Beruflich Dokumente
Kultur Dokumente
McGraw-Hill/Irwin
Learning Objective 1
McGraw-Hill/Irwin
Discounted-Cash-Flow Analysis
Plant expansion Equipment selection Equipment replacement
Cost reduction
Lease or buy
16-3
Net-Present-Value Method
o
o
o
Prepare a table showing cash flows for each year, Calculate the present value of each cash flow using a discount rate, Compute net present value, If the net present value (NPV) is positive, accept the investment proposal. Otherwise, reject it.
16-4
Net-Present-Value Method
Mattson Co. has been offered a five year contract to provide component parts for a large manufacturer.
Cost and revenue information Cost of special equipment $160,000 Working capital required 100,000 Relining equipment in 3 years 30,000 Salvage value of equipment in 5 years 5,000 Annual cash revenue and costs: Sales revenue from parts 750,000 Cost of parts sold 400,000 Salaries, shipping, etc. 270,000
16-5
Net-Present-Value Method
At the end of five years the working capital will be released and may be used elsewhere by Mattson. Mattson uses a discount rate of 10%.
16-6
Net-Present-Value Method
Annual net cash inflows from operations
Sales revenue Cost of parts sold Gross margin Less out-of-pocket costs Annual net cash inflows $ 750,000 400,000 350,000 270,000 $ 80,000
16-7
Net-Present-Value Method
Investment in equipment Working capital needed Annual net cash inflows Relining of equipment Salvage value of equip. Working capital released Net present value Years Now Now 1-5 3 5 5 Cash Flows $(160,000) (100,000) 80,000 (30,000) 5,000 100,000 10% Factor 1.000 1.000 3.791 0.751 0.621 0.621 Present Value $ (160,000) (100,000) 303,280 (22,530) 3,105 62,100 $ 85,955
Mattson should accept the contract because the present value of the cash inflows exceeds the present value of the cash outflows by $85,955. The project has a positive net present value.
16-8
Internal-Rate-of-Return Method
The internal rate of return is the true economic return earned by the asset over its life. The internal rate of return is computed by finding the discount rate that will cause the net present value of a project to be zero.
16-9
Internal-Rate-of-Return Method
Black Co. can purchase a new machine at a cost of $104,320 that will save $20,000 per year in cash operating costs. The machine has a 10-year life.
16-10
Internal-Rate-of-Return Method
Future cash flows are the same every year in this example, so we can calculate the internal rate of return as follows:
Investment required Net annual cash flows $104, 320 $20,000 = Present value factor
= 5.216
16-11
Internal-Rate-of-Return Method
The present value factor (5.216) is located on the Table IV in the Appendix. Scan the 10period row and locate the value 5.216. Look at the top of the column and you find a rate of 14% which is the internal rate of return.
$104, 320 $20,000
5.216
16-12
Internal-Rate-of-Return Method
Heres the proof . . .
Investment required Annual cost savings Net present value Year Now 1-10 Amount $(104,320) 20,000 14% Factor 1.000 5.216 Present Value (104,320) 104,320 $ -
16-13
Learning Objective 2
McGraw-Hill/Irwin
16-16
16-17
16-18
Learning Objective 3
McGraw-Hill/Irwin
16-20
Total-Cost Approach
Each system would last five years. 12 percent hurdle rate for the analysis.
