corporate finance - ch 6, 7 8
TRANSCRIPT
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6
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C O6.1 B C F, P,
6.2 D B B P
6.3 C B A6.4 C B
6.5 B
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6.1 B C F, P,
B
B C
M D F
C P
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6.1 B C F, P, (')
B
F
N
C R
D , APR
C P
Coupon Rate Face ValueNumber of Coupon Payments per Year
=CPN
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C B
C B
D A (
),
..
.
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C B (')
, , $100,000
$96,618.36. :
A ,
.
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C B (')
M
(1 )
=+
n
n
FVP
YTM
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C B (')
M
F :
, M 3.5%.
1
100,00096,618.36
(1 )=
+ YTM
1
100,0001 1.035
96,618.36+ = =YTM
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C B (')
M
M C B1
1
=
n
n
FVYTM
P
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A E 6.1
$100
. D
.M 1 2 3 4
P $98.04 $95.18 $91.51 $87.14
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A E 6.1 (')
:
1/2
1/3
1/4
YTM (100 / 98.04) 1 0.02 2%
YTM (100 / 95.18) 1 0.025 2.5%
YTM (100 / 91.51) 1 0.03 3%YTM (100 / 87.14) 1 0.035 3.5%
= = =
= = =
= = =
= = =
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C B (')
RF I R
A
. , L O P
.
RF I R M
=
n nr YTM
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C B (')
RF I R
I R
A ,
C C A
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C B
C BP
P
N
.. 110
B
.. 10
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A E 6.2
The U.S. Treasury has just issued a ten-year, $1000
bond with a 4% coupon and semi-annual couponpayments. What cash flows will you receive if youhold the bond until maturity?
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A E 6.2 (')
The face value of this bond is $1000. Because thisbond pays coupons semiannually, from Eq. 8.1 you will
receive a coupon payment every six months of CPN =$1000 X 4%/2 = $20. Here is the timeline, based on asix-month period:
Note that the last payment occurs ten years (twenty six-month periods) from now and is composed of both a couponpayment of $20 and the face value payment of $1000.
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C B (')
M
M .
M C B
1 1
1 (1 ) (1 )
= +
+ + N N
FV
P CPN y y y
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E 6.3
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E 6.3 (')
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E 6.4
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E 6.4 (')
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6.4 C B
C B
I
C R
R
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C B
I
.
.
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C B (')
N D
C 1, B M 4%.
?
1
1000 1000 $961.541 1.04= = =+P YTM
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C B (')
C D
90%
.
?
1
900 900 $865.381 1.04
= = =+
PYTM
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C B (')
C D
,
.
1000 1 1 15.56%865.38
= = =FVYTMP
900
1.04865.38 =
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C B (')
C D
.
.
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C B (')
R D
C , $1000, . A
.
50% 50%
$900. ,
$950.
B , 5.1%.
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C B (')
R D
950 $903.90
1.051= =P
1000 1 1 .1063
903.90
= = =FV
YTM
P
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C B (')
R D
A .
A .
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C B (')
Table 6.3 Price, Expected Return, and Yield to Maturity ofa One-Year, Zero-Coupon Avant Bond with Different
Likelihoods of Default
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B R
I G B
B
A J B H B
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6.4 B R ()
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C C
D
A C
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F 6.3 C C R, J 2012
Source: Bloomberg
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F 6.4 F C
Source:Bloomberg.com
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6.5 B
B
..
A
.. G 2012
I
P
E , EM, ECB
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F 6.5 P C D R D, 18002006
Source: Data from This Time Is Different, Carmen Reinhart and Kenneth Rogoff, Princeton University Press, 2009.
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F 6.6 E G B , 19632011
Source: Nowakwoski, David, Government Bonds/Rates: High, Low and Normal, Roubini Global Economics, June 8, 2012.
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Chapter 7
InvestmentDecision Rules
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C O7.1 NP A P
7.2 I R R R
7.3 P R
7.4 C B P
7.5 P R C
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7.1 NP A P
C ,
F F F (FFF).
$250
$35 ,
.
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NP R
NP :
NP .
35NPV 250= +r
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F 7.1 NP F F P
I FFF 10%, NP $100 .
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A R NP R
NP , .
, NP .
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7.2 I R R R
()
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I R R R (')
IRR I R NP , , .
I , IRR .
