Capital Budgeting(高级公司财务-资金时间价值-英文版课件).ppt

The Payback Method The number of years it takes to recover the initial cash outlay on a project Project is accepted if it pays back on or before the company’s ‘cut off’ payback period The payback method fails to take all project cash flows into account It also fails to consider the time value of money – this shortcoming is overcome by applying the discounted payback method * The Payback Method cntd. Self Assessment Question: Determine the payback periods for the following two projects and provide a brief comment on your answer. Year 0 1 2 3 4 5 C/flow (X) -1000 100 900 100 -100 -400 C/flow (Y) -1000 100 200 300 400 1250 * The Accounting Rate of Return (ARR) The ARR is the average after-tax profit divided by the initial cash outlay The project with a higher ARR is considered superior to a project with a lower ARR The ARR uses the accounting profit rather than cash flows and ignores the time value of money. * The Accounting Rate of Return (ARR) cntd Self Assessment Question: The following profits (losses) are reported for projects X and Y. Determine the ARR and provide a brief comment on your answer. Year 0 1 2 3 4 5 Profit (X) -1000 100 900 100 -100 -400 Profit (Y) -1000 100 200 300 400 1250 * Taxation in Investment Appraisal Project cash flows give rise to taxation which has an impact on project appraisal Capital allowances reduce the amount of tax organizations are required to pay and hence has to be considered in project appraisal The discount rate used for project appraisal is effectively an after tax figure and the actual interest payment on a borrowing is ignored (since it is already provided for in calculating the cost of capital) Where a tax loss arises in a project , it is assumed that there are sufficient tax profits elsewhere in the organisation to reduce the tax paid * Inflation and Project Evaluation Real cash flows are discounted by a real discount rate Nominal cash flows are discounted by a nominal discount r