《金融学基础》Module 3_Part II人生规划与投资规划

Forecasting cash flows: decisions and events Decision Flexibilities in the project’s life
– Continue/discontinue the project – Reduce/increase the level of investment
30 Yt C t t t 1 (1 i ) t 1 (1 i ) 45
— Human capital
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Finance
School of Management and Economics
40,000 30,000 20,000 10,000 0 -10,000 -20,000 -30,000
Finance
School of Management and Economics
Review & Preview


Compounding/Discounting APR & EFF NPV rule Life cycle planning Analysis of investment project
PMT ?
Result ￥5,646
yearly savinLeabharlann Baidus
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Finance
School of Management and Economics
Maintaining the Same Level of Consumption

Assume Mr. K plans to consume a constant stream of the same amount in each of the next 45 years, denoted by C.
The future value of total savings at age 65
=
The present value of total consumption after retirement at age 65
47.58(30,000 C) 11.94C
— C $23,982 Permanent income
Finance
School of Management and Economics
Target Replacement Rate of Preretirement Income

Suppose that Mr. K aims for a replacement rate equal to 75% of your preretirement income.

Aim for a target replacement rate of preretirement income. Aim for maintaining the same level of consumption spending before and after retirement.
4

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Finance
School of Management and Economics
Capital Budget and Capital Budgeting

A business firm should often decide whether to invest in
– factories, machinery, warehouses – research laboratories – marketing campaigns, and – training the personnel.
NPV = -69
Don’t do the Project
17
Finance
School of Management and Economics
250 200
150 100 NPV
50
0 0% -50 -100

5% 10% 15% 20%
-150 -200
Discount Rate NPV as a Function of Discount Rate
10
Finance
School of Management and Economics
Question

In the previous example, other things equal, if Mr. K has a heritage of ￥50,000 from his parents and plans to give a bequest to his child which is worth of ￥100,000. Then how much should Mr. K spend for consumption now and how much should he save for future?
– Starting with an original idea for increasing shareholder wealth – Gathering information to assess the costs and benefits – Devising and then implementing the strategy
35
-100000
45
55
Age
65
75
Human Capital, Retirement Assets, Wealth over the Life Cycle
9
Finance
School of Management and Economics
The Intertemporal Budget Constraint

The process of analyzing such decisions is called capital budgeting.
12
Finance
School of Management and Economics
The Nature of Project Analysis

Procedures of project analysis include
16
NPV= 20
Finance
School of Management and Economics
The discount rate 15% Year 0 1 2 3 4 5 Flow -1000 450 350 250 150 50 PV -1000 391 265 164 86 25 Cum_PV -1000 -609 -344 -180 -94 -69
Salary
Consumption
Saving
35
40
45
50
55
60
65
70
75
80
Age
Labor Income and Consumption
8
Finance
School of Management and Economics
700000 600000 500000 400000 Real $ 300000 200000 100000 0 Retirement Fund Human Capital Total Wealth
PV of cash outflows
T
=
PV of cash inflows
R Ct Yt B 1 i t 1 i T W0 1 i t t 1 t 1
i = (real) interest rate R = number of years to retirement Y = (real) labor income T = number of years of remaining life (T is greater than R ) W0 = (real) initial wealth B = (real) bequest
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Finance
School of Management and Economics
NPV Rule Revisited

The decision criterion/rule is that invest if the proposed project’s NPV is positive.
– Forecasting the cash inflows and outflows.
– How much should Mr. K spend for consumption now and how much should he save for retirement?
3
Finance
School of Management and Economics
Two Approaches

Mr. K is currently 35 years old, expect to retire in 30 years at age 65, and then to live for 15 more years until age 80.
– Mr. K ’s current income is ￥30,000 per year, and his real labor income adjusted for inflation remains at ￥30,000 per year until age 65. – The real rate of interest is 3% per year.
– That is to say, the target level of retirement income is0.75×￥30,000 = ￥22,500.
n 15
65-80
i 3%
PV ？
FV 0
PMT -22,500
Result ￥268,604
n 30
35-65
i 3%
PV 0
FV ￥268,604
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Finance
School of Management and Economics
An Example: NPV of a Project
The discount rate 10% Year 0 1 2 3 4 5 Flow -1000 450 350 250 150 50 PV -1000 409 289 188 102 31 Cum_PV -1000 -591 -302 -114 -11 20 Do the Project DCF Payback
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Finance
School of Management and Economics
Internal Rate of Return, IRR The discount rate 11.04% Year 0 1 2 3 4 5 Flow -1000 450 350 250 150 50 PV -1000 405 284 183 99 30 Cum_PV -1000 -595 -311 -128 -30 0 Indifferent
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Finance
School of Management and Economics
Where Do Investment Ideas Come from?

Customers


R&D department
Competition


Production division
Incentive systems
FV3565 (30,000 C) PV8065 (C)
n 30 i 3% PV 0 FV ? PMT 1 Result ￥47.58
n 15
i 3%
PV ?
FV 0
PMT 1
Result ￥11.94
6
Finance
School of Management and Economics
– The discount rate is the opportunity cost (or the cost of capital) which measures the rate of return on comparable investment opportunities.
NPV is the project’s fair market value in a competitive and efficient market.
1
Finance
School of Management and Economics
Life Cycle Planning
结 婚
准备
出生 工作
辛苦工作
退休
享受生活 死亡
生命周期
2
Finance
School of Management and Economics
How Much to Save for Retirement?