成本預(yù)算課程(英文版)課件

1、Capital BudgetingChapter 11 第1頁(yè)，共85頁(yè)。Long-Term (Capital) AssetsCapital assets are equipment or facilities that provide services to the organization for more than one fiscal period. Capital assets create these capacity-related costs2第2頁(yè)，共85頁(yè)。Need to Control Capital AssetsOrganizations have developed

2、specific tools to control the acquisition and use of long-term assets because:Organizations are usually committed to long-term assets for an extended time, creating the potential forExcess capacity that creates excess costsScarce capacity that creates lost opportunitiesThe amount of money committed

3、to the acquisition of capital assets is usually quite largeThe long-term nature of capital assets creates technological riskReduce an organizations flexibility3第3頁(yè)，共85頁(yè)。Meaning of Capital BudgetingCapital budgeting can be defined as the process of analyzing, evaluating, and deciding whether resource

4、s should be allocated to a project or not. Capital budgeting has three phases:Identifying potential investments,Choosing which investments to make, andFollow-up monitoring of the investments.4第4頁(yè)，共85頁(yè)。5第5頁(yè)，共85頁(yè)。Types of Capital Budgeting DecisionsShould we add a new product to our existing product l

5、ine?Should we expand into a new market?Should we replace our existing machinery?Should we buy fully automatic or semiautomatic machinery Where to locate manufacturing facility?6第6頁(yè)，共85頁(yè)。Investment and ReturnInvestment and return form the foundation of capital budgeting analysis, which focuses on whe

6、ther the expected increased cash flows (return) will justify the investment in the long-term assetInvestment is the monetary value of the assets the organization gives up to acquire a long-term asset which are often called capital outlays. Return is the increased future cash inflows attributable to

7、the long-term asset7第7頁(yè)，共85頁(yè)。Obviously, $1,000 today. Money received sooner rather than later allows one to use the funds for investment or consumption purposes. This concept is referred to as the TIME VALUE OF MONEY!The Time Value of MoneyWhich would you rather have - $1,000 today or $1,000 in 5 ye

8、ars? 8第8頁(yè)，共85頁(yè)。Time Value of MoneyA dollar today is worth more than a dollar a year from now since a dollar received today can be invested, yielding more than a dollar a year from now.9第9頁(yè)，共85頁(yè)。Time Value of Money (1 of 2)Time value of money (TVM) is a central concept in capital budgetingIn making i

9、nvestment decisions, the problem is that investment cash is paid out now, but the cash return is received in the futureWe need an equivalent basis to compare the cash flows that occur at different points in time10第10頁(yè)，共85頁(yè)。Time Value of Money (2 of 2)The critical idea underlying capital budgeting is

10、:Amounts of money spent or received at different periods of time must be converted into their value on a common date in order to be compared11第11頁(yè)，共85頁(yè)。Some Standard NotationFor simplicity, the following notation is used:Abbr.MeaningnFVPVarNumber of periods considered in the investment analysis; com

11、mon period lengths are a month, a quarter, or a yearFuture value, or ending value, of the investment n periods from nowPresent value, or the value at the current moment in time, of an amount to be received n periods from nowAnnuity, or equal amount, received or paid at the end of each period for n p

12、eriodsRate of return required, or expected, from an investment opportunity; the rate of interest earned on an investment12第12頁(yè)，共85頁(yè)。Types of InterestCompound InterestInterest paid (earned) on any previous interest earned, as well as on the principal borrowed (lent).Simple InterestInterest paid (earn

13、ed) on only the original amount, or principal borrowed (lent).SIn = P0(1+ i n)CIn = P0 (1+i)n13第13頁(yè)，共85頁(yè)。Present ValueAnalysts call a future cash flows value at time zero its present valueThe process of computing present value is called discountingWe can rearrange the FV formula to compute the prese

