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1、 Chapter9CapitalBudgetingDecisionCriteria 1998South WesternCollegePublishingSlide1 CapitalExpenditureAcashoutlayexpectedtogenerateaflowoffuturecashbenefitsformorethanayear CapitalBudgetingTheprocessofplanningforpurchasesofassetswhosereturnsareexpectedtocontinuebeyondayearCostofCapitalThecostofcapita
2、lisdefinedasthecostoffundssuppliedtoafirm Itrepresentstherequiredrateofreturnafirmmustearnonitsinvestment Slide2 CapitalExpenditureDecisions ExpandanexistingproductlineWorkingcapitalMergerandacquisitionEducationandtraining Slide3 EnteranewlineofbusinessReplacementofanoldmachineAdvertisingcampaignRan
3、dD CostofCapital Firm soverallcostoffundsInvestor srequiredrateofreturnProvidesabasisforevaluatingcapitalinvestmentprojects Slide4 HowAreProjectsClassified IndependentAcceptanceorrejectionhasnoeffectonotherprojectsExample InstallanewcomputersystemandupgradingsomeproductionequipmentMutuallyExclusive
4、OR Acceptanceofoneautomaticallyrejectstheothers Example BuildingafactoryinMaconorMcDonoughContingent AND AcceptanceisdependentupontheselectionofanotherExample Installinganewmanagementinformationsystemmayfirstrequirepurchaseofsuitablehardware computers Slide5 CapitalRationing Mostcompanieshavealimite
5、damountofdollarsavailableforinvestmentFundsconstraint Slide6 CapitalBudgetingProblems AllprojectsmaynotbeknownatonetimeChangingmarkets technology andcorporatestrategiescanmakecurrentprojectsobsoleteandmakenewonesprofitableEstimatesofCF shavevaryingdegreesofuncertainty Slide8 CapitalBudgetingProcess
6、Step1GeneratingproposalsStep2EstimatingCF sStep3EvaluatingalternativesandselectingprojectsStep4Reviewingpriordecisions Slide9 CapitalBudgetingCriteria Netpresentvalue NPV Internalrateofreturn IRR Profitabilityindex PI Paybackperiod PB 1998South WesternCollegePublishingSlide2 Workonproblem1 NPV PVoft
7、hestreamoffutureCF sfromaprojectminustheproject snetinvestmentNPV PVNCF PVNINVPVNCF ispresentvalueofallcashflowexcludinginvestment PVNINV ispresentvalueofallinvestments shouldinvestmentbemadeindifferentyears thencalculatethepresentvalueofinvestmentmadeindifferentyears Note YoucanalsocomputeNPVbyjust
8、computingpresentvalueofallcashflowsincludinginvestments Whenthediscountrateiszero NPVisthesumofcashflows includinginvestment 1998South WesternCollegePublishingSlide3 Workonproblem1 NPVCharacteristics 1998South WesternCollegePublishingSlide4 NPV 0acceptableabove normalprofitsConsidersthetimevalueofmo
9、neyAbsolutemeasureofwealthPositiveNPV sincreaseowner swealthNegativeNPV sdecreaseowner swealth IRR RateofdiscountthatequatesthePVofnetcashflowsofaprojectwiththePVoftheNINVPVNCF PVNINVTocomputeIRR simplycompute i or IRR inyourcalculatingafteryouinputallthecashflows 1998South WesternCollegePublishingS
10、lide6 Workonproblem1 IRRCharacteristics IRR kacceptableConsidersthetimevalueofmoneyUnusualCFpatterncanresultinmultipleratesofreturnCF scontainmorethanonesignchangeIftheNPVIfNPV 0 thenIRR k workonproblem1 1998South WesternCollegePublishingSlide7 PI RatioofthePVoffuturecashflowsoverthelifeoftheproject
11、totheNINVPI PVNCF PVNINVNote NPV PVNCF PVNINVTherefore PVNCF PVNINV NPVAlso PVNIV PVNCF NPVOr wecanalsosay PI 1 NPV PVNINV Workonproblem1 1998South WesternCollegePublishingSlide8 PIcharacteristics PI 1acceptableConsidersthetimevalueofmoneyCF sreinvestedatkRelativemeasureshowingwealthincreaseperdolla
12、rofinvestmentInthecaseofmutuallyexclusiveprojectsandwithfundconstraints NPVandPIarelikelytoyieldconflictingdecisionswhentheprojectsaresignificantlydifferentinsizeInthecaseofindependentprojectsandnofundconstraints NPV IRRandPIwouldgiveidenticalaccept rejectdecision 1998South WesternCollegePublishingS
13、lide9 PaybackMethodNumberofyearsforthecumulativenetcashflowsfromaprojecttoequaltheinitialcashoutlayWhenyouhaveequalcashflows PB NetInvestment AnnualCashFlowNote Threevariables PB NIandACF Givenanytwovariables youshouldbeabletodeterminethethirdvariable WhennetCF sareunequal interpolationisrequiredWor
14、konproblem1 1998South WesternCollegePublishingSlide10 PBCharacteristicsSimpleProvidesameasureofprojectliquidityNotatruemeasureofprofitabilityIgnoresCF safterthepaybackperiodIgnoresthetimevalueofmoney i JohnandJanecompanyisconsideringthefollowingtwoprojects AssumeCashflowsareevendistributedduringthey
15、ear Project1Project2YearCashFlowCashFlow0 165 17070250803608047060Thetwoprojectshavethesamepayback WhatisProject2 sinternalrateofreturnIRR Assumeka 8 computePIandNPV i IRR payback andmissingcashflowStep1 FindProject1 spayback Project1CumulativeYearCashFlowCashFlow0 16517070250120 360165 45outof60 47
16、0PaybackProject1 2 45 60 2 75years Step2 CalculateProject2 sinitialoutlay givenitspayback 2 75years 70 80 0 75 80 210Step3 CalculateProject2 sIRR Enterthefollowingdatainthecalculator 210 CF 70CF 80CF 80CF 60CF a CompNPV 31 01b CompIRR 14 59 c PI 1 NPV Inv 1 31 01 210 1 15 Ex Assumeinvestmentis 100 000inyear0 Thefirmwillreceive 20 000attheendofyear1 30 000attheendofyear2 andincreaseby10 fromthereon Whatisthepaybackperiod YearCashFlowCumulativeCFstillCFreceivedneeded1 20 000 20 000100K 20K 80K 30