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1、McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-1ChapterOutline7.1IncrementalCashFlows7.2TheBaldwinCompany:AnExample7.3InflationandCapitalBudgeting7.4InvestmentsofUnequalLives:TheEquivalentAnnualCostMethod7.5SummaryandConclusions第一页，编辑于星期二：七点 五十二分。McGraw-Hill/I
2、rwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-27.1IncrementalCashFlowsCashflowsmatternotaccountingearnings.Sunkcostsdontmatter.Incrementalcashflowsmatter.Opportunitycostsmatter.Sideeffectslikecannibalismanderosionmatter.Taxesmatter:wewantincrementalafter-taxcashflows.Infl
3、ationmatters.第二页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-3CashFlowsNotAccountingEarnings.Considerdepreciationexpense.Youneverwriteacheckmadeoutto“depreciation”.Muchoftheworkinevaluatingaprojectliesintakingaccountingnumbersandgeneratingcas
4、hflows.第三页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-4IncrementalCashFlowsSunkcostsarenotrelevantJustbecause“wehavecomethisfar”doesnotmeanthatweshouldcontinuetothrowgoodmoneyafterbad.Opportunitycostsdomatter.JustbecauseaprojecthasapositiveN
5、PVthatdoesnotmeanthatitshouldalsohaveautomaticacceptance.SpecificallyifanotherprojectwithahigherNPVwouldhavetobepassedupweshouldnotproceed.Sideeffectsmatter.Erosionandcannibalismarebothbadthings.Ifournewproductcausesexistingcustomerstodemandlessofcurrentproducts,weneedtorecognizethat.第四页，编辑于星期二：七点 五
6、十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-5EstimatingCashFlowsCashFlowsfromOperationsRecallthat:OperatingCashFlow=EBITTaxes+DepreciationNetCapitalSpendingDontforgetsalvagevalue(aftertax,ofcourse).ChangesinNetWorkingCapitalRecallthatwhentheprojectwinds
7、down,weenjoyareturnofnetworkingcapital.第五页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-6InterestExpenseLaterchapterswilldealwiththeimpactthattheamountofdebtthatafirmhasinitscapitalstructurehasonfirmvalue.Fornow,itsenoughtoassumethatthefirmsle
8、velofdebt(henceinterestexpense)isindependentoftheprojectathand.第六页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-77.2TheBaldwinCompany:AnExampleCostsoftestmarketing(alreadyspent):$250,000.Currentmarketvalueofproposedfactorysite(whichweown):$150
9、,000.Costofbowlingballmachine:$100,000(depreciatedaccordingtoACRS5-yearlife).Increaseinnetworkingcapital:$10,000.Production(inunits)byyearduring5-yearlifeofthemachine:5,000,8,000,12,000,10,000,6,000.Priceduringfirstyearis$20;priceincreases2%peryearthereafter.Productioncostsduringfirstyearare$10perun
10、itandincrease10%peryearthereafter.Annualinflationrate:5%WorkingCapital:initially$10,000changeswithsales.第七页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-8TheWorksheetforCashFlowsoftheBaldwinCompanyYear 0Year 1Year 2Year 3Year 4 Year 5 Investme
11、nts:(1)Bowlingballmachine100.0021.76*(2)Accumulated20.0052.0071.2082.7294.24depreciation(3)Adjustedbasisof80.0048.0028.8017.285.76machineafterdepreciation(endofyear)(4)Opportunitycost150.00150.00(warehouse)(5)Networkingcapital10.0010.0016.3224.9721.220(endofyear)(6)Changeinnet10.006.328.653.7521.22w
12、orkingcapital(7)Totalcashflowof260.006.328.653.75192.98investment(1)+(4)+(6)*Weassumethattheendingmarketvalueofthecapitalinvestmentatyear5is$30,000.Capitalgainisthedifferencebetweenendingmarketvalueandadjustedbasisofthemachine.Theadjustedbasisistheoriginalpurchasepriceofthemachinelessdepreciation.Th