14、nt value:FV = PV x (1 + r)nPV = FV/(1 + r)n or PV = FV x (1 + r)-nMethods similar to those described earlier may be used to compute this valueCalculator, tables, or spreadsheet software14第14頁(yè)，共85頁(yè)。Assume that you need to have exactly $4,000 saved 10 years from now. How much must you deposit today in

15、 an account that pays 6% interest, compounded annually, so that you reach your goal of $4,000? 0 5 10$4,0006%PV0Present Value (Graphic)15第15頁(yè)，共85頁(yè)。 PV0 = FV / (1+i)10= $4,000 / (1.06)10 = $2,233.58Present Value (Formula) 0 5 10$4,0006%PV016第16頁(yè)，共85頁(yè)。Quick Check How much would you have to put in the

16、bank today to have $100 at the end of five years if the interest rate is 10%? PV or FV? Table: _a. $62.10b. $56.70c. $90.90d. $51.9017第17頁(yè)，共85頁(yè)。 How much would you have to put in the bank today to have $100 at the end of five years if the interest rate is 10%?a. $62.10b. $56.70c. $90.90d. $51.90Quic

17、k Check $100 0.621 = $62.1018第18頁(yè)，共85頁(yè)。 PRESENT VALUEYear 5%10%15% 1.952.909.870 2.907.826.756 5.784.621.497 10.614.386.247 20.377.149.061PRESENT VALUE OF $119第19頁(yè)，共85頁(yè)。 PRESENT VALUEYear 5%10%15% 1.952.909.870 2.907.826.756 5.784.621.497 10.614.386.247 20.377.149.061PRESENT VALUE OF $1A fixed amoun

18、t of cash to be received at some future time become less valuable as interest rate increase and the time period increased20第20頁(yè)，共85頁(yè)。AnnuitiesAn Annuity represents a series of equal payments (or receipts) occurring over a specified number of equidistant periods.Ordinary Annuity: Payments or receipts

19、 occur at the end of each period.Annuity Due: Payments or receipts occur at the beginning of each period.21第21頁(yè)，共85頁(yè)。Examples of Annuities Student Loan Payments Car Loan Payments Mortgage Payments Retirement Savings22第22頁(yè)，共85頁(yè)。Parts of an Annuity0 1 2 3 $100 $100 $100(Ordinary Annuity)End ofPeriod 1

20、End ofPeriod 2TodayEqual Cash Flows Each 1 Period ApartEnd ofPeriod 323第23頁(yè)，共85頁(yè)。PVAn = R (PVIFAi%,n) PVA3 = $1,000 (PVIFA7%,3)= $1,000 (2.624) = $2,624Valuation Using Table IV24第24頁(yè)，共85頁(yè)。Approaches to Capital BudgetingOrganizations have developed many approaches to capital budgetingfive approaches

21、are discussed here:PaybackAccounting rate of returnNet present valueInternal rate of returnProfitability indexDCF focus on expected cashflows and TVM 25第25頁(yè)，共85頁(yè)。NPV:Sum of the PVs of inflows and outflows.Cost often is CF0 and is negative.Net Present Value26第26頁(yè)，共85頁(yè)。27第27頁(yè)，共85頁(yè)。Net Present Value (1

22、 of 4)The steps used to compute an investments net present value are as follows:Step 1: Choose the appropriate period length to evaluate the investment proposalThe period length depends on the periodicity of the investments cash flowsThe most common period used in practice is one yearStep 2: Identif

23、y the organizations cost of capital, and convert it to an appropriate rate of return for the period length chosen in step 128第28頁(yè)，共85頁(yè)。Cost of CapitalThe cost of capital is the interest rate used for discounting future cash flowsAlso known as the risk-adjusted discount rateThe cost of capital is the

24、 return the organization must earn on its investment to meet its investors return requirementsThe organizations cost of capital reflects:The amount and cost of debt and equity in its financial structure (WACC)The financial markets perception of the financial risk of the organizations activities29第29

