《International Financial Management》课程教学课件（PPT讲稿）Chapter 14 International Capital Budgeting

International CapitalBudgetingChapter Fourteen

ChapterOutlineReview of Domestic Capital BudgetingThe Adjusted Present Value ModelCapital Budgeting from the Parent Firm'sPerspectiveCaseApplication:The CentraliaSome Improvement of the APV Model

Chapter Outline ❖Review of Domestic Capital Budgeting ❖The Adjusted Present Value Model ❖Capital Budgeting from the Parent Firm’s Perspective ❖Case Application: The Centralia ❖Some Improvement of the APV Model

Review of Domestic CapitalBudgetingldentify the size and timing of all relevant cashflows on a time line.ldentify the riskiness of the cash flows todetermine the appropriate discount rateFind NPv by discounting the cash flows at theappropriate discount rate.Comparethevalueofcompetingcashflowstreams at the same point in time

❖Identify the size and timing of all relevant cash flows on a time line. ❖Identify the riskiness of the cash flows to determine the appropriate discount rate. ❖Find NPV by discounting the cash flows at the appropriate discount rate. ❖Compare the value of competing cash flow streams at the same point in time. Review of Domestic Capital Budgeting

Reviewof DomesticCapitalBudgetingThe basic net present value equation isTTVTCFZNPV =-Co(1+K)"(1+K)Where:CF, = expected incremental after-tax cash flow in year tTVr = expected after-tax terminal value including return ofnet working capitalCo= initial investment at inceptionK= weighted average cost of capitalT= economic life of the project in yearsThe NPV rule is to accept a project if NPV ≥0

Review of Domestic Capital Budgeting The basic net present value equation is 0 1 (1 ) (1 ) C K TV K CF NPV T T T t t t − + + + = = Where: CFt = expected incremental after-tax cash flow in year t TVT = expected after-tax terminal value including return of net working capital C0 = initial investment at inception K = weighted average cost of capital T = economic life of the project in years The NPV rule is to accept a project if NPV  0

Reviewof DomesticCapitalBudgetingFor our purposes it is necessary to expandthe NPV equation.CF =(R,-OC,-D,-I)(1 - ) + D, + I (1 - t)I is incremental interestR, is incremental revenueexpenseOC, is incremental operatingcash flowt is the marginal tax rateD, is incremental depreciation

Review of Domestic Capital Budgeting For our purposes it is necessary to expand the NPV equation. Rt is incremental revenue OCt is incremental operating cash flow Dt is incremental depreciation It is incremental interest expense  is the marginal tax rate CFt = (Rt – OCt – Dt – It )(1 – ) + Dt + It (1 – )

Review ofDomesticCapitalBudgetingWe can use CF, = (OCF)(1 - t) + tDto restate the NPV equation,TCF,TVTZNPV =Co+(1 + K)T+ K)tt=1(1as:1(OCF)(1 - t) + DTVTZNPV =XCo(1 + K))(1 + K)t = 1

Review of Domestic Capital Budgeting We can use CFt = (OCFt )(1 – ) +  Dt to restate the NPV equation, as: NPV = S t = 1 T CFt (1 + K) t – C0 TVT (1 + K) T + NPV = S t = 1 T (OCFt )(1 – ) +  Dt (1 + K) t – C0 TVT (1 + K) T +

The Adjusted Present ValueModelTT(OCF)(1 -tDtTVTZ2NPV二C+(1 + K))+ K)t=(1(1 + K)t = 1can be converted to adjusted present value(APYbCF)(1 - t)tD,tI,TVTAPVC(1 + K,)7(1 +i)(1 +i)(1 + K)t = 1by appealing to Modigliani and Miller's results

The Adjusted Present Value Model can be converted to adjusted present value (APV) by appealing to Modigliani and Miller’s results. NPV = S t = 1 T (OCFt )(1 – ) (1 + K) t C0 TVT (1 + K) T +  Dt (1 + K) t + S – t = 1 T APV =S t = 1 T (OCFt )(1 – ) (1 + Ku ) t C0 TVT (1 + Ku ) T +  Dt (1 + i) t + –  It (1 + i) t +

The AdjustedPresentValueModelT(OCF)(1- T)tD,tITVTAPV-Z(1 + K,)(1 + K)(1 + i)(1 + i)t =1&TheAPVmodelisavalueadditivityapproachtocapital budgeting. Each cash flow that is asource of value to the firm is consideredindividuallyNote that with the APV model, each cash flow isdiscounted at a rate that is appropriate to theriskiness of the cash flow

The Adjusted Present Value Model ❖The APV model is a value additivity approach to capital budgeting. Each cash flow that is a source of value to the firm is considered individually. ❖Note that with the APV model, each cash flow is discounted at a rate that is appropriate to the riskiness of the cash flow. APV =S t = 1 T (OCFt )(1 – ) (1 + Ku ) t C0 TVT (1 + Ku ) T +  Dt (1 + i) t + –  It (1 + i) t +

DomesticAPVExampleConsider a project where the timing and size of theincremental after-tax cash flows for an all-equity firm are$500-$1,000$125$250$37511K?120134CF=-$1000 The unlevered cost of equity is ro = 10%:The project would be rejected byCF1$125an all-equity firmCF2$2501= 10CF3$375NPV=-$56.50CF4二$500

Domestic APV Example Consider a project where the timing and size of the incremental after-tax cash flows for an all-equity firm are: 0 1 2 3 4 –$1,000 $125 $250 $375 $500 The unlevered cost of equity is r0 = 10%: The project would be rejected by an all-equity firm: CF0 = –$1000 CF1 = $125 CF2 = $250 CF3 = $375 I = 10 NPV = –$56.50 CF4 = $500

DomesticAPVExample(continued) Now, imagine that the firm finances theproject with $600 of debt at r = 8%. The tax rate is 40%, so each year they havean interest tax shield worth $19.20:T X / = .40 X ($600 X .08)= .40 X $48= $19.20

Domestic APV Example (continued) ❖Now, imagine that the firm finances the project with $600 of debt at r = 8%. ❖The tax rate is 40%, so each year they have an interest tax shield worth $19.20:  × I = .40 × ($600 × .08) = .40 × $48 = $19.20