1、成本预算英文版课件Capital BudgetingChapter 11 11-3Long-Term(Capital)Assets Capital assets are equipment or facilities that provide services to the organization for more than one fiscal period.Capital assets create these capacity-related costs11-4Need to Control Capital Assets Organizations have developed spe
2、cific tools to control the acquisition and use of long-term assets because:Organizations are usually committed to long-term assets for an extended time,creating the potential for Excess capacity that creates excess costs Scarce capacity that creates lost opportunitiesThe amount of money committed to
3、 the acquisition of capital assets is usually quite largeThe long-term nature of capital assets creates technological riskReduce an organizations flexibility11-5Meaning of Capital Budgeting Capital budgeting can be defined as the process of analyzing,evaluating,and deciding whether resources should
4、be allocated to a project or not.Capital budgeting has three phases:Identifying potential investments,Choosing which investments to make,andFollow-up monitoring of the investments.11-611-7Types of Capital Budgeting Decisions Should we add a new product to our existing product line?Should we expand i
5、nto a new market?Should we replace our existing machinery?Should we buy fully automatic or semiautomatic machinery Where to locate manufacturing facility?11-8Investment and Return Investment and return form the foundation of capital budgeting analysis,which focuses on whether the expected increased
6、cash flows(return)will justify the investment in the long-term asset Investment is the monetary value of the assets the organization gives up to acquire a long-term asset which are often called capital outlays.Return is the increased future cash inflows attributable to the long-term asset11-9Obvious
7、ly,.Money received sooner rather than later allows one to use the funds for investment or consumption purposes.This concept is referred to as the !The Time Value of MoneyWhich would you rather have-or 11-10Time Value of Money11-11Time Value of Money(1 of 2)Time value of money(TVM)is a central concep
8、t in capital budgeting In making investment decisions,the problem is that investment cash is paid out now,but the cash return is received in the futureWe need an equivalent basis to compare the cash flows that occur at different points in time11-12Time Value of Money(2 of 2)The critical idea underly
9、ing capital budgeting is:Amounts of money spent or received at different periods of time must be converted into their value on a common date in order to be compared11-13Some Standard Notation For simplicity,the following notation is used:Abbr.MeaningnFVPVarNumber of periods considered in the investm
10、ent analysis;common period lengths are a month,a quarter,or a yearFuture value,or ending value,of the investment n periods from nowPresent value,or the value at the current moment in time,of an amount to be received n periods from nowAnnuity,or equal amount,received or paid at the end of each period
11、 for n periodsRate of return required,or expected,from an investment opportunity;the rate of interest earned on an investment11-14Types of InterestInterest paid(earned)on any previous interest earned,as well as on the principal borrowed(lent).Interest paid(earned)on only the original amount,or princ
12、ipal borrowed(lent).SI =P0(1+i n)=P0(1+i)n11-15Present Value Analysts call a future cash flows value at time zero its present value The process of computing present value is called discounting We can rearrange the FV formula to compute the present value:FV=PV x(1+r)nPV=FV/(1+r)n or PV=FV x(1+r)-n Me
13、thods similar to those described earlier may be used to compute this valueCalculator,tables,or spreadsheet software11-16Assume that you need to have exactly saved 10 How much must you deposit today in an account that pays 6%interest,compounded annually,so that you reach your goal of$4,000?0 106%Pres
14、ent Value(Graphic)11-17 =/(1+i)10=/(1.06)10=Present Value (Formula)0 106%11-18Quick Check How much would you have to put in the bank today to have$100 at the end of five years if the interest rate is 10%?PV or FV?Table:_a.$62.10b.$56.70c.$90.90d.$51.9011-19 How much would you have to put in the bank
15、 today to have$100 at the end of five years if the interest rate is 10%?a.$62.10b.$56.70c.$90.90d.$51.90Quick Check 11-2000.20.40.60.811.202468101214161820 PRESENT VALUEYear 5%10%15%1.952.909.870 2.907.826.756 5.784.621.497 10.614.386.247 20.377.149.061PRESENT VALUE OF$111-2100.20.40.60.811.20246810
16、1214161820 PRESENT VALUEYear 5%10%15%1.952.909.870 2.907.826.756 5.784.621.497 10.614.386.247 20.377.149.061PRESENT VALUE OF$1A fixed amount of cash to be received at some future time become less valuable as interest rate increase and the time period increased11-22Annuities represents a series of eq
17、ual payments(or receipts)occurring over a specified number of equidistant periods.:Payments or receipts occur at the end of each period.:Payments or receipts occur at the beginning of each period.11-23Examples of Annuities Student Loan Payments Car Loan Payments Mortgage Payments Retirement Savings1
