Содержание
- 2. Lecture 5. Investment criteria
- 3. How should a firm make an investment decision What assets do we buy? What is the
- 4. Capital Budgeting: The process of planning for purchases of long-term assets. Example: Suppose our firm must
- 5. Decision-making Criteria in Capital Budgeting How do we decide if a capital investment project should be
- 6. Decision-making Criteria in Capital Budgeting The ideal evaluation method should: include all cash flows that occur
- 7. Decision-making Criteria in Capital Budgeting Firms invest in 2 categories of projects: Independent projects – do
- 8. Techniques in Capital Budgeting Payback period Discounted Payback Period Net Present Value (NPV) Profitability Index (PI)
- 9. 1) Payback Period The payback method simply measures how long (in years and/or months) it takes
- 10. How long will it take for the project to generate enough cash to pay for itself?
- 11. Bennett Company is a medium sized metal fabricator that is currently contemplating two projects: Project A
- 12. Example (cont.)
- 13. Payback Period Project A Year Cash flow 1 $14,000 2 $14,000 3 $14,000 4 $14,000 5
- 14. Payback Period Project B Year Cash flow 1 $28,000 2 $12,000 3 $10,000 4 $10,000 5
- 15. Payback Period Is the payback period good? Is it acceptable? Firms that use this method will
- 16. Pros and Cons of Payback Periods The payback method is widely used by large firms to
- 17. Pros and Cons of Payback Periods (cont.) One major weakness of the payback method is that
- 18. 2) Discounted Payback Period The number of years needed to recover initial cash outlay from the
- 19. Discounted Payback Period Year Free Cash Discounted Flow CF (14%) 0 -500 1 250 219.30 2
- 20. Discounted Payback Period Discounted payback period is 2.52 years. Is it acceptable? ACCEPT if discounted payback
- 21. Discounted Payback Period Advantages: Uses free cash flows Easy to calculate and to understand Considers time
- 22. Other Methods 3) Net Present Value (NPV) 4) Profitability Index (PI) 5) Internal Rate of Return
- 23. 3) Net Present Value (NPV) Gives an absolute dollar value for a project by taking the
- 24. Net Present Value (NPV) Decision rule : ACCEPT if NPV is positive { NPV > 0
- 25. Find the PV for every cash flows discounted @ the investors required rate of return Sum
- 26. NPV Example Suppose we are considering a capital investment that costs $250,000 and provides annual net
- 27. NPV Example Suppose we are considering a capital investment that costs $250,000 and provides annual net
- 28. NPV = 100,000 100,000 100,000 (1.15)1 (1.15)2 (1.15)3 100,000 100,000 (1.15)4 (1.15)5 = 335215.50 – 250,000
- 29. n = 5 k = 15% PMT = 100,000 PV of cash flows = 100,000 (PVIFA15%,5)
- 30. Net Present Value Advantages: Uses free cash flows Recognizes the time value of money Consistent with
- 31. Also known as profit and cost ratio, i.e benefit/costs Compares the benefits and costs of a
- 32. Profitability Index (PI) Decision rule : ACCEPT if PI is greater than or equal to one
- 33. Profitability Index Advantages: Uses free cash flows Recognizes the time value of money Consistent with the
- 34. Emerald Corp. is considering an investment with a cost of $350,000 and future benefits of $100,000
- 35. The discount rate that equates the present value of the project’s future free cash flows with
- 36. IRR is the rate of return that makes the PV of the cash flows equal to
- 37. Calculating IRR Bennett Company is a medium sized metal fabricator that is currently contemplating two projects:
- 38. Solution: -$42,000 $14,000 $14,000 $14,000 $14,000 $14,000 -$45,000 $28,000 $12,000 $10,000 $10,000 $10,000 $45,000 NPVB= $
- 39. Method: trial and error Choose one rate and calculate the NPV using that rate. If your
- 40. Solution: -$42,000 $14,000 $14,000 $14,000 $14,000 $14,000 NPVA= $ 0 $42,000 IRR = ? Project A
- 41. Solution: -$42,000 $14,000 $14,000 $14,000 $14,000 $14,000 NPVA= $ 0 $42,000 IRR = ? Project A
- 42. Solution: -$42,000 $14,000 $14,000 $14,000 $14,000 $14,000 NPVA= $ 0 $42,000 IRR = ? Project A
- 43. Solution: -$45,000 $28,000 $12,000 $10,000 $10,000 $10,000 $45,000 NPVB= $ 0 IRR = ? IRR =
- 44. Solution: -$45,000 $28,000 $12,000 $10,000 $10,000 $10,000 $45,000 NPVB= $ 0 IRR = ? IRR =
- 45. Solution: -$45,000 $28,000 $12,000 $10,000 $10,000 $10,000 $45,000 NPVB= $ 0 IRR = ? IRR =
- 46. Solution: -$45,000 $28,000 $12,000 $10,000 $10,000 $10,000 Project B Step 3 - Once you get one
- 47. Internal Rate of Return Advantages: Uses free cash flows Recognizes the time value of money Consistent
- 48. IRR is a good decision-making tool as long as cash flows are conventional. (- + +
- 49. Modified Internal Rate of Return (MIRR) IRR assumes that all cash flows are reinvested at the
- 50. Modified Internal Rate of Return (MIRR)
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