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1、13-113-2u Project Evaluation and Selectionu Potential Difficultiesu Capital Rationingu Project Monitoring13-3u Payback Period (PBP)u Internal Rate of Return (IRR)u Net Present Value (NPV)u Profitability Index (PI)13-4Julie Miller is evaluating a new project for her firm, Basket Wonders (BW). She has
2、 determined that the after-tax cash flows for the project will be $10,000; $12,000; $15,000; $10,000; and $7,000, respectively, for each of the Years 1 through 5. The initial cash outlay will be $40,000.13-5 - A project whose acceptance (or rejection) does not prevent the acceptance of other project
3、s under consideration.uFor this project, assume that it is independent of any other potential projects that Basket Wonders may undertake.13-6 is the period of time required for the cumulative expected cash flows from an investment project to equal the initial cash outflow.0 1 2 3 4 5 -40 K 10 K 12 K
4、 15 K 10 K 7 K13-7(c)10 K 22 K 37 K 47 K 54 K = a + ( b - c ) / d= 3 + (40 - 37) / 10= 3 + (3) / 10= 0 1 2 3 4 5 -40 K 10 K 12 K 15 K 10 K 7 KCumulativeInflows(a)(-b)(d)13-8 = 3 + ( 3K ) / 10K= Note: Take absolute value of last negative cumulative cash flow value.CumulativeCash Flows -40 K 10 K 12 K
5、 15 K 10 K 7 K0 1 2 3 4 5-40 K -30 K -18 K -3 K 7 K 14 K13-9Yes! The firm will receive back the initial cash outlay in less than 3.5 years. 3.3 Years 3.5 Year Max.The management of Basket Wonders has set a maximum PBP of 3.5 years for projects of this type.Should this project be accepted?13-10u Easy
6、 to use and understandu Can be used as a measure of liquidityu Easier to forecast ST than LT flowsu Does not account for TVMu Does not consider cash flows beyond the PBPu Cutoff period is subjective13-11IRR is the discount rate that equates the present value of the future net cash flows from an inve
7、stment project with the projects initial cash outflow.CF1 CF2 CFn (1+IRR)1 (1+IRR)2 (1+IRR)n+ . . . +ICO =13-12$15,000 $10,000 $7,000 $10,000 $12,000(1+IRR)1 (1+IRR)2Find the interest rate (IRR) that causes the discounted cash flows to equal $40,000.+$40,000 =(1+IRR)3 (1+IRR)4 (1+IRR)513-13 = $10,00
8、0(PVIF10%,1) + $12,000(PVIF10%,2) +$15,000(PVIF10%,3) + $10,000(PVIF10%,4) + $ 7,000(PVIF10%,5) = $10,000(.909) + $12,000(.826) + $15,000(.751) + $10,000(.683) + $ 7,000(.621) = $9,090 + $9,912 + $11,265 + $6,830 + $4,347 =13-14 = $10,000(PVIF15%,1) + $12,000(PVIF15%,2) + $15,000(PVIF15%,3) + $10,00
9、0(PVIF15%,4) + $ 7,000(PVIF15%,5) = $10,000(.870) + $12,000(.756) + $15,000(.658) + $10,000(.572) + $ 7,000(.497) = $8,700 + $9,072 + $9,870 + $5,720 + $3,479 =13-15.10$41,444.05IRR$40,000 $4,603.15$36,841 X$1,444.05$4,603$1,444X=13-16.10$41,444.05IRR$40,000 $4,603.15$36,841 X$1,444.05$4,603$1,444X=
10、13-17.10$41,444.05IRR$40,000 $4,603.15$36,841($1,444)(0.05) $4,603$1,444XX =X = .0157IRR = .10 + .0157 = .1157 or 11.57%13-18 No! The firm will receive 11.57% for each dollar invested in this project at a cost of 13%. IRR Hurdle Rate The management of Basket Wonders has determined that the hurdle ra
11、te is 13% for projects of this type. Should this project be accepted?13-19u Accounts for TVMu Considers all cash flowsu Less subjectivityu Assumes all cash flows reinvested at the IRRu Difficulties with project rankings and Multiple IRRs13-20 NPV is the present value of an investment projects net ca
12、sh flows minus the projects initial cash outflow.CF1 CF2 CFn (1+k)1 (1+k)2 (1+k)n+ . . . +- NPV =13-21Basket Wonders has determined that the appropriate discount rate (k) for this project is 13%.$10,000 $7,000 $10,000 $12,000 $15,000 (1.13)1 (1.13)2 (1.13)3 +- (1.13)4 (1.13)5 =+13-22 = $10,000(PVIF1
13、3%,1) + $12,000(PVIF13%,2) + $15,000(PVIF13%,3) + $10,000(PVIF13%,4) + $ 7,000(PVIF13%,5) - = $10,000(.885) + $12,000(.783) + $15,000(.693) + $10,000(.613) + $ 7,000(.543) - = $8,850 + $9,396 + $10,395 + $6,130 + $3,801 - = - 13-23 No! The NPV is negative. This means that the project is reducing sha
14、reholder wealth. as The management of Basket Wonders has determined that the required rate is 13% for projects of this type.Should this project be accepted?13-24 u Cash flows assumed to be reinvested at the hurdle rate.u Accounts for TVM.u Considers all cash flows.u May not include managerial option
15、s embedded in the project. See Chapter 14.13-25Discount Rate (%)0 3 6 9 12 15IRRNPV13%Sum of CFsPlot NPV for eachdiscount rate.Three of these points are easy now!Net Present Value$000s151050-413-26 PI is the ratio of the present value of a projects future net cash flows to the projects initial cash
16、outflow.CF1 CF2 CFn (1+k)1 (1+k)2 (1+k)n+ . . . +PI =PI = 1 + / 13-27 No! The is less than 1.00. This means that the project is not profitable. as = $38,572 / $40,000= .9643 (Method #1, 13-33)Should this project be accepted?13-28Same as NPVu Allows comparison of different scale projectsSame as NPVu Provides only relative profitabilityu Potential Ranking Problems13-29Method Project Comparison Decision PBP 3.3 3.5 Accept IRR 11.47% 13% Reject NPV -$1,424 $0 Reject PI .96 1.00 Reject Basket Wonders