I F 7.1, IRR 14%, NP .
A IRR R
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A IRR R
I , IRR NP .
IRR NP :
D I N IRR
M IRR
A IRR R ( ')
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A IRR R (')
D I
A CEO
. A . $1 . .
$500,000 . 10%.
A IRR R (')
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A IRR R (')
D I
?
C IRR.
IRR . ,
IRR .
A IRR R (')
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A IRR R (')
D I
?
NP , NP .
2 3
500,000 500,000 500,000 1,000,000 $243,426
1.1 1.1 1.1= = NPV
F 7 2 NP $1 M B D
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F 7.2 NP $1 M B D
, NP .
A IRR R (')
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A IRR R (')
M IRR
.
$550,000
$1,000,000
.
?
A IRR R (')
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A IRR R ( )
M IRR
:
NP :
2 3 4
500, 000 500, 000 500, 000 1, 000, 000
550,000 - - -1 (1 ) (1 ) (1 )NPV r r r r =
+ + + +
!
A IRR R (')
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A IRR R ( )
M IRR
B NP , IRR. I , IRR:
7.164% 33.673%. B
IRR, IRR .
F 7 3 NP B D R
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F 7.3 NP B D R
A IRR R (')
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A IRR R ( )
M IRR
B 7.164% 33.673%, NP.
10%, .
A IRR R (')
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A IRR R ( )
N IRR
F,
$750,000, $1 .
, IRR ;
NP .
F 7 4 NP F O
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F 7.4 NP F O
N IRR NP . IRR .
A IRR R (')
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A IRR R ( )
IRR IRR R
IRR , IRR . IRR
NP
.
E 7 1
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E 7.1
E 7 1 ()
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E 7.1 ( )
F 7.5 NP P E 7.1
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IRR R A,
.
7.3 P R
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7.3 P R
. I
, .O, .
.
A E 7.2
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A E 7.2
P A, B, C
5 .
, ?
A B C
Cost $80 $120 $150
Cash Flow $25 $30 $35
A E 7.2
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P A
$80 $25 = 3.2
P B
$120 $30 = 4.0
P C
$150 $35 = 4.29
P R ()
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( )
P:
I .
I .
R .
7.4 C B P
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M E P
, .
NP R
NP.
IRR R IRR
.
E 7.3
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E 7 3 ()
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E 7.3 ( )
A E 7.3
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A . G
, .
(
). ?
ProjectInitial
InvestmentFirst-YearCash Flow
GrowthRate
Cost ofCapital
Used Book Store $250,000 $55,000 4% 7%
Sandwich Shop $350,000 $75,000 4% 8%
Hair Salon $400,000 $120,000 5% 8%
Clothing Store $500,000 $125,000 8% 12%
A E 7.3 ()
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A ,
. NP
, NP. B , .
$55,000NPV (Used Book Store) = -$250,000 + $1,583,333
7% 4%
$75,000NPV (Sandwich Shop) = -$350,000 + $1,525,000
8% 4%
$120,000NPV (Hair Salon) = -$400,000 + $2,600,000
8% 5%
NPV (Clothing Store) = -$500,
=
=
=
$125,000000 + $2,625,000
12% 8%=
IRR R M E I: D
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I , NP
. IRR. , IRR
.
IRR R M E I: D ()
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BookstoreCoffee Shop
Initial Investment $300,000 $400,000
Cash FlowYear 1 $63,000 $80,000
Annual Growth Rate 3% 3%Cost of Capital 8% 8%
IRR 24% 23%
NPV $960,000 $1,200,000
C E 7.3
IRR R M E I: C F
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A IRR ,
.
IRR , .
C
E 7.3. B . IRR,
NP .
IRR R M E I: D R
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A IRR .
C E
7.3. IRR , NP .
IRR
.
I IRR R
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I IRR I R
A IRR (
).
A E 7.4
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Suppose your firm is considering two different projects, one that lasts oneyear and another that lasts five years. The cash flows for the two projects
look like this:
What is the IRR of each proposal? What is the incremental IRR? If yourfirms cost of capital is 10%, what should you do?
