财务管理ppt英文课件Chapter-12.ppt

1、Chapter 12Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan1Chapter ObjectiveslThe Capital Budgeting ProcesslGenerating Investment Project ProposalslEstimating Project“After-Tax Incremental Operating Cash Flows”Copyrig

2、ht 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan2What is Capital Budgeting?lThe process of identifying,analyzing,and selecting investment projects whose returns(cash flows)are expected to extend beyond one year.Copyright 200

3、1 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan3The Capital Budgeting ProcesslGenerate investment proposals consistent with the firms strategic objectives.lEstimate after-tax incremental operating cash flows for the investment pr

4、ojects.lEvaluate project incremental cash flows.lSelect projects based on a value-maximizing acceptance criterion.lReevaluate implemented investment projects continually and perform postaudits for completed projects.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Ho

5、rne and Wachowicz.Slides prepared by Wu Xiaolan4Classification of Investment Project Proposals1.New products or expansion of existing products2.Replacement of existing equipment or buildings3.Research and development4.Exploration5.Other(e.g.,safety or pollution related)Copyright 2001 Prentice-Hall,I

6、nc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan5Financial Cash FlowlIn finance,the most important item that can be extracted from financial statements is the actual cash flow of the firm.lSince there is no magic in finance,it must be the case tha

7、t the cash from received from the firms assets must equal the cash flows to the firms creditors and stockholders.CF(A)CF(B)+CF(S)Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan6Cash Flow From AssetslThe total cash fl

8、ow to debtholders and cash flow to shareholders.Consists of:operating cash flow-the cash flow that results from day-to-day activities of producing and selling;capital spending-the net spending on non-current assets;andadditions to net working capital-the amount spent on net working capital.Copyright

9、 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan7Estimating Cash FlowslComputing cash flows Operating Cash Flow(OCF)=Net income+depreciationCash Flow From Assets(CFFA)=OCF net capital spending(NCS)changes in net working capita

10、l(NWC)Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan8 Pro Forma Income StatementSales(50,000 units at$4.00/unit)$200,000Variable Costs($2.50/unit)125,000Gross profit$75,000Fixed costs12,000Depreciation($90,000/3)30,

11、000EBIT$33,000Taxes(34%)11,220Net Income$21,780OCF=EBIT+Depreciation-Taxes=33,000+30,000-11,220=51,780Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan9Original Investment(Year 0)lOriginal capital investment for this p

12、roject is$90,000The projects duration is three years.Investment will be depreciated straight-line(1/3 each year)for ease of calculation in this examplelIn addition,the project will tie up$20,000 of working capital,but this working capital can be recovered(freed up)at the end of the project.Copyright

13、 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan10Projected Total Cash FlowsYear0123OCF$51,780$51,780$51,780Change in NWC-$20,00020,000Capital Spending-$90,000 CFFA-$110,000$51,780$51,780$71,780Copyright 2001 Prentice-Hall,Inc

14、.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan11Cash Flow From AssetslThe cash flow to debtholders includes any interest paid less the net new borrowing.Cash flow to creditors=Interest paid Net new borrowinglThe cash flow to shareholders includes

15、dividends paid out by a firm less net new equity raised.Cash flow to stockholders=Dividends paid Net new equity raisedCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan12Cash Flow vs.Accounting IncomelDiscount actual ca

16、sh flows.lUsing accounting income,rather than cash flow,could lead to erroneous decisions.The realization principle is to recognize revenue at the time of sale.Costs are recorded based on the matching principle,that is,revenues are identified and costs associated with these revenues are matched and

17、subsequently recorded.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan13DifferenceslThe figures on the profit and loss account will differ from actual cash inflows and outflows during a period due to:Revenues and cost

18、s being recorded when they are realized,not when they are received or paid.The existence of non-cash items such as depreciation.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan14Relevant Cash FlowslThe cash flows that

19、 should be included in a capital budgeting analysis are those that will only occur if the project is accepted.lThese cash flows are called incremental cash flows.lThe stand-alone principle allows us to analyze each project in isolation from the firm simply by focusing on incremental cash flows.Copyr

20、ight 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan15Incremental Cash FlowsIMPORTANTAsk yourself this question Would the cash flow still exist if the project does not exist?If yes,do not include it in your analysis.If no,incl

21、ude it.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan16 Cash(not accounting income)flows Operating(not financing)flows After-tax flows Incremental flowsEstimating After-Tax Incremental Cash FlowsCopyright 2001 Prent

22、ice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan17lPrinciples that must be adhered to in the estimation Ignore sunk costs Include opportunity costs Include project-driven net of spontaneous changes in current liabilities Include effects

23、of inflationEstimating After-Tax Incremental Cash FlowsCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan18Incremental Cash FlowslSunk costs are not relevantJust because“we have come this far”does not mean that we shoul

24、d continue to throw good money after bad.lOpportunity costs do matter.Just because a project has a positive NPV that does not mean that it should also have automatic acceptance.Specifically if another project with a higher NPV would have to be passed up we should not proceed.Copyright 2001 Prentice-

25、Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan19Incremental Cash FlowslSide effects matter.Positive side effects benefits to other projectsNegative side effects costs to other projectsErosion and cannibalism are both bad things.If our new

26、product causes existing customers to demand less of current products,we need to recognize that.Incremental Cash Flowcash flow with projectcash flow without project=-Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan20In

