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1、The McGraw-Hill Companies,Inc.,20016-1Irwin/McGraw-HillIrwin/McGraw-HillChapter 6Fundamentals of Corporate FinanceThird EditionNet Present Value and Other Investment CriteriaBrealey Myers Marcusslides by Matthew WillIrwin/McGraw-HillThe McGraw-Hill Companies,Inc.,2001The McGraw-Hill Companies,Inc.,2
2、0016-2Irwin/McGraw-HillTopics CoveredNet Present ValueOther Investment CriteriaProject InteractionsCapital RationingThe McGraw-Hill Companies,Inc.,20016-3Irwin/McGraw-HillNet Present ValueOpportunity Cost of Capital-Expected rate of return given up by investing in a project.Net Present Value-Present
3、 value of cash flows minus initial investments.The McGraw-Hill Companies,Inc.,20016-4Irwin/McGraw-HillNet Present ValueExampleSuppose we can invest$50 today and receive$60 in one year.What is our increase in value given a 10%expected return?This is the definition of NPVInitial InvestmentAdded Value$
4、50$4.55The McGraw-Hill Companies,Inc.,20016-5Irwin/McGraw-HillNet Present ValueNPV=PV-required investmentThe McGraw-Hill Companies,Inc.,20016-6Irwin/McGraw-HillNet Present ValueTerminologyC=Cash Flowt=time period of the investmentr=“opportunity cost of capital”The Cash Flow could be positive or nega
5、tive at any time period.The McGraw-Hill Companies,Inc.,20016-7Irwin/McGraw-HillNet Present ValueNet Present Value RuleManagers increase shareholders wealth by accepting all projects that are worth more than they cost.Therefore,they should accept all projects with a positive net present value.The McG
6、raw-Hill Companies,Inc.,20016-8Irwin/McGraw-HillNet Present ValueExampleYou have the opportunity to purchase an office building.You have a tenant lined up that will generate$16,000 per year in cash flows for three years.At the end of three years you anticipate selling the building for$450,000.How mu
7、ch would you be willing to pay for the building?The McGraw-Hill Companies,Inc.,20016-9Irwin/McGraw-HillNet Present Value0 1 2 3$16,000$16,000$16,000$450,000$466,000Present Value 14,953 14,953 380,395$409,323Example-continuedThe McGraw-Hill Companies,Inc.,20016-10Irwin/McGraw-HillNet Present ValueExa
8、mple-continuedIf the building is being offered for sale at a price of$350,000,would you buy the building and what is the added value generated by your purchase and management of the building?The McGraw-Hill Companies,Inc.,20016-11Irwin/McGraw-HillNet Present ValueExample-continuedIf the building is
9、being offered for sale at a price of$350,000,would you buy the building and what is the added value generated by your purchase and management of the building?The McGraw-Hill Companies,Inc.,20016-12Irwin/McGraw-HillOther Investment CriteriaInternal Rate of Return(IRR)-Discount rate at which NPV=0.Rat
10、e of Return Rule-Invest in any project offering a rate of return that is higher than the opportunity cost of capital.The McGraw-Hill Companies,Inc.,20016-13Irwin/McGraw-HillInternal Rate of ReturnExampleYou can purchase a building for$350,000.The investment will generate$16,000 in cash flows(i.e.ren
11、t)during the first three years.At the end of three years you will sell the building for$450,000.What is the IRR on this investment?IRR=12.96%The McGraw-Hill Companies,Inc.,20016-14Irwin/McGraw-HillInternal Rate of ReturnIRR=12.96%The McGraw-Hill Companies,Inc.,20016-15Irwin/McGraw-HillPayback Method
12、Payback Period-Time until cash flows recover the initial investment of the project.The payback rule specifies that a project be accepted if its payback period is less than the specified cutoff period.The following example will demonstrate the absurdity of this statement.The McGraw-Hill Companies,Inc
13、.,20016-16Irwin/McGraw-HillPayback MethodExampleThe three project below are available.The company accepts all projects with a 2 year or less payback period.Show how this decision will impact our decision.Cash FlowsPrj.C0 C1 C2 C3 Payback NPV10%A-2000+1000+1000+100002+7,249B-2000+1000+1000 02-264C-20
14、00 0+2000 02-347The McGraw-Hill Companies,Inc.,20016-17Irwin/McGraw-HillBook Rate of ReturnBook Rate of Return-Average income divided by average book value over project life.Also called accounting rate of return.Managers rarely use this measurement to make decisions.The components reflect tax and ac
15、counting figures,not market values or cash flows.The McGraw-Hill Companies,Inc.,20016-18Irwin/McGraw-HillProject InteractionsWhen you need to choose between mutually exclusive projects,the decision rule is simple.Calculate the NPV of each project,and,from those options that have a positive NPV,choos
