Upload
benita
View
52
Download
0
Tags:
Embed Size (px)
DESCRIPTION
Chapter 6: An Economic Appraisal Technique: PBP and ARR. The Purpose of An Economic Appraisal. An economic appraisal is a vein to accomplish a corporate objective. - PowerPoint PPT Presentation
Citation preview
Chapter 6: An Economic Appraisal Technique: PBP and ARR
23年 4月 21日 1Kim, GT IE of Chosun University
The Purpose of An Economic Appraisal
• An economic appraisal is a vein to accomplish a corporate objective.•In other words, it is commensurate with evaluating the corporate strategies so as to improve stockholders’ wealth by implementing a most desirable projects.•The types of investment projects; i) service (cost) projects: those which are with regard to reducing costs. (ex. A power plant may need to decide one fuel resource to generate electricity between gas and oil.)• ii) revenue projects: those which are concerned with increasing a firm’s revenue.(ex. A company may need to decide which one to produce to increase its profit or revenue between a HD and plain tv)•All projects need cash outflows at the outset and generates cash inflows in the following times.
23年 4月 21日 2Kim, GT IE of Chosun University
Depending on whether or not the interest concept is involved.
- Appraisal techniques without interest involved.
(1) payback period(PB)
(2) accounting rate of return(ARR)
- Appraisal techniques with interest involved.
(1) net present value(NPV)
(2) annual equivalent value(AE)
(3) internal rate of return(IRR)
Appraisal Techniques
23年 4月 21日 3Kim, GT IE of Chosun University
Depending on the final value of the results which are provided by the appraisal techniques
- appraisal techniques with an absolute value
i) conventional & discounted PB
ii) NPV
iii) AE
- appraisal techniques with a relative value
i) ARR
ii) IRR
Appraisal Techniques
23年 4月 21日 4Kim, GT IE of Chosun University
Tech. %*Firm Size PER Debt Dividend Industry Ownership
Avg Small Big G NG H L Y N M NM L H
IRR 75.61 3.09 2.87 3.41 3.36 3.36 2.85 3.36 3.43 2.68 3.19 2.94 3.34 2.85
NPV 74.93 3.08 2.83 3.42 3.30 3.27 2.84 3.39 3.35 2.76 3.23 2.82 3.35 2.77
PB 56.74 2.53 2.72 2.25 2.55 2.41 2.58 2.46 2.46 2.63 2.68 2.33 2.39 2.70
MARR 56.94 2.48 2.13 2.95 2.78 2.87 2.27 2.63 2.84 2.06 2.60 2.29 2.70 2.12
SA 51.54 2.31 1.58 2.56 2.35 2.41 2.10 2.56 2.42 2.17 2.35 2.24 2.37 2.18
DPB 29.45 1.56 1.47 1.55 1.52 1.67 1.49 1.64 1.54 1.62 1.61 1.50 1.49 1.76
ROA 26.59 1.47 1.34 1.57 1.31 1.55 1.50 1.41 1.37 1.52 1.49 1.45 1.40 1.52
ARR 20.29 1.34 0.95 1.25 1.43 1.19 1.34 1.32 1.40 1.27 1.36 1.34 1.30 1.44
SA** 13.66 0.95 0.85 1.22 0.84 0.86 0.78 1.10 1.04 0.82 0.95 0.92 0.95 0.86
APV 10.78 0.85 0.83 0.72 0.97 0.69 0.87 0.80 0.91 0.78 0.92 0.79 0.99
PI 11.87 0.83 0.75 0.73 0.81 0.74 0.81 0.83 0.90 0.76 0.81 0.98
The Utilization of the Appraisal Techniques
PER: price-earning ratio, G: growth, NG: no-growth, H: hight, L: low, Y: yes, N: no, M: a manufacturing industry, NM: a non-manufacturing industry, IRR: internal rate of return, NPV: net present value, PB: payback period, MARR: minimum attractive of return, SA: sensitivity analysis, DPB: discounted payback period,ROA: real options approach, ARR: accounting rate of return, SA**: simulation analysis,APV: adjusted present value, PI: profitability index
23年 4月 21日 5Kim, GT IE of Chosun University
Principle - To be a period of time spent to fully recover the initial investment cost
Method - It is determined based on the cumulative amount of cash flows.
