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1、13-113-2u Project Evaluation and Selectionu Potential Difficultiesu Capital Rationingu Project Monitoringu Post-Completion Audit13-3u Payback Period (PBP)u Internal Rate of Return (IRR)u Net Present Value (NPV)u Profitability Index (PI)13-4Julie Miller is evaluating a new project for her firm, Baske
2、t Wonders (BW). She has determined that the after-tax cash flows for the project will be $10,000; $12,000; $15,000; $10,000; and $7,000, respectively, for each of the Years 1 through 5. The initial cash outlay will be $40,000.13-5 - A project whose acceptance (or rejection) does not prevent the acce
3、ptance of other projects under consideration.uFor this project, assume that it is independent of any other potential projects that Basket Wonders may undertake.13-6 is the period of time required for the cumulative expected cash flows from an investment project to equal the initial cash outflow.0 1
4、2 3 4 5 -40 K 10 K 12 K 15 K 10 K 7 K13-7(c)10 K 22 K 37 K 47 K 54 K = a + ( b - c ) / d= 3 + (40 - 37) / 10= 3 + (3) / 10= 0 1 2 3 4 5 -40 K 10 K 12 K 15 K 10 K 7 KCumulativeInflows(a)(-b)(d)13-8 = 3 + ( 3K ) / 10K= Note: Take absolute value of last negative cumulative cash flow value.CumulativeCas
5、h Flows -40 K 10 K 12 K 15 K 10 K 7 K0 1 2 3 4 5-40 K -30 K -18 K -3 K 7 K 14 K13-9Yes! The firm will receive back the initial cash outlay in less than 3.5 years. 3.3 Years 3.5 Year Max.The management of Basket Wonders has set a maximum PBP of 3.5 years for projects of this type.Should this project
6、be accepted?13-10u Easy to use and understandu Can be used as a measure of liquidityu Easier to forecast ST than LT flowsu Does not account for TVMu Does not consider cash flows beyond the PBPu Cutoff period is subjective13-11IRR is the discount rate that equates the present value of the future net
7、cash flows from an investment project with the projects initial cash outflow.CF1 CF2 CFn (1+IRR)1 (1+IRR)2 (1+IRR)n+ . . . +ICO =13-12$15,000 $10,000 $7,000$10,000 $12,000(1+IRR)1 (1+IRR)2Find the interest rate (IRR) that causes the discounted cash flows to equal $40,000.+$40,000 =(1+IRR)3 (1+IRR)4
8、(1+IRR)513-13 = $10,000(PVIF10%,1) + $12,000(PVIF10%,2) +$15,000(PVIF10%,3) + $10,000(PVIF10%,4) + $ 7,000(PVIF10%,5) = $10,000(.909) + $12,000(.826) + $15,000(.751) + $10,000(.683) + $ 7,000(.621) = $9,090 + $9,912 + $11,265 + $6,830 + $4,347 =13-14 = $10,000(PVIF15%,1) + $12,000(PVIF15%,2) + $15,0
9、00(PVIF15%,3) + $10,000(PVIF15%,4) + $ 7,000(PVIF15%,5) = $10,000(.870) + $12,000(.756) + $15,000(.658) + $10,000(.572) + $ 7,000(.497) = $8,700 + $9,072 + $9,870 + $5,720 + $3,479 =13-15.10$41,444.05IRR$40,000 $4,603.15$36,841 X$1,444.05$4,603$1,444X=13-16.10$41,444.05IRR$40,000 $4,603.15$36,841 X$
10、1,444.05$4,603$1,444X=13-17.10$41,444.05IRR$40,000 $4,603.15$36,841($1,444)(0.05) $4,603$1,444XX =X = .0157IRR = .10 + .0157 = .1157 or 11.57%13-18 No! The firm will receive 11.57% for each dollar invested in this project at a cost of 13%. IRR Hurdle Rate The management of Basket Wonders has determi
11、ned that the hurdle rate is 13% for projects of this type. Should this project be accepted?13-19u Accounts for TVMu Considers all cash flowsu Less subjectivityu Assumes all cash flows reinvested at the IRRu Difficulties with project rankings and Multiple IRRs13-20 NPV is the present value of an inve
12、stment projects net cash flows minus the projects initial cash outflow.CF1 CF2 CFn (1+k)1 (1+k)2 (1+k)n+ . . . +- NPV =13-21Basket Wonders has determined that the appropriate discount rate (k) for this project is 13%.$10,000 $7,000$10,000 $12,000 $15,000 (1.13)1 (1.13)2 (1.13)3 +- (1.13)4 (1.13)5 =+
13、13-22 = $10,000(PVIF13%,1) + $12,000(PVIF13%,2) + $15,000(PVIF13%,3) + $10,000(PVIF13%,4) + $ 7,000(PVIF13%,5) - = $10,000(.885) + $12,000(.783) + $15,000(.693) + $10,000(.613) + $ 7,000(.543) - = $8,850 + $9,396 + $10,395 + $6,130 + $3,801 - = - 13-23 No! The NPV is negative. This means that the pr
14、oject is reducing shareholder wealth. as The management of Basket Wonders has determined that the required rate is 13% for projects of this type.Should this project be accepted?13-24 u Cash flows assumed to be reinvested at the hurdle rate.u Accounts for TVM.u Considers all cash flows.u May not incl
15、ude managerial options embedded in the project. See Chapter 14.13-25Discount Rate (%)0 3 6 9 12 15IRRNPV13%Sum of CFsPlot NPV for eachdiscount rate.Three of these points are easy now!Net Present Value$000s151050-413-26 PI is the ratio of the present value of a projects future net cash flows to the p