27、terest ExpenselLater chapters will deal with the impact that the amount of debt that a firm has in its capital structure has on firm value.lFor now,its enough to assume that the firms level of debt(hence interest expense)is independent of the project at hand.lWhen valuing a project,ignore how the pr

28、oject is financed.You must separate financing and investment decisions.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan21Inflation Rule1 real interest rate=1+nominal interest rate1+inflation ratelBe consistent in how

29、you handle inflation!lUse nominal interest rates to discount nominal cash flows.lUse real interest rates to discount real cash flows.lYou will get the same results,whether you use nominal or real figures.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wach

30、owicz.Slides prepared by Wu Xiaolan22Inflation ExampleYou own a lease that will cost you$8,000 next year,increasing at 3%a year(the forecasted inflation rate)for 3 additional years(4 years total).If discount rates are 10%what is the present value cost of the lease?Copyright 2001 Prentice-Hall,Inc.Fu

31、ndamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan23InflationExample-nominal figuresYearCash FlowPV 10%1800028000 x1.03=82408000 x1.03=8487.208000 x1.03=8741.82 80001.1023=7272 736809 9236376 5645970 78429 9982401108487 201108741 82110234.$26,.Copyright

32、2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan24InflationExample-real figuresYearCash FlowPV6.7961%1=7766.992=7766.99=7766.99=7766.99 80001.037766.991.06882401.038487.201.038741.821.03234=7272736809923637656459707826429997766

33、 9910687766 9910687766 991068234.=$,.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan25Tax Considerations and DepreciationlDepreciation represents the systematic allocation of the cost of a capital asset over a period

34、 of time for financial reporting purposes,tax purposes,or both.lGenerally,profitable firms prefer to use an accelerated method for tax reporting purposes(MACRS).Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan26lEvery

35、thing else equal,the greater the depreciation charges,the lower the taxes paid by the firm.lDepreciation is a noncash expense.lAssets are depreciated(MACRS)on one of eight different property classes.lGenerally,the half-year convention is used for MACRS.Depreciation and the MACRS MethodCopyright 2001

36、 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan27RecoveryProperty ClassYear3-Year5-Year7-Year1 33.33%20.00%14.29%2 44.45 32.00 24.493 14.81 19.20 17.494 7.41 11.52 12.495 11.52 8.936 5.76 8.927 8.938 4.46MACRS Sample ScheduleCopyr

37、ight 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan28Depreciable BasislIn tax accounting,the fully installed cost of an asset.This is the amount that,by law,may be written off over time for tax purposes.Depreciable Basis=Cost

38、 of Asset+Capitalized Expenditures lCapitalized Expenditures are expenditures that may provide benefits into the future and therefore are treated as capital outlays and not as expenses of the period in which they were incurred.Such as Shipping and installation.Copyright 2001 Prentice-Hall,Inc.Fundam

39、entals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan29Sale or Disposal of a Depreciable AssetlGenerally,the sale of a“capital asset”(as defined by the IRS)generates a capital gain(asset sells for more than book value)or capital loss(asset sells for less than b

40、ook value).lOften historically,capital gains income has received more favorable U.S.tax treatment than operating income.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan30Corporate Capital Gains/LosseslCurrently,capita

41、l gains are taxed at ordinary income tax rates for corporations,or a maximum 35%.lCapital losses are deductible only against capital gains.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan31Calculating the Incremental

42、Cash FlowslInitial cash outflow-the initial net cash investment.lInterim incremental net cash flows-those net cash flows occurring after the initial cash investment but not including the final periods cash flow.lTerminal-year incremental net cash flows-the final periods net cash flow.Copyright 2001

43、Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan32Initial Cash Outflowa)b)+Capitalized expendituresc)+(-)Increased(decreased)NWCd)-Net proceeds from sale of “old”asset(s)if replacemente)+(-)Taxes(savings)due to the sale of“old”asset

44、(s)if replacementf)=Initial cash outflowCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan33Incremental Cash Flowsa)Net incr.(decr.)in operating revenue less(plus)any net incr.(decr.)in operating expenses,excluding depr

45、.b)-(+)Net incr.(decr.)in tax depreciationc)=Net change in income before taxesd)-(+)Net incr.(decr.)in taxese)=Net change in income after taxesf)+(-)Net incr.(decr.)in tax depr.chargesg)=Incremental net cash flow for periodCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by

46、 Van Horne and Wachowicz.Slides prepared by Wu Xiaolan34Terminal-Year IncrementalCash Flowsa)Calculate the for the terminal periodb)+(-)Salvage value(disposal/reclamation costs)of any sold or disposed assetsc)-(+)Taxes(tax savings)due to asset sale or disposal of“new”assetsd)+(-)Decreased(increased)

47、level of“net”working capital e)Terminal year incremental net cash flowCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan35Example of an Asset Expansion Project Example Basket Wonders(BW)is considering the purchase of a

48、new basket weaving machine.The machine will cost$50,000 plus$20,000 for shipping and installation and falls under the 3-year MACRS class.NWC will rise by$5,000.Lisa Miller forecasts that revenues will increase by$110,000 for each of the next 4 years and will then be sold(scrapped)for$10,000 at the e

49、nd of the fourth year,when the project ends.Operating costs will rise by$70,000 for each of the next four years.BW is in the 40%tax bracket.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan36Initial Cash Outflow?a)$50,

50、000 b)+20,000 c)+5,000 d)-0 (not a replacement)e)+(-)0 (not a replacement)f)=$75,000*Note that we have calculated this value as a“positive”because it is a cash OUTFLOW(negative).Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by W