公司理财 英文 课件Chap007.ppt

Net Present Value and Other Investment Rules 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 the internal rate of return and profitability index, understanding the strengths and weaknesses of both approaches Be able to compute the net present value and understand why it is the best decision criterion Chapter Outline 7.1 Why Use Net Present Value? 7.2 The Payback Period Method 7.3 The Discounted Payback Period Method 7.4 The Average Accounting Return Method 7.5 The Internal Rate of Return 7.6 Problems with the IRR Approach 7.7 The Profitability Index 7.8 The Practice of Capital Budgeting 7.1 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 Reinvestment assumption: the NPV rule assumes that all cash flows can be reinvested at the discount rate. 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 Calculating NPV with Spreadsheets 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. Add the initial investment after computing the NPV. 7.2 The Payback Period Method 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 Method Disadvantages: Ignores the time v