16、e the one whose NPV is highest.The McGraw-Hill Companies,Inc.,20016-19Irwin/McGraw-HillMutually Exclusive ProjectsExampleSelect one of the two following projects,based on highest NPV.Proj01234NPVA-155.55.55.55.5 B-20999assume 9%discount rateThe McGraw-Hill Companies,Inc.,20016-20Irwin/McGraw-HillMut
17、ually Exclusive ProjectsExampleSelect one of the two following projects,based on highest NPV.Proj01234NPVA-155.55.55.55.52.82 B-209992.78assume 9%discount rateThe McGraw-Hill Companies,Inc.,20016-21Irwin/McGraw-HillInvestment TimingSometimes you have the ability to defer an investment and select a t
18、ime that is more ideal at which to make the investment decision.A common example involves a tree farm.You may defer the harvesting of trees.By doing so,you defer the receipt of the cash flow,yet increase the cash flow.The McGraw-Hill Companies,Inc.,20016-22Irwin/McGraw-HillInvestment TimingExampleYo
19、u may purchase a computer anytime within the next five years.While the computer will save your company money,the cost of computers continues to decline.If your cost of capital is 10%and given the data listed below,when should you purchase the computer?YearCostPV SavingsNPV at PurchaseNPV Today050702
20、020.0145702522.7240703024.83367034Date to purchase 25.5433703725.3531703924.2The McGraw-Hill Companies,Inc.,20016-23Irwin/McGraw-HillEquivalent Annual CostEquivalent Annual Cost-The cost per period with the same present value as the cost of buying and operating a machine.The McGraw-Hill Companies,In
21、c.,20016-24Irwin/McGraw-HillEquivalent Annual CostExampleGiven the following costs of operating two machines and a 6%cost of capital,select the lower cost machine using equivalent annual cost method.YearMach.1234PV6%Ann.CostD-15-4-4-4-25.69-9.61E-10-6-6-21.00-11.45The McGraw-Hill Companies,Inc.,2001
22、6-25Irwin/McGraw-HillEquivalent Annual CostExample(with a twist)Select one of the two following projects,based on highest“equivalent annual annuity”(r=9%).Proj01234NPVEq.AnnA-155.55.55.55.52.82.87 B-209992.781.10The McGraw-Hill Companies,Inc.,20016-26Irwin/McGraw-HillInternal Rate of ReturnExample Y
23、ou have two proposals to choice between.The initial proposal(H)has a cash flow that is different than the revised proposal(I).Using IRR,which do you prefer?The McGraw-Hill Companies,Inc.,20016-27Irwin/McGraw-HillInternal Rate of ReturnExample You have two proposals to choice between.The initial prop
24、osal(H)has a cash flow that is different than the revised proposal(I).Using IRR,which do you prefer?The McGraw-Hill Companies,Inc.,20016-28Irwin/McGraw-HillInternal Rate of Return50403020100-10-20NPV$,1,000sDiscount rate,%8 10 12 14 16Revised proposalInitial proposalThe McGraw-Hill Companies,Inc.,20
25、016-29Irwin/McGraw-HillInternal Rate of ReturnPitfall 1-Mutually Exclusive ProjectsIRR sometimes ignores the magnitude of the project.The following two projects illustrate that problem.Pitfall 2-Lending or Borrowing?With some cash flows(as noted below)the NPV of the project increases s the discount
26、rate increases.This is contrary to the normal relationship between NPV and discount rates.Pitfall 3-Multiple Rates of ReturnCertain cash flows can generate NPV=0 at two different discount rates.The following cash flow generates NPV=0 at both (-50%)and 15.2%.The McGraw-Hill Companies,Inc.,20016-30Irw
27、in/McGraw-Hill內部報酬率法內部報酬率法內部報酬率(Internal Rate of Return Md.;簡稱 IRR)法方法:內部報酬率:使淨現值(NPV)為0之折現率NPV=或CFt：t 期淨現金流量(即各期稅後現金入)IRR：內部報酬率(即投資人之報酬率)The McGraw-Hill Companies,Inc.,20016-31Irwin/McGraw-Hill內部報酬率法內部報酬率法(續續)決策準則:單一計劃:IRR R;互斥計劃:Max(IRR1,IRR2,)R優劣:缺:(1)複雜(2)某些狀況未符合價值最大化原則(3)可能無解或(4)有多重解(5)再投資報酬率問題
28、優點:(1)考慮風險因素（2）考慮整時間價值因素 (3）考慮投資人之機會成本 （4）考慮整個投資期間之現金流量 (5)考慮整個投資期末處分資產之現金流量The McGraw-Hill Companies,Inc.,20016-32Irwin/McGraw-Hill修正內部報酬率法修正內部報酬率法修正內部報酬率(Modified Internal Rate of Return Md.;簡稱 MIRR)法方法:修正內部報酬率:使各期淨現金流出現值之和等於未來各期現金流入現值之和之折現率PV cost=PV(terminal value)The McGraw-Hill Companies,Inc.,
29、20016-33Irwin/McGraw-Hill修正內部報酬率法修正內部報酬率法(續續)決策準則:單一計劃:MIRR R;互斥計劃:Max(MIRR1,MIRR2,)R優劣:缺:(1)複雜(2)某些狀況未符合價值最大化原則優點:(1)考慮風險因素（2）考慮整時間價值因素 (3）考慮投資人之機會成本 （4）考慮整個投資期間之現金流量 (5)考慮整個投資期末處分資產之現金流量The McGraw-Hill Companies,Inc.,20016-34Irwin/McGraw-HillCapital RationingCapital Rationing-Limit set on the amount of funds available for investment.Soft Rationing-Limits on available funds imposed by management.Hard Rationing-Limits on available funds imposed by the unavailability of funds in the capital market.The McGraw-Hill Companies,Inc.,20016-35Irwin/McGraw-HillProfitability Index