18、1-24Parts of an Annuity0 1 2 3$100$100$100(Ordinary Annuity)ofPeriod 1 ofPeriod 2Today Cash Flows Each 1 Period Apart ofPeriod 311-25=R(PVIFAi%,n)=$1,000(PVIFA7%,3)=$1,000(2.624)=Valuation Using Table IVPeriod6%7%8%10.9430.9350.92621.8331.8081.78332.6732.6242.57743.4653.3873.31254.2124.1003.99311-26
19、Approaches to Capital Budgeting Organizations have developed many approaches to capital budgeting five approaches are discussed here:PaybackAccounting rate of return Net present value Internal rate of return Profitability indexDCF focus on expected cashflows and TVM 11-27.10ttntrCFNPVNPV:Sum of the
20、PVs of inflows and outflows.Cost often is CF0 and is negative.101CFrCFNPVttntNet Present Value11-2811-29Net Present Value(1 of 4)The steps used to compute an investments net present value are as follows:Step 1:Choose the appropriate period length to evaluate the investment proposal The period length
21、 depends on the periodicity of the investments cash flows The most common period used in practice is one yearStep 2:Identify the organizations cost of capital,and convert it to an appropriate rate of return for the period length chosen in step 111-30Cost of Capital The cost of capital is the interes
22、t rate used for discounting future cash flowsAlso known as the risk-adjusted discount rate The cost of capital is the return the organization must earn on its investment to meet its investors return requirements The organizations cost of capital reflects:The amount and cost of debt and equity in its
23、 financial structure (WACC)The financial markets perception of the financial risk of the organizations activities11-31Net Present Value(2 of 4)Step 3:Identify the incremental cash flow in each period of the projects life.Step 4:Compute the present value of each periods cash flow using the organizati
24、ons cost of capital for the discount rateStep 5:Sum the present values of all the periodic cash inflows and outflows to determine the investment projects net present valueStep 6:If the projects net present value is positive,the project is acceptable from an economic perspective11-32Typical Cash Outf
25、lows11-33Typical Cash Inflows11-34General decision rule.If the Net Present Value is.Then the Project is.Positive.Acceptable,since it promises a return greater than the required rate of return.Zero.Acceptable,since it promises a return equal to the required rate of return.Negative.Not acceptable,sinc
26、e it promises a return less than the required rate of return.The Net Present Value Method11-35The Net Present Value(NPV)Criterion-Example A company can purchase a machine for$2200.The machine has a productive life of three years.It will generate net cash flows of$770 in the first year,$968 in the se
27、cond,and$1331 in the third.If the firm does not buy this machine,it can invest its money elsewhere and earn a return of 10%.Should the machine be bought?11-36The Net Present Value(NPV)Criterion-Example So,we calculate the NPV using the PV of estimated cash flows.300$2200100080070022001.113311.19681.
28、177032NPV.101CFrCFNPVttnt11-37The Net Present Value(NPV)Criterion-Example In this case,the NPV is positive.This means the investment should be undertaken.11-38Quick Check DataDenny Associates has been offered a four-year contract to supply the computing requirements for a local bank.Cash flow inform
29、ationCost of computer equipment$250,000 Working capital required20,000 Upgrading of equipment in 2 years90,000 Salvage value of equipment in 4 years10,000 Annual net cash inflow120,000 The working capital would be released at the end of the contract.Denny Associates requires a 14%return.11-39Quick C
30、heck What is the net present value of the contract with the local bank?a.$150,000b.$28,230c.$92,340d.$132,91611-40 What is the net present value of the contract with the local bank?a.$150,000b.$28,230c.$92,340d.$132,916Quick Check Years Cash Flows 14%FactorPresent ValueInvestment in equipmentNow$(25
31、0,000)1.000 (250,000)$Working capital neededNow(20,000)1.000 (20,000)Annual net cash inflows1-4120,000 2.914 349,680 Upgrading of equipment2 (90,000)0.769 (69,210)Salvage value of equip.4 10,000 0.592 5,920 Working capital released4 20,000 0.592 11,840 Net present value28,230$11-41Comparison of Two
32、Projects11-42Total Project Approach11-43Differential Approach11-4411-45Good Attributes of the NPV Rule 1.Uses cash flows 2.Uses ALL cash flows of the project 3.Discounts ALL cash flows properly Reinvestment assumption:the NPV rule assumes that all cash flows can be reinvested at the discount rate.11
33、-46“Sales is vanity,profit is necessary,but cash is king”11-47Sounds good My sales have grown by 5%over the last few years My business makes a profit of xm per year the banks and investors need this But.11-48Cash Control Cash is the lifeblood of any business.It is essential to enable the business to
