Upload
aubrey-park
View
282
Download
9
Tags:
Embed Size (px)
Citation preview
Chapter 10Principles of
Corporate FinanceTenth Edition
Slides by
Matthew Will
Project Analysis
McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
10-2
Topics Covered
The Capital Investment ProcessSensitivity AnalysisMonte Carlo SimulationReal Options and Decision Trees
10-3
Capital Investments
Items for consideration
Capital Budget – A list of investment projects under consideration by a firm
Do not add fudge factors to the cost of capital
Post audits – A review of the project to see how closely it met forewcasts
10-4
How To Handle Uncertainty
Sensitivity Analysis - Analysis of the effects of changes in sales, costs, etc. on a project.
Scenario Analysis - Project analysis given a particular combination of assumptions.
Simulation Analysis - Estimation of the probabilities of different possible outcomes.
Break Even Analysis - Analysis of the level of sales (or other variable) at which the company breaks even.
10-5
Sensitivity Analysis
ExampleGiven the expected cash flow forecasts for Otobai Company’s Motor Scooter project, listed on the next slide, determine the NPV of the project given changes in the cash flow components using a 10% cost of capital. Assume that all variables remain constant, except the one you are changing.
10-6
Sensitivity Analysis
Example - continued
315- FlowCashNet
3.0flow cash Operating
1.5after taxProfit
1.550% @ .Taxes
3profitPretax
1.5onDepreciati
3Costs Fixed
30Costs Variable
37.5Sales
15-Investment
10-1 Years0Year
NPV= 3.43 billion Yen
10-7
Sensitivity Analysis
Example - continued
Possible Outcomes
bil 2bil 3bil 4Cost Fixed
275,000300,000360,000CostVar Unit
380,000375,000350,000priceUnit
.16.1.04ShareMarket
mil 1.1mil 1.0mil .9SizeMarket
OptimisticExpectedcPessimistiVariable
Range
10-8
Sensitivity Analysis
Example - continuedNPV Calculations for Optimistic Market Size Scenario
NPV= +5.7 bil yen
3.3815-Flow CashNet
3.38flow cash Operating
1.88taxafter Profit
1.8850% @ .Taxes
3.75profitPretax
1.5onDepreciati
3Costs Fixed
33Costs Variable
41.25Sales
15-Investment
10-1 Years0Year
10-9
Sensitivity Analysis
Example - continued
NPV Possibilities (Billions Yen)
6.53.40.4Cost Fixed
11.13.415.0-CostVar Unit
5.03.44.2-priceUnit
17.33.410.4-ShareMarket
5.73.41.1SizeMarket
OptimisticExpectedcPessimistiVariable
Range
10-10
Electric Scooter – NPV
Cash Flows, Years 1-10, Billions
Base CaseHigh Oil Prices and
Recession Case
1 Revenue 37.5 44.9 2 Variable cost 30.0 35.9 3 Fixed cost 3.0 3.5 4 Depreciation 1.5 1.5 5 Pretax profit (1-2-3-4) 3.0 4.0 6 Tax 1.5 2.0 7 Net profit (5-6) 1.5 2.0 8 Net cash flow (4+7) 3.0 3.5
18.4 21.4 NPV 3.4 6.4
PV of cash flows
10-11
Electric Scooter - Assumptions
Base CaseHigh Oil Prices and
Recession CaseMarket size 1 million .8 million
Market share 0.1 0.13Unit Price 375000 431300
Unit variable cost 300000 345000Fixed cost 3 billion 3.5 billion
Assumptions
10-12
Electric Scooter - Scenarios
InflowsYear 0
Unit Sales, Thousands
Revenue, Years 1-10 Investment
Variable Costs
Fixed Costs Taxes PV Inflows
PV Outflows NPV
0 0 15 0 3 -2.25 0 19.6 -19.6100 37.5 15 30 3 1.5 230.4 227 3.4200 75 15 60 3 5.25 460.8 434.4 26.5
OutflowsYears 1-10
10-13
Electric Scooter – Accounting Profit
Unit Sales, Thousands Revenue
Variable Costs
Fixed Costs Depreciation Taxes
Total Costs
Profit after Tax
0 0 0 3 1.5 -2.25 2.25 -2.25100 37.5 30 3 1.5 1.5 36 1.5200 75 60 3 1.5 5.25 69.75 5.25
10-14
Electric Scooter – Cash Flows
Year 0 Year 1-10
Investment 15.00 1. Revenue 37.50 2. Variable cost 12.00 3. Fixed cost 19.00 4. Depreciation 1.50
5. Pretax profit (1-2-3-4) 5.00 6.Tax 2.50 7. Net profit (5-6) 2.50
8. Operating cash flow (4+7) 4.00
Net cash flow (15.00) 4.00
10-15
Break Even Analysis
Point at which the NPV=0 is the break even point Otobai Motors has a breakeven point of 85,000
units sold.
