term projects,such as R&D and new products,9-16,Average Accounting Return,There are many different definitions for average accounting returnThe one used in the book is:Average net income/average book valueNote that the average book value depends on how the asset is depreciated.Need to have a target cutoff rateDecision 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=15,340AAR=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,AdvantagesEasy to calculateNeeded information will usually be available,DisadvantagesNot a true rate of return;time value of money is ignoredUses an arbitrary benchmark cutoff rateBased 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=0Decision Rule:Accept the project if the IRR is greater than the required return,9-21,Internal Rate of Return,ExampleYou 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$4,000 in cash flows for two years,respectively.What is the IRR on this investment?,Internal Rate of Return,IRR=28%,Decision Criteria Test-IRR,Does the IRR rule account for the time value of money?Does the IRR rule account for the risk of the cash flows?Does the IRR rule provide an indication about the increase in value?Should we consider the IRR rule for our primary decision criteria?,9-26,Summary of Decisions for the Project,9-27,NPV vs.IRR,NPV and IRR will generally give us the same decisionExceptionsNonconventional cash flows cash flow signs change more than onceMutually exclusive projectsInitial investments are substantially different(issue of scale)Timing of cash flows is substantially different,9-28,Internal Rate of Return,Pitfall 1-Lending or Borrowing?With some cash flows(as noted below)the NPV of the project increases s the discount rate increases.This is contrary to the normal relationship between NPV and discount rates.,Internal Rate of Return,Pitfall 1-Lending or Borrowing?With some cash flows(as noted below)the NPV of the project increases s the discount rate increases.This is contrary to the normal relationship between NPV and discount rates.,Discount Rate,NPV,Internal Rate of Return,Pitfall 2-Multiple Rates of ReturnCertain cash flows can generate NPV=0 at two different discount rates.The following cash flow generates NPV=$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 ReturnCertain 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 projectsIf you choose one,you cant choose the otherExample:You can choose to attend graduate school at either Harvard or Stanford,but not bothIntuitively,you would use the following decision rules:NPV choose the project with the higher NPVIRR choose the project with the higher IRR,9-33,Example With Mutually Exclusive Projects,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 firmWhenever there is a conflict between NPV and another decision rule,you should always use NPVIRR is unreliable in the following situationsNonconventional cash flowsMutually exclusive projects,9-36,Advantages and Disadvantages of internal rate of return,AdvantagesClosely related to NPV,generally leading to identical decisionsEasy to understand and communicate,DisadvantagesMay lead to incorrect decisions in comparisons of mutually exclusive investmentsMay 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 alternativesA set of limited resources and projects can yield various combinations.The highest weighted average PI can indicate which projects to select.,Profitability Index,ExampleWe only have$300,000 to invest.Which do we select?ProjNPV InvestmentPIA230,000200,0001.15B141,250125,0001.13C194,250175,0001.11D162,000150,0001.08,Profitability Index,Example-continuedProjNPV InvestmentPIA230,000200,0001.15B141,250125,0001.13C194,250175,0001.11D162,000150,0001.08Select projects with highest Weighted Avg PIWAPI(BD)=1.13(125)+1.08(150)+0.0(25)(300)(300)(300)=1.01,Profitability Index,Example-continuedProjNPV InvestmentPIA230,000200,0001.15B141,250125,0001.13C194,250175,0001.11D162,000150,0001.08Select projects with highest Weighted Avg PIWAPI(BD)=1.01WAPI(A)=0.77WAPI(BC)=1.12,Advantages and Disadvantages of Profitability Index,AdvantagesClosely related to NPV,generally leading to identical decisionsEasy to understand and communicateMay be useful when available investment funds are limited,DisadvantagesMay lead to incorrect decisions in comparisons of mutually exclusive investments,9-42,Summary DCF Criteria,Net present valueDifference between market value and costTake the project if the NPV is positiveHas no serious problemsPreferred decision criterionInternal 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 nonconventional cash flows or mutually exclusive projectsProfitability IndexBenefit-cost ratioTake investment if PI 1Cannot be used to rank mutually exclusive projectsMay be used to rank projects in the presence of capital rationing,9-43,Summary Payback Criteria,Payback 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 periodDiscounted payback periodLength of time until initial investment is recovered on a discounted basisTake the project if it pays back in some specified periodThere is an arbitrary cutoff period,9-44,Summary Accounting Criterion,Average Accounting ReturnMeasure of accounting profit relative to book valueSimilar to return on assets measureTake the investment if the AAR exceeds some specified return levelSerious problems and should not be used,9-45,