1、18 -1 18 -2 1. Explain what a capital investment decision is, and distinguish between independent獨立 and mutually相互 exclusive排斥 capital investment decisions.2. Compute the payback period and accounting rate of return for a proposed investment, and explain their roles in capital investment decisions.3

2、. Use net present value凈現值 analysis for capital investment decisions involving independent projects.18 -3 4. Use the internal rate of return內在回報率to assess the acceptability of independent projects.5. Discuss the role and value of post-audits.6. Explain why NPV凈現值 is better than IRR內在報酬率 for capital

3、investment decisions involving mutually exclusive projects.7. Convert gross cash flows to after-tax cash flows.8. Describe capital investment in the advanced manufacturing environment.18 -4 Capital investment decisions are concerned with the process of planning, setting goals and priorities, arrangi

4、ng financing, and using certain criteria to select long-term assets.1. Non-discounting models2. Discounting models18 -5 1.1 Payback Method投資回報法 投資回報期 Payback period = Original investmentAnnual cash flowThe cash flows is assume to occur evenly（均勻）.1. Non-discounting models:非貼現模型18 -6 1.1 Payback Meth

5、odExample 1:1 $100,000$30,0002 70,00040,0003 30,00050,0004 -60,0005 -70,00018 -7 Payback Method 之作用之作用The payback period provides information to managers that can be used as follows: To help control the risks associated with the uncertainty of future cash flows. To help minimize the impact of an inv

6、estment on a firms liquidity problems. To help control the risk of obsolescence. To help control the effect of the investment on performance measures.18 -8 Ignores the time value of moneyIgnores the performance of the investment beyond the payback periodPayback Method 之之Deficiency 缺憾18 -9 1.2 Accoun

7、ting Rate of Return (ARR)ARR = Average income Original investment or Average investmentI = the original investmentS = salvage value/ residual/ scrap valueAssume that the investment is uniformly consumed18 -10 Example 2: Suppose that some new equipment requires an initial outlay(支出) of $80,000 and pr

8、omises total cash flows of $120,000 over the next five years (the life of the machine). What is the ARR?Answer: The average cash flow is $24,000 ($120,000 5) and the average depreciation is $16,000 ($80,000 5). ARR = ($24,000 $16,000) $80,000 = $8,000 $80,000 = 10%Accounting Rate of Return (ARR會計回報率

9、)18 -11 Reasons for Using ARRA screening measure to ensure that new investment will not adversely(反向地) affect net incomeTo ensure a favorable effect on net income so that bonuses can be earned (increased) ARR 之缺點之缺點The major deficiency of the accounting rate of return is that it ignores the time val

10、ue of money.Accounting Rate of Return (續)18 -12 附錄：基本概念:Future Value(終值): Time Value of Money貨幣的時間價值Let:F=future valuei=the interest rate P=the present value or original outlayn=the number or periodsFuture value can be expressed by the formula: F = P(1 + i)n: as compounding of interest 復利: future va

11、lue factor終值系數2. Discounting models貼現模型貼現模型:18 -13 Future Value: Time Value of Money （續）（續）Answer:F = $1,000(1.08)= $1,080.00 (after one year)F = $1,000(1.08)2= $1,166.40 (after two years)F = $1,000(1.08)3= $1,259.71 (after three years)Example3: Assume the investment is $1,000. The interest rate is

12、8%. What is the future value if the money is invested for one year? Two? Three?18 -14 P= F/(1 + i)nThe discount factor(present value factor現值系數), 1/(1 + i) n, is computed for various combinations of i and n. Example 4: Compute the present value of $300 to be received three years from now. The intere

13、st rate is 12%.Answer: From Exhibit 18B-1, the discount factor is 0.712. Thus, the present value (P) is:P =F(df)=$300 x 0.712=$213.6018 -15 Answer:DiscountPresent YearCash Factor Value1$1000.893$ 89.3021000.79779.7031000.712 71.20 2.402*$240.20Annuity 年金* Notice that it is possible to multiply the s

