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1、14-1 2001 Prentice-Hall, Inc.Fundamentals of Financial Management, 11/eCreated by: Gregory A. Kuhlemeyer, Ph.D.Carroll College, Waukesha, WI14-2uThe Problem of Project RiskuTotal Project RiskuContribution to Total Firm Risk: Firm-Portfolio ApproachuManagerial Options14-3ANNUAL CASH FLOWS: YEAR 1 Sta
2、te Deep Recession.05 $ -3,000Mild Recession.25 1,000Normal.40 5,000Minor Boom.25 9,000Major Boom.05 13,00014-4.40.05.25Probability-3,000 1,000 5,000 9,000 13,000Cash Flow ($)14-5 ($ -3,000 .05 $ -150 1,000 .25 250 5,000 .40 2,000 9,000 .25 2,250 13,000 .05 650 =14-6 ( $ -150 ( -3,000 - 5,000) 250 (
3、1,000 - 5,000) 2,000 ( 5,000 - 5,000) 2,250 ( 9,000 - 5,000) 650 (13,000 - 5,000) 14-7 ( $ -150 3,200,000 250 4,000,000 2,000 0 2,250 4,000,000 650 3,200,000 14-8The = SQRT (14,400,000) = The = 14-9ANNUAL CASH FLOWS: YEAR 1 State Deep Recession.05 $ -1,000Mild Recession.25 2,000Normal.40 5,000Minor
4、Boom.25 8,000Major Boom.05 11,00014-10.40.05.25Probability-3,000 1,000 5,000 9,000 13,000Cash Flow ($)14-11 ($ -1,000 .05 $ -50 2,000 .25 500 5,000 .40 2,000 8,000 .25 2,000 11,000 .05 550 =14-12 ( $ -50 ( -1,000 - 5,000) 500 ( 2,000 - 5,000) 2,000 ( 5,000 - 5,000) 2,000 ( 8,000 - 5,000) 550 (11,000
5、 - 5,000) 14-13 ( $ -50 1,800,000 500 2,250,000 2,000 0 2,000 2,250,000 550 1,800,000 14-14The standard deviation of The = SQRT (8,100,000)= The = 14-15Projects have risk that may change from period to period.Projects are more likely to have continuous, rather than discrete distributions. Cash Flow
6、($) Year14-16A graphic or tabular approach for organizing the possible cash-flow streams generated by an investment. The presentation resembles the branches of a tree. Each complete branch represents one possible cash-flow sequence.14-17Basket Wonders is examining a project that will have an today o
7、f . Uncertainty surrounding the first year cash flows creates three possible cash-flow scenarios in .14-18Node 1: 20% chance of a cash-flow.Node 2: 60% chance of a cash-flow. Node 3: 20% chance of a cash-flow.(.20) (.20) (.60) 14-19Each node in represents a of our probability tree.The probabilities
8、are said to be .() () (.) (.60) (.30) (.10) (.35) (.40) (.25) (.10) (.50) (.40) 14-20.02 Branch 1.12 Branch 2.06 Branch 3.21 Branch 4.24 Branch 5.15 Branch 6.02 Branch 7.10 Branch 8.08 Branch 9() () (.) (.60) (.30) (.10) (.35) (.40) (.25)(.10) (.50) (.40) 14-21The probability tree accounts for the d
9、istribution of cash flows. Therefore, discount all cash flows at only the rate of return.The of the probability tree for two years of cash flows isNPV = S S ()() = (1 + )(1 + )- +i = 1z14-22 $ 2,238.32 $ 1,331.29 $ 1,059.18 $ 344.90 $ 72.79-$ 199.32-$ 1,017.91-$ 1,562.13-$ 2,106.35() () (.) (.60) (.
