bma9e06 Why Net Present Value Leads to Better Investment Decisions Than Other Criteria Principles of Corporate Finance 9th Edition 公司金融教学课件.pptVIP

* * * * * * * * Copyright ? 2008 by The McGraw-Hill Companies, Inc. All rights reserved 6- * McGraw Hill/Irwin Chapter 6 Principles of Corporate Finance Ninth Edition Why Net Present Value Leads to Better Investment Decisions Than Other Criteria Slides by Matthew Will Copyright ? 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin Topics Covered A Review of The Basics NPV and its Competitors The Payback Period The Book Rate of Return Internal Rate of Return Capital Rationing NPV and Cash Transfers Every possible method for evaluating projects impacts the flow of cash about the company as follows. Cash Investment opportunity (real asset) Firm Shareholder Investment opportunities (financial assets) Invest Alternative: pay dividend to shareholders Shareholders invest for themselves CFO Decision Tools Survey Data on CFO Use of Investment Evaluation Techniques SOURCE: Graham and Harvey, “The Theory and Practice of Finance: Evidence from the Field,” Journal of Financial Economics 61 (2001), pp. 187-243. Book Rate of Return Book Rate of Return - Average income divided by average book value over project life. Also called accounting rate of return. Managers rarely use this measurement to make decisions. The components reflect tax and accounting figures, not market values or cash flows. Payback The payback period of a project is the number of years it takes before the cumulative forecasted cash flow equals the initial outlay. The payback rule says only accept projects that “payback” in the desired time frame. This method is flawed, primarily because it ignores later year cash flows and the the present value of future cash flows. Payback Example Examine the three projects and note the mistake we would make if we insisted on only taking projects with a payback period of 2 years or less. Payback Example Examine the three projects and note the mistake we would make if we insisted on only taking projects with a payback period of 2 year