Problem
A E 7.4 ()
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Solution
We can compute the IRR of Project L using theannuity calculator:
NPER RATE PV PMT FV Excel formula
Given 4 -100 0 200
Solve
for rate
14.87% =RATE(4,0,-100,200)
A E 7.4 ()
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Solution
We can compute the IRR of Project S using theannuity calculator:
NPER RATE PV PMT FV Excel formula
Given 1 -100 0 125
Solve
for rate
25% =RATE(1,0,-100,125)
A E 7.4 ()
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Solution
We can calculate the incremental IRR this way:
NPER RATE PV PMT FV Excel formula
Given 4 -125 0 200
Solvefor rate
12.47% =RATE(4,0,-125,200)
Project 0 1 2 3 4 5
L -100 200
S -100 125
Difference 0 -125 200
A E 7.4 ()
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SolutionBecause the 12.47% incremental IRR is biggerthan the cost of capital of 10%, the long-termproject is better than the short-term project, eventhough the short-term project has a higher IRR.
I IRR R (')
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I IRR R
IRR .
M IRR .
IRR NP.
, IRR .
7.5 P R C
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E P D RC
C $100
7.1 P P $100 M B
P I
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.
F 7.1,
II & III I.
Value Created NPVProfitability Index
Resource Consumed Resource Consumed= =
A E 7.5
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NP
. H,
. , 100,000 .
Project NPV Square feet needed
Project 1 100,000 40,000
Project 2 88,000 30,000
Project 3 80,000 38,000
Project 4 50,000 24,000
Project 5 12,000 1,000
Total 330,000 133,000
A E 7.5 ()
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C PI .Project NPV Square feetneeded
Profitability Index(NPV/Sq. Ft)
Project 1 100,000 40,000 2.5
Project 2 88,000 30,000 2.93Project 3 80,000 38,000 2.10
Project 4 50,000 24,000 2.08
Project 5 12,000 1,000
12.0Total 330,000 133,000
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R PI .
Project NPV Squarefeet
needed
ProfitabilityIndex
(NPV/Sq. Ft)
Cumulative totalspace used
Project 5 12,000 1,000 12 1,000
Project 2 88,000 30,000 2.93 31,000
Project 1 100,000 40,000 2.5 71,000
Project 3 80,000 38,000 2.11
Project 4 50,000 24,000 2.08
P I
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I I .
E 7.4 NI NP $120,000 3. 0.1 2/ 3 = 0.04,
. H, 3 190 . A , .
P I (')
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, .
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8
C O
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8.1 F E
8.2 D F C F NP
8.3 C A A
8.4 F A F C F
8.5 A P
8.1 F E
C B
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C B
L
C B
P
I E
R C E
E
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E
L $300,000
,HN.
.
R E
= 100,000 /
P P = $260
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E
C E F R&D = $15,000,000
F N E = $7,500,000 E 5
H
A O = $2,800,000
P C = $110
I E F
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8.1 HN I E
F
C E D
$7 5
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$7.5 ,
. I,
.
L D .
A D = $7.5 5 = $1.5 /
I E
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I , .
, .
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M C R
. N: A
.
Income Tax EBIT= c
(')
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N I C
Unlevered Net Income EBIT (1 )(Revenues Costs Depreciation) (1 )
=
=
c
c
A E 8.1
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NRG, I. .
$500
.
NRG
$7 .
NRG 39% .
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()
NRG ?
?
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, NRG :
$7 39% = $2.730
, NRG :
$6.5 39% = $2.535
P I = $7 $500 = $6.5
L NRG :
$2.730 $2.535 = $195 .
I E I E
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I HN , . E
,
(.., )
.
A E 8.2
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NRG
$900 .
H NRG ?
A E 8.2
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.
NRG
:
$900 (1 .39) = $549 .
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.
.
I E I E (')
P E
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I HN , 25% L
HN . B
HN,
HN .
I E I E (')
8.2 HN I E
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F I C L R
C I E
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.
.
C I E (')
F O E
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.
C I E (')
P R D E
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M R&D
.
.
C I E (')
C E
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, .
H, ,
.
R C
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,
.
.
.
E 8.3
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E 8.3 (')
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8.2 D F C F NP
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.
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C F C F E (')
C E DTable 8.3 Spreadsheet Calculation of HomeNets Free Cash Flow
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(Including Cannibalization and Lost Rent)
C F C F E (')
N C (NC)
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M .
.
