ch11thebasicsofcapitalbudgeting(财务管理,英文版).pptVIP

What is capital budgeting? Analysis of potential additions to fixed assets. Long-term decisions; involve large expenditures. Very important to firm’s future. Steps 1. Estimate CFs (inflows outflows). 2. Assess riskiness of CFs. 3. Determine k = WACC (adj.). 4. Find NPV and/or IRR. 5. Accept if NPV 0 and/or IRR WACC. What is the difference between independent and mutually exclusive projects? Projects are: independent, if the cash flows of one are unaffected by the acceptance of the other. mutually exclusive, if the cash flows of one can be adversely impacted by the acceptance of the other. An Example of Mutually Exclusive Projects Normal Cash Flow Project: What is the payback period? Payback for Project L(Long: Large CFs in later years) Project S (Short: CFs come quickly) What’s Project L’s NPV? Calculator Solution Rationale for the NPV Method Using NPV method, which project(s) should be accepted? If Projects S and L are mutually exclusive, accept S because NPVs NPVL . If S L are independent, accept both; NPV 0. Internal Rate of Return: IRR What’s Project L’s IRR? Rationale for the IRR Method IRR Acceptance Criteria If IRR k, accept project. If IRR k, reject project. Decisions on Projects S and L per IRR If S and L are independent, accept both. IRRs k = 10%. If S and L are mutually exclusive, accept S because IRRS IRRL . Construct NPV Profiles To Find the Crossover Rate Two Reasons NPV Profiles Cross Reinvestment Rate Assumptions NPV assumes reinvest at k (opportunity cost of capital). IRR assumes reinvest at IRR. Reinvest at opportunity cost, k, is more realistic, so NPV method is best. NPV should be used to choose between mutually exclusive projects. Managers like rates--prefer IRR to NPV comparisons. Can we give them a better IRR? Why use MIRR versus IRR? Pavilion Project: NPV and IRR? Logic of Multiple IRRs Accept Project P? Yes, MIRR is the discount rate that causes the PV of a project’s terminal value (TV) to equal the PV of costs. TV i