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1、PPT PPT 文档演模板 文档演模板 Office Office PPT PPT19 五月 2023投资净现值分析PPT PPT 文档演模板 文档演模板 Office Office PPT PPT2 2Contents The concept of capital budgeting The steps of investment analysis Estimation of cost of capital Measure cash flows The approaches of capital budgeting 2PPT PPT 文档演模板 文档演模板 Office Office PPT
2、 PPT3What is a investment or a project?Any decision that requires the use of resources(financial or otherwise)is a project.Broad strategic decisions Entering new areas of business Entering new market Investing in equipment to reduce costs Acquiring other companies3PPT PPT 文档演模板 文档演模板 Office Office P
3、PT PPTWhat is Corporate Finance talking about Balance Sheet CurrentAssetsFixedAssetsTotalAssetsCurrent LiabilitiesLong-term Liabilities ShareholdersEquityTotal Liabilities and Shareholders EquityInvestmentdecision(CapitalBudgetingFinancingdecision(CapitalStructure)CashManagement44PPT PPT 文档演模板 文档演模板
4、 Office Office PPT PPT5 5Capital budgeting The process of analyzing investment decisions for a firm is called capital budgeting.Well look at how to use discounted cash flow(DCF)analysis and net present value(NPV)and other rules in capital budgeting decision making.5PPT PPT 文档演模板 文档演模板 Office Office
5、PPT PPT6Steps in Investment Analysis1.Estimate a hurdle rate for the project,based upon the riskiness of the investment2.Estimate revenues and accounting earnings on the investment.3.Convert accounting earnings into cash flows Use the cash flows to evaluate whether the investment is a good investmen
6、t.4.Time weight the cash flows Use the time-weighted cash flows to evaluate whether the investment is a good investment.5.Evaluate investment and make decisions6PPT PPT 文档演模板 文档演模板 Office Office PPT PPT7Estimating the Hurdle Rate for an Investment If a firm is in only one business,and all of its inv
7、estments are homogeneous:Use the companys costs of capital to evaluate its investments.If the firm is in more than one business,but investments within each of business are similar:Use the divisional costs of capital to evaluate investments made by that division7PPT PPT 文档演模板 文档演模板 Office Office PPT
8、PPT8 Example：Suppose that a firm 100%equity funded,it has three divisions:(1)electronics which is occupied 30%of the firms market value,the cost of capital is 22%;(2)chemical department which has 40%of market value,its cost of capital is 17%;(3)nature gas transmission division has 30%of market value
9、,the cost of capital is 14%.the weighted average cost of capital of the firm=0.322%+0.417%+0.314%=17.6%when we conduct capital budgeting for a project,assume its similar to electronic industry,if we use 17.6%as hurdle rate of the new investment,no doubt we would over value the investment,would make
10、worry decision in the consequence.How we estimate the appropriate discount rate then?8PPT PPT 文档演模板 文档演模板 Office Office PPT PPTEstimating the Hurdle Rate for an Investment If a firm is planning on entering a new business:Estimate a cost of equity for the investment,based upon the riskiness of the in
11、vestment Estimate a cost of debt and debt ratio for the investment based upon the costs of debt and debt ratios of other firms in the business.99PPT PPT 文档演模板 文档演模板 Office Office PPT PPTEstimating the Hurdle Rate for an Investment The hurdle rate of a particular project based upon the riskness of it
12、.The risk that is relevant in computing a projects cost of capital is the risk of the projects cash flows and not the risk of the financing instruments the firm issues to finance the project.1010PPT PPT 文档演模板 文档演模板 Office Office PPT PPT11Example:suppose that Compusell Corporation is planning to fina
13、nce$5 million outlay required to undertake a new project by issuing bonds.Suppose Compusell can issue bonds at an interest rate of 6%per year.Can we adopts 6%as the cost of capital to evaluate the new project?Why?11PPT PPT 文档演模板 文档演模板 Office Office PPT PPT12Estimating the Hurdle Rate for an Investme
14、ntFinancingmixofaprojectorafirmOwnersfunds(equity)Borrowedmoney(debt)Costofdebt?rBCostofequity？rECAPMAftertaxofinterests/actualmoneyfundedTheWeightedAverageCostofCapital：12PPT PPT 文档演模板 文档演模板 Office Office PPT PPT13Estimating the Hurdle Rate for an Investment Investor and InvesteeRequirearateofretur
15、nCostofcapitalStep213PPT PPT 文档演模板 文档演模板 Office Office PPT PPT Step 2:Estimate revenues and accounting earnings on the investment.Step 3:Convert accounting earnings into cash flows14MeasureCashFlows14PPT PPT 文档演模板 文档演模板 Office Office PPT PPT15 15The features of cash flows in capital budgeting1.Cash
16、flows from operating activities 2.After tax cash flows 3.Incremental cash flows operating+after tax+incremental15PPT PPT 文档演模板 文档演模板 Office Office PPT PPT16 16Incremental cash flows In calculating the NPV of a project,incremental cash flows should be used.These cash flow are the changes in the firms
17、 cash flows that occur as a direct consequence of accepting the project.The difference between the cash flows of the firm with the project and the cash flows of the firm without the project.16PPT PPT 文档演模板 文档演模板 Office Office PPT PPT17From Cash Flows to Incremental Cash Flows The Key Questions to de