13、ecapitalgainis$24,240(=$30,000$5,760).WewillassumetheincrementalcorporatetaxforBaldwinonthisprojectis34percent.Capitalgainsarenowtaxedattheordinaryincomerate,sothecapitalgainstaxdueis$8,2400.34($30,000$5,760).Theafter-taxsalvagevalueis$30,0000.34($30,000$5,760)=21,760.($thousands)(Allcashflowsoccura
14、ttheendoftheyear.)第八页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-9TheWorksheetforCashFlowsoftheBaldwinCompanyAttheendoftheproject,thewarehouseisunencumbered,sowecansellitifwewantto.($thousands)(Allcashflowsoccurattheendoftheyear.)Year 0Year
15、1Year 2Year 3Year 4 Year 5 Investments:(1)Bowlingballmachine100.0021.76*(2)Accumulated20.0052.0071.2082.7294.24depreciation(3)Adjustedbasisof80.0048.0028.8017.285.76machineafterdepreciation(endofyear)(4)Opportunitycost150.00150.00(warehouse)(5)Networkingcapital10.0010.0016.3224.9721.220(endofyear)(6
16、)Changeinnet10.006.328.653.7521.22workingcapital(7)Totalcashflowof 260.006.328.653.75192.98investment(1)+(4)+(6)第九页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-10TheWorksheetforCashFlowsoftheBaldwinCompany(continued)Year 0Year 1Year 2Year 3Ye
17、ar 4 Year 5Income:(8)SalesRevenues100.00163.00249.72212.20129.90($thousands)(Allcashflowsoccurattheendoftheyear.)Recallthatproduction(inunits)byyearduring5-yearlifeofthemachineisgivenby:(5,000,8,000,12,000,10,000,6,000).Priceduringfirstyearis$20andincreases2%peryearthereafter.Salesrevenueinyear3=12,
18、000$20(1.02)2=12,000$20.81=$249,720.第十页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-11TheWorksheetforCashFlowsoftheBaldwinCompany(continued)Year 0Year 1Year 2Year 3Year 4 Year 5Income:(8)SalesRevenues100.00163.00249.72212.20129.90(9)Operating
19、costs50.0088.00145.20133.1087.84($thousands)(Allcashflowsoccurattheendoftheyear.)Again,production(inunits)byyearduring5-yearlifeofthemachineisgivenby:(5,000,8,000,12,000,10,000,6,000).Productioncostsduringfirstyear(perunit)are$10and(increase10%peryearthereafter).Productioncostsinyear2=8,000$10(1.10)
20、1=$88,000第十一页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-12TheWorksheetforCashFlowsoftheBaldwinCompany(continued)Year 0Year 1Year 2Year 3Year 4 Year 5Income:(8)SalesRevenues100.00163.00249.72212.20129.90(9)Operatingcosts50.0088.00145.20133.1
21、087.84(10)Depreciation20.0032.0019.2011.5211.52($thousands)(Allcashflowsoccurattheendoftheyear.)DepreciationiscalculatedusingtheAcceleratedCostRecoverySystem(shownatright)Ourcostbasisis$100,000Depreciationchargeinyear4=$100,000(.1152)=$11,520.YearACRS%120.00%232.00%319.20%411.52%511.52%65.76%Total 1
22、00.00%第十二页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-13TheWorksheetforCashFlowsoftheBaldwinCompany(continued)Year 0Year 1Year 2Year 3Year 4 Year 5Income:(8)SalesRevenues100.00163.00249.72212.20129.90(9)Operatingcosts50.0088.00145.20133.1087
23、.84(10)Depreciation20.0032.0019.2011.5211.52(11)Incomebeforetaxes30.0043.2085.3267.5830.54(8)(9)-(10)(12)Taxat34percent10.2014.6929.0122.9810.38(13)NetIncome19.8028.5156.3144.6020.16($thousands)(Allcashflowsoccurattheendoftheyear.)第十三页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hil
24、l Companies,Inc.All rights reserved.7-14IncrementalAfterTaxCashFlowsoftheBaldwinCompanyYear 0Year 1Year 2Year 3Year 4Year 5(1)SalesRevenues$100.00$163.00$249.72$212.20$129.90(2)Operatingcosts-50.00-88.00-145.20133.10-87.84(3)Taxes-10.20-14.69-29.01-22.98-10.38(4)OCF(1)(2)-(3)39.8060.5175.5156.1231.6
25、8(5)TotalCFofInvestment260.6.328.653.75192.98(6)IATCF(4)+(5)260.39.8054.1966.8659.87224.66第十四页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-157.3InflationandCapitalBudgetingInflationisanimportantfactofeconomiclifeandmustbeconsideredincapitalbu
