Chapter 8 Investment appraisal using DCF (discounted cash flow) methods

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1、Chapter8InvestmentAppraisalDCFGeorgeDongChapteroverviewInvestmentAppraisalNondiscountedCFDiscountedOthermethodsmethodsCFmethodsROCENPVPaybackIRRRelevantCFChapter8.InvestmentappraisalusingDCF1.1CompoundingFV=PV(1+r)nFV=Futurevalueafternperiods/terminalvaluePV=PresentorInitialvaluer=Compo

2、undrateofreturnperperiodn=NumberofperiodsSlide3Chapter8.Investmentappraisalusing1.2DiscountingManyprojectsinvolveinvestingmoneynowandreceivingreturnsinafuturedate,theprocessofadjustingaproject’scashflowstoreflectthereturnthatinvestorscouldgetelsewhereiscalleddiscountingthecashflowsorDCF.Slide4

3、Chapter8.InvestmentappraisalusingDCF2.1Keyterms•AnnuityAseriesofequalcashflows,usetheannuitytableordiscounteachcashflowseparately,whicheveryouprefer(theannuitytableisquicker)•PerpetuityAnequalcashflowreceivedforever;thecumulativePVof$1is$1/r.•CostofcapitalThereturnrequiredbytheprovidersoffinanc

4、e(5%inthelectureexample)–thiswillbecalculatedlaterinthecourse.Chapter8.InvestmentappraisalusingDCF2.1Keyterms•Annuityintoperpetuity•Anequalcashflowreceivedforever,use1/r(youwillneedtorememberthisformula)•Delayedannuity•Usetheappropriateannuityfactorandthensubtracttheannuityfactorforthetimeperio

5、dsforwhichtheannuityhasnotbeenreceivedSlide6Chapter8.InvestmentappraisalusingDCF3.Internalrateofreturn(IRR)Internalrateofreturnisadiscountedcashflowtechniqueofaprojectthatcalculatesthe%returngivenbyaproject.Atthisratetheproject’sNPViszero.Slide7Chapter8.InvestmentappraisalusingDCF3.1IRRformulaI

6、RR=The%returngivenbyaprojectatwhichNPV=0•Step1–calculatetheNPVoftheprojectatalowerrate(say,5%)•Step2–calculatetheNPVoftheprojectatahigherrate(say10%)•Step3–calculatetheinternalrateofreturnusingtheformulausinginterpolation.NPVLIRRR(RR)LHLNPVNPVLHChapter8.InvestmentappraisalusingDCF4.5NPVprof

7、ormaFlowsT0T1T2SalesreceiptsXXCosts(X)(X)SaleslesscostsXXTaxation(X)(X)Capitalexpenditure(X)ScrapvalueXTaxbenefitofCAsXXWorkingcapital(X)(X)XNetcashflows(X)XXDF@post-taxcostofcapitalXXXPresentvalue(X)XXChapter8.Investmentappraisal