CH11TheBasicsofCapitalBudgeting(財(cái)務(wù)管理,英文版)

Shouldwebuildthisplant?CHAPTER11

TheBasicsofCapitalBudgetingWhatiscapitalbudgeting?Analysisofpotentialadditionstofixedassets.Long-termdecisions;involvelargeexpenditures.Veryimportanttofirm’sfuture.Steps1.EstimateCFs(inflows&outflows).2.AssessriskinessofCFs.3.Determinek=WACC(adj.).4.FindNPVand/orIRR.5.AcceptifNPV>0and/orIRR>WACC.Whatisthedifferencebetweenindependentandmutuallyexclusiveprojects?Projectsare:

independent,ifthecashflowsofoneareunaffectedbytheacceptanceoftheother.

mutuallyexclusive,ifthecashflowsofonecanbeadverselyimpactedbytheacceptanceoftheother.AnExampleofMutuallyExclusiveProjectsBRIDGEvs.BOATtogetproductsacrossariver.NormalCashFlowProject:Cost(negativeCF)followedbyaseriesofpositivecashinflows.Onechangeofsigns.NonnormalCashFlowProject:Twoormorechangesofsigns.Mostcommon:Cost(negativeCF),thenstringofpositiveCFs,thencosttocloseproject.Nuclearpowerplant,stripmine.Inflow(+)orOutflow(-)inYear012345NNN-+++++N-++++-NN---+++N+++---N-++-+-NNWhatisthepaybackperiod?Thenumberofyearsrequiredtorecoveraproject’scost,orhowlongdoesittaketogetourmoneyback?PaybackforProjectL

(Long:LargeCFsinlateryears)10600123-100=CFtCumulative-100-90-3050PaybackL2 + 30/80 =2.375years01002.480ProjectS(Short:CFscomequickly)7020500123-100CFtCumulative-100-302040PaybackL1+30/50 =1.6years10001.6=StrengthsofPayback:1. Providesanindicationofaproject’sriskandliquidity.2. Easytocalculateandunderstand.WeaknessesofPayback:1. IgnorestheTVM.2. IgnoresCFsoccurringafterthepaybackperiod.DiscountedPayback:UsesdiscountedratherthanrawCFs.1080600123CFtCumulative-100-90.91-41.3218.79Discountedpayback2+41.32/60.11=2.7yearsPVCFt-100-10010%9.0949.5960.11=Recoverinvest.+cap.costsin2.7years.NPV: SumofthePVsofinflowsandoutflows.What’sProjectL’sNPV?108060012310%ProjectL:-100.009.0949.5960.1118.79=NPVLNPVS=$19.98.CalculatorSolutionEnterinCFLOforL:-10010608010CF0CF1NPVCF2CF3I=18.78=NPVLRationalefortheNPVMethodNPV =PVinflows–Cost =Netgaininwealth.AcceptprojectifNPV>0.ChoosebetweenmutuallyexclusiveprojectsonbasisofhigherNPV.Addsmostvalue.UsingNPVmethod,whichproject(s)shouldbeaccepted?IfProjectsSandLaremutuallyexclusive,acceptSbecauseNPVs>NPVL.IfS&Lareindependent,acceptboth;NPV>0.InternalRateofReturn:IRR0123CF0CF1CF2CF3CostInflowsIRRisthediscountratethatforcesPVinflows=cost.ThisisthesameasforcingNPV=0.NPV:Enterk,solveforNPV.IRR:EnterNPV=0,solveforIRR.What’sProjectL’sIRR?1080600123IRR=?-100.00PV3PV2PV10=NPVEnterCFsinCFLO,thenpressIRR:IRRL=18.13%.IRRS=23.56%.4040400123IRR=?FindIRRifCFsareconstant:-100Or,withCFLO,enterCFsandpressIRR=9.70%. 3 -100 400

