ChapterOutline6.1WhyUseNetPresentValue?6.2ThePaybackPeriodRule6.3TheDiscountedPaybackPeriodRule6.4TheAverageAccountingReturn6.5TheInternalRateofReturn6.6ProblemswiththeIRRApproach6.7TheProfitabilityIndex6.8ThePracticeofCapitalBudgeting6.9SummaryandConclusionsChapterOutline6.1WhyUseNet6.1WhyUseNetPresentValue?AcceptingpositiveNPVprojectsbenefitsshareholders.NPVusescashflowsNPVusesallthecashflowsoftheprojectNPVdiscountsthecashflowsproperly6.1WhyUseNetPresentValue?TheNetPresentValue(NPV)RuleNetPresentValue(NPV)=TotalPVoffutureCF’s+InitialInvestmentEstimatingNPV:1.Estimatefuturecashflows:howmuch?andwhen?2.Estimatediscountrate3.EstimateinitialcostsMinimumAcceptanceCriteria:AcceptifNPV>0RankingCriteria:ChoosethehighestNPVTheNetPresentValue(NPV)RuGoodAttributesoftheNPVRule1.Usescashflows2.UsesALLcashflowsoftheproject3.DiscountsALLcashflowsproperlyReinvestmentassumption:theNPVruleassumesthatallcashflowscanbereinvestedatthediscountrate.GoodAttributesoftheNPVRul6.2ThePaybackPeriodRuleHowlongdoesittaketheprojectto“payback”itsinitialinvestment?PaybackPeriod=numberofyearstorecoverinitialcostsMinimumAcceptanceCriteria:setbymanagementRankingCriteria:setbymanagement6.2ThePaybackPeriodRuleHowThePaybackPeriodRule(continued)Disadvantages:IgnoresthetimevalueofmoneyIgnorescashflowsafterthepaybackperiodBiasedagainstlong-termprojectsRequiresanarbitraryacceptancecriteriaAprojectacceptedbasedonthepaybackcriteriamaynothaveapositiveNPVAdvantages:EasytounderstandBiasedtowardliquidityThePaybackPeriodRule(conti6.3TheDiscountedPaybackPeriodRuleHowlongdoesittaketheprojectto“payback”itsinitialinvestmenttakingthetimevalueofmoneyintoaccount?Bythetimeyouhavediscountedthecashflows,youmightaswellcalculatetheNPV.6.3TheDiscountedPaybackPer6.4TheAverageAccountingReturnRuleAnotherattractivebutfatallyflawedapproach.RankingCriteriaandMinimumAcceptanceCriteriasetbymanagementDisadvantages:IgnoresthetimevalueofmoneyUsesanarbitrarybenchmarkcutoffrateBasedonbookvalues,notcashflowsandmarketvaluesAdvantages:TheaccountinginformationisusuallyavailableEasytocalculate6.4TheAverageAccountingRet6.5TheInternalRateofReturn(IRR)RuleIRR:thediscountthatsetsNPVtozeroMinimumAcceptanceCriteria:AcceptiftheIRRexceedstherequiredreturn.RankingCriteria:SelectalternativewiththehighestIRRReinvestmentassumption:AllfuturecashflowsassumedreinvestedattheIRR.Disadvantages:Doesnotdistinguishbetweeninvestingandborrowing.IRRmaynotexistortheremaybemultipleIRRProblemswithmutuallyexclusiveinvestmentsAdvantages:Easytounderstandandcommunicate6.5TheInternalRateofRetuTheInternalRateofReturn:ExampleConsiderthefollowingproject:0123$50$100$150-$200Theinternalrateofreturnforthisprojectis19.44%TheInternalRateofReturn:ETheNPVPayoffProfileforThisExampleIfwegraphNPVversusdiscountrate,wecanseetheIRRasthex-axisintercept.IRR=19.44%TheNPVPayoffProfileforThi6.6ProblemswiththeIRRApproachMultipleIRRs.AreWeBorrowingorLending?TheScaleProblem.TheTimingProblem.6.6ProblemswiththeIRRApprMultipleIRRsTherearetwoIRRsforthisproject:0 1 2 3$200 $800-$200-$800100%=IRR20%=IRR1Whichoneshouldweuse?MultipleIRRsTherearetwoIRRTheScaleProblemWouldyourathermake100%or50%onyourinvestments?Whatifthe100%returnisona$1investmentwhilethe50%returnisona$1,000investment?TheScaleProblemWouldyouratTheTimingProblem0 1 2 3$10,000$1,000 $1,000-$10,000ProjectA0 1 2 3$1,000 $1,000 $12,000-$10,000ProjectBThepreferredprojectinthiscasedependsonthediscountrate,nottheIRR.TheTimingProblem0 1 