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Chapter 11: The Basics of Capital BudgetingI. What is Capital Budgeting?The process of determining what capital projects to acceptProject Classification is the starting point for determining the appropriate discount rate Replacement to maintain current operationsReplacement to reduce costsExpansion of existing products or marketsExpansion into new products or marketsPure research & development (example: pharmaceutical firms)Exploration (example: energy firms)Safety and /or environmental (government mandated) projectsII. Decision CriteriaWhat are the major investment decision criteria?Net Present Value - NPVInternal Rate of Return - IRRModified Internal Rate of Return - MIRRPayback Period - PaybackDiscounted Payback Period – Discounted PaybackProfitability Index - PIWhat are they used for?To evaluate the cash flows from capital investment projectsTo make the accept or reject decisionA. The NPV Rule:1. Why Is Net Present Value the Best Decision Criteria?- It considers the time value of money(TVM)… a dollar today is worth more than a dollar in the future- It considers all cash flows during the project’s entire life- NPV lets you know exactly how much value is being added by the project- You can set the appropriate require rate of return (discount rate or hurdle rate) depending on a project’s risk2. Calculating Net Present Value (NPV:NPV =CF0+ CF1 + CF2 + ... + CF tt3. The NPV decision (accept/reject) rule:- Accept the project (investment) if NPV > zero- Reject the project if NPV < zero4. What does a positive NPV mean?- The PV of cash inflows > PV of cash outflows- The value of the company is being increased by the amount of NPV- The project meets the required rate of return…and then someA friend asks you to invest $20,000 and promises to pay you $26,000 at the end of 2 years. Your required rate of return is 15%. Do you take the offer?NPV =CF0+ CF2NPV = -20,000 + 26,000 => -20,000 + 19,6601.15 2NPV = $-340 You should reject your friend’s offer!* If this were a capital investment project, acceptance would reduce the value of the company by $340!* Acceptance of the project would not increase the value of the company by $6,000! The key variable here is the required rate of return (or discount rate).The required rate of return (RRR) is:* The hurdle rate* The cost of capital (funds)* The best rate of return the company could expect on other projects of similar risk Note:In a competitive market, positive NPV projects are considered rare and require diligent effort to uncoverTwo projects with identical cash outflows (investment =$1,000) but different timing of cash inflows. Discount rate = 10%NPV for project S: (Large cash inflows come sooner)0 1 2 3 4|---------------|---------------|---------------|--------------|Net CF -1,000 500 400 300 100NPV(S) = $78.82NPV for project L: (Large cash inflows come later)0 1 2 3 4|---------------|---------------|---------------|--------------|Net CF -1,000 100 300 400 500NPV(L) = -$19.12B. The Payback Rule:Time period required for a project to generate enough cash inflows to recover the initial cost.The Payback decision (accept/reject) rule:- Accept if payback period < maximum acceptable payback period.- Reject if payback period > maximum acceptable payback period.Advantages- Easy to understand: the shorter the payback period, the better- Quick indicator of the liquidity risk of the project (how long funds will be tied up) Disadvantages- Ignores time value of money- Ignores cash flows beyond acceptable payback date- Acceptable payback date is usually an arbitrary cutoff point. Risk is not quantified in a required rate of return. The liquid ity risk is simply a “rule ofthumb”Project S:0 1 2 3 4|---------------|---------------|---------------|---------------|Net CF -1,000 500 400 300 100 Cumulative -1,000 -500 -100 200 300NCFPayback = years before + uncovered cost at end of yearfull recovery NCF during following year= 2 + 100/300= 2.33 yearsIf acceptable payback period is 2.33 or more years, you accept project SC. The Discounted Payback Rule:Time period required for a project to generate enough discounted cash inflows to recover the initial cost.The Discounted Payback decision (accept/reject) rule:- Accept if discounted payback period < maximum acceptable payback period.