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CORPORATE FINANCE
ThS. Nguy n T ng Minh Email: minh.nguyentuong@yahoo.com.vn
CORPORATE FINANCE
CHAPTER 5 NET PRESENT VALUE and OTHER INVESTMENT CRITERIA
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References
Fundamentals of Corporate Finance, Brealey et al., McGraw Hill, 5th edition, USA, 2007. Foundation of Financial Management, Block & Hirt, McGraw Hill, 12th edition,USA, 2008. Other relevant materials.
-$350,000 ??? Should he invest in this project ? Assuming that he could invest in a 1 year-US Treasury note of 7% calculate NPV PV = $373,832 NPV = PV of cash flow required investment ACCEPT the project
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NPV = $23,832
-$350,000 NPV with rate of return of 12% = $7,143 < $23,832 A risky dollar is worth less than a safe one
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-$350,000
NPV = ?
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Project A
Project B
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WHAT IF ?
Project A NPV > 0, the payback period = 1 NPV > 0, the payback period = 2
Project B NPV > 0, the payback period = 2 NPV < 0, the payback period = 1
Select A or B ?? A or B15 ??
Steps to calculate Discounted Payback 1 2 Calculate the PV of the cash flow Add each PV up to be equal with initial investment
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NPV is NEGATIVE
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calculate IRR
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???D and E have the same attraction ? Not exactly !!!!! D What paid today is received more and more tomorrow You are in lending with high interest rate E What received today is repaid more and more tomorrow
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Steps to calculate modified IRR (applied for a 4-year project): 1 2 3 4 Combining last two cash flows into one PV of year 4 If the PV is negative, combining last three cash flows into one PV of year 3 If the PV is still negative, combining last four cash flows into one PV of year 2 and so on If the PV is positive, making a new modified cash flow and calculate the25 modified IRR
r = 10%
IRR = 12.53%
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Financial Manager Several years later, the project cannot be launched, the business of company
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Which machine should Samsung choose ? calculating the Equivalent Annual Annuity and select the machine that has the lowest Equivalent Annual Annuity
the cash flow per period with the same PV as the cost of buying and operating a machine
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CURRENT MOTO will be last in 2 more years cost $12,000 per year to operate Which moto should you choose ?
NEW MOTO will be last in 5 years cost $8,000 per year to operate
Higher than 12
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Soft rationing constrains on spending under certain circumstances can be violated or even viewed as constituting targets rather than absolute limits
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V. LAST LOOK
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