26、dgeting.Considertherelationshipbetweeninterestratesandinflation,oftenreferredtoastheFisherrelationship:(1+NominalRate)=(1+RealRate)(1+InflationRate)Forlowratesofinflation,thisisoftenapproximatedasRealRateNominalRateInflationRateWhilethenominalrateintheU.S.hasfluctuatedwithinflation,mostofthetimether
27、ealratehasexhibitedfarlessvariancethanthenominalrate.Whenaccountingforinflationincapitalbudgeting,onemustcomparerealcashflowsdiscountedatrealratesornominalcashflowsdiscountedatnominalrates.第十五页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-16Ex
28、ampleofCapitalBudgetingunderInflationSonyInternationalhasaninvestmentopportunitytoproduceanewstereocolorTV.TherequiredinvestmentonJanuary1ofthisyearis$32million.Thefirmwilldepreciatetheinvestmenttozerousingthestraight-linemethod.Thefirmisinthe34%taxbracket.ThepriceoftheproductonJanuary1willbe$400per
29、unit.Thepricewillstayconstantinrealterms.Laborcostswillbe$15perhouronJanuary1.Thewillincreaseat2%peryearinrealterms.Energycostswillbe$5perTV;theywillincrease3%peryearinrealterms.Theinflationrateis5%Revenuesarereceivedandcostsarepaidatyear-end.第十六页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by Th
30、e McGraw-Hill Companies,Inc.All rights reserved.7-17ExampleofCapitalBudgetingunderInflationTherisklessnominaldiscountrateis4%.Therealdiscountrateforcostsandrevenuesis8%.CalculatetheNPV.Year1Year2Year3Year4PhysicalProduction(units)100,000200,000200,000150,000LaborInput(hours)2,000,0002,000,0002,000,0
31、002,000,000Energyinput,physicalunits200,000200,000200,000200,000第十七页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-18ExampleofCapitalBudgetingunderInflationThedepreciationtaxshieldisarisk-freenominalcashflow,andisthereforediscountedatthenominal
32、risklessrate.Costofinvestmenttoday=$32,000,000Projectlife=4yearsAnnualdepreciationexpense:Depreciationtaxshield=$8,000,000.34=$2,720,000第十八页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-19ExampleofCapitalBudgetingunderInflationRiskyRealCashFlo
33、wsPrice:$400perunitwithzerorealpriceincreaseLabor:$15perhourwith2%realwageincreaseEnergy:$5perunitwith3%realenergycostincreaseYear1After-taxRealRiskyCashFlows:After-taxrevenues=$400100,000(1-.34)=$26,400,000After-taxlaborcosts=$152,000,0001.02(1-.34)=$20,196,000After-taxenergycosts=$52,00,0001.03(1-
34、.34)=$679,800After-taxnetoperatingCF=$26,400,000-$20,196,000-$679,800=$5,524,200第十九页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-20ExampleofCapitalBudgetingunderInflation$5,524,200$31,499,886$31,066,882$17,425,007-$32,000,0000 1 2 34YearOneAf
35、ter-taxrevenues=$400100,000(1-.34)=$26,400,000YearOneAfter-taxlaborcosts=$152,000,0001.02(1-.34)=$20,196,000YearOneAfter-taxenergycosts=$52,00,0001.03(1-.34)=$679,800YearOneAfter-taxnetoperatingCF=$5,524,200第二十页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All righ
36、ts reserved.7-21ExampleofCapitalBudgetingunderInflationTheprojectNPVcannowbecomputedasthesumofthePVofthecost,thePVoftheriskycashflowsdiscountedattheriskyrateandthePVoftherisk-freecashflowsdiscountedattherisk-freediscountrate.NPV=-$32,000,000+$69,590,868+$9,873,315=$47,464,183第二十一页，编辑于星期二：七点 五十二分。McG
37、raw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-22InvestmentsofUnequalLivesTheEquivalentAnnualCostMethodReplacementChainRepeattheprojectsforever,findthePVofthatperpetuity.Assumption:Bothprojectscanandwillberepeated.MatchingCycleRepeatprojectsuntiltheybeginandendat