10、30) (.10) (.35) (.40) (.25) (.10) (.50) (.40) 14-23 Remember, we can use the cash flow registry to solve these NPV problems quickly and accurately!14-24Solving for Branch #3:Step 1:PressCF keyStep 2:Press2ndCLR WorkkeysStep 3: For CF0 Press -900 Enter keysStep 4: For C01 Press 1200 Enter keysStep 5:
11、 For F01 Press 1 Enter keysStep 6: For C02 Press 900 Enter keysStep 7: For F02 Press 1 Enter keys14-25Solving for Branch #3: Step 8: Press keysStep 9: PressNPV keyStep 10: For I=, Enter 5Enter keysStep 11: PressCPT keyResult:Net Present Value = $1,059.18You would complete this for EACH branch!14-26
12、BranchBranch 1 $ 2,238.32Branch 2 $ 1,331.29Branch 3 $ 1,059.18Branch 4 $ 344.90Branch 5 $ 72.79Branch 6 -$ 199.32Branch 7 -$ 1,017.91Branch 8-$ 1,562.13Branch 9 -$ 2,106.35 * .02 $ 44.77 .12 $159.75 .06 $ 63.55 .21 $ 72.43 .24 $ 17.47 .15 -$ 29.90 .02 -$ 20.36 .10 -$156.21 .08 -$168.51= 14-27 $ 2,2
13、38.32 $ 1,331.29 $ 1,059.18 $ 344.90 $ 72.79-$ 199.32-$ 1,017.91-$ 1,562.13-$ 2,106.35 - )2 .02 $ 101,730.27 .12 $ 218,149.55 .06 $ 69,491.09 .21 $ 27,505.56 .24 $ 1,935.37 .15 $ 4,985.54 .02 $ 20,036.02 .10 $ 238,739.58 .08 $ 349,227.33= 14-28The = SQRT ($1,031,800) = The = 14-29An approach that al
14、lows us to test the possible results of an investment proposal before it is accepted. Testing is based on a model coupled with probabilistic information.14-30u uMarket size, selling price, market growth rate, and market shareu uInvestment required, useful life of facilities, and residual valueu uOpe
15、rating costs and fixed costsFactors we might consider in a model:14-31Each variable is assigned an appropriate probability distribution. The distribution for the selling price of baskets created by Basket Wonders might look like:$20 $25 $30 $35 $40 $45 $50.02 .08 .22 .36 .22 .08 .02 The resulting pr
16、oposal value is dependent on the distribution and interaction of EVERY variable listed on slide 14-30.14-32Each proposal will generate an . The process of generating many, many simulations results in a large set of internal rates of return. The might look like the following:INTERNAL RATE OF RETURN (
17、%)PROBABILITYOF OCCURRENCE14-33Combining projects in this manner reduces the firm risk due to .CASH FLOWTIMETIMETIME14-34 NPVP = S S ( NPVj )NPVP is the expected portfolio NPV,NPVj is the expected NPV of the jth NPV that the firm undertakes,m is the total number of projects in the firm portfolio.mj=
18、114-35 = S SS S s sjk s sjk is the covariance between possible NPVs for projects j and k, , jk = s s j s s k jk .s sj is the standard deviation of project j,s sk is the standard deviation of project k,rjk is the correlation coefficient between projects j and k.mj=1mk=114-368 Combinations + 1 + 1 + 2
19、 + 2 + 1 + 3 + 3 + 2 + 3 + 1 + 2 + 3, , and are combinations from the eight possible.ABCEStandard DeviationExpected Value of NPV14-37Management flexibility to make future decisions that affect a projects expected cash flows, life, or future acceptance.Project Worth = NPV + Option(s) Value14-38uAllow
20、s the firm to expand (contract) production if conditions become favorable (unfavorable).uAllows the project to be terminated early.uAllows the firm to delay undertaking a project (reduces uncertainty via new information).14-39Assume that this project can be abandoned at the end of the first year for
21、 .What is the ?() () (.) (.60) (.30) (.10) (.35) (.40) (.25) (.10) (.50) (.40) 14-40:(/1.05)(.1)+ (/1.05)(.5)+ (/1.05)(.4)= ($476.19)(.1)+ -($ 95.24)(.5)+ -($666.67)(.4)= () () (.) (.60) (.30) (.10) (.35) (.40) (.25) (.10) (.50) (.40) 14-41() () (.) (.60) (.30) (.10) (.35) (.40) (.25) (.10) (.50) (.
22、40) The optimal decision at the end of is to abandon the project for . What is the project value?14-42 $ 2,238.32 $ 1,331.29 $ 1,059.18 $ 344.90 $ 72.79-$ 199.32 -$ 1,280.95 () () (.) (.60) (.30) (.10) (.35) (.40) (.25) (1.0) *-$600 + $200 abandonment14-43* For “True” Project considering abandonment optionThe = SQRT (740,326) = The = = Original NPV + = -$17.01 +=