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1、厦门大学管理学院博士研究生课程报告八,高级投资项目管理和经济效益评价 理论、方法和实践 厦门大学管理学院 吴世农 Advanced Capital Budgeting Theory, Methods Budgeting=Plan detailing projected cash inflows and outflows during some future period, thus “Capital Budgeting” outlines the planned expenditures on fixed assets. 1. Multi-concepts for Capital Budget
2、ing (1) Capital Investment Analysis by IRR (or PVI) B is over A. This case is typical as a conflict raised from decision criteria by NPV or by IRR?,厦门大学吴世农,(2) Solution Since K=10% is assumed to be fixed, we can solve this conflict by creating a differential project (B-A), if the differential projec
3、t yields a positive NPV, it is obvious that B is better than A because not only a part of B will create a NPV equal to NPVA, but also create a positive NPV for the differential project (B-A). Thus, we create a differential project (B-A), and then calculate its NPV and IRR NPV(B-A) = (75000-8000)/(1+
4、10%)-(50000-5000)=$15909 (75000-8000)/(1+IRR(B-A) )=(50000-5000), IRR(B-A) =48.8% No doubt, the results above suggests that the investors of the firm will be better off if project B is accepted.,Advanced Topics in Capital Budgeting,2. Trend Effect of NCF on NPV and IRR (1) ConflictWhich One is a Sou
5、nding Decision Rule? Suppose there are two mutually exclusive projects, A and B, the following graphs show that the trend of As NCFs and the trend of Bs NCFs are different. Obviously, graph 1 states that As NCFs are always larger than Bs NCFs over the periods, thus, NPVANPVB; graph 2 states for the
6、earlier periods As NCFs are larger than Bs NCFs, thus NPVA NPVB, but for the later periods (after K*) As NCFs are smaller than Bs NCFs, thus NPVANPV B B A NPVA NPV B NPVA =NPV B K NPVA NPV B K k IRRB IRRA k* IRRAIRRB,厦门大学吴世农,For graph 1, project A will be chosen for investment while project be will
7、be given up. The decision is clear. For graph 2, it is hard to say which one is better. The question can not be answered until we do a further study. (2) Solution To illustrate the case shown in graph 2, the following table contains necessary information for making the accept/reject decision. Projec
8、t I0 NCF1 NCF2 NPV(K=10%) IRR NPV(K=20%) A 1000 1000 310 165.3 24.8% 48.6 B 1000 200 1200 173.6 20% 0 To answer the question for the case of graph 2, we has to create a differential project (B-A), we regard the difference of Bs NCF and ANCF in the first year (NCF1B -NCF1A) as I1, which is a negative
9、 value (or cash outflow). Also we treated the difference of Bs NCF and ANCF in the second year (NCF2B -NCF1A) as NCF1, which is a positive value (or cash inflow). Thus the differential projects NPV and IRR can be shown as follows:,Advanced Topics in Capital Budgeting,NPV(B-A) = 890/(1+10%) - 800 = $
10、9.1 890/(1+IRR(B-A) - 800; IRR(B-A) = 11.23% By the calculations above, it suggests that project B is better than project A。 3. Sign Effect of NCFs on NPV and IRR (1) ConflictWhich One is Applicable? We one discussed a classification of cash flows: conventional NCF and non-conventional NCF, the rati
11、onal behind this classification is to identify applicability of capital budgeting techniques, particularly for NPV and IRR. If a projects stream of estimated NCFs changes sign more than once, the stream of NCFs is non-conventional. In this case, IRR is not applicable because it can result in multipl
12、e rates of return! Why? A simple answer to this question is that if the stream of NCFs changes sign more than one time, mathematically, solving the equation of IRR will results in more than one solutionsMultiple Rates of Returns.,厦门大学吴世农,Geometrically, the multiple rates of return can be shown in th
13、e following graph. NPV 0 K Some Studies show that cash flows of investment projects were highly associated with economic environment, market competition, management ability and many others. In practice, it is common that NCF changes sign many times during its entire life as the influential factors c
14、hange. Thus, IRR is ineffective to the case of non-conventional cash flows.,Advanced Topics in Capital Budgeting,(2) Solution Oil-well Pump Investment is a typical case in capital budgeting to show the problem of multiple rates of return if IRR is employed to evaluate this projects IRR. A oil compan
15、y is trying to decide whether or not to install a high-speed pump on an oil-well which is already in operation. The pump will cost $1,600 to install. The pump will, for the first year, generate $10,000 more oil than the pump used now, but for the second year the new pump will generate $10,000 less oil because the well has been depleted. Should the oil company install the high-speed pimp? We summarize the estimated incremental cash flows and present them in the following table. Year 0 1 2 NCF -1,600 10,000 -10,000 (a) Confusing
