上海交通大学：《财务管理》教学资源（PPT课件，英文版）Chapter 11 Project Analysis and Evaluation

Ross Westerfield Jordan Chapter 11 Fundamentals of TMP Corporate Finance TAM6AmD走OITION Project Analysis and Evaluation 0

0 Chapter 11 Project Analysis and Evaluation

Chapter Outline Evaluating NPV Estimates n Scenario and Simulation Analyses Break-Even Analysis Operating Leverage Capital Rationing

1 Chapter Outline n Evaluating NPV Estimates n Scenario and Simulation Analyses n Break-Even Analysis n Operating Leverage n Capital Rationing

Key Concepts and Skills Understand forecasting risk and sources of value Understand and be able to do scenario and sensitivity analysis Understand the various forms of break-even analysis Understand operating leverage ■ Understand capital rationing

2 Key Concepts and Skills n Understand forecasting risk and sources of value n Understand and be able to do scenario and sensitivity analysis n Understand the various forms of break-even analysis n Understand operating leverage n Understand capital rationing

Evaluating NPV Estimates NPV estimates are just that-estimates A positive NPV is a good start-now we need to take a closer look Forecasting risk-how sensitive is our NPV to changes in the cash flow estimates;the more sensitive,the greater the forecasting risk Sources of value why does this project create value?

3 Evaluating NPV Estimates n NPV estimates are just that – estimates n A positive NPV is a good start – now we need to take a closer look q Forecasting risk – how sensitive is our NPV to changes in the cash flow estimates; the more sensitive, the greater the forecasting risk q Sources of value – why does this project create value?

Scenario Analysis What happens to the NPV under different cash flows scenarios? At the very least look at: Best case-high revenues,low costs Worst case-low revenues,high costs Measure of the range of possible outcomes Best case and worst case are not necessarily probable,but they can still be possible

4 Scenario Analysis n What happens to the NPV under different cash flows scenarios? n At the very least look at: q Best case – high revenues, low costs q Worst case – low revenues, high costs q Measure of the range of possible outcomes n Best case and worst case are not necessarily probable, but they can still be possible

New Project Example Consider the project discussed in the text The initial cost is $200,000 and the project has a 5-year life.There is no salvage. Depreciation is straight-line,the required return is 12%and the tax rate is 34% The base case NPV is 15,567 区 5

5 New Project Example n Consider the project discussed in the text n The initial cost is $200,000 and the project has a 5-year life. There is no salvage. Depreciation is straight-line, the required return is 12% and the tax rate is 34% n The base case NPV is 15,567

Summary of Scenario Analysis Scenario Net Income Cash Flow NPV IRR Base case 19,800 59,800 15,567 15.1% Worst Case -15,510 24,490 -111,719 -14.4% Best Case 59,730 99,730 159,504 40.9% 6

6 Summary of Scenario Analysis Scenario Net Income Cash Flow NPV IRR Base case 19,800 59,800 15,567 15.1% Worst Case -15,510 24,490 -111,719 -14.4% Best Case 59,730 99,730 159,504 40.9%

Sensitivity Analysis What happens to NPV when we vary one variable at a time -This is a subset of scenario analysis where we are looking at the effect of specific variables on NPV The greater the volatility in nPV in relation to a specific variable,the larger the forecasting risk associated with that variable and the more attention we want to pay to its estimation

7 Sensitivity Analysis n What happens to NPV when we vary one variable at a time n This is a subset of scenario analysis where we are looking at the effect of specific variables on NPV n The greater the volatility in NPV in relation to a specific variable, the larger the forecasting risk associated with that variable and the more attention we want to pay to its estimation

Summary of Sensitivity Analysis for New Project Scenario Unit Sales Cash Flow NPV IRR Base case 6000 59,800 15,567 15.1% Worst case 5500 53,200 -8,226 10.3% Best case 6500 66,400 39,357 19.7% 8

8 Summary of Sensitivity Analysis for New Project Scenario Unit Sales Cash Flow NPV IRR Base case 6000 59,800 15,567 15.1% Worst case 5500 53,200 -8,226 10.3% Best case 6500 66,400 39,357 19.7%

Simulation Analysis Simulation is really just an expanded sensitivity and scenario analysis Monte Carlo simulation can estimate thousands of possible outcomes based on conditional probability distributions and constraints for each of the variables The output is a probability distribution for NPV with an estimate of the probability of obtaining a positive net present value The simulation only works as well as the information that is entered and very bad decisions can be made if care is not taken to analyze the interaction between variables

9 Simulation Analysis n Simulation is really just an expanded sensitivity and scenario analysis n Monte Carlo simulation can estimate thousands of possible outcomes based on conditional probability distributions and constraints for each of the variables n The output is a probability distribution for NPV with an estimate of the probability of obtaining a positive net present value n The simulation only works as well as the information that is entered and very bad decisions can be made if care is not taken to analyze the interaction between variables