Objectives • To show how to use discounted cash flow analysis to make decisions such as: – Whether to enter a new line of business – Whether to invest in equipment to reduce costs... T
Trang 2Chapter 6 Contents
• 1 The Nature of Project
Analysis
• 2 Where do Investments
Ideas come from?
• 3 The NPV Investment Rule
• 4 Estimating a Project.s Cash
Trang 3Objectives
• To show how to use discounted cash
flow analysis to make decisions such as:
– Whether to enter a new line of business
– Whether to invest in equipment to reduce costs
Trang 8Average Cost of Capital: Example with 3-Securities
• Let
• k e be the return on equity
• k d be the return on debt
• k p be the return on preferred
• V e be the market value of issued equity
• V d be the Market value of issued bonds
• V p be the market value of issued preferred
• t be the tax rate
Trang 9Average Cost of Capital:
Example with 3-Securities
• k = k e * V e + k p * V p + k d * V d * (1 - t)
• The average cost of capital is also the
cost of capital for each of the firms
business divisions weighted according to their market value
Trang 10Tax rate 40.00%
Unit sales in year 1 $4,000
Sales growth rate 0.00%
Trang 11Assumptions (Table in $'000)
Cost of capital 15.00%
Tax rate 40.00%
Unit sales in year 1 $4,000
Sales growth rate 2.00%
Operating Profit 1,500 1,199 879 538 174 -214 -629
Taxes 600 480 351 215 70 -86 -252
Net Profit 900 719 527 323 104 -129 -377 Operating CF 1,300 1,119 927 723 504 271 23
Working cap move 2200 -2,200Investment in P&E 2,800 0 0 0 0 0 0
Invest CF 5,000 0 0 0 0 0 0 -2,200 Net CF -5,000 1,300 1,119 927 723 504 271 2,223
PV(NCF) -5000 1130 846 610 413 251 117 836
Trang 12Assumptions (Table in $'000)
Cost of capital 25.00%
Tax rate 40.00%
Unit sales in year 1 $4,000
Sales growth rate 0.00%
Trang 13Assumptions (Table in $'000)
Cost of capital 15.00%
Tax rate 30.00%
Unit sales in year 1 $4,000
Sales growth rate 0.00%
Operating Profit 1,500 1,500 1,500 1,500 1,500 1,500 1,500
Taxes 450 450 450 450 450 450 450
Net Profit 1,050 1,050 1,050 1,050 1,050 1,050 1,050 Operating CF 1,450 1,450 1,450 1,450 1,450 1,450 1,450
Working cap move 2200 -2,200Investment in P&E 2,800 0 0 0 0 0 0
Invest CF 5,000 0 0 0 0 0 0 -2,200 Net CF -5,000 1,450 1,450 1,450 1,450 1,450 1,450 3,650
PV(NCF) -5000 1261 1096 953 829 721 627 1372
Was 40%
Trang 14Assumptions (Table in $'000)
Cost of capital 15.00%
Tax rate 40.00%
Unit sales in year 1 $4,000
Sales growth rate 5.00%
Operating Profit 1,500 1,750 2,013 2,288 2,578 2,881 3,200
Taxes 600 700 805 915 1,031 1,153 1,280
Net Profit 900 1,050 1,208 1,373 1,547 1,729 1,920 Operating CF 1,300 1,450 1,608 1,773 1,947 2,129 2,320
Working cap move 2200 -2,200Investment in P&E 2,800 0 0 0 0 0 0
Invest CF 5,000 0 0 0 0 0 0 -2,200 Net CF -5,000 1,300 1,450 1,608 1,773 1,947 2,129 4,520
Was 0%
Trang 15Assumptions (Table in $'000)
Cost of capital 15.00%
Tax rate 40.00%
Unit sales in year 1 $4,000
Sales growth rate 0.00%
Operating Profit -500 -500 -500 -500 -500 -500 -500
Taxes -200 -200 -200 -200 -200 -200 -200
Net Profit -300 -300 -300 -300 -300 -300 -300 Operating CF 100 100 100 100 100 100 100
Working cap move 2200 -2,200Investment in P&E 2,800 0 0 0 0 0 0
Invest CF 5,000 0 0 0 0 0 0 -2,200 Net CF -5,000 100 100 100 100 100 100 2,300
PV(NCF) -5000 87 76 66 57 50 43 865
Was 75%
Trang 16Assumptions (Table in $'000)
Cost of capital 15.00%
Tax rate 40.00%
Unit sales in year 1 $4,000
Sales growth rate 0.00%
Operating Profit 1,100 1,100 1,100 1,100 1,100 1,100 1,100
Taxes 440 440 440 440 440 440 440
Net Profit 660 660 660 660 660 660 660 Operating CF 1,060 1,060 1,060 1,060 1,060 1,060 1,060
Working cap move 2200 -2,200Investment in P&E 2,800 0 0 0 0 0 0
Invest CF 5,000 0 0 0 0 0 0 -2,200 Net CF -5,000 1,060 1,060 1,060 1,060 1,060 1,060 3,260
Was $3,100,000
Trang 17Table 6.4 Project Sensitivity to Sales Volume
Trang 21Schedule of Bdella Price & Maint
Trang 22Schedule of Bdella Price & Maint
Age Price Maint Intang PV_Price PV_Maint PV_Intang PV_Proj
Trang 23Schedule of Bdella Price & Maint