38、thesametimelikewejustdidwiththeaircleaners.ComputeNPVforthe“repeatedprojects”.第二十二页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-237.4InvestmentsofUnequalLives:TheEquivalentAnnualCostMethodTherearetimeswhenapplicationoftheNPVrulecanleadtothewr
39、ongdecision.Considerafactorywhichmusthaveanaircleaner.Theequipmentismandatedbylaw,sothereisno“doingwithout”.Therearetwochoices:The“Cadillaccleaner”costs$4,000today,hasannualoperatingcostsof$100andlastsfor10years.The“cheapercleaner”costs$1,000today,hasannualoperatingcostsof$500andlastsfor5years.Which
40、oneshouldwechoose?第二十三页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-247.4InvestmentsofUnequalLives:TheEquivalentAnnualCostMethodAtfirstglance,thecheapcleanerhasthelowerNPV(r=10%):ThisoverlooksthefactthattheCadillaccleanerlaststwiceaslong.When
41、weincorporatethat,theCadillaccleanerisactuallycheaper.第二十四页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-257.4InvestmentsofUnequalLives:TheEquivalentAnnualCostMethodTheCadillaccleanertimelineofcashflows:-$4,000 100 -100 -100 -100 -100 -100 -10
42、0 -100 -100 -1000 1 2 3 4 5 6 7 8 9 10-$1,000 500 -500 -500 -500-1,500 -500 -500 -500 -500 -5000 1 2 3 4 5 6 7 8 9 10The“cheapercleaner”timelineofcashflowsover ten years:第二十五页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-26InvestmentsofUnequal
43、Lives:EACTheEquivalentAnnualCostMethodApplicabletoamuchmorerobustsetofcircumstancesthanreplacementchainormatchingcycle.TheEquivalentAnnualCostisthevalueofthelevelpaymentannuitythathasthesamePVasouroriginalsetofcashflows.NPV=EAC ArTForexample,theEACfortheCadillacaircleaneris$750.98TheEACforthecheaper
44、aircleaneris$763.80whichconfirmsourearlierdecisiontorejectit.第二十六页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-27ExampleofReplacementProjectsConsideraBelgianDentistsoffice;heneedsanautoclavetosterilizehisinstruments.Hehasanoldonethatisinuse,b
45、utthemaintenancecostsarerisingandsoisconsideringreplacingthisindispensablepieceofequipment.NewAutoclaveCost=$3,000today,Maintenancecost=$20peryearResalevalueafter6years=$1,200NPVofnewautoclave(atr=10%):EACofnewautoclave=-$553.29第二十七页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill
46、Companies,Inc.All rights reserved.7-28ExampleofReplacementProjectsExistingAutoclaveYear012345Maintenance0200275325450500Resale900850775700600500Total Annual CostTotalCostforyear1=(9001.10850)+200=$340340435TotalCostforyear2=(8501.10775)+275=$435478 TotalCostforyear3=(7751.10700)+325=$478620TotalCost
47、foryear4=(7001.10600)+450=$620TotalCostforyear5=(6001.10500)+500=$660660Note that the total cost of keeping an autoclave for the first year includes the$200 maintenance cost as well as the opportunity cost of the foregone future value of the$900 we didnt get from selling it in year 0 less the$850 we
48、 have if we still own it at year 1.第二十八页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.7-29ExampleofReplacementProjects340435478620660NewAutoclaveEACofnewautoclave=-$553.29ExistingAutoclaveYear012345Maintenance0200275325450500Resale900850 7757006
49、00500Total Annual CostWeshouldkeeptheoldautoclaveuntilitscheapertobuyanewone.Replacetheautoclaveafteryear3:atthatpointthenewonewillcost$553.29forthenextyearsautoclavingandtheoldonewillcost$620foronemoreyear.第二十九页，编辑于星期二：七点 五十二分。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rig
50、hts reserved.7-307.5SummaryandConclusionsCapitalbudgetingmustbeplacedonanincrementalbasis.SunkcostsareignoredOpportunitycostsandsideeffectsmatterInflationmustbehandledconsistentlyDiscountrealflowsatrealratesDiscountnominalflowsatnominalrates.Whenafirmmustchoosebetweentwomachinesofunequallives:thefir