MAINFRAME PC _ Salvage value old system $ 25,000 $ 25,000 Cost of new system (400,000) (300,000) Cost of new software ( 40,000) ( 75,000) Update new system ( 40,000) ( 60,000) Salvage value new system 50,000 30,000 ================================================ Operating costs over 5-year life: Personnel (300,000) (220,000) Maintenance ( 25,000) ( 10,000) Other costs ( 10,000) ( 5,000) Datalink services ( 20,000) ( 20,000) Revenue from time-share 25,000 16-21
Total-Cost Approach
MAINFRAME ($) Acquisition cost computer Acquisition cost software System update Salvage value Operating costs Time sharing revenue Total cash flow X Discount factor Present value Today (400,000) ( 40,000) Year 1 Year 2 Year 3 Year 4 Year 5 ( 40,000)
50,000 (335,000) (335,000) (335,000) (335,000) (335,000) (335,000) 20,000 20,000 20,000 20,000 20,000 20,000 440,000 (315,000) (315,000) (355,000) (315,000) (265,000) X 1.000 X .893 X .797 X .712 X .636 X .567 (440,000) (281,295) (251,055) (252,760) (200,340) (150,255)
SUM = ($1,575,705)
PERSONAL COMPUTER ($) Acquisition cost computer Acquisition cost software System update Salvage value Operating costs Time sharing revenue Total cash flow X Discount factor Present value Today (300,000) ( 75,000) Year 1 Year 2 Year 3 Year 4 Year 5
( 60,000)
50,000 (235,000) (235,000) (235,000) (235,000) (235,000) (235,000) -0-0-0-0-0-0_ 375,000 (235,000) (235,000) (295,000) (235,000) (205,000) X 1.000 X .893 X .797 X .712 X .636 X .567 (375,000) (209,855) (187,295) (210,040) (149,460) (116,235)
SUM = ($1,247,885)
16-22
Total-Cost Approach
($1,575,705)
Mountainview should purchase the personal computer system for a cost savings of $327,820.
16-23
Incremental-Cost Approach
INCREMENTAL ($) Acquisition cost computer Acquisition cost software System update Salvage value Operating costs Time sharing revenue Total cash flow X Discount factor Present value
Year 1
Year 2
Year 3
Year 4
Year 5
20,000 20,000 (100,000) (100,000) (100,000) (100,000) (100,000) 20,000 20,000 20,000 20,000 20,000 20,000 ( 65,000) ( 80,000) ( 80,000) ( 80,000) ( 80,000) ( 60,000) X 1.000 X .893 X .797 X .712 X .636 X .567 ( 65,000) ( 71,440) ( 63,760) ( 42,720) ( 50,880) ( 34,020)
SUM = ($ 327,820)
16-24
($ 327,820)
($ 327,820)
16-27
Learning Objective 4
McGraw-Hill/Irwin
16-29
Revenue Expenses
525,000
(210,000) 315,000
The tax rate is 40%, so income taxes are $525,000 40% = $ 210,000
Not all expenses require cash outflows. The most common example is depreciation.
16-30
Learning Objective 5
McGraw-Hill/Irwin
Learning Objective 6
McGraw-Hill/Irwin
16-34
Extended Illustration
For a complete present value analysis for an investment decision facing High Country Department Stores, Inc., see the textbook. High Country Department Stores
16-35
Learning Objective 7
McGraw-Hill/Irwin
The total cash flows are the same, but the pattern of the flows is different.
16-37
This project has a positive net present value which means the projects return is greater than the discount rate.
16-38
Project B has a negative net present value which means the projects return is less than the discount rate.
16-39
Learning Objective 8
McGraw-Hill/Irwin
Payback = period
$20,000 $4,000
= 5 years
16-41
Accounting-Rate-of-Return Method
Discounted-cash-flow method focuses on cash flows and the time value of money.
Accounting-rate-of-return method focuses on the incremental accounting income that results from a project.
16-43
Accounting-Rate-of-Return Method
The following formula is used to calculate the accounting rate of return:
Average incremental revenues
Initial investment
16-44
Accounting-Rate-of-Return Method
Meyers Company wants to install an espresso bar in its restaurant.
The espresso bar:
Cost $140,000 and has a 10-year life. Will generate incremental revenues of $100,000 and incremental expenses of $80,000 including depreciation.
Accounting-Rate-of-Return Method
Accounting = rate of return $100,000 - $80,000 $140,000
= 14.3%
The accounting rate of return method is not recommended for a variety of reasons, the most important of which is that it ignores the time value of money.
16-46
Learning Objective 9
McGraw-Hill/Irwin
16-48
Learning Objective 10
McGraw-Hill/Irwin
Inflation Effects
Nominal Dollars Real dollars
16-51
End of Chapter 16
16-52