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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 Budgetin
2、g(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 project yi
3、elds 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 IRRNPV(B-A) = (75000-8000)/(1+10%)-
4、(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 Budgeting2. Trend Effect of NCF on NPV and IRR(1) ConflictWhich One is a Sounding Dec
5、ision 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 earlier p
6、eriods 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 ANPVA 0, so the project should be accepted! (b) Should be the project be abandoned after its operation?Yes, because the projects NCFs rend to decline year b
7、y year!(c) When to abandon the project?The firm should abandon the project when the NPV is maximized! The following Calculation show Max(NPV) appears when n=3. Why? Advanced Topics in Capital Budgeting(c-1) NPV for 5-year Operation:NPV= 5000(0.909)+4000(0.826)+3000(0.751)+2000(0.683)+1000(0.621)-100
8、00 = $2089 (c-2) NPV for 4-year Operation:NPV= 5000(0.909)+4000(0.826)+3000(0.751)+2000(0.683)+1000(0.683)- -10000 = $2157 (c-3) NPV for 3-year Operation:NPV= 5000(0.909)+4000(0.826)+3000(0.751)+3000(0.751)-10000= $2355=Max(NPV) (c-4) NPV for 2-year Operation:NPV= 5000(0.909)+4000(0.826)+5000(0.826)
9、-10000= $1979(c-5) NPV for 1-year Operation:NPV= 5000(0.909)+7000(0.909)-10000= $908厦门大学吴世农(2) Project Abandonment Under UncertaintySuppose that a firm considers a project which initial outlay is $10000, K=10%, n=2, and its NCFs and associated probabilities were shown in the previous section (see IV
10、). If the firm expected that salvage value(F) by the end of period 1 is $3000 while nothing left by the end of period 2, will this project is acceptable? If yes, should be it abandoned after operation?(a) Is the project acceptable?By computation from Section IV, E(NPV)0, so the project must be accep
11、ted!E(NPV)=4623(63%)+3797(27%)+(-6530)(5%)+(-7356)(5%)=$3242S(NPV)= (NPVj -3242)2 Probability1/2 =$3254 (b) When to Abandon the Project? Year1 or Year2?(b-1): If the project is abandoned at the end of year 2, then E(NPV)=$3242S(NPV)=$3254 Advanced Topics in Capital Budgeting(b-2): If the project is
12、abandoned at the end of year 1, then E(NPV)=4623(63%)+3797(27%)+(-5455)(5%)+(-5455)(5%)=$3392S(NPV)= (NPVj -3392)2 Probability1/2 =$2971The results above come from the following table:State NPVj Probability1 -1000+7000(0.909)+10000(0.826)=4624 0.63 2 -1000+7000(0.909)+ 9000(0.826)=3797 0.27 3 -1000+
13、(2000+3000)(0.909) =-5455 0.05 4 -1000+(2000+3000)(0.909) =-5455 0.05Total 1.00 (b-3) Decisions The first, the results suggest that abandoning the project at the end of year 1 shows a larger NPV and less standard deviation by a comparison to NPV and standard deviation resulted from abandoning the pr
14、oject at the end of year 2, so the project should be abandoned at the end of year1. 厦门大学吴世农The second, the project will not be abandoned by the end of year 1 if the NCF=$70000 in the first year, but will be abandoned if the NCF = $2000 in the first year. (3) Optimal Project Life for Continuos Variab
15、le in Capital Budgeting(a) Continuos Variable in Capital BudgetingIn practice, some firm may be faced with some capital budgeting problems which variables such as price, profit and cash flow are continuous variables, for instance, brewery industry, forests plantation, raising chicken, and son on. There are two ques