34、 carry out day to day transactions An organisation can make a profit but without a sustainable flow can be in danger of going into liquidation A business should continue to drive cash generation in order to sustain business operations and to fund future growth Poor cash flow limits opportunities and
35、/or options,can leave little room to respond to threats Cash is often the first sign of deterioration and send signals to stakeholders11-49Effect of Taxes The effect of taxes on capital budgeting is two-fold:Organizations must pay taxes on any net benefits provided by the investments.Organizations c
36、an use the depreciation associated with a capital investment to reduce income and offset some of their taxes.So,analysis of capital budgeting requires converting all pretax cash flows to after-tax cash flows.11-50Effects of Depreciation Deductions11-51 we show how cash flows are related to accountin
37、g numbers and taxes.Define the net cash flow generated by certain assets as:Net Cash Flow=Cash Inflow-Cash Outflow=Revenue-Expenses-Capital Expenditure-Taxes The income tax paid is determined by:Taxes=t*(Revenue-Expenses-Depreciation)Net Cash flow=(1-t)*(Revenue Expenses)+t*Depreciation11-5211-5311-
38、54 Joshua Manufacturing Company(JMC)is considering buying some new equipment that would allow for increased sales of its product.The incremental impact of the proposed$280,000 investment is shown below using straight-line depreciation and an expected useful life of four years for the equipment.The c
39、ompany has a minimum desired rate of return of 14%.Revenues$420,000Nondepreciation expenses$240,000Depreciation 70,000Total expenses$310,000Taxable income$110,000Income tax(40%)44,000Net Income$66,00011-55 1.The annual cash inflows expected from the project are:a.$80,000 b.$68,000c.$136,000 d.$108,0
40、00 2.The present value of the tax savings from straight-line depreciation is:a.$100,000 b.$81,584 c.$28,274d.$0 3.The NPV of the investment using straight-line depreciation is:a.($280,000)b.($1,868.40)c.$396,264 d.$116,264.11-56 1.cThe easiest way to compute the cash flows generated by the investmen
41、t is to add the depreciation back to the net income.In this case,$70,000+$68,000=$136,000.Alternatively,one could add the after-tax cash flows from operations to the tax savings resulting from the depreciation expense.Here,$108,000($420,000-$240,000)x(1-.40)+$28,000$70,000 x.40 also gives$136,000 in
42、 total after-tax cash flows.11-57 2.bThe annual tax savings from depreciation are$28,000$70,000 x.40.The present value of the savings is computed by multiplying the$28,000 by the present value factor for an annuity for four years at 14%of 2.9137.The result is$81,584.11-58Inflation effects InflationT
43、he decline in the general purchasing power of the power of the monetary unit.ConsistencyConsistent treatment of the minimum desired rate of return and the predicted cash flows.11-59Other methods of analysis11-60Internal Rate of Return The internal rate of return(IRR)is the actual rate of return expe
44、cted from an investment The IRR is the discount rate that makes the investments net present value equal to zeroIf an investments NPV is positive,then its IRR exceeds its cost of capitalIf an investments NPV is negative,then its IRR is less than its cost of capital11-61Calculating the IRR Let a proje
45、cts cash flow be C1,C2,C3,CN.Let the initial cost of the project be C0.Then,the IRR is r in the following equation:NNrCrCrCrCC)1(.)1()1(133221011-62Calculating the IRRTwo casesLevel cash inflows(the same amount each year)uneven inflows11-63Internal Rate of Return Method11-64Internal Rate of Return M
46、ethod Investment required Net annual cash flowsPV factor for theinternal rate of return=$104,320$20,000=5.216Investment/inflow ratio11-65Internal Rate of Return MethodFind the 10-period row,move across until you find the factor 5.216.Look at the top of the column and you find a rate of.Periods10%12%
47、14%10.909 0.893 0.877 21.736 1.690 1.647.95.759 5.328 4.946 106.145 5.650 5.216 Using the present value of an annuity of$1 table.11-66Uneven cash inflowsConsider the following project:0123$50$100$150-$20032)1(150$)1(100$)1(50$200IRRIRRIRRNPV11-67Calculating the IRR The equation cannot be solved for
48、r.We can use a trial and error approach.Or we could use“solver”or“goal seek”in Excel.11-68The NPV Payoff Profile for This ExampleDiscount RateNPV0%$100.004%$71.048%$47.3212%$27.7916%$11.6520%($1.74)24%($12.88)28%($22.17)32%($29.93)36%($36.43)40%($41.86)If we graph NPV versus discount rate,we can see
49、 the IRR as the x-axis intercept.IRR=19.44%11-69The IRR Decision RuleMinimum Acceptance Criteria for screening problem:Accept if the IRR exceeds the required return.Ranking Criteria for preference problemsSelect alternative with the highest IRR11-70The Payback MethodPayback Period=number of years to
50、 recover initial costs11-71The Payback MethodPayback period =Investment required Net annual cash inflow11-72Decision criterion The payback method assumes that risk is time-related:the longer the period,the greater the chance of failure,so:When projects are mutually exclusive,accept the project with
