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1、成员：李 健、王纯瑞、 朱 卫、申 欣 陈 龙、方兆运、王栋坤、刘 恒,Chapter 4: Compounded Cash Flow MethodsChapter 5:Selected Furthen Applications of Investment Appraisal Methods,2020年7月29日星期三,CONTENTS,4.1 Compound Value (CV) Method 4.2 Critical Debt Interest Rate (CDIR) Method 4.3 Visualisation of Financial Implications (VoFI) Me
2、thod 5.1 Income Taxes and Investment Decisions 5.2 The Assessment of Foreign Direct Investments,4.1 Compound Value Method,The compound value (CV) method is a dynamic investment appraisal method that uses the compound value as its target measure. The compound value is the overall net monetary gain or
3、 loss resulting from the investment project and is related to the end of its economic life.,4.1 Compound Value Method,Three assumptions: Different interest rates:a debt interest rate for borrowings and a credit interest rate for financial investments Unlimited amounts can be borrowed or invested at
4、these rates Interest rates are assumed to be independent of the amount borrowed or invested,4.1 Compound Value Method,4.1.1Prohibited account balancing Separate accounts are established for the net cash inflows and net cash outflows. The inflows earn the credit interest rate (c) (CVT+) and the outfl
5、ows incur the debt interest rate (d) (CVT-). The compound values at the end of the planning period are:,4.1 Compound Value Method,4.1.2Mandatory account balancing Only one account (CV) are assigned to which all cash inflows and outflows (NCFt) . if the project-specific financial assets at beginning
6、of the period(CVt-1) are negative, using the debt interest rate (d) or using the credit interest rate (c) if CVt-1 is positive.,4.1 Compound Value Method,Two concepts: Absolute profitability:is achieved if an investment projects compound value is greater than zero. Relative profitability:is achieved
7、 if an investment project has a higher compound value than the alternative investment project(s).,4.1 Compound Value Method,Using the mandatory account balancing assumption: CVt=32423.80 Using the prohibited account balancing assumption:,Project A:The debt interest rate (d) is 10%;The credit interes
8、t rate (c) is 6%,Example 1,4.1 Compound Value Method,Assessment of the method: The CV method evaluation is largely the same as that presented for the NPV method. The required data are identical except that the CV method requires both debt and credit interest rates.,4.1 Compound Value Method,Assessme
9、nt of the method: But, some differences do exist between CV and NPV:The CV method avoids the assumption of a perfect capital market and with it the use of a uniform discount rate. The CV model assumptions are more realistic than those of the NPV method. However, if debt and credit interest rates dev
10、iate only slightly from each other, the results of both the CV and NPV calculations will be often the same in practice.,4.2 Critical Debt Interest Rate Method,The critical debt interest rate method assumes separate debt and credit interest rates. The critical debt interest rate serves as the target
11、measure for this method. The critical debt interest rate is the rate that (with a given credit interest rate)results in a compound value of zero. An investment project is absolutely profitable if its critical debt interest rate exceeds the markets debt interest rate.,4.2 Critical Debt Interest Rate
12、Method,An approximation of the critical debt interest rate： The CDIR method have a relationship similar to that of the internal rate of return (IRR). An interpolation or extrapolation can be executed using a formula similar to the one used to calculate with the IRR method. The accuracy of the approx
13、imation depends on the difference between the debt interest rates and how far from zero the resulting compound values lay.,4.2 Critical Debt Interest Rate Method,Application of the method: The absolute profitability assessments: Absolute profitability results are the same for the CDIR method as they
14、 are for the CV method, in the case of isolated investment projects.,4.2 Critical Debt Interest Rate Method,Application of the method: The relative profitability assessments: Critical debt interest rate comparisons usually fail to yield meaningful results, since capital tie-up and economic life diff
15、erences are assumed to be balanced by the critical debt interest rate; The use of the CDIR method with a fictitious differential investment is problematic, because the resulting compound value does not always equate to the difference between the compound values of the projects under consideration; T
16、he CDIR method can be used to assess relative profitability only in some cases. Since all of these cases can also be assessed using the CV method, the CDIR method is not recommended for assessing relative profitability.,4.2 Critical Debt Interest Rate Method,Example 2 (This example draws on data used for Example 1 otherwise compound values referring to different points in time will not be comparable. The capital available at the end of the shorter investment project h