14、um of the individual discount factors (查表: 2.402) by $100 to obtain the same answer. See (580頁)Exhibit 18B.2(年金現值系數表) for these sums which can be used as discount factors for uniform series.Example 5: Calculate the present value of a $100 per year annuity, to be received for the next three years. Th

15、e interest rate is 12%.18 -16 NPV = P Iwhere:P = the sum of present value of the projects future net cash inflowsI = the present value of the projects cost (usually the initial outlay)Net present value is the difference between the present value of the cash inflows and outflows associated with a pro

16、ject.18 -17 Example 6: Brannon Company has developed new earphones for portable CD and tape players that are expected to generate an annual revenue of $300,000. Necessary production equipment would cost $320,000 and can be sold in five years for $40,000. In addition, working capital營運資金 is expected

17、to increase by $40,000 and is expected to be recovered at the end of five years. Annual operating expenses are expected to be $180,000. The required(期望的) rate of return is 12 %.18 -18 Year:Year:0 01 12 23 34 45 5Equipment(320)Working capital(40)Revenues300 300 300 300 300 Operating expenses(180)(180

18、)(180)(180)(180)Salvage40 Recovery of working capital40 (360)120 120 120 120 200 Discount factor10.8930.7970.7120.6360.567PVPV(360)107 96 85 76 113 NPVNPV117.960 18 -19 YEAR CASH FLOW DISCOUNT FACTOR PRESENT VALUE0$-360,0001.000$-360,0001-4120,0003.307364,4005200,0000.567 113,400Net present value$11

19、7,840*Can anybody tell me why this is different?18 -20 Reinvestment Assumption再投資假設The NVP model assumes that all cash flows generated by a project are immediately reinvested to earn the required rate of return throughout the life of the project.18 -21 If NPV = 0, this indicates:1. The initial inves

20、tment has been recovered(彌補彌補)2. The required rate of return has been recoveredThus, break even has been achieved and we are indifferent(無關) about the project.Decision Criteria決策標準 for NPV18 -22 Decision Criteria for NPVIf the NPV 0 this indicates:1. The initial investment has been recovered2. The r

21、equired rate of return has been recovered3. A return in excess of 1. and 2. has been receivedThus, the products should be manufactured.18 -23 The internal rate of return (IRR) is the discount rate that sets the projects NPV at zero, i.e., P = I for the IRR.Example 7:A project requires a $10,000 inve

22、stment and will return $12,000 after only one year. What is the IRR? $12,000/(1 + i) = $10,000 1 + i = 1.2 I = 20%18 -24 Year:Year:0 01 12 23 34 45 5Equipment(320)Working capital(40)Revenues300 300 300 300 300 Operating expenses(180)(180)(180)(180)(180)Salvage40 Recovery of working capital40 (360)12

23、0 120 120 120 200 Discount factor10.8930.7970.7120.6360.567PVPV(360)107 96 85 76 113 NPV(when i=12%NPV(when i=12%）117.960 NPV(when i=20%)NPV(when i=20%)31.024 NPV(when i=28%)NPV(when i=28%)(360)94 73 57 45 58 NPV(when i=28%)NPV(when i=28%)(32.876)IRR=IRR=23.6%23.6%18 -25 (40.000)(30.000)(20.000)(10.

