fundamentals of corporate finance chapter 9 making capital investment decisions

52
Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Upload: katherine-tyler

Post on 30-Dec-2015

234 views

Category:

Documents


5 download

TRANSCRIPT

Page 1: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Fundamentals of Corporate Finance

Chapter 9

Making Capital Investment Decisions

Page 2: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Overview of Lecture

Page 3: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Corporate Finance in the News

Insert a current news story here to frame the material you will cover in the lecture.

Page 4: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Incremental Cash Flows

Page 5: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

The Stand-Alone Principal

Page 6: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Incremental Cash Flows

Page 7: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Incremental Cash Flows

Page 8: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Incremental Cash Flows

Page 9: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Pro Forma Financial Statements

Page 10: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Pro Forma Financial Statements

Page 11: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Pro Forma Financial Statements

Page 12: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Pro Forma Financial Statements

Page 13: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Project Cash Flows

Page 14: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Project Operating Cash Flow (OCF)

Page 15: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Project Operating Cash Flow

Page 16: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Project Value

Page 17: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

A Closer Look at Net Working Capital

Page 18: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

A Closer Look at Net Working Capital

Page 19: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

A Closer Look at Net Working Capital

Page 20: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example 9.1Cash Collections and Costs

Page 21: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example 9.1Cash Collections and Costs

Page 22: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Depreciation

Page 23: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Depreciation

Page 24: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Depreciation

20% Reducing Balance:

Page 25: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example 9.2Reducing Balance Depreciation

Page 26: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example 9.2Reducing Balance Depreciation

Page 27: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example: Majestic Mulch and Compost Ltd (MMC)

Page 28: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example: Majestic Mulch and Compost Ltd (MMC)

Page 29: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example: Majestic Mulch and Compost Ltd (MMC)

Page 30: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example: Majestic Mulch and Compost Ltd (MMC)

Page 31: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example: Majestic Mulch and Compost Ltd (MMC)

Page 32: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example: Majestic Mulch and Compost Ltd (MMC)

Page 33: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example: Majestic Mulch and Compost Ltd (MMC)

Page 34: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example: Majestic Mulch and Compost Ltd (MMC)

Page 35: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Alternative Definitions of Operating Cash Flow

Page 36: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Special Cases of DCF Analysis

Page 37: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example 9.3To Buy or Not to Buy

Page 38: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example 9.3To Buy or Not to Buy

Page 39: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example 9.3To Buy or Not to Buy

At 16 per cent, the NPV is €16,157, so the investment is not attractive. After some trial and error, we find that the NPV is zero when the discount rate is 10.62 per cent, so the IRR on this investment is about 10.6 per cent.

Page 40: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Equivalent Annual Cost (EAC)

Page 41: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Investments of Unequal Lives:The Equivalent Annual Cost Method

Date

Machine

0 1 2 3 4

A €500 €120 €120 €120

B €600 €100 €100 €100 €100

Page 42: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Investments of Unequal Lives: The Equivalent Annual Cost Method

Assuming a discount rate of 10%, NPV is:

What is problematic about this analysis?

2 3

2 3 4

€120 €120 €120

1.1 (1.1) (1.1)

€100 €100 €100 €100

1.1 (1.1) (1.1) (1.1)

Machine : €798.42 = €500 +

Machine : €916.99 = €600 +

A

B

Page 43: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Investments of Unequal Lives:The Equivalent Annual Cost Method

Page 44: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Investments of Unequal Lives: The Equivalent Annual Cost Method

Page 45: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Investments of Unequal Lives: The Equivalent Annual Cost Method

Machine A:

3.10€798.42 = 2.4869

€321.05

C A C

C

Date0 1 2 3

Cash outflows of machine A

€500 €120 €120 €120

Equivalent annual cost of machine A

€321.05 €321.05 €321.05

Page 46: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Investments of Unequal Lives:The Equivalent Annual Cost Method

Machine B:

4.10€916.99 = 3.1699

€289.28

C A C

C

Date

0 1 2 3 4

Cash outflows of machine B €600 €100 €100 €100 €100

Equivalent annual cost of machine B

€289.28

€289.28

€289.28

€289.28

Page 47: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Investments of Unequal Lives: The Equivalent Annual Cost Method

Choose Machine B

Page 48: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example 9.4Equivalent Annual Costs

Page 49: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example 9.4Equivalent Annual Costs

Page 50: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Example 9.4Equivalent Annual Costs

Page 51: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Activities for this Lecture

Page 52: Fundamentals of Corporate Finance Chapter 9 Making Capital Investment Decisions

Thank You