Lecture 4 capital budgeting in more complicated scenarios.pdf

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1、CapitalbudgetinginmorecomplicatedscenariosBoSun1I.SensitivityAnalysisandWhat-ifQuestions…•TheNPVandIRRforaninvestmentwillchangeaswechangethevaluesthatweusefordifferentvariables.•Onewayofanalyzinguncertaintyistochecktoseehowsensitivethedecisionmeasure(NPV,IRR..)istochangesinkeya

2、ssumptions.Whilethishasbecomeeasierandeasiertodoovertime,therearecaveatsthatwewouldoffer.Caveat1:Whenanalyzingtheeffectsofchangingavariable,weoftenholdallelseconstant.Intherealworld,variablesmovetogether.Caveat2:Theobjectiveinsensitivityanalysisisthatwemakebetterdecisions,notch

3、urnoutmoretablesandnumbers.Corollary1:Lessismore.Noteverythingisworthvarying…Corollary2:Apictureisworthathousandnumbers(andtables).2Thefinalstepup:Incorporateprobabilisticestimates..Ratherthanexpectedvalues..ActualRevenuesas%ofForecastedRevenues(Basecase=100%)•EqDiscountrate(Ba

4、seCase=10%)OperatingExpensesatParksas%ofRevenues(BaseCase=60%)3Theresultingsimulation…Average=$2.95billionMedian=$2.73billionNPVrangesfrom-$4billionto+$14billion.NPVisnegative12%ofthetime.4Youarethedecisionmaker…•Assumethatyouarethepersonatthecompanywhoisgiventheresultsofthesim

5、ulation.TheaverageandmedianNPVareclosetoyourbasecasevaluesof$2.877billion.However,thereisa12%probabilitythattheprojectcouldhaveanegativeNPVandthattheNPVcouldbealargenegativevalue?Howwouldyouusethisinformation?a)Iwouldaccepttheinvestmentandprinttheresultsofthissimulationandfilet

6、hemawaytoshowthatIexercisedduediligence.b)Iwouldrejecttheinvestment,because12%ishigherthanmythresholdvalueforlosingonaproject.c)Other5II.SideCostsandBenefits•Mostprojectsconsideredbyanybusinesscreatesidecostsandbenefitsforthatbusiness.–Thesidecostsincludethecostscreatedbytheuse

7、ofresourcesthatthebusinessalreadyandlostrevenuesforotherprojectsthatthefirmmayhave.–Thebenefitsthatmaynotbecapturedinthetraditionalcapitalbudgetinganalysisincludeprojectsynergies(wherecashflowbenefitsmayaccruetootherprojects)andoptionsembeddedinprojects(includingtheoptionstodel

8、ay,expandorabandonaproject).•Thereturnsonaprojectshoul