4-analyzinginvestmentproject投资净现值分析
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Investment decision(Capital Budgeting
What is Corporate Finance
talking about
Balance Sheet
Cash Management
Current Assets
Current Liabilities
Fixed Assets
5. Evaluate investment and make decisions
6
Estimating the Hurdle Rate for an Investment
If a firm is in only one business, and all of its investments are homogeneous:
Entering new areas of business Entering new market Investing in equipment to reduce costs Acquiring other companies
3
Financing decision(Capital Structure)
k
rB
(1 Tc
)
D A
rE
E A
12
Estimating the Hurdle Rate for an Investment
Investor and Investee
Require a rate of return
Cost of capital
Step 2
13
Measure Cash Flows
Use the company’s costs of capital to evaluate its investments.
If the firm is in more than one business, but investments within each of business are similar:
We’ll look at how to use discounted cash flow (DCF) analysis and net present value (NPV) and other rules in capital budgeting decision making.
5
Steps in Investment Analysis
The Key Questions to determine 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?
8
Estimating 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 rent
The hurdle rate of a particular project based upon the riskness of it. The risk that is relevant in computing a project’s cost of capital is the risk of the project’s cash flows and not the risk of the financing instruments the firm issues to finance the project.
10
Example: suppose that Compusell Corporation is planning to finance $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.
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.
9
Estimating the Hurdle Rate for an Investment
Can we adopts 6% as the cost of capital to evaluate the new project? Why?
11
Estimating the Hurdle Rate for an
Investment
Owner’s funds
Financing mix of a
the weighted average cost of capital of the firm = 0.3×22%+0.4×17%+0.3×14% =17.6%
when we conduct capital budgeting for a project, assume it’s 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 worry decision in the consequence. How we estimate the appropriate discount rate then?
(equity)
project or a firm
Borrowed
money (debt)
Cost of debt? rrBB
Cost of equity？rrEE
After tax of interests/actual money funded
CAPM
The Weighted Average Cost of Capital：
The difference between the cash flows of the firm with the project and the cash flows of the firm without the project.
16
From Cash Flows to Incremental Cash Flows
Step 2: Estimate revenues and accounting earnings on the investment.
Step 3: Convert accounting earnings into cash f lows
14
The features of cash flows in capital budgeting
Use the divisional costs of capital to evaluate investments made by that division
7
Example：
Suppose that a firm 100% equity funded, it has three divisions: (1) electronics which is occupied 30% of the firm’s 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, the cost of capital is 14%.
Chapter Four Analyzing Investment project
1
Contents
The concept of capital budgeting The steps of investment analysis Estimation of cost of capital Measure cash flows The approaches of capital budgeting
2
What is a investment or a project?
Any decision that requires the use of resources (financial or otherwise) is a project.
Broad strategic decisions
If the cash flow will occur whether you take this investment or reject it, it is not an incremental cash f low.
17
Sunk Costs
Any expenditure that has already been incurred, and cannot be recovered (even if a project is rejected) is called a sunk cost.
1. Cash flows from operating activities 2.After tax cash flows 3.Incremental cash flows
operating + after tax + incremental
15
Incremental cash flows
In calculating the NPV of a project, incremental cash flows should be used. These cash flow are the changes in the firm’s cash flows that occur as a direct consequence of accepting the project.
Long-term Liabilities Shareholder’s Equity
Total
Assets
Total Liabilities and
Shareholders Equity
4
Capital budgeting
The process of analyzing investment decisions for a firm is called capital budgeting.
1. Estimate a hurdle rate for the project, based upon the riskiness of the investment
2. 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 investment.
4. Time weight the cash flows
Use the time-weighted cash flows to evaluate whether the investment is a good investment.
What is Corporate Finance
talking about
Balance Sheet
Cash Management
Current Assets
Current Liabilities
Fixed Assets
5. Evaluate investment and make decisions
6
Estimating the Hurdle Rate for an Investment
If a firm is in only one business, and all of its investments are homogeneous:
Entering new areas of business Entering new market Investing in equipment to reduce costs Acquiring other companies
3
Financing decision(Capital Structure)
k
rB
(1 Tc
)
D A
rE
E A
12
Estimating the Hurdle Rate for an Investment
Investor and Investee
Require a rate of return
Cost of capital
Step 2
13
Measure Cash Flows
Use the company’s costs of capital to evaluate its investments.
If the firm is in more than one business, but investments within each of business are similar:
We’ll look at how to use discounted cash flow (DCF) analysis and net present value (NPV) and other rules in capital budgeting decision making.
5
Steps in Investment Analysis
The Key Questions to determine 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?
8
Estimating 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 rent
The hurdle rate of a particular project based upon the riskness of it. The risk that is relevant in computing a project’s cost of capital is the risk of the project’s cash flows and not the risk of the financing instruments the firm issues to finance the project.
10
Example: suppose that Compusell Corporation is planning to finance $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.
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.
9
Estimating the Hurdle Rate for an Investment
Can we adopts 6% as the cost of capital to evaluate the new project? Why?
11
Estimating the Hurdle Rate for an
Investment
Owner’s funds
Financing mix of a
the weighted average cost of capital of the firm = 0.3×22%+0.4×17%+0.3×14% =17.6%
when we conduct capital budgeting for a project, assume it’s 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 worry decision in the consequence. How we estimate the appropriate discount rate then?
(equity)
project or a firm
Borrowed
money (debt)
Cost of debt? rrBB
Cost of equity？rrEE
After tax of interests/actual money funded
CAPM
The Weighted Average Cost of Capital：
The difference between the cash flows of the firm with the project and the cash flows of the firm without the project.
16
From Cash Flows to Incremental Cash Flows
Step 2: Estimate revenues and accounting earnings on the investment.
Step 3: Convert accounting earnings into cash f lows
14
The features of cash flows in capital budgeting
Use the divisional costs of capital to evaluate investments made by that division
7
Example：
Suppose that a firm 100% equity funded, it has three divisions: (1) electronics which is occupied 30% of the firm’s 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, the cost of capital is 14%.
Chapter Four Analyzing Investment project
1
Contents
The concept of capital budgeting The steps of investment analysis Estimation of cost of capital Measure cash flows The approaches of capital budgeting
2
What is a investment or a project?
Any decision that requires the use of resources (financial or otherwise) is a project.
Broad strategic decisions
If the cash flow will occur whether you take this investment or reject it, it is not an incremental cash f low.
17
Sunk Costs
Any expenditure that has already been incurred, and cannot be recovered (even if a project is rejected) is called a sunk cost.
1. Cash flows from operating activities 2.After tax cash flows 3.Incremental cash flows
operating + after tax + incremental
15
Incremental cash flows
In calculating the NPV of a project, incremental cash flows should be used. These cash flow are the changes in the firm’s cash flows that occur as a direct consequence of accepting the project.
Long-term Liabilities Shareholder’s Equity
Total
Assets
Total Liabilities and
Shareholders Equity
4
Capital budgeting
The process of analyzing investment decisions for a firm is called capital budgeting.
1. Estimate a hurdle rate for the project, based upon the riskiness of the investment
2. 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 investment.
4. Time weight the cash flows
Use the time-weighted cash flows to evaluate whether the investment is a good investment.