25、頁(yè)，共85頁(yè)。Net Present Value (2 of 4)Step 3: Identify the incremental cash flow in each period of the projects life. Step 4: Compute the present value of each periods cash flow using the organizations cost of capital for the discount rateStep 5: Sum the present values of all the periodic cash inflows an

26、d outflows to determine the investment projects net present valueStep 6: If the projects net present value is positive, the project is acceptable from an economic perspective30第30頁(yè)，共85頁(yè)。Typical Cash OutflowsRepairs andmaintenanceIncrementaloperatingcostsInitialinvestmentWorkingcapital31第31頁(yè)，共85頁(yè)。Typ

27、ical Cash InflowsReductionof costsSalvagevalueIncrementalrevenuesRelease ofworkingcapital32第32頁(yè)，共85頁(yè)。General decision rule . . .The Net Present Value Method33第33頁(yè)，共85頁(yè)。The Net Present Value (NPV) Criterion - ExampleA company can purchase a machine for $2200. The machine has a productive life of thre

28、e years.It will generate net cash flows of $770 in the first year, $968 in the second, and $1331 in the third. If the firm does not buy this machine, it can invest its money elsewhere and earn a return of 10%.Should the machine be bought? 34第34頁(yè)，共85頁(yè)。The Net Present Value (NPV) Criterion - ExampleSo

29、, we calculate the NPV using the PV of estimated cash flows.35第35頁(yè)，共85頁(yè)。The Net Present Value (NPV) Criterion - ExampleIn this case, the NPV is positive.This means the investment should be undertaken.36第36頁(yè)，共85頁(yè)。Quick Check DataDenny Associates has been offered a four-year contract to supply the com

30、puting requirements for a local bank.The working capital would be released at the end of the contract.Denny Associates requires a 14% return.37第37頁(yè)，共85頁(yè)。Quick Check What is the net present value of the contract with the local bank?a. $150,000b. $ 28,230c. $ 92,340d. $132,91638第38頁(yè)，共85頁(yè)。 What is the

31、net present value of the contract with the local bank?a. $150,000b. $ 28,230c. $ 92,340d. $132,916Quick Check 39第39頁(yè)，共85頁(yè)。Comparison of Two ProjectsTwo common methods forcomparing alternatives are:Total projectapproachDifferentialapproach40第40頁(yè)，共85頁(yè)。Total Project ApproachThe total project approach c

32、omputes thetotal impact on cash flows for eachalternative and then converts thesetotal cash flows to their present values.The alternative with the largest NPV of total cash flows is best.41第41頁(yè)，共85頁(yè)。Differential ApproachThe differential approach computesthe differences in cash flows betweenalternati

33、ves and then converts thesedifferences to their present values.This method cannot be used tocompare more than two alternatives.42第42頁(yè)，共85頁(yè)。43第43頁(yè)，共85頁(yè)。Good Attributes of the NPV Rule1. Uses cash flows2. Uses ALL cash flows of the project3. Discounts ALL cash flows properlyReinvestment assumption: th

34、e NPV rule assumes that all cash flows can be reinvested at the discount rate.44第44頁(yè)，共85頁(yè)。 “Sales is vanity, profit is necessary, but cash is king”45第45頁(yè)，共85頁(yè)。Sounds goodMy sales have grown by 5% over the last few yearsMy business makes a profit of xm per year the banks and investors need thisBut .4

35、6第46頁(yè)，共85頁(yè)。Cash ControlCash is the lifeblood of any business. It is essential to enable the business to carry out day to day transactionsAn organisation can make a profit but without a sustainable flow can be in danger of going into liquidationA business should continue to drive cash generation in o

36、rder to sustain business operations and to fund future growthPoor cash flow limits opportunities and/ or options, can leave little room to respond to threats Cash is often the first sign of deterioration and send signals to stakeholders47第47頁(yè)，共85頁(yè)。Effect of TaxesThe effect of taxes on capital budget