24、000)0.000 10.000 20.000 30.000 40.000 1NPVInterpolation (內內插法插法)：assuming the IRR is the same proportionate distance. (p559 end)20%28%To approximate(估算) thatIRR IRR =20%+31.02/(31.02+32.88)*8% =24.6%18 -26 Example 8: multiple-period setting with uniform (一致) CFs：I = CF(df) , I=120000, CF=49950, n= 3

25、 yearsso df = I/CF = investment annual CF= 120,000 49,950 =2.402Seen in the Table “Present Value of an Annuity of $1” (反查) in Ex.18B.2 in p.580, the corresponding discount rate is 12%.If the df is not exactly in the Table 18B.2, then approximate the IRR with the interpolation as well.Trial & err

26、or （）: 18 -27 multiple-period setting with uniform CFsDiscount factor =Example 9:Initial InvestmentAnnual cash flow=$180,00060,000= 3,000From(查) Exhibit 18B.2, df = 3.000 for 5 years; IRR = 20%= 3.00018 -28 If the IRR Cost of Capital, the project should be accepted(接受).If the IRR = Cost of Capital,

27、acceptance or rejection is equal.If the IRR Cost of Capital, the project should be rejected(拒絕).Decision Criteria (18 -29 2.3 Mutually Exclusive排斥排斥 projects:NPV Compared With IRRThere are two major differences between net present value and the internal rate of return:q NPV assumes cash inflows are

28、reinvested at the required rate of return whereas the IRR method assumes that the inflows are reinvested at the internal rate of return.q NPV measures the profitability of a project in absolute dollars(絕對值), whereas the IRR method measures it as a percentage(%), NOT dollar amount.18 -30 SoDesign A D

29、esign BAnnual revenue$179,460$239,280Annual operating costs119,460169,280Annual operating income 60,00070,000Equipment (purchased before Year 1)180,000210,000Project life5 years5 yearsIn Example 10: Bintley Corporation Case18 -31 NPV Compared With IRR0$-180,000$-210,000160,00070,000260,00070,000360,

30、00070,000460,00070,000560,00070,000A: 1-560,0003.000 180,000B: 1-570,0003.000210,000Check the Table for df; IRRA=20%IRRB=20%18 -32 But0$-210,0001.000$-210,0001-570,0003.605 252,350 Net present value $ 42,3500$-180,0001.000$-180,0001-560,0003.605 216,300 Net present value $ 36,300NPVA NPVB18 -33 Exam

31、ple 11： i=20% i=20%+inflation rate =20% +15%18 -34 2.4 After-Tax Operating Cash Flows The Income Approach 利潤表法利潤表法After-tax cash flow = After-tax net income + Noncash expensesExample 12:Revenues$1,000,000Less: Operating expenses* 600,000Income before taxes$ 400,000Less: Income taxes 136,000Net incom

32、e$ 264,000*$100,000 is depreciationAfter-tax cash flow = $264,000 + $100,000 = $364,00018 -35 After-tax cash revenues = (1 Tax rate) * Cash revenuesAfter-tax cash expense = (1 Tax rate) * Cash expTax savings (noncash expenses) = (Tax rate) * Noncash exp Total operating cash is equal to the after-tax

33、 cash revenues, less the after-tax cash expenses, plus the tax savings on noncash expenses.After-Tax Operating Cash Flows Decomposition Approach 分解法分解法 p57018 -36 as Example 12: Revenues= $1,000,000, cash expenses = $500,000, and depreciation = $100,000. Tax rate = 34%.After-tax cash revenues (1 .34

34、)($1,000,000) = $660,000Less: After-tax cash expense (1 .34)($500,000)= -330,000Add: Tax savings (noncash exp.) .34($100,000) = 34,000 Total$364,000After-Tax Operating Cash Flows Decomposition Approach18 -37 2.5 DepreciationTax-Shielding Effect(節稅效果節稅效果)Depreciation is a non-cash expense and is not

35、a cash flow. Depreciation, however SHIELDs (= protects) revenues from being taxed and, thus, creates a cash inflow equal to the tax savings. 18 -38 Net operating cash flows$300,000Less: Depreciation 0Taxable income$300,000Less: Income taxes ( 34%) 102,000 Net income$198,000Depreciation 之之Tax-Shieldi

36、ng Effect 是如何得來的是如何得來的:Assume設 initially that tax laws DO NOT allow depreciation to be deducted to arrive at taxable income. If a company had before-tax operating cash flows of $300,000 and depreciation of $100,000, we have the statement as following:18 -39 Net operating cash flows$300,000 Less: Dep

