L4 capital budgeting

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1、CapitalbudgetinginmorecomplicatedscenariosBoSun12I.SensitivityAnalysisandWhat-ifQuestions…•TheNPVandIRRforaninvestmentwillchangeaswechangethevaluesthatweusefordifferentvariables.•Onewayofanalyzinguncertaintyistochecktoseehowsensitivethedecisionmeasure(NPV,IRR..)istochan

2、gesinkeyassumptions.Whilethishasbecomeeasierandeasiertodoovertime,therearecaveatsthatwewouldoffer.Caveat1:Whenanalyzingtheeffectsofchangingavariable,weoftenholdallelseconstant.Intherealworld,variablesmovetogether.Caveat2:Theobjectiveinsensitivityanalysisisthatwemakebett

3、erdecisions,notchurnoutmoretablesandnumbers.Corollary1:Lessismore.Noteverythingisworthvarying…Corollary2:Apictureisworthathousandnumbers(andtables).3Thefinalstepup:Incorporateprobabilisticestimates..Ratherthanexpectedvalues..ActualRevenuesas%ofForecastedRevenues(Basecas

4、e=100%)•EqDiscountrate(BaseCase=10%)OperatingExpensesatParksas%ofRevenues(BaseCase=60%)4Theresultingsimulation…Average=$2.95billionMedian=$2.73billionNPVrangesfrom-$4billionto+$14billion.NPVisnegative12%ofthetime.5Youarethedecisionmaker…•Assumethatyouarethepersonattheco

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

6、ndprinttheresultsofthissimulationandfilethemawaytoshowthatIexercisedduediligence.b)Iwouldrejecttheinvestment,because12%ishigherthanmythresholdvalueforlosingonaproject.c)Other6II.SideCostsandBenefits•Mostprojectsconsideredbyanybusinesscreatesidecostsandbenefitsforthatbus

7、iness.–Thesidecostsincludethecostscreatedbytheuseofresourcesthatthebusinessalreadyownsandlostrevenuesforotherprojectsthatthefirmmayhave.–Thebenefitsthatmaynotbecapturedinthetraditionalcapitalbudgetinganalysisincludeprojectsynergies(wherecashflowbenefitsmayaccruetootherp

8、rojects)andoptionsembeddedinprojects(includingtheoptionstodelay,expandorabandonaproject).•Thereturnsonaproject