A PB is found to be one which satisfies the equation above.
Decision Criteria - If A PB is less than the predetermined period of time, undertake the project and perform
the following sophisticated evaluation techniques. Otherwise, reject it.
The Types of PB i) Traditional payback period(TPBP): no interest concept considered. ii) Discounted payback period (DPB): interest concept considered.
Payback Period
23年 4月 21日 6Kim, GT IE of Chosun University
00
tCFn
n
Traditional Payback Period
N CF CCF 012345
-30,0009,0009,0009,0009,0009,000
-30,000-21,000-12,000-3,0006,000
15,000
A TPBP is determined between 3 and 4 years. TPBP= 3.33 years
(unit: 000 won)
23年 4月 21日 7Kim, GT IE of Chosun University
A Conventional Payback Period
A TPBP based on the a real cash flowA TPBP based on a nominal cash
flow
n Real CF CCF Nominal CF CCF
012345
-300,00090,00090,00090,00090,00090,000
-300,000-210,000
-12,000-3,0006,000
15,000
-300,0009,900
10,89011,97913,17714,495
-300,000-20,100
-9,2102,769
15,94630,441
(unit: 000 won)
23年 4月 21日 8Kim, GT IE of Chosun University
A Conventional Payback Period
Ex 6.1] Determine a TPBP
Given] The initial investment costs of project A and B: 120 m won and 150 m won
A project life of A and B are 3 and 7 years
n A B
CF CCF CF CCF01234567
-120,00060,00060,00060,000
-120,000-60,000
060,000
-150,00050,00050,00050,00050,00050,00050,00050,000
-150,000-100,000
-50,0000
50,000100,000150,000200,000
IRR 23.4% 27%
23年 4月 21日 9Kim, GT IE of Chosun University
Principle - TPBP + Interest Concept Employed
Decision Criteria - To be one which makes a cumulative cash flow zero - NPV=0
Equation
Discounted Payback Period
0
0(1 )
ntt
t
CF
i
DPBP
23年 4月 21日 10Kim, GT IE of Chosun University
Ex 6.2] Determine a discounted payback period for the project for an automatic machining center
Given] Cash flows for the project, interest rate=15%
DPBP
0
62,500
33,982
33,726
33,205
33,135
82,013
n
Unit: ooo won
1 2 3 4 5
23年 4月 21日 11Kim, GT IE of Chosun University
Sol] determine a DPBP
DPBP
N 0 1 2 3 4 5
NCF -62,500 33,982 33,726 33,205 33,135 82,013
CCF* -62,500 -28,518 -5,208 38,413 71,548 153,562
Interest Factor(P/F,15%,0)
=1(P/F,15%,1)
=0.870(P/F,15%,2)
=0.7561(P/F,15%,3)
=0.658(P/F,15%,4)
=0.572(P/F,15%,5)
=0.4971
Discounted CF -62,500 29,564 25,500 21,848 18,953 40,768**
CumDCF*** -62,500 -32,936 -7,436 14,412 33,365 74,134
*: Cumulative Cash Flow without considering an interest rate **: Discounted Cash Flow= NCF * Interest Factor***: Cumulative Discounted Cash Flow
23年 4月 21日 12Kim, GT IE of Chosun University
A Relationship Between PB and ROR
i
0
P
A
1
A
2
A
3
A
4
A
N
…………………………
N
N
ii
i1AP
1
1
where, P: present value, A: equal amount of a cash flow
N: project life, i: interest rate
23年 4月 21日 13Kim, GT IE of Chosun University
if a project life is infinite, i.e., “ ” ,
The equation above is called a capitalized equivalent (CE).