18、termine whether a cash flow is incremental:What will happen to this cash flow item if I accept the investment?What will happen to this cash flow item if I do not accept the investment?If the cash flow will occur whether you take this investment or reject it,it is not an incremental cash flow.17PPT P
19、PT 文档演模板 文档演模板 Office Office PPT PPT18Sunk Costs Any expenditure that has already been incurred,and cannot be recovered(even if a project is rejected)is called a sunk cost.When analyzing a project,sunk costs should not be considered since they are not incremental.By this definition,market testing ex
20、penses and R&D expenses are both likely to be sunk costs before the projects that are based upon them are analyzed.If sunk costs are not considered in project analysis,how can a firm ensure that these costs are covered?18PPT PPT 文档演模板 文档演模板 Office Office PPT PPT19Side Effects-Costs and Benefits Most
21、 projects considered by any business create side costs and benefits for that business.The side costs include the costs created by the use of resources that the business already owns(opportunity costs)and lost revenues for other projects that the firm may have.The benefits that may not be captured in
22、 the traditional capital budgeting analysis include project synergies(where cash flow benefits may accrue to other projects)and options embedded in projects(including the options to delay,expand or abandon a project).19PPT PPT 文档演模板 文档演模板 Office Office PPT PPT20Opportunity Cost An opportunity cost a
23、rises when a project uses a resource that may already have been paid for by the firm.When a resource that is already owned by a firm is being considered for use in a project,this resource has to be priced on its next best alternative use,which may be a sale of the asset renting or leasing the asset
24、out use elsewhere in the business 20PPT PPT 文档演模板 文档演模板 Office Office PPT PPT21Case 1:Opportunity Costs Assume that Boeing owns the land that will be used to build the plant for the Super Jumbo Jet.This land is undeveloped and was acquired several years ago for$40 million.The land currently can be s
25、old for$100 million,though that would create a capital gain(which will be taxed at 20%).In assessing the Boeing Super Jumbo,which of the following would you do:Ignore the cost of the land,since Boeing owns its alreadyUse the book value of the land,which is$40 millionUse the market value of the land,
26、which is$100 millionOther:21PPT PPT 文档演模板 文档演模板 Office Office PPT PPTCase 2:Excess Capacity In the Boeing example,assume that the firm will use its existing storage facilities,which have excess capacity,to hold inventory associated with the Super Jumbo.The project analyst argues that there is no cos
27、t associated with using these facilities,since they have been paid for already and cannot be sold or leased to a competitor(and thus has no competing current use).Do you agree?YesNo2222PPT PPT 文档演模板 文档演模板 Office Office PPT PPT23Product and Project Cannibalization When a firm makes a new investment,s
28、ome of the revenues may come from existing investments of the firm.This is referred to as cannibalization(erosion).Examples would be:A New Starbucks that is opening four blocks away from an existing Starbucks A personal computer manufacturer like Apple or Dell introducing a new and more powerful PC
29、A motor manufacturer determine to produce a new convertible sports car.23PPT PPT 文档演模板 文档演模板 Office Office PPT PPT24Product and Project Cannibalization:A Real Cost?Assume that in the Starbucks analysis,20%of the revenues at the store are expected to come from people who would have gone to a existing
30、 store nearby.In doing the analysis of the store,would youLook at only incremental revenues(i.e.80%of the total revenue)Look at total revenues of the new storeChoose an intermediate number 24PPT PPT 文档演模板 文档演模板 Office Office PPT PPT25Project Synergies A project may provide benefits for other project
31、s within the firm.If this is the case,these benefits have to be valued and shown in the initial project analysis.For instance,the Home Depot,when it considers opening a new restaurant at one of its stores,will have to examine the additional revenues that may accrue to this store from people who come
32、 to the restaurant.25PPT PPT 文档演模板 文档演模板 Office Office PPT PPTDepreciation and incremental cash flow In accounting,the capital expense will be spread over assets life time and treat the spreading as operating expense for each year.The point is depreciation can reduce taxable income therefore have ta
33、xes benefit.When a firm undertake a new project,the benefit would change arise cash flows changed.Depreciation effect should be considered in project analysis.2626PPT PPT 文档演模板 文档演模板 Office Office PPT PPT27Depreciation Methods Broadly categorizing,depreciation methods can be classified as straight l
