Beruflich Dokumente
Kultur Dokumente
9: Capital
Budgeting
Decision
Criteria
Decision-making Criteria in
Capital Budgeting
How do we decide
if a capital
investment
project should
be accepted or
rejected?
Decision-making Criteria in
Capital Budgeting
The Ideal Evaluation Method
should:
a) include all cash flows that occur
during the life of the project,
b) consider the time value of money,
c) incorporate the required rate of
return on the project.
Payback Period
How long will it take for the project
to generate enough cash to pay for
itself?
Payback Period
How long will it take for the project
to generate enough cash to pay for
itself?
(500)
150
Payback Period
How long will it take for the project
to generate enough cash to pay for
itself?
(500)
150
Payback Period
Is a 3.33 year payback period good?
Is it acceptable?
Firms that use this method will compare
the payback calculation to some
standard set by the firm.
If our senior management had set a cutoff of 5 years for projects like ours, what
would be our decision?
Accept the project.
Discounted Payback
Discounts the cash flows at the firms
required rate of return.
Payback period is calculated using
these discounted net cash flows.
Problems:
Cutoffs are still subjective.
Still does not examine all cash flows.
Discounted Payback
(500)
250
Discounted
Year
0
1
Cash Flow
-500
250
CF (14%)
-500.00
219.30
Discounted Payback
(500)
250
Discounted
Year
0
1
Cash Flow
-500
250
CF (14%)
-500.00
219.30
280.70
1 year
Discounted Payback
(500)
250
Discounted
Year
Cash Flow
0
1
-500
250
250
CF (14%)
-500.00
219.30
280.70
192.37
1 year
Discounted Payback
(500)
250
Discounted
Year
Cash Flow
0
1
-500
250
250
CF (14%)
-500.00
219.30
280.70
192.37
88.33
1 year
2 years
Discounted Payback
(500)
250
Discounted
-500
250
280.70
2
250
88.33
3
250
CF (14%)
-500.00
219.30
1 year
192.37
2 years
168.74
Discounted Payback
(500)
250
Discounted
-500
250
280.70
2
250
88.33
3
250
CF (14%)
-500.00
219.30
1 year
192.37
2 years
168.74
.52 years
Discounted Payback
(500)
250
Discounted
CF (14%)
The Discounted
-500 -500.00
Payback
250 219.30
1 year
is 2.52 years
280.70
2
250
88.33
3
250
192.37
2 years
168.74
.52 years
Other Methods
1) Net Present Value (NPV)
2) Profitability Index (PI)
3) Internal Rate of Return (IRR)
Each of these decision-making criteria:
Examines all net cash flows,
Considers the time value of money, and
Considers the required rate of return.
NPV =
t=1
FCFt
(1 + k) t
- IO
NPV Example
Suppose we are considering a capital
investment that costs $250,000 and
provides annual net cash flows of
$100,000 for five years. The firms
required rate of return is 15%.
NPV Example
Suppose we are considering a capital
investment that costs $250,000 and
provides annual net cash flows of
$100,000 for five years. The firms
required rate of return is 15%.
(250,000) 100,000 100,000 100,000 100,000 100,000
P/Y = 1 N = 5
PMT = 100,000
I = 15
Profitability Index
Profitability Index
n
NPV =
t=1
FCFt
t
(1 + k)
- IO
Profitability Index
n
NPV =
t=1
n
PI
t=1
FCFt
t
(1 + k)
- IO
FCFt
(1 + k) t
IO
Profitability Index
Decision Rule:
If PI is greater than or equal
to 1, accept.
If PI is less than 1, reject.
NPV =
t=1
FCFt
(1 + k) t
- IO
NPV =
t=1
IRR:
t=1
FCFt
(1 + k) t
FCFt
t
(1 + IRR)
- IO
= IO
IRR:
FCFt
t
(1 + IRR)
= IO
t=1
Calculating IRR
Looking again at our problem:
The IRR is the discount rate that
makes the PV of the projected cash
flows equal to the initial outlay.
(250,000) 100,000 100,000 100,000 100,000 100,000
IRR
Decision Rule:
If IRR is greater than or equal to
the required rate of return,
accept.
If IRR is less than the required
rate of return, reject.
(500)
200
100
(200)
400
300
200
100
(200)
400
300
(500)
200
100
(200)
400
300
(500)
200
100
(200)
400
300
Summary Problem
(900)
300
400
400
500
600
Summary Problem
IRR = 34.37%.
Using a discount rate of 15%,
NPV = $510.52.
PI = 1.57.
(900)
300
400
400
500
600
MIRR Steps:
Menghitung nilai sekarang (PV)cash
outflows menggunakan tingkat bunga
rate of return.
Menghitung nilai nanti (FV) cash
inflows pada akhir tahun proyek,
disebut nilai terminal menggunakan
tingkat bunga rate of return.
MIRR: suatu tingkat diskonto yang
menyamakan nilai sekarang cash
outflow dengan nilai sekarang nilai
terminal . PVoutflows = PVinflows
MIRR
(900)
300
400
400
500
600
MIRR
MIRR