37、ing is two-fold:Organizations must pay taxes on any net benefits provided by the investments.Organizations can use the depreciation associated with a capital investment to reduce income and offset some of their taxes.So,analysis of capital budgeting requires converting all pretax cash flows to after

38、-tax cash flows. 48第48頁(yè)，共85頁(yè)。Effects of Depreciation DeductionsDepreciation expense is a noncash expense andso is ignored for capital budgeting, except thatit is an expense for tax purposes and so willprovide a cash inflow from income tax savings(depreciation tax shields)TAX49第49頁(yè)，共85頁(yè)。we show how c

39、ash flows are related to accounting numbers and taxes. Define the net cash flow generated by certain assets as: Net Cash Flow = Cash Inflow - Cash Outflow = Revenue - Expenses - Capital Expenditure - Taxes The income tax paid is determined by: Taxes = t*(Revenue - Expenses - Depreciation)Net Cash fl

40、ow = (1-t)*(Revenue Expenses) + t*Depreciation50第50頁(yè)，共85頁(yè)。51第51頁(yè)，共85頁(yè)。52第52頁(yè)，共85頁(yè)。Joshua Manufacturing Company (JMC) is considering buying some new equipment that would allow for increased sales of its product. The incremental impact of the proposed $280,000 investment is shown below using straight-

41、line depreciation and an expected useful life of four years for the equipment. The company has a minimum desired rate of return of 14%.Revenues$420,000Nondepreciation expenses$240,000Depreciation 70,000Total expenses$310,000Taxable income$110,000Income tax (40%) 44,000Net Income$ 66,00053第53頁(yè)，共85頁(yè)。1

42、. The annual cash inflows expected from the project are:a. $80,000 b. $68,000c. $136,000d. $108,0002. The present value of the tax savings from straight-line depreciation is:a. $100,000 b. $81,584 c. $28,274d. $03. The NPV of the investment using straight-line depreciation is:a. ($280,000) b. ($1,86

43、8.40)c. $396,264d. $116,264.54第54頁(yè)，共85頁(yè)。 1. cThe easiest way to compute the cash flows generated by the investment is to add the depreciation back to the net income. In this case, $70,000 + $68,000 = $136,000. Alternatively, one could add the after-tax cash flows from operations to the tax savings r

44、esulting from the depreciation expense. Here, $108,000 ($420,000 - $240,000) x (1 - .40) + $28,000 $70,000 x .40 also gives $136,000 in total after-tax cash flows.55第55頁(yè)，共85頁(yè)。2. bThe annual tax savings from depreciation are $28,000 $70,000 x .40. The present value of the savings is computed by multi

45、plying the $28,000 by the present value factor for an annuity for four years at 14% of 2.9137. The result is $81,584.56第56頁(yè)，共85頁(yè)。Inflation effectsInflationThe decline in the general purchasing power of the power of the monetary unit.ConsistencyConsistent treatment of the minimum desired rate of retu

46、rn and the predicted cash flows. 57第57頁(yè)，共85頁(yè)。Other methods of analysis58第58頁(yè)，共85頁(yè)。Internal Rate of ReturnThe internal rate of return (IRR) is the actual rate of return expected from an investmentThe IRR is the discount rate that makes the investments net present value equal to zeroIf an investments

47、NPV is positive, then its IRR exceeds its cost of capitalIf an investments NPV is negative, then its IRR is less than its cost of capital59第59頁(yè)，共85頁(yè)。Calculating the IRRLet a projects cash flow be C1, C2, C3, CN.Let the initial cost of the project be C0.Then, the IRR is r in the following equation:60

48、第60頁(yè)，共85頁(yè)。Calculating the IRRTwo casesLevel cash inflows(the same amount each year) uneven inflows61第61頁(yè)，共85頁(yè)。Internal Rate of Return MethodDecker Company can purchase a new machine at a cost of $104,320 that will save $20,000 per year in cash operating costs. The machine has a 10-year life.62第62頁(yè)，共