Sales, 000’s
PV (Yen)
Billions
400
200
19.6
85 200
Break even
NPV=0
PV Inflows
PV Outflows
10-16
Break Even Analysis
Accounting break even is different, yet wrong. It does not consider the time value of money.
Otobai Motors has an accounting breakeven point of 60,000 units sold.
Sales, 000’s
Accounting revenue and costs (Yen)
Billions
60
40
20
60 200
Break even
Profit =0
Revenues
Costs
10-17
Operating Leverage
Operating Leverage- The degree to which costs are fixed.
Degree of Operating Leverage (DOL) - Percentage change in profits given a 1 percent change in sales.
profits
costs fixed1
salesin change %profitsin change %
DOL
or
DOL
10-18
Operating Leverage
Example – Use the data from the Otobai scooter project.What is the DOL?
5.23
1.5)(31=DOL
10-19
Monte Carlo Simulation
Step 1: Modeling the ProjectStep 2: Specifying ProbabilitiesStep 3: Simulate the Cash FlowsStep 4: Calculate Present Value
Modeling Process
10-21
Flexibility & Real Options
Decision Trees - Diagram of sequential decisions and possible outcomes.
Decision trees help companies determine their Options by showing the various choices and outcomes.
The Option to avoid a loss or produce extra profit has value.
The ability to create an Option thus has value that can be bought or sold.
10-22
Decision Trees
Acquire option on future delivery
Observe growth in demand for airfreight
High Demand
Low Demand
Exercise delivery option
Don’t take delivery
Example - FedEx Expansion Option
10-23
Real Options
1. Option to expand
2. Option to abandon
3. Timing option
4. Flexible production facilities
10-24
Decision Trees$700 (.80)
$ 0 (.20)
$ 300 (.80)
$ 0 (.20)
$ 100 (.80)
$ 0 (.20)
Invest Yes / No
NPV= ?
- $18
- $130
- $130
- $130
.25
.50
.25
$ 0
.44
.56
10-25
Decision Trees$700 (.80)
$ 0 (.20)
$ 300 (.80)
$ 0 (.20)
$ 100 (.80)
$ 0 (.20)
560
240
80
Invest Yes / No
NPV= ?
- $18
- $130
- $130
- $130
.25
.50
.25
$ 0
.44
.56
10-26
Decision Trees$700 (.80)
$ 0 (.20)
$ 300 (.80)
$ 0 (.20)
$ 100 (.80)
$ 0 (.20)
560
240
80
Invest Yes / No
NPV= ?
- $18
- $130
- $130
- $130
.25
.50
.25
$ 0
.44
.56
56020.080.700
10-27
Decision Trees$700 (.80)
$ 0 (.20)
$ 300 (.80)
$ 0 (.20)
$ 100 (.80)
$ 0 (.20)
560
240
80
Invest Yes / No
NPV= ?
- $18
- $130
- $130
- $130
.25
.50
.25
$ 0
.44
.56
295
096.1
560130(upside) NPV 3
NPV = $295
10-28
Decision Trees$700 (.80)
$ 0 (.20)
$ 300 (.80)
$ 0 (.20)
$ 100 (.80)
$ 0 (.20)
560
240
80
Invest Yes / No
NPV= ?
- $18
- $130
- $130
- $130
.25
.50
.25
$ 0
.44
.56
NPV = $295
NPV = $52
NPV = - $69 (do not invest, so NPV = 0)
10-29
Decision Trees$700 (.80)
$ 0 (.20)
$ 300 (.80)
$ 0 (.20)
$ 100 (.80)
$ 0 (.20)
560
240
80
Invest Yes / No
NPV= ?
- $18
- $130
- $130
- $130
.25
.50
.25
$ 0
.44
.56
NPV = $295
NPV = $52
NPV = - $69 (do not invest, so NPV = 0)
83$
096.1
)25.295()5.52()25.0( NPV 2
NPV = $83
10-30
Decision Trees$700 (.80)
$ 0 (.20)
$ 300 (.80)
$ 0 (.20)
$ 100 (.80)
$ 0 (.20)
560
240
80
Invest Yes / No
NPV= $19
- $18
- $130
- $130
- $130
.25
.50
.25
$ 0
.44
.56
NPV = $295
NPV = $52
NPV = - $69 (do not invest, so NPV = 0)
NPV = $83
19$
)056(.)8344(.18 NPV
10-31
Decision Trees$700 (.80)
$ 0 (.20)
$ 300 (.80)
$ 0 (.20)
$ 100 (.80)
$ 0 (.20)
560
240
80
Invest Yes / No
NPV= $19
- $18
- $130
- $130
- $130
.25
.50
.25
$ 0
.44
.56
NPV = $295
NPV = $52
NPV = - $69 (do not invest, so NPV = 0)
NPV = $83