:
Net Working Capital Current Assets Current Liabilities
Cash Inventory Receivables Payables
=
= + +
1 = t t tNWC NWC NWC
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A E 8.4
R I
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R I $250,000 , $275,000
, $300,000 . 5% , 7% ,
10% , 8% . F R .
A E 8.4 ()
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:
0 1 2 3
() $250,000 $275,000 $300,000
(5% ) $12,500 $13,750 $15,000 (7% ) $17,500 $19,250 $21,000
(10% ) $25,000 $27,500 $30,000
(8% ) $20,000 $22,000 $24,000
$35,000 $38,500 $42,000
C F C F D
F C FUnlevered Net Income
7
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.
Free Cash Flow (Revenues Costs Depreciation) (1 )
Depreciation CapEx
=
+
644444444474444444448
c
NWC
Free Cash Flow (Revenues Costs) (1 ) CapEx
Depreciation
=
+
c
c
NWC
C NP
1( )
(1 ) (1 )= =
+ +
t
t tt t
FCFPV FCF FCF
r r
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HN NP (ACC = 12%)
year discount factor
(1 ) (1 )
=
+ +14243
t
r r
NPV 16,500 4554 5740 5125 4576 1532
5027
= + + + + +
=
Table 8.5 Spreadsheet Computing HomeNets NPV
8.3 C A A
L HN
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NP,
0 NP.
E M A
8.3 C A A (')
E M A
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I HN , $95 $5
( $110 ).
.
8.3 C A A (')
E M A
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O C = $110
I A/P = 15% COG
COG = 100,000 $110 = $11
I A/P = 15% $11 = $1.65
NC = $1.65 1 $1.65 5
NC A/P
8.3 C A A (')
E M A
I H
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IH
C = $95
$5,000,000
I A/P = 15% COG COG = 100,000 $95 = $9.5
I A/P = 15% $9.5 = $1.425 I I = $9.5 / 12 = $0.792
NC 1 = $0.792 $1.425 =$0.633
NC $0.633 1 $0.633 5
8.3 C A A (')
E M A
Table 8 6 Spreadsheet NPV Cost of Outsourced Versus
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Table 8.6 Spreadsheet NPV Cost of Outsourced VersusIn-House Assembly of HomeNet
8.3 C A A (')
C F C F C
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A
O .
8.4 F A F C F
O N I
A
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A
C F
C .
A D
M A C R
(MACR)
A E 8.5
C M
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C M
. $50,000
MACR 3 .
MACR ,
0?
A E 8.5 ()
B 8A.1,
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B 8A.1,
:
0 1 2 3
$50,000
33.33% 44.45% 14.81% 7.41%
$16,665 $22,225 $7,405 $3,705
F A F C F (')
L
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Capital Gain Sale Price Book Value=
Book Value Purchase Price Accumulated Depreciation=
After-Tax Cash Flow from Asset Sale Sale Price ( Capital Gain)= c
E 8.6
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E 8.6 (')
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F A F C F (')
C
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.
E 8.7
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E 8.7 (')
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F A F C F (')
C
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.
E 8.8
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E 8.8 (')
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8.5 A P
BE A
NP .
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HN IRR C
Table 8.7 Spreadsheet HomeNet IRR Calculation
8.5 A P (')
BE A BE L HN
T bl 8 8 B k E L l f H N t
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EBI BE L EBI
Table 8.8 Break-Even Levels for HomeNet
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A (')
Table 8.9 Best- and Worst-Case Parameter Assumptionsfor HomeNet
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F 8.1 HN NP B C P
A
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A E 8.9
A NRG
$500,000 1 3.
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$ ,
$200,000 $900,000 . H
NP
? R, NRG 39%
. A 9%.
A E 8.9 ()
.
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NP , .
A E 8.9 ()
.A $300,000
NRG EBI $300,000 ,
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NRG :$300,000 ( 1 0.39) = $183,000
:
, NP $463,227.
2 3
$183,000 $183,000 $183,000PV= $463,227
1.09 1.09 1.09+ + =
A E 8.9 ()
.A $400,000
NRG EBI $400,000 ,
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NRG :$400,000 ( 1 0.39) = $244,000
:
, NP $617,636.
2 3
-$244,000 -$244,000 -$244,000PV= $617,6361.09 1.09 1.09
+ + =
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F 8.2 P C HN
E NP
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8A.1 MACR
D
P
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P
A C MB D E
B I
R P