9.70%INPUTSOUTPUTNI/YRPVPMTFV9010909001210IRR=?Q. Howisaproject’sIRR relatedtoabond’sYTM?A. Theyarethesamething. Abond’sYTMistheIRR ifyouinvestinthebond.-1134.2IRR=7.08%(useTVMorCFLO)....RationalefortheIRRMethodIfIRR>WACC,thentheproject’srateofreturnisgreaterthanitscost--somereturnisleftovertobooststockholders’returns.Example: WACC=10%,IRR=15%. Profitable.IRRAcceptanceCriteriaIfIRR>k,acceptproject.IfIRR<k,rejectproject.DecisionsonProjectsSandLperIRRIfSandLareindependent,acceptboth.IRRs>k=10%.IfSandLaremutuallyexclusive,acceptSbecauseIRRS>IRRL.ConstructNPVProfilesEnterCFsinCFLOandfindNPVLandNPVSatdifferentdiscountrates:k

05101520NPVL5033197(4

NPVS402920125

(4)-100102030405060510152023.6NPV($)DiscountRate(%)IRRL=18.1%IRRS=23.6%CrossoverPoint=8.7%k

05101520NPVL5033197(4)

NPVS402920125

SL...........NPVandIRRalwaysleadtothesameaccept/rejectdecisionforindependentprojects:k>IRRandNPV<0.Reject.NPV($)k(%)IRRIRR>kandNPV>0Accept.MutuallyExclusiveProjectsk8.7kNPV%IRRSIRRLLSk<8.7:NPVL>NPVS,IRRS>IRRLCONFLICTk>8.7:NPVS>NPVL,IRRS>IRRLNOCONFLICTToFindtheCrossoverRate1. Findcashflowdifferencesbetweentheprojects.Seedataatbeginningofthecase.2. EnterthesedifferencesinCFLOregister,thenpressIRR.Crossoverrate=8.68%,roundedto8.7%.3. CansubtractSfromLorviceversa,butbettertohavefirstCFnegative.4. Ifprofilesdon’tcross,oneprojectdominatestheother.TwoReasonsNPVProfilesCross1. Size(scale)differences.Smallerprojectfreesupfundsatt=0forinvestment.Thehighertheopportunitycost,themorevaluablethesefunds,sohighkfavorssmallprojects.2. Timingdifferences.ProjectwithfasterpaybackprovidesmoreCFinearlyyearsforreinvestment.Ifkishigh,earlyCFespeciallygood,NPVS>NPVL.ReinvestmentRateAssumptionsNPVassumesreinvestatk(opportunitycostofcapital).IRRassumesreinvestatIRR.Reinvestatopportunitycost,k,ismorerealistic,soNPVmethodisbest.NPVshouldbeusedtochoosebetweenmutuallyexclusiveprojects.Managerslikerates--preferIRRtoNPVcomparisons.CanwegivethemabetterIRR?Yes,MIRRisthediscountratethatcausesthePVofaproject’sterminalvalue(TV)toequalthePVofcosts.TVisfoundbycompoundinginflowsatWACC.Thus,MIRRassumescashinflowsarereinvestedatWACC.MIRR=16.5%10.080.060.0012310%66.012.1158.1MIRRforProjectL(k=10%)-100.010%10%TVinflows-100.0PVoutflowsMIRRL=16.5%

$100=$158.1(1+MIRRL)3TofindTVwithHP10B,enterinCFLO:I=10NPV=118.78=PVofinflows.EnterPV=-118.78,N=3,I=10,PMT=0.PressFV=158.10=FVofinflows.EnterFV=158.10,PV=-100,PMT=0,N=3.PressI=16.50%=MIRR.CF0=0,CF1=10,CF2=60,CF3=80WhyuseMIRRversusIRR?MIRRcorrectlyassumesreinvestmentatopportunitycost=WACC.MIRRalsoavoidstheproblemofmultipleIRRs.Managerslikerateofreturncomparisons,andMIRRisbetterforthisthanIRR.PavilionProject:NPVandIRR?5,000-5,000012k=10%-800EnterCFsinCFLO,enterI=10.NPV=-386.78IRR=ERROR.Why?WegotIRR=ERRORbecausethereare2IRRs.NonnormalCFs--twosignchanges.Here’sapicture:NPVProfile450-8000400100IRR2=400%IRR1=25%kNPVLogicofMultipleIRRs1. Atverylowdiscountrates,t