Chapter 9 Net Present Value and Other Investment Criteria,McGraw-Hill/Irwin,Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.,Key Concepts and Skills,Be able to compute payback and discounted payback and understand their shortcomings Understand accounting rates of return and their shortcomings Be able to compute internal rates of return (standard and modified) and understand their strengths and weaknesses Be able to compute the net present value and understand why it is the best decision criterion Be able to compute the profitability index and understand its relation to net present value,9-2,Chapter Outline,Why Use Net Present Value? 净现值法NPV The Payback Period Method 投资回收期法PP The Discounted Payback Period Method折现回收期法 The Average Accounting Return Method 平均会计收益率法AAR The Internal Rate of Return 内含报酬率法IRR Problems with the IRR Approach The Profitability Index 获利指数法PI The Practice of Capital Budgeting,Good Decision Criteria,We need to ask ourselves the following questions when evaluating capital budgeting decision rules: Does the decision rule adjust for the time value of money? Does the decision rule adjust for risk? Does the decision rule provide information on whether we are creating value for the firm?,9-4,Net Present Value,The difference between the market value of a project and its cost How much value is created from undertaking an investment? The first step is to estimate the expected future cash flows. The second step is to estimate the required return for projects of this risk level. The third step is to find the present value of the cash flows and subtract the initial investment.,9-5,Project Example Information,You are reviewing a new project and have estimated the following cash flows: Year 0:CF = -165,000 Year 1:CF = 63,120; NI = 13,620 Year 2:CF = 70,800; NI = 3,300 Year 3:CF = 91,080; NI = 29,100 Average Book Value = 72,000 Your required return for assets of this risk level is 12%.,9-6,NPV Decision Rule,If the NPV is positive, accept the project A positive NPV means that the project is expected to add value to the firm and will therefore increase the wealth of the owners. Since our goal is to increase owner wealth, NPV is a direct measure of how well this project will meet our goal.,9-7,Computing NPV for the Project,Using the formulas: NPV = -165,000 + 63,120/(1.12) + 70,800/(1.12)2 + 91,080/(1.12)3 = 12,627.41 Using the calculator: CF0 = -165,000; C01 = 63,120; F01 = 1; C02 = 70,800; F02 = 1; C03 = 91,080; F03 = 1; NPV; I = 12; CPT NPV = 12,627.41 Do we accept or reject the project?,9-8,Decision Criteria Test - NPV,Does the NPV rule account for the time value of money? Does the NPV rule account for the risk of the cash flows? Does the NPV rule provide an indication about the increase in value? Should we consider the NPV rule for our primary decision rule?,9-9,Calculating NPVs with a Spreadsheet,Spreadsheets are an excellent way to compute NPVs, especially when you have to compute the cash flows as well. Using the NPV function The first component is the required return entered as a decimal The second component is the range of cash flows beginning with year 1 Subtract the initial investment after computing the NPV NPV 使用 Value1,Value2, 的顺序来解释现金流的顺序。所以务必保证支出和收入的数额按正确的顺序输入。假设都在期末发生。,9-10,Payback Period 回收期法,How long does it take to get the initial cost back in a nominal sense? 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,9-11,Computing Payback for the Project,Assume we will accept the project if it pays back within two years. Year 1: 165,000 63,120 = 101,880 still to recover Year 2: 101,880 70,800 = 31,080 still to recover Year 3: 31,080 91,080 = -60,000 project pays back in year 3 Do we accept or reject the project?,9-12,Decision Criteria Test - Payback,Does the payback rule account for the time value of money? Does the payback rule account for the risk of the cash flows? Does the payback rule provide an indication about the increase in value? Should we consider the payback rule for our primary decision rule?,9-13,Advantages and Disadvantages of Payback,Advantages Easy to understand Adjusts for uncertainty of later cash flows Biased toward liquidity,Disadvantages Ignores the time value of money Requires an arbitrary cutoff point Ignores cash flows beyond the cutoff date Biased against long-term projects, such as research and development, and new projects,9-14,Discounted Payback Period贴现的回收期法,Compute the present value of each cash flow and then determine how long it takes to pay back 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,9-15,Computing Discounted Payback for the Project,Assume we will accept the project if it pays back on a discounted basis in 2 years. Compute the PV for each cash flow and determ