财务管理英文Chapter13.pptVIP

Chapter 13 Capital Budgeting Techniques Chapter Objectives Discuss the various investment evaluation techniques, including their advantages and disadvantages. Apply these techniques to the evaluation of projects. Interpret the results of the application of these techniques in accordance with their respective decision rules. Project Evaluation: Alternative Methods Payback Period (PP) Internal Rate of Return (IRR) Net Present Value (NPV) Profitability Index (PI) Independent Project Independent -- A project whose acceptance (or rejection) does not prevent the acceptance of other projects under consideration. Payback Period PP is the period of time required for the cumulative expected cash flows from an investment project to equal the initial cash outflow. Computation Estimate the cash flows Subtract the future cash flows from the initial cost until the initial investment has been recovered Decision Rule – Accept if the payback period is less than some preset limit Payback Period Illustrated Payback Period Illustrated (con.) Advantages of Payback Period No need for detailed analysis. Simple to calculate and understand. Adjusts for uncertainty of later cash flows. Biased towards liquidity. Disadvantages of Payback Period Time value of money and risk ignored. Ad hoc determination of acceptable payback period. Ignores cash flows beyond the cut-off date. Biased against long-term and new projects. Discounted Payback Period Defined as the time it takes to recover the initial cash outlay (IO) on a present value basis Compute the present value of each cash flow and then determine how long it takes to payback on a discounted basis Compare to a specified required period Decision Rule - Accept the project if it pays back on a discounted basis within the specified time Discounted Payback Example Ordinary Discounted Payback Advantages and Disadvantages of Discounted Payback Advantages Includes time value of money Easy to understand Does not accept negative estimated