37、reciation 100,000 Taxable income$200,000Less: Income taxes ( 34%) -68,000 Net income$132,000Now assume再設 allowing a deduction for depreciation:Notice that the taxes saved are： ( $102,000 $68,000)= $34,000 . Thus, the firm has additional cash available of $34,000.This savings節約 can be computed as：mul

38、tiplying the tax rate by the amount of depreciation claimed, i.e.: 34% * $100,000 = $34,000 18 -40 Year Depreciation Deduction2003$2,000(half-year amount)20044,00020054,00020064,00020074,00020082,000(half-year amount)Assume that the asset is disposed of in April 2005. Only $2,000 of depreciation can

39、 be claimed, so the book value would be $12,000 ($20,000 $8,000).2.5.1 Straight-Line直線 DepreciationThe annual depreciation is $4,000 ( = $20,000 5). However, due to the half-year convention, only $2,000 can be deducted in 2003.18 -41 The tax laws classify most assets into the following three classes

40、 (class = Allowable years):ClassTypes of Assets3Most small tools5Cars, light trucks, computer equipment7Machinery, office equipmentAssets in any of the three classes can be depreciated using either straight-line or MACRS (Modified Accelerated Cost Recovery System修正的成本加速回收法) with a half-year conventi

41、on (“半年慣例”）*A taxpayer claims a half of a years depreciation for the first taxable year, regardless of when the property was actually put into service. It is assumed that the property being depreciated was placed into service at the mid-point of the year. To compensate for this computation, the taxp

42、ayer is entitled to another half-year of depreciation at the end of the normal recovery period. 18 -42 Half the depreciation for the first year can be claimed regardless of when the asset is actually placed in service.The other half year of depreciation is claimed in the year following the end of th

43、e assets class life.If the asset is disposed of before the end of its class life, only half of the depreciation for that year can be claimed. As 168(d)(4) of the Federal Income Tax Code.18 -43 MACRS rates120.00%232.00319.20411.52511.526 5.7618 -44 Example for MACRS Method P5721$4,0000.40$1,600.000.9

44、09$1,454.4026,4000.402,560.000.8262,114.5633,8400.401,536.000.7511,153.5442,3040.40921.600.683629.4552,3040.40921.600.621572.3161,1520.40460.800.564 259.89i=10%Net present value =$6,184.1518 -45 對照: Straight-Line Depreciation1$2,0000.40$ 800.000.909$ 727.2024,0000.401,600.000.8261,321.6034,0000.401,

45、600.000.7511,201.6044,0000.401,600.000.6831,092.8054,0000.401,600.000.621993.6062,0000.401,600.000.564 451.20 Net present value$5,788.0018 -46 3.1 How investment is defines?Software, engineering, training and implementation costs are a significant % of the total costs. (Peripheral costs, side-line c

46、osts)3.2 How operating CFs are estimated?3.3 How salvage value is treated?3.4 How discount rate is chosen?3.5 Others: non-financial criteria, Ethics, Post-audit3. Under the Advanced manufacturing environment (p573)18 -47 3.2 How Estimates of Operating Cash Flows Differ?A company is evaluating a pote

47、ntial investment in a flexible manufacturing system (FMS,靈活制造系統). The choice is to (1) continue producing with its traditional equipment, expected to last 10 years, or (2) to switch轉換 to the new system, which is also expected to have a useful life of 10 years. The companys discount rate is 12%.18 -4

48、8 Status quoInvestment (current outlay):Direct costs$10,000,000-Software, engineering 8,000,000- Total current outlay支出$18,000,000Net after-tax cash flows$ 5,000,000$1,000,000Less: After-tax cash flows for status quo現有系統 1,000,000n/aIncremental增量的 benefit$ 4,000,000n/a3.2 How Estimates of Operating C