49、85頁(yè)。Internal Rate of Return MethodFuture cash flows are the same every year in this example, so we can calculate the internal rate of return as follows: Investment required Net annual cash flowsPV factor for theinternal rate of return= $104, 320 $20,000= 5.216Investment/inflow ratio63第63頁(yè)，共85頁(yè)。Inter

50、nal Rate of Return MethodFind the 10-period row, move across until you find the factor 5.216. Look at the top of the column and you find a rate of 14%.Using the present value of an annuity of $1 table . . .64第64頁(yè)，共85頁(yè)。Uneven cash inflowsConsider the following project:0123$50$100$150-$20065第65頁(yè)，共85頁(yè)。

51、Calculating the IRRThe equation cannot be solved for r. We can use a trial and error approach.Or we could use “solver” or “goal seek” in Excel.66第66頁(yè)，共85頁(yè)。The NPV Payoff Pro This ExampleIf we graph NPV versus discount rate, we can see the IRR as the x-axis intercept.IRR = 19.44%67第67頁(yè)，共85頁(yè)。The IRR D

52、ecision RuleMinimum Acceptance Criteria for screening problem: Accept if the IRR exceeds the required return.Ranking Criteria for preference problemsSelect alternative with the highest IRR68第68頁(yè)，共85頁(yè)。The Payback MethodThe payback period is the length of time that it takes for a project to recover it

53、s initial cost out of the cash receipts that it generates. Payback Period = number of years to recover initial costs69第69頁(yè)，共85頁(yè)。When the net annual cash inflow is the same each year, this formula can be used to compute the payback period:When the net annual cash inflow is not constant from year to y

54、ear, the payback period is determined by adding up the cash inflows expected in successive years until the total is equal to the original outlay. The Payback MethodPayback period = Investment required Net annual cash inflow70第70頁(yè)，共85頁(yè)。Decision criterionThe payback method assumes that risk is time-re

55、lated: the longer the period,the greater the chance of failure,so:When projects are mutually exclusive, accept the project with shortest payback period.Or accept the proposal which payback period is less the target period (which is determined by companys policy) .71第71頁(yè)，共85頁(yè)。The Payback Method Manag

56、ement at The Daily Grind wants to install an espresso bar in its restaurant. The espresso bar:Costs $140,000 and has a 10-year life.Will generate net annual cash inflows of $35,000. Management requires a payback period of 5 years or less on all investments.What is the payback period for the espresso

57、 bar?72第72頁(yè)，共85頁(yè)。The Payback MethodPayback period = Investment required Net annual cash inflowPayback period = $140,000 $35,000Payback period = 4.0 yearsAccording to the companys criterion, management would invest in the espresso bar because its payback period is less than 5 years.73第73頁(yè)，共85頁(yè)。Quick

58、Check Consider the following two investments:Project XProject YInitial investment$100,00$100,000Year 1 cash inflow$60,000$60,000Year 2 cash inflow$40,000$35,000Year 3-10 cash inflows$0$25,000Which project has the shortest payback period?a. Project Xb. Project Yc. Cannot be determined74第74頁(yè)，共85頁(yè)。 Con

59、sider the following two investments:Project XProject YInitial investment$100,00$100,000Year 1 cash inflow$60,000$60,000Year 2 cash inflow$40,000$35,000Year 3-10 cash inflows$0$25,000Which project has the shortest payback period?a. Project Xb. Project Yc. Cannot be determinedQuick Check Project X has

60、 a payback period of 2 years.Project Y has a payback period of slightly more than 2 years.Which project do you think is better?75第75頁(yè)，共85頁(yè)。Strengths of Payback:1.Provides an indication of a projects risk and liquidity.2.Easy to calculate and understand.Weaknesses of Payback:1.Ignores the TVM.2.Ignor