《金融学（第二版）》讲义大纲及课后习题答案详解
第六章
***** 6
HOW TO ***** *****ENT *****S Objectives
To show how to use discounted cash flow analysis to make investment decisions such as: ? Whether to enter a new line of business
? Whether to invest in equipment to reduce operating costs Outline
6.1 The Nature of Project Analysis
6.2 Where Do Investment Ideas Come From? 6.3 The Net Present Value Investment Rule 6.4 Estimating a Project’s Cash Flows 6.5 Cost of Capital
6.6 Sensitivity Analysis Using Spreadsheets 6.7 Analyzing Cost-Reducing Projects 6.8 Projects with Different Lives
6.9 Ranking Mutually Exclusive Projects 6.10 Inflation and Capital Budgeting Summary
? The unit of analysis in capital budgeting is the investment project. From a finance perspective, investment
projects are best thought of as consisting of a series of contingent cash flows over time, whose amount and timing are partially under the control of management.
? The objective of capital budgeting procedures is to assure that only projects which increase shareholder value
(or at least do not reduce it) are undertaken.
? Most investment projects requiring capital expenditures fall into three categories: new products, cost reduction,
and replacement. Ideas for investment projects can come from customers and competitors, or from within the firm’s own RD or production departments.
? Projects are often evaluated using a discounted cash flow procedure wherein the incremental cash flows
associated with the project are estimated and their NPV is calculated using a risk-adjusted discount rate which should reflect the risk of the project.
? If the project happens to be a “mini-replica” of the assets currently held by the firm, then management should
use the firm’s cost of capital in computing the project’s net present value. However, sometimes it may be necessary to use a discount rate which is totally unrelated to the cost of capital of the firm’s current operations. The correct cost of capital is the one applicable to firms in the same industry as the new project.
? It is always important to check whether cash flow forecasts have been properly adjusted to take account of
inflation over a project’s life. There are two correct ways to make the adjustment: 1. Use the nominal cost of capital to discount nominal cash flows. 2. Use the real cost of capital to discount real cash flows. Instructor’s Manual Chapter 6 Page 86
Solutions to Problems at End of Chapter
1. Your firm is considering two investment projects with the following patterns of expected future net after-tax cash flows: Year Project A Project B 1 $1 million $5 million 2 2 million 4 million
3 3 million 3 million 4 4 million 2 million 5 5 million 1 million The appropriate cost of capital for both projects is 10%. If both projects require an initial outlay of $10 million, what would you recommend and why?
*****N: Present Values of B @ Year Project A Present Values of A Project B @ 10% 10% 1 $1 million 909,091 $5 million 4,545,454 2 2 million 1,652,893 4 million 3,305,785 3 3 million 2,253,944 3 million 2,253,944 4 4 million 2,732,054 2 million 1,366,027 5 5 million 3,104,607 1 million 620,921 Total PV 10,652,589 12,092,132 NPV 652,589 2,092,132 Project B is better than A because it has a higher NPV, a result of paying cash earlier. Investing in Cost-Reducing Equipment
2. A firm is considering investing $10 million in equipment which is expected to have a useful life of four years and is expected to reduce the firm’s labor costs by $4 million per year. Assume the firm pays a 40% tax rate on accounting profits and uses the straight line depreciation method. What is the after-tax cash flow from the investment in years 1 through 4? If the firm’s hurdle rate for this investment is 15% per year, is it worthwhile? What are the investment’s IRR and NPV? *****N:
We have to find the incremental cash flows resulting from this investment. There are two methods that we can use to find the after tax cash flow.
1. Find the (incremental) net income, then add (incremental) depreciation. Hence:
Annual depreciation (using straight-line method) = $10MM/4 = $2.5MM Pretax income increases by: $4MM - $2.5MM = $1.5MM Net income increase by : 1.5x(1-0.4) = $0.9MM
《金融学(第二版)》讲义大纲及课后习题答案详解第六章
