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1、1GlobalFinancialManagementValuationofCashFlowsInvestmentDecisionsandCapitalBudgetingCopyright1999byAlonBrav,CampbellR.Harvey,StephenGrayandErnstMaug.Allrightsreserved.Nopartofthislecturemaybereproducedwithoutthepermissionoftheauthors.LatestRevision:August23,1
2、9996.0Overview:Thisclassprovidesanoverviewofcapitalbudgeting-determiningwhichinvestmentsafirmshouldundertake.Thenetpresentvalue(NPV)rule,whichiswidelyusedinpractice,isdevelopedandillustratedwithseveralexamples.Anumberofalternativeevaluationtechniquesincluding
3、internalrateofreturnandpaybackperiodarealsoillustrated,highlightingpotentialproblemswiththeiruse.TheNPVtechniqueisillustratedinthecontextofchoosingbetweenmutuallyexclusiveprojectsandprojectswithdifferentlives.6.1Objectives:Aftercompletingthisclass,youshouldbe
4、ableto:·Computethenetpresentvalueofaninvestmentproposal.·ExplainwhytheNPVruleleadstooptimaldecisions·Computetheinternalrateofreturnofaninvestmentproposal.·ExplainthelimitationsoftheIRRasaninvestmentappraisalcriterion.·Computethepaybackperiodofaninvestmentprop
5、osal.2·Determinewhetheraparticularinvestmentproposalshouldbeundertaken.·Determinewhich(ifany)ofasetofinvestmentproposalsshouldbeundertakenwhenthefirmiscapitalconstrained.·Determinewhich(ifeither)oftwomutuallyexclusiveinvestmentproposalswithdifferentlivesshoul
6、dbeundertaken.·ComputetheappropriatecashflowstouseintheNPVanalysis.6.2ProjectsandCashFlowsEverydecisionthefirmmakesisacapitalbudgetingdecisionwheneveritchangesthecompany'scashflows.Considerlaunchinganewproduct.Thisinvolvesaphasewherethenewproductisadvertiseda
7、nddistributed.Hencethefirmwillhavecashoutflowsforpayingadvertisingagencies,distributors,transportationservicesetc.Then,foraperiodoftime,thefirmhascashinflowsfromthesaleoftheproductinthefuture.Alternatively,considerthedecisiontomakeorbuyacertaincomponentthefir
8、mneedsasaninputitcurrentlypurchasesfromanothercompany.Makingtheinputrequirespaymentsforlaborandmaterials,butsavespaymentstothesupplier,andallthesecashinflowsandoutflowsareaffectedbythatde
