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1、ChapterOutline 8 1CorporateStrategyandPositiveNPV8 2DecisionTrees8 3SensitivityAnalysis ScenarioAnalysis andBreak EvenAnalysis8 4Options8 5SummaryandConclusions IntroducenewproductsAppleCorporationandthemouseDevelopcoretechnologyHondaandsmallenginesCreatebarriertoentryQualcomm spatentsonproprietaryt
2、echnologyIntroducevariationsonexistingproductsChrysler sPTCruiserCreateproductdifferentiationCoca Cola it stherealthingUtilizeorganizationalinnovationMotorolajust in timeinventorymanagementExploitanewtechnologyYahoo suseofbanneradvertisementsontheweb CorporateStrategyandPositiveNPV CorporateStrategy
3、andtheStockMarket Thereshouldbeaconnectionbetweenthestockmarketandcapitalbudgeting IfthefirminvestsinapositiveNPVprojects thefirm sstockpriceshouldgoup Sometimesthestockmarketprovidesnegativecluesastoanewproject sNPV ConsiderAT T srepeatedattemptstopenetratethecomputer manufacturingindustry 8 2Decis
4、ionTrees Allowustographicallyrepresentthealternativesavailabletousineachperiodandthelikelyconsequencesofouractions ExampleofDecisionTree Donotstudy Studyfinance Opencirclesrepresentdecisionstobemade Filledcirclesrepresentreceiptofinformatione g atestscoreinthisclass Thelinesleadingawayfromthecircles
5、representthealternatives StewartPharmaceuticals TheStewartPharmaceuticalsCorporationisconsideringinvestingindevelopingadrugthatcuresthecommoncold Acorporateplanninggroup includingrepresentativesfromproduction marketing andengineering hasrecommendedthatthefirmgoaheadwiththetestanddevelopmentphase Thi
6、spreliminaryphasewilllastoneyearandcost 1billion Furthermore thegroupbelievesthatthereisa60 chancethattestswillprovesuccessful Iftheinitialtestsaresuccessful StewartPharmaceuticalscangoaheadwithfull scaleproduction Thisinvestmentphasewillcost 1 600million Productionwilloccuroverthenext4years Stewart
7、PharmaceuticalsNPVofFull ScaleProductionfollowingSuccessfulTest NotethattheNPViscalculatedasofdate1 thedateatwhichtheinvestmentof 1 600millionismade Laterwebringthisnumberbacktodate0 DecisionTreeforStewartPharmaceutical Donottest Test Failure Success Donotinvest Invest Thefirmhastwodecisionstomake T
8、otestornottotest Toinvestornottoinvest StewartPharmaceutical DecisiontoTest Let smovebacktothefirststage wherethedecisionboilsdowntothesimplequestion shouldweinvest Theexpectedpayoffevaluatedatdate1is TheNPVevaluatedatdate0is Soweshouldtest 8 3SensitivityAnalysis ScenarioAnalysis andBreak EvenAnalys
9、is AllowsustolookthebehindtheNPVnumbertoseefirmourestimatesare Whenworkingwithspreadsheets trytobuildyourmodelsothatyoucanjustadjustvariablesinonecellandhavetheNPVcalculationskeytothat SensitivityAnalysisandScenarioAnalysis IntheStewartPharmaceuticalexample revenueswereprojectedtobe 7 000 000peryear
10、 Iftheyareonly 6 000 000peryear theNPVfallsto 1 341 64 Alsoknownas whatif analysis weexaminehowsensitiveaparticularNPVcalculationistochangesintheunderlyingassumptions SensitivityAnalysis WecanseethatNPVisverysensitivetochangesinrevenues Forexample a14 dropinrevenueleadstoa61 dropinNPV Forevery1 drop
11、inrevenuewecanexpectroughlya4 25 dropinNPV ScenarioAnalysis Avariationonsensitivityanalysisisscenarioanalysis Forexample thefollowingthreescenarioscouldapplytoStewartPharmaceuticals Thenextyearseachhaveheavycoldseasons andsalesexceedexpectations butlaborcostsskyrocket Thenextyearsarenormalandsalesme
12、etexpectations Thenextyearseachhavelighterthannormalcoldseasons sosalesfailtomeetexpectations OtherscenarioscouldapplytoFDAapprovalfortheirdrug Foreachscenario calculatetheNPV Break EvenAnalysis Anotherwaytoexaminevariabilityinourforecastsisbreak evenanalysis IntheStewartPharmaceuticalsexample wecou
13、ldbeconcernedwithbreak evenrevenue break evensalesvolumeorbreak evenprice Thebreak evenIATCFisgivenby Break EvenAnalysis Wecanstartwiththebreak evenincrementalafter taxcashflowandworkbackwardsthroughtheincomestatementtobackoutbreak evenrevenue Break EvenAnalysis Nowthatwehavebreak evenrevenueas 5 35
14、8 72millionwecancalculatebreak evenpriceandsalesvolume Iftheoriginalplanwastogeneraterevenuesof 7 000millionbysellingthecoldcureat 10perdoseandselling700milliondosesperyear wecanreachbreak evenrevenuewithasalesvolumeofonly Wecanreachbreak evenrevenuewithapriceofonly 8 4Options Oneofthefundamentalins
15、ightsofmodernfinancetheoryisthatoptionshavevalue Thephrase Weareoutofoptions issurelyasignoftrouble Options Becausecorporationsmakedecisionsinadynamicenvironment theyhaveoptionsthatshouldbeconsideredinprojectvaluation TheOptiontoExpandHasvalueifdemandturnsouttobehigherthanexpected TheOptiontoAbandon
16、Hasvalueifdemandturnsouttobelowerthanexpected TheOptiontoDelayHasvalueiftheunderlyingvariablesarechangingwithafavorabletrend TheOptiontoDelay Example Considertheaboveproject whichcanbeundertakeninanyofthenext4years Thediscountrateis10percent Thepresentvalueofthebenefitsatthetimetheprojectislaunchedremainconstantat 25 000 butsincecostsaredecliningtheNPVatthetimeoflaunchsteadilyrises Thebesttimetolaunchtheprojectisinyear2 thisscheduleyieldsthehighestNPVwhenjudgedtoday DiscountedCashFlowsandOptions