fundamentals of corporate finance chapter 9 making capital investment decisions
TRANSCRIPT
Fundamentals of Corporate Finance
Chapter 9
Making Capital Investment Decisions
Overview of Lecture
Corporate Finance in the News
Insert a current news story here to frame the material you will cover in the lecture.
Incremental Cash Flows
The Stand-Alone Principal
Incremental Cash Flows
Incremental Cash Flows
Incremental Cash Flows
Pro Forma Financial Statements
Pro Forma Financial Statements
Pro Forma Financial Statements
Pro Forma Financial Statements
Project Cash Flows
Project Operating Cash Flow (OCF)
Project Operating Cash Flow
Project Value
A Closer Look at Net Working Capital
A Closer Look at Net Working Capital
A Closer Look at Net Working Capital
Example 9.1Cash Collections and Costs
Example 9.1Cash Collections and Costs
Depreciation
Depreciation
Depreciation
20% Reducing Balance:
Example 9.2Reducing Balance Depreciation
Example 9.2Reducing Balance Depreciation
Example: Majestic Mulch and Compost Ltd (MMC)
Example: Majestic Mulch and Compost Ltd (MMC)
Example: Majestic Mulch and Compost Ltd (MMC)
Example: Majestic Mulch and Compost Ltd (MMC)
Example: Majestic Mulch and Compost Ltd (MMC)
Example: Majestic Mulch and Compost Ltd (MMC)
Example: Majestic Mulch and Compost Ltd (MMC)
Example: Majestic Mulch and Compost Ltd (MMC)
Alternative Definitions of Operating Cash Flow
Special Cases of DCF Analysis
Example 9.3To Buy or Not to Buy
Example 9.3To Buy or Not to Buy
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.
Equivalent Annual Cost (EAC)
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
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
Investments of Unequal Lives:The Equivalent Annual Cost Method
Investments of Unequal Lives: The Equivalent Annual Cost Method
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
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
Investments of Unequal Lives: The Equivalent Annual Cost Method
Choose Machine B
Example 9.4Equivalent Annual Costs
Example 9.4Equivalent Annual Costs
Example 9.4Equivalent Annual Costs
Activities for this Lecture
Thank You