- A relationship between a PB and IRR
i
A
i
i1A
ii
i1AP
N
NN
N
N
/11lim
1
1lim
N
nnA
Ai
P
Ai
i
APnAP
1
PB Approx. IRR3 년 33%4 년 25%5 년 20%6 년 17%7 년 14%
23年 4月 21日 14Kim, GT IE of Chosun University
A Relationship Between PB and ROR
Ex 6.3] A adequate Case for A Traditional Payback Period
Given] A investment cost for installing a heating and air conditioning system in the class: May=3.375m won, Jun=1.125m won, a cost saving of electricity: Jun. to Aug. =450, 000 won, Apr. to May & Sep to Oct=225,000 won, Nov. to Mar=337,000 won
Sol] Determine a traditional payback period
2009 2010
mo CF CCF CF CCF
5
6
7
8
9
10
11
12
1
2
3
4
-3,375
-1,125
450
450
225
225
337.5
337.5
337.5
337.5
337.5
225
-3,375
-4,500
-4,050
-3,600
-3,375
-3,150
-2,812.5
-2,475
-2,137.5
-1,800
-1,462.5
-1,237
225
450
450
450
-1,012.5
-562.5
-112.5
337.5
PBP 15.25months
When The Payback Period Technique Can Be Properly Used:
It is better to use for a case in which the project life is measured in a month rather than a year.
(unit: 000 won)
23年 4月 21日 15Kim, GT IE of Chosun University
Ex 6.4] Measure Risk with a Payback PeriodGiven] A investment cost for installing a heating and air conditioning system in the class:
May=3.375m won, Jun=1.125m won, a cost saving of electricity: Jun. to Aug. =450, 000 won, Apr. to May & Sep to Oct=225,000 won, Nov. to Mar=337,000 won , Interest Rate =12%
Sol] Determine a discounted payback period
A Risk Measuring with A Payback Period
(unit: 000 won)
2009 2010
mo CF CCF CF CCF
5
6
7
8
9
10
11
12
1
2
3
4
-3,375
-1,125
450
450
225
225
337.5
337.5
337.5
337.5
337.5
225
-3,408.8
-4,579.1
-4,174.9
-3,766.6
-3,579.3
-3,390.1
-3,086.5
-2,780.0
-2,470.2
-2,157.4
-1,841.4
-1,634.8
225
450
450
450
225
225
337.5
-1,426.2
-990.5
-550.4
-106.0
118.1
344.3
685.2투자회수기간 16.47
개월
ttt CFiPBPB 11
Project Balance: PB
23年 4月 21日 16Kim, GT IE of Chosun University
-5000
-4000
-3000
-2000
-1000
0
1000
1 2 3 4 5 6 7 8 9 10111213141516171819
월
누적현금흐름
23年 4月 21日 17Kim, GT IE of Chosun University
A Risk Measuring with A Payback Period
Ex 6.6] Determine an ARR with an average investment capital
Given] I: 500 m won, life: 5 years, No salvage value at the end of year 5: 0, The relevant financial date
Accounting Rate of Return
ARR Af ter-Tax Average I ncomeAverage I nvestment Capi tal
n 1 2 3 4 5
Rev 433,333 450,000 266,667 200,000 133,333
Expenses 200,000 150,000 100,000 100,000 100,000
BTCF 233,333 300,000 166,667 100,000 33,333
Dep 100,000 100,000 100,000 100,000 100,000
BTI 133,333 200,000 66,667 0 -66,667
Tax(25%) 33,333 50,000 16,667 0 -16,667
NI 100,000 150,000 50,000 0 -50,000
23年 4月 21日 18Kim, GT IE of Chosun University
- Step 1: derive an after-tax average income
- Step 2: determine an average investment capital
- Step 3: Determine an ARR
100,000 150,000 50,000 0 50,000 50 5
m won ATAI
500,000 400,000 300,000 200,000 100,000 0 250 5
m won Average I nvestment Capi tal
50,000 20%250,000
ARR
23年 4月 21日 19Kim, GT IE of Chosun University
Accounting Rate of Return