Chapter 6: An Economic Appraisal Technique: PBP and ARR Kim, GT IE of Chosun University

Transcription

1 Chapter 6: n Economc pprasal Technque: PBP and RR

2 The Purpose of n Economc pprasal n economc apprasal s a ven to accomplsh a corporate objectve. In other words, t s commensurate wth evaluatng the corporate strateges so as to mprove stockholders wealth by mplementng a most desrable projects. The types of nvestment projects; ) servce (cost) projects: those whch are wth regard to reducng costs. (ex. power plant may need to decde one fuel resource to generate electrcty between gas and ol.) ) revenue projects: those whch are concerned wth ncreasng a frm s revenue.(ex. company may need to decde whch one to produce to ncrease ts proft or revenue between a HD and plan tv) ll projects need cash outflows at the outset and generates cash nflows n the followng tmes. 2

3 pprasal Technques Dependng on whether or not the nterest concept s nvolved. - pprasal technques wthout nterest nvolved. () payback perod(pb) (2) accountng rate of return(rr) - pprasal technques wth nterest nvolved. () net present value(npv) (2) annual equvalent value(e) (3) nternal rate of return(irr) 3

4 pprasal Technques Dependng on the fnal value of the results whch are provded by the apprasal technques - apprasal technques wth an absolute value ) conventonal & dscounted PB ) NPV ) E - apprasal technques wth a relatve value ) RR ) IRR 4

5 The Utlzaton of the pprasal Technques Tech. %* Frm Sze PER Debt Dvdend Industry Ownershp vg Small Bg G NG H L Y N M NM L H IRR NPV PB MRR S DPB RO RR S** PV PI PER: prce-earnng rato, G: growth, NG: no-growth, H: hght, L: low, Y: yes, N: no, M: a manufacturng ndustry, NM: a non-manufacturng ndustry, IRR: nternal rate of return, NPV: net present value, PB: payback perod, MRR: mnmum attractve of return, S: senstvty analyss, DPB: dscounted payback perod, RO: real optons approach, RR: accountng rate of return, S ** : smulaton analyss, PV: adjusted present value, PI: proftablty ndex 5

6 Payback Perod Prncple - To be a perod of tme spent to fully recover the ntal nvestment cost Method - It s determned based on the cumulatve amount of cash flows. t CF n 0 n 0 PB s found to be one whch satsfes the equaton above. Decson Crtera - If PB s less than the predetermned perod of tme, undertake the project and perform the followng sophstcated evaluaton technques. Otherwse, reject t. The Types of PB ) Tradtonal payback perod(tpbp): no nterest concept consdered. ) Dscounted payback perod (DPB): nterest concept consdered. 6

7 Tradtonal Payback Perod N CF 0-30,000 9, , , , ,000 (unt: 000 won) CCF -30,000-2,000-2,000-3,000 6,000 5,000 TPBP s determned between 3 and 4 years. TPBP= 3.33 years 7

8 Conventonal Payback Perod (unt: 000 won) TPBP based on the a real cash flow TPBP based on a nomnal cash flow n Real CF CCF Nomnal CF CCF ,000 90,000 90,000 90,000 90,000 90, ,000-20,000-2,000-3,000 6,000 5, ,000 9,900 0,890,979 3,77 4, ,000-20,00-9,20 2,769 5,946 30,44 8

9 Conventonal Payback Perod Ex 6.] Determne a TPBP Gven] The ntal nvestment costs of project and B: 20 m won and 50 m won project lfe of and B are 3 and 7 years n B CF CCF CF CCF -20,000-20,000 60,000-60,000 60, ,000 60,000 IRR 23.4% 27% -50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000-50,000-00,000-50, ,000 00,000 50, ,000 9

10 Prncple - TPBP + Interest Concept Employed Decson Crtera - To be one whch makes a cumulatve cash flow zero -NPV=0 Equaton Dscounted Payback Perod DPBP n t0 CFt ( ) t 0 0

