罗斯公司理财Chpt006.ppt

Chapter Outline 6.1 Why Use Net Present Value? 6.2 The Payback Period Rule 6.3 The Discounted Payback Period Rule 6.4 The Average Accounting Return 6.5 The Internal Rate of Return 6.6 Problems with the IRR Approach 6.7 The Profitability Index 6.8 The Practice of Capital Budgeting 6.9 Summary and Conclusions 6.1 Why Use Net Present Value? Accepting positive NPV projects benefits shareholders. NPV uses cash flows NPV uses all the cash flows of the project NPV discounts the cash flows properly The Net Present Value (NPV) Rule Net Present Value (NPV) = Total PV of future CF’s - Initial Investment Estimating NPV: 1. Estimate future cash flows: how much? and when? 2. Estimate discount rate 3. Estimate initial costs Minimum Acceptance Criteria: Accept if NPV 0 Ranking Criteria: Choose the highest NPV Good 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. 6.2 The Payback Period Rule How long does it take the project to “pay back” its initial investment? Payback Period = number of years to recover initial costs Minimum Acceptance Criteria: set by management Ranking Criteria: set by management The Payback Period Rule (continued) Disadvantages: Ignores the time value of money Ignores cash flows after the payback period Biased against long-term projects Requires an arbitrary acceptance criteria A project accepted based on the payback criteria may not have a positive NPV Advantages: Easy to understand Biased toward liquidity 6.3 The Discounted Payback Period Rule How long does it take the project to “pay back” its initial investment taking the time value of money into account? By the time you have discounted the cash flows, you might as well calculate the NPV. 6.4 The Average Accounting Return Rule Another attractive but fatally flawed approach. Ranking Criteria and Minimum Acceptance Criteria s