16、rojects initial cash outflow.CF1 CF2 CFn (1+k)1 (1+k)2 (1+k)n+ . . . +PI =PI = 1 + / 13-27 No! The is less than 1.00. This means that the project is not profitable. as = $38,572 / $40,000= .9643 (Method #1, 13-33)Should this project be accepted?13-28Same as NPVu Allows comparison of different scale
17、projectsSame as NPVu Provides only relative profitabilityu Potential Ranking Problems13-29Method Project Comparison Decision PBP 3.3 3.5 Accept IRR 11.47% 13% Reject NPV -$1,424 $0 Reject PI .96 1.00 Reject Basket Wonders Independent Project13-30- A project whose acceptance precludes the acceptance
18、of one or more alternative projects. - A project whose acceptance depends on the acceptance of one or more other projects.13-31 Ranking of project proposals may create contradictory results.13-32 Compare a small (S) and a large (L) project.NET CASH FLOWSProject S Project LEND OF YEAR 0 -$100 -$100,0
19、00 1 0 0 2 $400 $156,25013-33Calculate the PBP, IRR, NPV10%, and PI10%.Which project is preferred? Why?Project IRR NPV PI S 100% $ 231 3.31 L 25% $29,132 1.2913-34Let us compare a decreasing cash-flow (D) project and an increasing cash-flow (I) project.NET CASH FLOWSProject D Project IEND OF YEAR 0
20、-$1,200 -$1,200 1 1,000 100 2 500 600 3 100 1,08013-35 D 23% I 17% Calculate the IRR, NPV10%, and PI10%.Which project is preferred? Project IRR NPV PI13-36Discount Rate (%)0 5 10 15 20 25-200 0 200 400 600IRRNPV10%Plot NPV for eachproject at variousdiscount rates.Net Present Value ($)13-37Discount R
21、ate ($)0 5 10 15 20 25-200 0 200 400 600Net Present Value ($)13-38 Let us compare a long life (X) project and a short life (Y) project.NET CASH FLOWSProject X Project YEND OF YEAR 0 -$1,000 -$1,000 1 0 2,000 2 0 0 3 3,375 013-39 X 50% $1,536 2.54 Y 100% $ 818 1.82Calculate the PBP, IRR, NPV10%, and
22、PI10%.Which project is preferred? Why? Project IRR NPV PI13-401.Adjust cash flows to a common terminal year if project “Y” will be replaced.Compound Project Y, Year 1 10% for 2 years.Year 0 1 2 3CF -$1,000 $0 $0 $2,420Results:IRR* = 34.26%NPV = $818*Lower IRR from adjusted cash-flow stream. X is sti
23、ll Best.13-412.Use Replacement Chain Approach (Appendix B) when project “Y” will be replaced.0 1 2 3Results:IRR* = 100% = *Higher NPV, but the same IRR. .13-42Capital Rationing occurs when a constraint (or budget ceiling) is placed on the total size of capital expenditures during a particular period
24、.Example: Julie Miller must determine what investment opportunities to undertake for Basket Wonders (BW). She is limited to a maximum expenditure of $32,500 only for this capital budgeting period.13-43 Project ICO IRR NPV PIA $ 500 18% $ 50 1.10 B 5,000 25 6,500 2.30 C 5,000 37 5,500 2.10 D 7,500 20
25、 5,000 1.67 E12,500 26 500 1.04 F15,000 28 21,000 2.40 G17,500 19 7,500 1.43 H25,000 15 6,000 1.2413-44 Project ICO IRR NPV PIC $ 5,00037% $ 5,500 2.10 F15,000 28 21,000 2.40 E12,50026 500 1.04 B 5,00025 6,500 2.30 Projects C, F, and E have the three largest IRRs.The resulting increase in shareholde
26、r wealth is $27,000 with a $32,500 outlay.13-45 Project ICO IRR NPV PI F $15,000 28% $21,000 2.40 G17,50019 7,500 1.43 B 5,00025 6,500 2.30Projects F and G have the two largest NPVs.The resulting increase in shareholder wealth is $28,500 with a $32,500 outlay.13-46 Project ICO IRR NPV PI F $15,000 2
27、8% $21,000 2.40B 5,000 25 6,500 2.30 C 5,000 37 5,500 2.10 D 7,500 20 5,000 1.67 G 17,500 19 7,500 1.43Projects F, B, C, and D have the four largest PIs.The resulting increase in shareholder wealth is $38,000 with a $32,500 outlay.13-47 Method Projects Accepted Value Added PI F, B, C, and D $38,000
28、NPV F and G $28,500 IRRC, F, and E $27,000 generates the in when a limited capital budget exists for a single period.13-48Post-completion AuditA formal comparison of the actual costs and benefits of a project with original estimates.u Identify any project weaknessesu Develop a possible set of correc
29、tive actionsu Provide appropriate feedbackResult: Making better future decisions!13-49 There are as many potential IRRs as there are sign changes.Let us assume the following cash flow pattern for a project for Years 0 to 4:-$100 +$100 +$900 -$1,000* Refer to Appendix A13-50Discount Rate (%)0 40 80 120 160 200Net Present Value($000s)Multiple IRRs at= and 7550250-100