英文版 finance Ch6std.ppt

Capital Budgeting For 9.220 Outline Introduction Net Present Value (NPV) Payback Period Rule (PP) Discounted Payback Period Rule Average Accounting Return (AAR) Internal Rate of Return Rule (IRR) Profitability Index Rule (PI) Special Situations Mutually Exclusive, Differing Scales Capital Rationing Summary and Conclusions Recall the Flows of funds and decisions important to the financial manager Introduction Capital Budgeting is the process of determining which real investment projects should be accepted and given an allocation of funds from the firm. To evaluate capital budgeting processes, their consistency with the goal of shareholder wealth maximization is of utmost importance. Capital Budgeting Mutually Exclusive versus Independent Project Mutually Exclusive Projects: only ONE of several potential projects can be chosen, e.g. acquiring an accounting system. RANK all alternatives and select the best one. Independent Projects: accepting or rejecting one project does not affect the decision of the other projects. Must exceed a MINIMUM acceptance criteria. NPV: Strengths and Weaknesses Strengths Resulting number is easy to interpret: shows how wealth will change if the project is accepted. Acceptance criteria is consistent with shareholder wealth maximization. Relatively straightforward to calculate Weaknesses An improper NPV analysis may lead to the wrong choices of projects when the firm has capital rationing – this will be discussed later. The Payback Period Rule How long does it take the project to “pay back” its initial investment? Payback Period = # of years to recover costs of project Minimum Acceptance Criteria: set by management Ranking Criteria: set by management Discounted Payback - An Example Initial outlay -$1,000 r = 10% PV of Year Cash flow Cash flow 1 $ 200 $ 182 2 400 331 3 700 526 4 300 205 Accumulated Year discounted cash flow 1 $ 182 2