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1、Chapter+11budget5-23财务管理财务管理11-2ProjectsnA series of cash flows.nCF0, CF1, CF2, , CFN11-3What is capital budgeting?nAnalysis of potential additions to fixed assets.nLong-term decisions; involve large expenditures.nVery important to firms future.11-4What is the difference between independent and mutu
2、ally exclusive projects?nIndependent projects if the acceptance of one are unaffected by the acceptance of the others.nMutually exclusive projects if the acceptance of one results in the rejection of the others.11-5What is the difference between normal and nonnormal cash flow streams?nNormal cash fl
3、ow stream Cost (negative CF) followed by a series of positive cash inflows. One change of signs.nNonnormal cash flow stream Two or more changes of signs. Most common: Cost (negative CF), then string of positive CFs, then cost to close project. Nuclear power plant, strip mine, etc.11-6Capital Budgeti
4、ng Decision Rulesn1. Payback Rulen2. Discounted Payback Rulen3. NPV Rulen4. IRR Rulen5. MIRR Rule11-7What is the payback period?nThe number of years required to recover a projects cost, or “How long does it take to get our money back?”nCutoff period is an arbitrary decision criterion.nRule: If a pro
5、jects payback period is less than or equal to the cutoff period, then accept the project.11-8Projects L & SnCash FlowsProject L -100 10 60 80Project S -100 70 50 20012311-9Calculating paybackPaybackL = 2 + / = 2.375 yearsCFt -100 10 60Cumulative -100 -90 500123=308080-30Project Ls Payback Calculatio
6、nPaybackL = 2.375 yearsPaybackS = 11-10Strengths and weaknesses of paybacknStrengthsnProvides an indication of a projects risk and liquidity.nEasy to calculate and understand.nWeaknessesnIgnores the time value of money.nCutoff period is arbitrary.nIgnores CFs occurring after the payback period (Buil
7、t-in bias against long-term projects).11-11Discounted payback periodnUses discounted cash flows rather than raw CFs.Disc PaybackL = 2 + / = 2.69 yearsCFt -100 10 60 80Cumulative -100 -90.91 18.790123=60.11-41.32PV of CFt -100 9.09 49.5941.3260.1110%11-12Another examplenProject SSnCF0CF1n-300300nWhat
8、 is the payback period and the discounted payback period of the project above?11-1311-14Net Present Value (NPV)nSum of the PVs of all cash inflows and outflows of a project:N0ttt)r 1 (CF NPV 11-15What is Project Ls NPV?Year CFtPV of CFt 0-100 -$100 1 10 9.09 2 60 49.59 3 80 60.11 NPVL = $18.79 11-16
9、Solving for NPV:Financial calculator solutionnEnter CFs into the calculators CFLO register.nCF0 = -100nCF1 = 10nCF2 = 60nCF3 = 80nEnter I/YR = 10, press NPV button to get NPVL = $18.78. NPVs =11-17Rationale for the NPV methodNPV= PV of inflows Cost= Net gain in wealthnIf projects are independent, ac
10、cept if the project NPV 0.nIf projects are mutually exclusive, accept projects with the highest positive NPV, those that add the most value.nIn this example, accept S if mutually exclusive (NPVs NPVL), and accept both if independent.11-18NPV ProfilesnA graphical representation of project NPVs at var
11、ious different costs of capital. WACC NPVL NPVS 0 $50 $40 5 33.05 29.2910 18.78 19.9915 6.67 11.8320 -3.70 4.6325-12.64 -1.7611-19Drawing NPV profiles-100102030405060510152023.6NPV ($)Discount Rate (%)IRRL = 18.13%IRRS = 23.56%Crossover Point = 8.68%SL.11-2011-21Internal Rate of Return (IRR)nIRR is
12、the discount rate that forces PV of inflows equal to cost, and the NPV = 0:nSolving for IRR with a financial calculator:nEnter CFs in CFLO register.nPress IRR; IRRL = 18.13% and IRRS = N0ttt) IRR 1 (CF 011-22Rationale for the IRR methodnIf IRR WACC, the projects return exceeds its costs and there is
13、 some return left over to boost stockholders returns.If IRR WACC, accept project.If IRR WACC = 10%.nIf projects are mutually exclusive, accept S, because IRRs IRRL.11-23Comparing the NPV and IRR methodsnIf projects are independent, the two methods always lead to the same accept/reject decisions.nIf
14、projects are mutually exclusive nIf WACC crossover rate, the methods lead to the same decision and there is no conflict.nIf WACC NPVL.11-25Reinvestment rate assumptionsnNPV method assumes CFs are reinvested at the WACC.nIRR method assumes CFs are reinvested at IRR.nAssuming CFs are reinvested at the
15、 opportunity cost of capital is more realistic, so NPV method is the best. NPV method should be used to choose between mutually exclusive projects.nPerhaps a hybrid of the IRR that assumes cost of capital reinvestment is needed.11-26Project P has cash flows (in 000s): CF0 = -$0.8 million, CF1 = $5 m
16、illion, and CF2 = -$5 million. Find Project Ps NPV and IRR.nEnter CFs into calculator CFLO register.nIRR = 25% Accept the project?nIf WACC = 15%, decision?nIf WACC = 35%, decision?-800 5,000 -5,0000 1 2WACC = 10%11-2711-2811-29Multiple IRRs (NPV at 10% = -$386.78.)450-8000400100IRR2 = 400%IRR1 = 25%
17、WACCNPV11-30Why are there multiple IRRs?nAt very low discount rates, the PV of CF2 is large & negative, so NPV 0.nAt very high discount rates, the PV of both CF1 and CF2 are low, so CF0 dominates and again NPV 0.nResult: 2 IRRs. 11-31Since managers prefer the IRR to the NPV method, is there a better
18、 IRR measure?nYes, MIRR is the discount rate that causes the PV of a projects terminal value (TV) to equal the PV of costs. TV is found by compounding inflows at WACC.nMIRR assumes cash flows are reinvested at the WACC.11-32Calculating MIRR11-33Why use MIRR versus IRR?nMIRR assumes reinvestment at t
19、he opportunity cost = WACC. MIRR also avoids the multiple IRR problem.nManagers like rate of return comparisons, and MIRR is better for this than IRR.11-34When to use the MIRR instead of the IRR? Accept Project P?nWhen there are nonnormal CFs and more than one IRR, use MIRR.nPV of outflows 10% = -$4
20、,932.2314.nTV of inflows 10% = $5,500.nMIRR = 5.6%.nDo not accept Project P.nNPV = -$386.78 0.nMIRR = 5.6% WACC = 10%.11-35Conclusionsn1. Consider all rules because each rule provides a different piece of information.n2. NPV rule is the best. It gives a direct measure of the dollar benefit of a proj
21、ect to a firms shareholders which is consistent with SH wealth maximization.n3. Payback period can be used as a measure of liquidity and risk.n4. IRR can be more useful when “Safety Margin” is concerned.n5. IRR and MIRR may be better when capital rationing exists.11-36Safety MarginnProjectCF0 CF1 IRRNPV(10%)n S -$10,000 $16,500 65% $5,000n L -$100,000 $116,000 16% $5,455n10% forecast errorn IRR NPV(10%)nS 16,500 1,650 = 14850 48.5% $3,500nL 116,000 11,600 = 104,400 4.4% -$5,091