TheTimingProblem10.55%=crossoverrate12.94%=IRRB16.04%=IRRATheTimingProblem10.55%=croCalculatingtheCrossoverRateComputetheIRRforeitherproject“A-B”or“B-A”10.55%=IRRCalculatingtheCrossoverRateMutuallyExclusivevs.IndependentProjectMutuallyExclusiveProjects:onlyONEofseveralpotentialprojectscanbechosen,e.g.acquiringanaccountingsystem.RANKallalternativesandselectthebestone.IndependentProjects:acceptingorrejectingoneprojectdoesnotaffectthedecisionoftheotherprojects.MustexceedaMINIMUMacceptancecriteria.MutuallyExclusivevs.Indepen6.7TheProfitabilityIndex(PI)RuleMinimumAcceptanceCriteria:AcceptifPI>1RankingCriteria:SelectalternativewithhighestPIDisadvantages:ProblemswithmutuallyexclusiveinvestmentsAdvantages:MaybeusefulwhenavailableinvestmentfundsarelimitedEasytounderstandandcommunicateCorrectdecisionwhenevaluatingindependentprojects6.7TheProfitabilityIndex(P6.8ThePracticeofCapitalBudgetingVariesbyindustry:Somefirmsusepayback,othersuseaccountingrateofreturn.ThemostfrequentlyusedtechniqueforlargecorporationsisIRRorNPV.6.8ThePracticeofCapitalBuExampleofInvestmentRulesComputetheIRR,NPV,PI,andpaybackperiodforthefollowingtwoprojects.Assumetherequiredreturnis10%. Year ProjectA ProjectB 0 -$200 -$150 1 $200 $50 2 $800 $100 3 -$800 $150ExampleofInvestmentRulesComExampleofInvestmentRules

ProjectA ProjectBCF0 -$200.00 -$150.00PV0ofCF1-3 $241.92 $240.80NPV= $41.92 $90.80IRR= 0%,100% 36.19%PI= 1.2096 1.6053ExampleofInvestmentRules PrExampleofInvestmentRulesPaybackPeriod: ProjectA ProjectB Time CF Cum.CF CF Cum.CF 0 -200 -200 -150 -150 1 200 0 50 -100 2 800 800 100 0 3 -800 0 150 150PaybackperiodforprojectB=2years.PaybackperiodforprojectA= 1or3years?ExampleofInvestmentRulesPayRelationshipBetweenNPVandIRR

Discountrate NPVforA NPVforB -10% -87.52 234.77 0% 0.00 150.00 20% 59.26 47.92 40% 59.48 -8.60 60% 42.19 -43.07 80% 20.85 -65.64 100% 0.00 -81.25 120% -18.93 -92.52 RelationshipBetweenNPVandIProjectAProjectB($200)($100)$0$100$200$300$400-15%0%15%30%45%70%100%130%160%190%DiscountratesNPVIRR1(A)IRR(B)NPVProfilesIRR2(A)Cross-overRateProjectAProjectB($200)($100)6.9SummaryandConclusionsThischapterevaluatesthemostpopularalternativestoNPV:PaybackperiodAccountingrateofreturnInternalrateofreturnProfitabilityindexWhenitisallsaidanddone,theyarenottheNPVrule;forthoseofusinfinance,itmakesthemdecidedlysecond-rate.6.9SummaryandConclusionsThi演講完畢，謝謝觀看！演講完畢，謝謝觀看！ChapterOutline6.1WhyUseNetPresentValue?6.2ThePaybackPeriodRule6.3TheDiscountedPaybackPeriodRule6.4TheAverageAccountingReturn6.5TheInternalRateofReturn6.6ProblemswiththeIRRApproach6.7TheProfitabilityIndex6.8ThePracticeofCapitalBudgeting6.9SummaryandConclusionsChapterOutline6.1WhyUseNet6.1WhyUseNetPresentValue?AcceptingpositiveNPVprojectsbenefitsshareholders.NPVusescashflowsNPVusesallthecashflowsoftheprojectNPVdiscountsthecashflowsproperly6.1WhyUseNetPresentValue?TheNetPresentValue(NPV)RuleNetPresentValue(NPV)=TotalPVoffutureCF’s+InitialInvestmentEstimatingNPV:1.Estimatefuturecashflows:howmuch?andwhen?2.Estimatediscountrate3.EstimateinitialcostsMinimumAcceptanceCriteria:AcceptifNPV>0RankingCriteria:ChoosethehighestNPVTheNetPresentValue(NPV)RuGoodAttributesoftheNPVRule1.Usescashflows2.UsesALLcashflowsoftheproject3.DiscountsALLcashflowsproperlyReinvestmentassumption:theNPVruleassumesthatallcashflowscanbereinvestedatthediscountrate.GoodAttributesoftheNPVRul6.2ThePaybackPeriodRuleHowlongdoesittaketheprojectto“payback”itsinitialinvestment?PaybackPeriod=numberofyearstorecoverinitialcostsMinimumAcceptanceCriteria:setbymanagementRankingCriteria:setbymanagement6.2ThePaybackPeriodRuleHowThePaybackPeriodRule(continued)Disadvantages:IgnoresthetimevalueofmoneyIgnorescashflowsafterthepaybackperiodBiasedagainstlong-termprojectsRequiresanarbitraryacceptancecriteriaAprojectacceptedbasedonthepaybackcriteriamaynothaveapositiveNPVAdvantages:EasytounderstandBiasedtowardliquidityThePaybackPeriodRule(conti6.3TheDiscountedPaybackPeriodRuleHowlongdoesittaketheprojectto“payback”itsinitialinvestmenttakingthetimevalueofmoneyintoaccount?Bythetimeyouhavediscountedthecashflows,youmightaswellcalculatetheNPV.6.3TheDiscountedPaybackPer6.4TheAverageAccountingReturnRuleAnotherattractivebutfatallyflawedapproach.RankingCriteriaandMinimumAcceptanceCriteriasetbymanagementDisadvantages:IgnoresthetimevalueofmoneyUsesanarbitrarybenchmarkcutoffrateBasedonbookvalues,notcashflowsandmarketvaluesAdvantages:TheaccountinginformationisusuallyavailableEasytocalculate6.4TheAverageAccountingRet6.5TheInternalRateofReturn(IRR)RuleIRR:thediscountthatsetsNPVtozeroMinimumAcceptanceCriteria:AcceptiftheIRRexceedstherequiredreturn.RankingCriteria:SelectalternativewiththehighestIRRReinvestmentassumption:AllfuturecashflowsassumedreinvestedattheIRR.Disadvantages:Doesnotdistinguishbetweeninvestingandborrowing.IRRmaynotexistortheremaybemultipleIRRProblemswithmutuallyexclusiveinvestmentsAdvantages:Easytounderstandandcommunicate6.5TheInternalRateofRetuTheInternalRateofReturn:ExampleConsiderthefollowingproject:0123$50$100$150-$200Theinternalrateofreturnforthisprojectis19.44%TheInternalRateofReturn:ETheNPVPayoffProfileforThisExampleIfwegraphNPVversusdiscountrate,wecanseetheIRRasthex-axisintercept.IRR=19.44%TheNPVPayoffProfileforThi6.6ProblemswiththeIRRApproachMultipleIRRs.AreWeBorrowingorLending?TheScaleProblem.TheTimingProblem.6.6ProblemswiththeIRRApprMultipleIRRsTherearetwoIRRsforthisproject:0 1 2 3$200 $800-$200-$800100%=IRR20%=IRR1Whichoneshouldweuse?MultipleIRRsTherearetwoIRRTheScaleProblemWouldyourathermake100%or50%onyourinvestments?Whatifthe100%returnisona$1investmentwhilethe50%returnisona$1,000investment?TheScaleProblemWouldyouratTheTimingProblem0 1 2 3$10,000$1,000 $1,000-$10,000ProjectA0 1 2 3$1,000 $1,000 $12,000-$10,000ProjectBThepreferredprojectinthiscasedependsonthediscountrate,nottheIRR.TheTimingProblem0 1 TheTimingProblem10.55%=crossoverrate12.94%=IRRB16.04%=IRRATheTimingProblem10.55%=croCalculatingtheCrossoverRateComputetheIRRforeitherproject“A-B”or“B-A”10.55%=IRRCalculatingtheCrossoverRateMutuallyExclusivevs.IndependentProjectMutuallyExclusiveProjects:onlyONEofseveralpotentialprojectscanbechosen,e.g.acquiringanaccountingsystem.RANKallalternativesandselectthebestone.IndependentProjects:acceptingorrejectingoneprojectdoesnotaffectthedecisionoftheotherprojects.MustexceedaMINIMUMacceptancecriteria.MutuallyExclusivevs.Indepen6.7TheProfitabilityIndex(PI)RuleMinimumAcceptanceCriteria:AcceptifPI>1RankingCriteria:SelectalternativewithhighestPIDisadvantages:ProblemswithmutuallyexclusiveinvestmentsAdvantages:MaybeusefulwhenavailableinvestmentfundsarelimitedEasytounderstandandcommunicateCorrectdecisionwhenevaluatingindependentprojects6.7TheProfitabilityIndex(P6.8ThePracticeofCapitalBudgetingVariesbyindustry:Somefirmsusepayback,othersuseaccountingrateofreturn.ThemostfrequentlyusedtechniqueforlargecorporationsisIRRorNPV.6.8ThePracticeofCapitalBuExampleofInvestmentRulesComputetheIRR,NPV,PI,andpaybackperiodforthefollowingtwoprojects.Assumetherequiredreturnis10%. Year