英文版公司理财课件chapter 7
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capital
5
Suppose that you have identified a possible tenant who would be prepared to rent your office block for 3 years at a fixed annual rent of $16000. You forecast that after you have collected the third year’s rent the building could be sold for $450000. Assume that the opportunity cost of capital is r = 7%
13
Internal rate of return
Two rules for deciding whether to go ahead with an investment project 1. The NPV rule. Invest in any project that has a positive NPV when its cash flows are discounted at the opportunity cost of capital 2. The rate of return rule. Invest in any project offering a rate of return that is higher than the opportunity cost of capital The rate of return or internal rate of return (IRR) is the discount rate at which NPV equals zero The rate or return rule will give the same answer as the NPV rule as long as the NPV of a project declines smoothly as the discount rate increase
9
Content
Net present value Other investment criteria More examples of mutually exclusive projects Capital rationing A last look
10
Payback period: 投资回收期 Internal rate of return (IRR): 内含报酬率
Mutually exclusive projects: two or more projects that cannot be pursued simultaneously
8
Using the NPV rule to choose among projects
Reinvestment assumption: the NPV rule assumes that all cash flows can be reinvested at the discount rate. Minimum Acceptance Criteria: Accept if NPV >0 Ranking Criteria: Choose the highest NPV
6
A factory costs $400,000. You reckon that it will produce an inflow after operating costs of $100,000 in year 1, $200,000 in year 2, and $300,000 in year 3. The opportunity cost of capital is 12 percent. Draw up a worksheet and use tables to calculate the NPV.
Chapter 7
Net present value and other investment criteria
COPYRIGHT©ZHULI
1
Objectives
Calculate the net present value of an investment Calculate the internal rate of return of a project and know what to look out for when using the internal rate of return rule 3. Explain why the payback rule doesn’t always make shareholders better off 4. Use the net present value rule to analyze three common problems that involve competing projects: (a) when to postpone an investment expenditure, (b) how to choose between projects with unequal lives, and (c) when to replace equipment 5. Calculate the profitability index and use it to choose between projects when funds are limited
12
Advantages Simplicity Disadvantages Payback does not consider any cash flows that arrive after the payback period Payback does not consider the time value of money
1. 2.
2
Content
Net present value Other investment criteria More examples of mutually exclusive projects Capital rationing A last look
3
Net present value: 净现值 Opportunity cost of capital: 资金的机会 成本 Mutually exclusive projects: 互斥项目
17Leabharlann Some pitfalls with the internal rate of return rule
When NPV is higher as the discount rate increases, a project is acceptable only if its internal rate of return is less than the opportunity cost of capital
IRR = 12.96%
16
Remember:
The project IRR measures the profitability of the project. It is an internal rate of return in the sense that it depends only on the project’s own cash flows. The opportunity cost of capital is the standard for deciding whether to accept the project. It is equal to the return offered by equivalent-risk investments in the capital market.