34、ine and accelerated methods.In straight line depreciation,the capital expense is spread evenly over time,In accelerated depreciation,the capital expense is depreciated more in earlier years and less in later years.Declining Balance Depreciation Method Sum of the Years Digits27PPT PPT 文档演模板 文档演模板 Off
35、ice Office PPT PPTStraight Line Method-example SL=Cost/LifeExample:A machine is purchased for$10000.The expected life is 5 years.Calculate the annual depreciation as follows:10000/5=2000Each year for 5 years$2000 would be expensed.2828PPT PPT 文档演模板 文档演模板 Office Office PPT PPTAccelerated Methods-exam
36、ples Declining Balance Depreciation MethodExample:A copy machine is purchased for$3500.The expected life is 5 years.Using double declining balance the depreciation would be calculated as follows:factor=2*(1/5)=0.4029YearDepreciable BasisDepreciationCalculationDepreciation ExpenseAccumulatedDepreciat
37、ion1 10000 10000*0.40 4000 40002 6000 6000*0.40 2400 64003 3600 3600*0.40 1440 78404 2160 2160*0.40 864 87045 1296 1296*0.40 518.4 9222.429PPT PPT 文档演模板 文档演模板 Office Office PPT PPTAccelerated Methods-examples Sum of the Years DigitsThe first step is to sum the digits or numbers starting with the lif
38、e and going back to one.For example,an asset with a life of 5 would have a sum of digits as follows:5+4+3+2+1=15To find the percentage for each year divide the years digit by the sum.30Year 1 5/15=33.34%Year 2 4/15=26.67%Year 3 3/15=20%Year 4 2/15=13.33%Year 5 1/15=6.67%YearDepreciationCalculationDe
39、preciationExpense1 10000*33.33%33332 10000*26.67%26673 10000*20%20004 10000*13.33%13335 10000*6.67%66730PPT PPT 文档演模板 文档演模板 Office Office PPT PPT31 Depreciation Assume that you made a large investment this year,and that you are choosing between straight line and accelerated depreciation methods.Whic
40、h will result in higher net income this year?Straight Line DepreciationAccelerated DepreciationWhich will result in higher cash flows this year?Straight Line DepreciationAccelerated Depreciation31PPT PPT 文档演模板 文档演模板 Office Office PPT PPTIncremental cash flows in project analysis Estimate incremental
41、 cash flows when conduct project analysis consider:Sunk cost Side effect Opportunity cost Cannibalization(erosion)Project synergy Embedded options Non-cash working capital Depreciation effect on taxes32*32PPT PPT 文档演模板 文档演模板 Office Office PPT PPTInvestments in Non-Cash Working Capital The difference
42、 between current assets and current liabilities is often titled working capital by accountants.We modify that definition to make it the difference between non-cash current assets and non-debt current liabilities and call it non-cash working capital.We eliminate cash from current assets because large
43、 cash balances today earn a fair market return.Thus,they cannot be viewed as a wasting asset.We eliminate debt from current liabilities because we consider debt to be part of our financing and include it in our cost of capital calculations.3333PPT PPT 文档演模板 文档演模板 Office Office PPT PPT34Non-Cash Work
44、ing Capital Effect Intuitively,money invested in inventory or in accounts receivable cannot be used elsewhere.It,thus,represents a drain on cash flows.To the degree that some of these investments can be financed using suppliers credit(accounts payable)the cash flow drain is reduced.34PPT PPT 文档演模板 文
45、档演模板 Office Office PPT PPT35Non-Cash Working Capital Effect Investments in non-cash working capital are thus cash outflows Any increase in non-cash working capital reduces cash flows in that year Any decrease in non-cash working capital increases cash flows in that year To provide closure,working ca
46、pital investments need to be salvaged at the end of the project life.35PPT PPT 文档演模板 文档演模板 Office Office PPT PPTExercise Determine which of the following cash flows are incremental cash flows that should be incorporated into a NPV calculation.a.The sale of an old machine,when a company is replacing
47、property,plant,and equipment for a new product launch.b.The cost of research and development for a new product concept that was conducted over the past year that is now being put into production.c.Potential rental income that was forgone from a previously unused warehouse owned by the company,which
48、is now being used as part of a new product launch.d.New equipment purchased for a project.e.The annual depreciation expense on new equipment purchased for a project.f.Net working capital expenditures of$10 million in year 0,$12 million in year 1 and$5million in year 2.g.A dividend payment that was f
49、unded in part by a given projects contribution to the net income for that year.3636PPT PPT 文档演模板 文档演模板 Office Office PPT PPT37From Accounting Earnings to Cash Flows Cash Flow from OperationsOCF=EBIT Taxes+Depreciation Net Capital Spending Do not forget salvage value.Changes in Net Working Capital wh
50、en the project winds down,we enjoy a return of net working capital.Cash flow=OCF+net working capital37PPT PPT 文档演模板 文档演模板 Office Office PPT PPT Other Methods for Computing OCF Bottom-Up Approach Works only when there is no interest expense OCF=NI+depreciation Top-Down Approach OCF=Sales Costs Taxes