- Reject if discounted payback period > maximum acceptable payback period. Advantages- Easy to understand: the shorter the payback period, the better- Quick indicator of the liquidity risk of the project (how long funds will be tied up) - Does consider the time value of moneyDisadvantages- Ignores cash flows beyond acceptable payback date- Acceptable payback date is usually an arbitrary cutoff point.Project S: Assume a 10 percent discount rate0 1 2 3 4|---------------|---------------|---------------|---------------|Net CF -1,000 500 400 300 100PVNCF -1,000 454 331 225 68Cumulative -1,000 -546 -215 10PVNCFPayback = years before + uncovered cost at end of yearfull recovery NCF during following year= 2 + 215/225= 2.96 yearsIf acceptable payback period is 2.96 or more years, you accept project SD. Internal Rate of ReturnThe IRR is similar to a bond’s yield to maturity. It is the rate that makes the present value of cash inflows (CIF) equal to the present value of cash outflows (COF). Thus, it is the rate of return that results in a zero NPV when it is used as the discount rate.NPV = CF0+ CF1 + CF2 + ... + CF t(1 + r)1 (1 + r)2 (1 + r)t0 = CF0+ CF1 + CF2 + ... + CF t(1 + IRR) 1(1 + IRR) 2(1 + IRR)tIRR Decision Rule- Accept the project if IRR > req’d rate of return (discount rate)- Reject the project if IRR < req’d rate of return (discount r ate)Advantages- Considers TVM- Considers all cash flows- Easy to understandDisadvantages- May use unreasonable discount rate- Can conflict with NPV if projects are mutually exclusiveIRR Examples:IRR for Project S0 1 2 3 4Project S|---------------|---------------|---------------|---------------|-1,000 500 400 300 1000 = -1000 + 500 + 400 + 300 + 100(1+Irr) 1 (1+Irr) 2 (1+Irr) 3 (1+Irr)4Solve for the IRR. That is the discount rate that solves this equation and makes the answer (NPV) equal to zero.IRR for Project S = 14.49%IRR for Project L0 1 2 3 4Project L|---------------|---------------|---------------|----------------|-1,000 100 300 400 5000 = -1000 + 100 + 300 + 400 + 500(1+Irr) 1 (1+Irr) 2 (1+Irr) 3 (1+Irr)4IRR for Project L =9.27%The IRR is the most popular method, after NPV, for evaluating cash flows and is almost as good.Problems with IRR:There are problems with using IRR rather than NPV with you are choosing between mutually exclusive projects:- Independent projects: When evaluating multiple projects and any, none, or all of them can be accepted. Acceptance of any project has no bearing on the acceptance or rejection of another.- Mutually exclusive projects: When evaluating multiple projects and only one can be accepted. Acceptance of one project means rejection of the other(s).There is never a conflict between IRR and NPV criterion when evaluating independent projects. But when choosing between mutually exclusive projects, the IRR choice may conflict with the NPV choice under certain conditions.The Scale Problem: A potential conflict exists when there are significant differences in the size of the cash flows. An example would be if comparing a project with a $100,000 initial investment (COF) with another project with a $1,000,000 initial investment.The Timing Problem: A potential conflict exists when the timing of the cash flows for two projects are radically different. This can result in a conflict between the NPV choice and the IRR choice at low discount rates.Multiple IRRs: Projects with non-normal (non-conventional) cash flows may have multiple IRRs. A normal (or conventional) cash flow is a cash outflow at the beginning of a project, followed by cash inflows thereafter.The NPV Profile: NPV graphed against the