11 DPBP Ex 6.2] Determne a dscounted payback perod for the project for an automatc machnng center Gven] Cash flows for the project, nterest rate=5% 33,982 33,726 33,205 33,35 82, n Unt: ooo won 62,500

12 DPBP Sol] determne a DPBP N NCF -62,500 33,982 33,726 33,205 33,35 82,03 CCF * -62,500-28,58-5,208 38,43 7,548 53,562 Interest Factor (P/F,5%,0) = (P/F,5%,) =0.870 (P/F,5%,2) =0.756 (P/F,5%,3) =0.658 (P/F,5%,4) =0.572 (P/F,5%,5) =0.497 Dscounted CF -62,500 29,564 25,500 2,848 8,953 40,768 ** Cum DCF *** -62,500-32,936-7,436 4,42 33,365 74,34 * : Cumulatve Cash Flow wthout consderng an nterest rate ** : Dscounted Cash Flow= NCF * Interest Factor *** : Cumulatve Dscounted Cash Flow 2

13 Relatonshp Between PB and ROR 0 P N N N P where, P: present value, : equal amount of a cash flow N: project lfe, : nterest rate Km, GT IE of Chosun Unversty

14 Relatonshp Between PB and ROR f a project lfe s nfnte,.e., N, P N lm N N / lm N N The equaton above s called a captalzed equvalent (CE). - relatonshp between a PB and IRR P n P P n n PB pprox. IRR 3년 33% 4년 25% 5년 20% 6년 7% 7년 4% 4

15 When The Payback Perod Technque Can Be Properly Used: It s better to use for a case n whch the project lfe s measured n a month rather than a year. Ex 6.3] adequate Case for Tradtonal Payback Perod Gven] nvestment cost for nstallng a heatng and ar condtonng system n the class: May=3.375m won, Jun=.25m won, a cost savng of electrcty: Jun. to ug. =, 000 won, pr. to May & Sep to Oct=,000 won, Nov. to Mar=337,000 won Sol] Determne a tradtonal payback perod mo CF CCF CF CCF ,375 -,25-3,375-4,500-4,050-3,600-3,375-3,50-2,82.5-2,475-2,37.5 -,800 -, ,237 (unt: 000 won) -, PBP 5.25months 5

16 Rsk Measurng wth Payback Perod Ex 6.4] Measure Rsk wth a Payback Perod Gven] nvestment cost for nstallng a heatng and ar condtonng system n the class: May=3.375m won, Jun=.25m won, a cost savng of electrcty: Jun. to ug. =, 000 won, pr. to May & Sep to Oct=,000 won, Nov. to Mar=337,000 won, Interest Rate =2% Sol] Determne a dscounted payback perod (unt: 000 won) mo CF CCF CF CCF ,375 -,25-3, , ,74.9-3, , , , , , ,57.4 -,84.4 -, , Project Balance: PB PBt PBt CFt 투자회수기간 6.47 개월 6

17 Rsk Measurng wth Payback Perod 월 누적현금흐름

18 ccountng Rate of Return RR fter-tax verage Income verage Investment Captal Ex 6.6] Determne an RR wth an average nvestment captal Gven] I: 500 m won, lfe: 5 years, No salvage value at the end of year 5: 0, The relevant fnancal date n Rev 433,333, , ,000 33,333 Expenses 200,000 50,000 00,000 00,000 00,000 BTCF 233, ,000 66,667 00,000 33,333 Dep 00,000 00,000 00,000 00,000 00,000 BTI 33, ,000 66, ,667 Tax(25%) 33,333 50,000 6, ,667 NI 00,000 50,000 50, ,000 8

19 ccountng Rate of Return - Step : derve an after-tax average ncome TI 00,00050,00050,000050, mwon 5 - Step 2: determne an average nvestment captal 500,000400,000300,000200,00000,0000 verage Investment Captal 250 mwon 5 - Step 3: Determne an RR RR 50,000 20% 250,000 9