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1、The McGraw-Hill Companies, Inc.,2001 8- 1 Irwin/McGraw-Hill Chapter 8Fundamentals of Corporate FinanceThird Edition Project Analysis Brealey Myers Marcusslides by Matthew Will The McGraw-Hill Companies, Inc.,2001 8- 2 Irwin/McGraw-Hill Topics CoveredHow Firms Organize Their Investment ProcessSome “W

2、hat If” QuestionsSensitivity AnalysisBreak Even AnalysisFlexibility in Capital BudgetingDecision Trees Options The McGraw-Hill Companies, Inc.,2001 8- 3 Irwin/McGraw-Hill Capital Budgeting ProcessCapital Budget - The list of planned investment projects.The Decision Process1 - Develop and rank all in

3、vestment projects2 - Authorize projects based on: Govt regulation Production efficiency Capacity requirements NPV The McGraw-Hill Companies, Inc.,2001 8- 4 Irwin/McGraw-Hill Capital Budgeting ProcessCapital Budgeting ProblemsConsistent forecastsConflict of interestForecast biasSelection criteria (NP

4、V and others) The McGraw-Hill Companies, Inc.,2001 8- 5 Irwin/McGraw-Hill H ow To H andle UncertaintySensitivity Analysis - Analysis of the effects of changes in sales, costs, etc. on a project.Scenario Analysis - Project analysis given a particular combination of assumptions.Simulation Analysis - E

5、stimation of the probabilities of different possible outcomes.Break Even Analysis - Analysis of the level of sales (or other variable) at which the company breaks even. The McGraw-Hill Companies, Inc.,2001 8- 6 Irwin/McGraw-Hill Sensitivity AnalysisExampleGiven the expected cash flow forecasts liste

6、d on the next slide, determine the NPV of the project given changes in the cash flow components using an 8% cost of capital. Assume that all variables remain constant, except the one you are changing. The McGraw-Hill Companies, Inc.,2001 8- 7 Irwin/McGraw-Hill Sensitivity AnalysisYear 0 Years 1 - 12

7、I nvestment - 5, 400Sal es 16, 000Vari abl e Costs 13, 000Fi xed Costs 2, 000Depreci ati on 450Pretax prof i t 550. Taxes 40% 220Prof i t af ter tax 330 Operati ng cash f l ow 780Net Cash Fl ow - 5, 400 780Example - continued NPV= $478 The McGraw-Hill Companies, Inc.,2001 8- 8 Irwin/McGraw-Hill Sens

8、itivity AnalysisExample - continuedPossible Outcomes RangeVari abl e Pessi mi st i c Expect ed Opt i mi st i cI nvest ment( 000s) 6, 200 5, 400 5, 000Sal es( 000s) 14, 000 16, 000 18, 000Var Cost ( % of sal es) 83% 81. 25% 80%Fi xed Cost s( 000s) 2, 100 2, 000 1, 900 The McGraw-Hill Companies, Inc.,

9、2001 8- 9 Irwin/McGraw-Hill Sensitivity AnalysisExample - continuedNPV Calculations for Pessimistic Investment ScenarioYear 0 Years 1 - 12I nvestment - 6, 200Sal es 16, 000Vari abl e Costs 13, 000Fi xed Costs 2, 000Depreci ati on 450Pretax prof i t 550. Taxes 40% 220Prof i t af ter tax 330 Operati n

10、g cash f l ow 780Net Cash Fl ow - 6, 200 780NPV= ($121) The McGraw-Hill Companies, Inc.,2001 8- 10 Irwin/McGraw-Hill Sensitivity AnalysisExample - continuedNPV Possibilities NPV sVar i abl e Pessi mi st i c Expect ed Opt i mi st i cI nvest ment ( )000( 000s) - 121 478 778Sal es( 000s) - 1, 218 478 2

11、, 174Var Cost ( % of sal es) - 788 478 1, 382Fi xed Cost s( 000s) 26 478 930 The McGraw-Hill Companies, Inc.,2001 8- 11 Irwin/McGraw-Hill Break Even AnalysisExampleGiven the forecasted data on the next slide, determine the number of planes that the company must produce in order to break even, on an

12、NPV basis. The companys cost of capital is 10%. The McGraw-Hill Companies, Inc.,2001 8- 12 Irwin/McGraw-Hill Break Even AnalysisYear 0 Years 1 - 6I nvestment $900Sal es 15. 5xPl anes Sol dVar. Cost 8. 5xPl anes Sol dFi xed Costs 175Depreci ati on 900 / 6 = 150Pretax Prof i t ( 7xPl anes Sol d) - 325

13、Taxes ( 50%) ( 3. 5xPl anes Sol d) - 162. 5 Net Prof i t ( 3. 5xPl anes Sol d) - 162. 5Net Cash Fl ow - 900 ( 3. 5xPl anes Sol d) - 12. 5 The McGraw-Hill Companies, Inc.,2001 8- 13 Irwin/McGraw-Hill Break Even AnalysisAnswerThe break even point, is the # of Planes Sold that generates a NPV=$0. The p

14、resent value annuity factor of a 6 year cash flow at 10% is 4.355Thus, NPV xPl anes So= -900 + 435535. ( . l d - 12. 5) The McGraw-Hill Companies, Inc.,2001 8- 14 Irwin/McGraw-Hill AnswerSolving for “Planes Sold”0 4355 35= -900 + . ( . l d - 12. 5)xPl anes SoPl anes Sol d = 63Break Even Analysis The

15、 McGraw-Hill Companies, Inc.,2001 8- 15 Irwin/McGraw-Hill Operating LeverageOperating Leverage- The degree to which costs are fixed.Degree of Operating Leverage (DOL) - Percentage change in profits given a 1 percent change in sales. DOL = % change i n pr of i t s% change i n sal es The McGraw-Hill C

16、ompanies, Inc.,2001 8- 16 Irwin/McGraw-Hill Operating LeverageExample - A company has sales outcomes that range from $16mil to $19 mil, Depending on the economy. The same conditions can produce profits in the range from $550,000 to $1,112,000. What is the DOL? DOL = = 5.45 102.218.75 The McGraw-Hill

17、 Companies, Inc.,2001 8- 17 Irwin/McGraw-Hill Flexibility & OptionsDecision Trees - Diagram of sequential decisions and possible outcomes.Decision trees help companies determine their Options by showing the various choices and outcomes.The Option to avoid a loss or produce extra profit has value.The ability to create an Option thus has value that can be bought or sold. The McGraw-Hill Companies, Inc.,2001 8- 18 Irwin/McGraw-Hill Decision Trees NPV=0Dont test Test (Invest $200,000) SuccessFailure Pursue project NPV=$2millionStop projectNPV=0