Lecture 2 NPV &ampamp;amp; Capital budgeting.pdf

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1、NPVandCapitalBudgetingBoSunFIRM’SINVESTMENTDECISION(ORHOWTOPICKUPAPROJECT?)FundamentalprincipleExampleThecashcosttobuildthefactorytomaketheHowdowedefinea“good”project?drugis$10million.Let’sassumethatitcanbebuiltimmediately,at“time0”Thefirstobviousanswer:cost-benefitThecas

2、hreturnsinyears1,2,3,4,and5fromnoware$2M,$2M,$3M,$4M,and$4M.WewanttoassessbyhowmuchtheThedrugwillbeobsoletein5years,whenabenefitsoutweighthecostsnewerdrugwillsupercedeit.And,weassumethefactorywillhavenosalvagevalue.But,howdowedefine“benefits”?“costs”?Howandwhendowedecidet

3、otakeontheproject?Isthisagoodproject?THETIMEVALUEOFMONEY(TVM)–AKEYSUB-PARADIGMExamplesWecanputthemoneyinthebank,earninterestuntiltomorrow,$1Onedollartodayistoday=$1*(1+interestrate)notequaltoonetomorrowdollartomorrow!!!Whenyouwinthe“10millionlottery”,isitreallyworth$10mil

4、lion?Needtoconsiderthe•Ofcoursenot!timevalueofmoney,•Infact,$10millionpaidoutover25yearsisonlyworthabout$5ortheopportunitymillionintoday’sdollarscostofmoney!!–dependsontheinterestrateTimevalueofmoneyFirstprincipleofFinance•timevalueofmoney–therearetwocashflows•samemagnitu

5、de•samerisk–thecashflowthatoccursearlierintimeismorevaluableearlyhighAB3Timevalueofmoney–interestrate!!!•Marketclearswhenthetotalamountofmoneyborrowerswillingtoborrowequalstothetotalamountlenderswillingtolend.•Theinterestratethatclearsthemarketisequilibriumrateofinterest.

6、•Thepriceofmoneyisinterestrate.4FutureValue0t$100FVtFV=$100(1+r)ttFutureValuestr=5%r=10%r=20%0$100.00$100.00$100.001$105.00$110.00$120.005$127.63$161.05$248.8310$162.89$259.37$619.175PresentValue0tPV10-t$100PV=$100/(1+r)現值(PresentValues)tr=5%r=10%r=20%10$100.00$100.00$100

7、.009$95.24$90.91$83.335$78.35$62.09$40.190$61.39$38.55$16.156COMMPOUNDINTERESTCompoundInterest:Formula:FV=PV*(1+i)Nwhere“i”istheinterestratepercompoundingAkeyimplementationconceptperiodandNisnumberofperiodsExample:Youhave$1000,thebankMostfinancialcalculationsuseit.willpay

8、8%peryear,compoundedsemi-annually,youwillinvestforeither6•Itissometimesreferredtoasmonthsoroneye