管理经济学 chp1-1

SUNK COSTS ARE NOT INCLUDED SUNK COSTS ARE EXPENDITURES THAT HAVE ALREADY OCCURRED OR HAVE BEEN AGREED TO ON A CONTRACTUAL BASIS SUNK COSTS ARE NOT INCREMENTAL COSTS THEY ARE NOT RELEVANT TO SUBSEQUENT INVESTMENT DECISIONS
TYPES OF PROJECTS

REPLACEMENT PROJECTS – COST REDUCTION PROJECTS – SAFETY,

ENVIRONMENTAL, REGULATION IMPOSITION, ADDED TECHNOLOGY TO LOWER COSTS, ETC.




FIXED COST = EXPENSE THAT DOES NOT VARY WITH OUTPUT VARIABLE COST = EXPENSE THAT FLUCTUATES WITH OUTPUT
PROFIT CONTRIBUTION = PROFIT BEFORE FIXED CHARGES



MAXIMIZING PROFITS MEANS MAXIMIZING THE VALUE OF THE FIRM
THE VALUE OF THE FIRM IS THE PRESENT VALUE OF CURRENT AND FUTURE PROFITS ------ PVFIRM = PRESENT VALUE OF THE FIRM

AN ECONOMICALLY SOUND CAPITAL BUDGETING DECISION RULE MUST CONSISTENTLY LEAD THE ACCEPTANCE OF PROJECTS THAT WILL INCREASE THE VALUE OF THE FIRM WHEN THE DISCOUNTED PRESENT VALUE OF EXPECTED FUTURE CASH FLOWS EXCEEDS THE COST OF INVESTMENT, A PROJECT REPRESENTS A WORTHY USE OF SCARCE RESOURCES NPV ANALYSIS MEETS THESE ABOVE CRITERIA --- BUT IS ONLY 1 OF 4 CAPITAL BUDGETING DECISION RULES COMMONLY USED

EXPANSION PROJECTS ---
INCREASE THE AVAILABILITY OF EXISTING PRODUCTS & SERVICES --EXPANSION INTO NEW PRODUCTS—EXPANSION TO OTHER PLANTS AND TECHNOLOGY
EXTENSIONS OF TIME VALUE OF MONEY CHAPTER 1
CAPITAL BUDGETING AND PROJECT INVESTMENT DECISIONS
WHAT IS CAPITAL BUDGETING?



CAPITAL BUDGETING IS A LONG-TERM INVESTMENT PLANNING PROCESS THE TERM CAPITAL REFERS TO THE FUNDS EMPLOYED TO FINANCE FIXED ASSETS USED IN PRODUCTION A BUDGET IS A DETAILED PLAN OF PROJECTED INFLOWS AND OUTFLOWS OVER FUTURE PERIODS
STEPS IN CAPITAL BUDGETING



THE COST OF THE PROJECT IS DETERMINED PROJECTION OF THE CASH FLOWS – INVESTMENT OUTLAYS AND ANNUAL NET CASH FLOW INFLOWS OF THE PROJECT IN OPERATION INCREMENTAL CASH FLOW EVALUATION
CASH AND MARKETABLE SECURITIES

(from the income statement) = THE FREE CASH FLOW (FCF)

NPV ANALYSIS IS BASED ON THE TIMING AND MAGNITUDE OF CASH FLOWS AND OUTFLOWS


CAPITAL BUDGET DECISION RULES

NET PRESENT VALUE ANALYSIS
----- NPV = NET PRESENT VALUE NPV = CURRENT-DOLLAR DIFFERENCE BETWEEN MARGINAL REVENUES AND MARGINAL COSTS
0 = CURRENT PROFITS, t = FUTURE
PROFITS,
n t 1
= SUMMATION FROM 1 TO n


IF DIVIDENDS ARE PAID OUT FROM THE FIRM --- THE PRESENT VALUE OF THE FIRM IS THE VALUE OF FUTURE PROFITS --- SINCE CURRENT PROFITS HAVE BEEN PAID OUT IN DIVIDENDS PVFIRMEX-DIVIDEND = PVFIRM –

ONE CAN CONSTRUCT A FIRM’S PRO FORMA CASH FLOW STATEMENTS WITH AND WITHOUT PROJECT FOR EACH YEAR AND THEN MEASURE ANNUAL PROJECT DIFFERENCE IN CASH FLOWS
0
1 = 0
g i g
AS LONG AS
gi

THUS, SO LONG AS THE INTEREST RATE AND GROWTH RATE ARE CONSTANT, THE STRATEGY OF MAXIMIZING CURRENT PROFITS ALSO MAXIMIZES THE VALUE OF THE FIRM ON THE EX-DIVIDEND DATE --THE DATE THAT CURRENT PROFITS ARE PAID OUT IN DIVIDENDS



OBTAINING FUNDS AND ESTIMATING THE COST OF FUNDING ARE MAJOR TASKS OF THE FINANCIAL MANAGER – THE CFO, TREASURER, ETC ALTHOUGH THE FINANCIAL DEPARTMENT USUALLY WRITES UP THE EVALUATION REPORT OF THE CAPITAL BUDGETING PROCESS --- THE PROJECT EVALUATION TOP MANAGEMENT ULTIMATELY SETS STANDARDS OF ACCEPTABILITY
NPV ANALYSIS IS COMMONLY USED BY MБайду номын сангаасNAGERS TO CORRECTLY EMPLOY MARGINAL ANALYSIS IN THE CAPITAL BUDGETING PROCESS


THE BASIC VALUATION MODEL PROVIDES A REFLECTION OF MARGINAL ANALYSIS AND THE VALUE-MAXIMIZATION THEORY OF THE FIRM AS: n n


PVFIRM = OR, PVFIRM =
0 t /(1i )t ,
t1
n

0 0 (1 g )t / (1 i)t 0 (1 i i g )
t 1
n
AS t APPROACHES INFINITY AND WHERE i = INTEREST RATE AND g = GROWTH RATE OF PROFITS
FIRM VALUE
FIRM VALUE IS GENERALLY DERIVED FROM THE DISCOUNTED FREE CASH FLOW
FREE CASH FLOW IS DERIVED FROM THE FINANCIAL STATEMENTS



START WITH PROFIT AFTER TAX (from the income statement) ADD BACK THE DEPRECIATION (from the income statement) SUBTRACT THE INCREASES IN CURRENT ASSETS (from the change in the balance sheet) ADD BACK THE INCREASE IN CURRENT LIABILITIES (from the change in the balance sheet)



SUBTRACT THE INCREASE IN FIXED ASSETS AT COST (from the change in the balance sheet) ADD BACK THE AFTER-TAX INTEREST ON DEBT = (1 – tax rate)(interest payments on debt) coming from the income statement MINUS THE AFTER-TAX INTEREST ON