discount rateRecall the NPV & IRR acceptance rules:NPV: Accept the project if NPV > zeroIRR: Accept the project if IRR > RRRNPVCash Flows-1000$300 500400300100IRR0 r.1449Any project with a positive NPV will also have an IRR that exceeds the discount rate (required rate of return).NPV Profiles for Mutually Exclusive Projects:NPV Cash FlowsExample: IRR vs NPV for Mutual Exclusive ProjectsCash FlowsA B-10,000 -10,00010,000 1,0001,000 1,0001,000 12,000IRR for A _____________ IRR for B is ___________ NPV at 0% ____________ NPV at 0% ____________ NPV at 10% ___________ NPV at 10% ___________ NPV at 15% ___________ NPV at 15% ___________ Which project is acceptable if they are independent? Why?Which project is acceptable if they are mutually exclusive? Why? E. Modified Internal Rate of Return- Accept the project if M IRR > req’d rate of return (discount rate) - Reject the project if M IRR < req’d rate of return (discount rate) Advantage: Let’s you decide the reinvestment rate!Cost = Terminal Value TGiven: Cost, TVSolve: MIRRF. Profitability Index (PI)PI = (PV of Cash Inflows)/(PV of Cash Outflows)The PI is the ratio of the PV of the project’s cash inflows to the PV of the project’s cash outflows.PI for Project SPVCIF S= 500 + 400 + 300 + 100 = 1,078.82(1+.10)1 (1+.10)2 (1+.10)3 (1+.10)4PVCOF S= 1,000PI S= 1,078.82/1,000 = 1.07882PI Decision Rule- Accept if PI > 1.00- Reject if PI < 1.00Advantages- Considers TVM- Considers all cash flows- Uses reasonable discount rate- Useful when faced with capital rationing.Disadvantages- Cannot distinguish projects of vastly different scale- May conflict with NPV when evaluating mutually exclusive projectsProfitability Index vs NPV for Mutually Exclusive Projects0 1|---------------------|Cash FlowsProject A -$10 $15Project B -$1,000 $1,250A BNPV at .10 $ 3.64 $136.36PI at .10 1.364 1.136According to NPV, you choose B.According to PI, you choose A.。
资本预算原理2515892376Capital Budgeting前提：无杠杆公司，以后再讨论融资决策对资本预算的复杂阻碍。
第一节、推测以后收益〔forecasting earnings〕收益与真实的现金流不同，资本预算从推测因为项目投资而引起的预期收益变化——差量收益——开始。
HomeNet公司的差量收益推测1. 〔Incremental〕收入和成本估量2. 资本性支出与折旧3．利息费用4．税负5．机会成本〔opportunity cost〕如失去的租金6．项目的外部性〔project externalities〕如对相关产品销售量的负面阻碍7. 沉没成本(sunk cost) 如前期市场调查费用、固定制造费用、过去的研发支出等。
8．Real-World Complexities (price changes)1．Sales2．Cost of Goods Sold3．Gross Profit4．Selling, General, and Administrative5．Research and Development(注意是否资本化，假设是，那么无此项)6．Depreciation〔与资本性支出相联系〕7．EBIT8．Income Tax9．Unlevered Net Income第二节、决定自由现金流及运算NPV收益是对企业绩效的会计计量，企业不能够使用利润去购买商品、支付工资、进行新投资、发放股利等。
做上述情况，必须现金。
项目投资对企业可支配现金流带来的预期差量变化，称作项目的自由现金流。
调整项目：资本性支出与折旧NWC:净营运资本＝流淌资产 － 流淌负债＝现金 ＋ 存货 ＋应收 － 应对 〔典型项目〕1．Sales2．Cost of Goods Sold3．Gross Profit4．Selling, General, and Administrative5．Research and Development(注意是否资本化，假设是，那么无此项)6．Depreciation 〔与资本性支出相联系〕7．EBIT8．Income Tax9．Unlevered Net IncomeFree Cash Flow10. Plus: Depreciation11. Less: Capital Expenditures12. Less: Increases in NWC13. Free Cash Flow注释：1t t t NWC NWC NWC -∆=-直截了当运算自由现金流：Free Cash Flow =(Revenues –Costs-Depreciation )×(1-c τ)+ Depreciation – CapEx -∆NWC自由现金流(FCF)＝ (收入－付现成本)×(1－所得税率)－资本性支出－ 净营运资本的变动 ＋ 所得税率×折旧。
1．资本预算（capital budgeting ）答：资本预算是一种既衡量负债又衡量资产的预算程序，它考虑到了资本的变动。
采用资本预算，净国债等于政府资产减去政府负债。
按现行的预算程序，当政府出售其资产时，预算赤字会减少。
但在资本预算中，从出售中得到的收入并没有减少赤字，因为债务的减少被资产的减少所抵消了。
同样，在资本预算中，政府借贷为购买资本品筹资并不会增加赤字。
经济学家对资本预算的看法不一。
资本预算的反对者认为，虽然这个体系在原则上优于现行体系，但它在实践中难以实施。
资本预算的支持者认为，即使对资本资产的不完善处理也比完全忽略资本资产好。
2．对周期调整的预算赤字（cyclically adjusted budget deficit ）答：对周期调整的预算赤字有时称为充分就业预算赤字，它是根据对经济在其产出和就业自然率运行时政府支出与税收收入的估算而做出的。
对周期调整的预算赤字是一个有用的衡量指标，因为它反映了政策的变动，但并不反映经济周期的当前阶段。
5．政府购买乘数（government-purchases multiplier ）答：政府购买乘数指收入变动（Y ∆）对引起这种变动的政府购买支出变动（用G ∆表示）的比率。
政府购买乘数用△Y/△G 表示，△Y/△G=1/（1—MPC ），其中MPC 是边际消费倾向，而且边际消费倾向MPC 越大，政府购买乘数越大。
政府购买乘数说明，财政政策对收入有乘数效应。
原因是根据消费函数C=C(Y-T)，高收入引起高消费。
当政府购买增加时，提高了收入，同时也提高了消费，消费又进一步增加了收入，收入又进一步提高了消费，如此循环，以至政府购买的增加引起了收入更大的增加。
6．税收乘数（tax multiplier ）答：税收乘数指收入变动（Y ∆）对引起这种变动的税收变动（用T ∆表示）的比率，此时指的是税收总量的变化而不是税率的变化。
税收乘数用△Y/△T 表示，△Y/△T=－MPC/(1－MPC)，其中MPC 是边际消费倾向。