11
Payback
Payback period: time until cash flows recover the initial investment in the project
The payback rule states that a project should be accepted if its payback period is less than a specified cutoff period To use the payback rule, a firm has to decide on an appropriate cutoff period 基准期
18
When there are multiple changes in the sign of the cash flows, the IRR rule does not work, but the NPV rule always does
19
A high IRR is not an end in itself. You want projects that increase the value of the firm. Projects that earn a good rate of return for a long time often have higher NPVs than those that offer high percentage rates of return but die young
14
Suppose you rent out the office block for 3 years, the cash flows are as follows:
Trial and error
15
You can accept a project if the rate of return exceeds the opportunity cost of capital
7
When you need to choose among mutually exclusive projects, the decision rule is simple: calculate the NPV of each alternative, and choose the highest positive-NPV project
20
Content
Net present value Other investment criteria More examples of mutually exclusive projects Capital rationing A last look
21
Content
Net present value Other investment criteria More examples of mutually exclusive projects Capital rationing A last look
4
Net present value
Net present value (NPV): present value of cash flows minus investment The net present value rule states that managers 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 first two steps in calculating NPVs: forecasting the cash flows and estimating the opportunity cost of
5
Suppose that you have identified a possible tenant who would be prepared to rent your office block for 3 years at a fixed annual rent of $16000. You forecast that after you have collected the third year’s rent the building could be sold for $450000. Assume that the opportunity cost of capital is r = 7%
13
Internal rate of return
Two rules for deciding whether to go ahead with an investment project 1. The NPV rule. Invest in any project that has a positive NPV when its cash flows are discounted at the opportunity cost of capital 2. The rate of return rule. Invest in any project offering a rate of return that is higher than the opportunity cost of capital The rate of return or internal rate of return (IRR) is the discount rate at which NPV equals zero The rate or return rule will give the same answer as the NPV rule as long as the NPV of a project declines smoothly as the discount rate increase
9
Content
Net present value Other investment criteria More examples of mutually exclusive projects Capital rationing A last look
10
Payback period: 投资回收期 Internal rate of return (IRR): 内含报酬率
Mutually exclusive projects: two or more projects that cannot be pursued simultaneously
8
Using the NPV rule to choose among projects
Reinvestment assumption: the NPV rule assumes that all cash flows can be reinvested at the discount rate. Minimum Acceptance Criteria: Accept if NPV >0 Ranking Criteria: Choose the highest NPV
6
A factory costs $400,000. You reckon that it will produce an inflow after operating costs of $100,000 in year 1, $200,000 in year 2, and $300,000 in year 3. The opportunity cost of capital is 12 percent. Draw up a worksheet and use tables to calculate the NPV.
Chapter 7
Net present value and other investment criteria
COPYRIGHT©ZHULI
1
Objectives
Calculate the net present value of an investment Calculate the internal rate of return of a project and know what to look out for when using the internal rate of return rule 3. Explain why the payback rule doesn’t always make shareholders better off 4. Use the net present value rule to analyze three common problems that involve competing projects: (a) when to postpone an investment expenditure, (b) how to choose between projects with unequal lives, and (c) when to replace equipment 5. Calculate the profitability index and use it to choose between projects when funds are limited
12
Advantages Simplicity Disadvantages Payback does not consider any cash flows that arrive after the payback period Payback does not consider the time value of money
1. 2.
2
Content
Net present value Other investment criteria More examples of mutually exclusive projects Capital rationing A last look
3
Net present value: 净现值 Opportunity cost of capital: 资金的机会 成本 Mutually exclusive projects: 互斥项目
17Leabharlann Some pitfalls with the internal rate of return rule
When NPV is higher as the discount rate increases, a project is acceptable only if its internal rate of return is less than the opportunity cost of capital
IRR = 12.96%
16
Remember:
The project IRR measures the profitability of the project. It is an internal rate of return in the sense that it depends only on the project’s own cash flows. The opportunity cost of capital is the standard for deciding whether to accept the project. It is equal to the return offered by equivalent-risk investments in the capital market.
11
Payback
Payback period: time until cash flows recover the initial investment in the project
The payback rule states that a project should be accepted if its payback period is less than a specified cutoff period To use the payback rule, a firm has to decide on an appropriate cutoff period 基准期
18
When there are multiple changes in the sign of the cash flows, the IRR rule does not work, but the NPV rule always does
19
A high IRR is not an end in itself. You want projects that increase the value of the firm. Projects that earn a good rate of return for a long time often have higher NPVs than those that offer high percentage rates of return but die young
14
Suppose you rent out the office block for 3 years, the cash flows are as follows:
Trial and error
15
You can accept a project if the rate of return exceeds the opportunity cost of capital
7
When you need to choose among mutually exclusive projects, the decision rule is simple: calculate the NPV of each alternative, and choose the highest positive-NPV project
20
Content
Net present value Other investment criteria More examples of mutually exclusive projects Capital rationing A last look
21
Content
Net present value Other investment criteria More examples of mutually exclusive projects Capital rationing A last look
4
Net present value
Net present value (NPV): present value of cash flows minus investment The net present value rule states that managers 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 first two steps in calculating NPVs: forecasting the cash flows and estimating the opportunity cost of