cH4Wet presenb value cuh o&her ihvesbmenb eifeid

bebwee
Neb Pres enb v alue - The :Jerence

s it eest
narHet Va lue
an
inves tmesn s
Wet presen b va lue(WPV) = (c)+ 2e}
(1tr)
cocqsh out }lowu lagias o Lid[

Ecy>aillssJ
&ln->
(DCFJ
disco untel cash low by isCauhbin g
nvestm en &
&he Pra cess Valuiha
ibs u gur cash Hows

inves&menb shoul be accefted

N P V R u l e - An
an d reje<bed
1 she het presen b value is Posióive

i 6 is nea abive

11%

34ooo ) 15 ooo
O =
(3 4ooo)+ 16000+ 18ood
16eoo +os11 U+nf 1+o11)
8 o oo
2
315o WPV 5941,5|
we shoul acc ep&se
puy bacK Rule
The am oun o6ime Por a inves bmen bb
o
reguired
ge hara be cshlows su fficient to
Ve cover
ibs i ia l eaos6 (cto)
Rulel investmenb is aceep 6able IP i6s calulubed
P ay back is d
Perie Less bhan some P resp ecifi e

Discounbe d Pay bucK

he Length o) bime reuired or un inves bmenb's
dissounbees tash lows & equal ibs inib ial cosb
fe in vestm enb is ace ep bab le JP its disceuhfe
Paybaek is Les5 bhah Some pre sp eei fi ed num b er

yearr
Ex1 Y 10x
i s coun&ed sash Plow
yeo
O 1000
454, 5 7
5 0
2
25o 26,d PV

600 4 509

Pay bacK > hoo +2 5o 7So Diseeun bed=)y5U, 5 +

20 6,6 661.1
P ay back
too-25 250 1oo0- e l : l =
338, 9
o0 250 g 4So

od
25 os41 338.1 e,75
+e Disebe.d Pay bc is 2.75
Pay bacK is 2,4
75
aybuck
 verae Ascoun bing
A veraqe Reurn ( AAR)

aniMvesmen& averaqe neb incoMe divieby ibs

averaa e boo K valu

ave e het ihcom e

AAR- avee boo Ku alue

Nobe-> Web ineomz sales - cos6- dep. bax

EBIT

vrag ne6 ih eome= ne6incom

com
No. neb in

L BooK value eg endc. - sal7aqe

2 2

Rulea p rojecb is aceepkable 1} i65 avaraqe

acGoungina reburn elceeds ab ae6 avera

acc eubin cre bufh AAR C AAR

() ps Jiss

Cast 15oo0 oeo

he ineome- 1938,2 oe

2.21.40
1,876, ooo
1,329, 50oo

AAR- b°o
+ 132 ,
22of doo + 1876, coe(

14382o s +
a e n e b incom
:

qverade neb 1 8 3 6. 325

o0
15oeo oe = 7,5o0,0
avera a e bo K 2
Vale

AAR 116,725, - o,24438

o0poo
 # The InberhalRate . Rebn
FV)
ne
distaulb ra6e 6hut makes the
el NPVao
an ihvesbmen &
Zer

ep pabl IP bhe
Rde ahinvesbhenb is acc

refwh
he reguire d
RR eXCeedb
IRR regu.re reburn
> (IR IK
Wobe Inbernal R ate - R cburn
Some IRR s MPV

re
bu'h
a n ihves bmenb bh he eyured r
when
BMag resulks in a 2ero PV
i is s e o s she d'kcoun6 rate
wibh JRRI
proP lem mal 8ie raßes
cash Plow s e r ebWn
1-hoh c onveh tional li&y
L bhe p oss;b
Bha more thah one
cY (eash ovbtlw) La rabe will
ds cou 6
ma e bhe NPU P
dn inves bm ent 2ero

1
r3
d. q4.16 Mubualy ezalusivee

-94.16,
(. nvesmenb

sibuabion in
a
2- mu bually exXelusive inves&men 6 one iuves bmeh
w ieh ta Kinq
P reveh 6r bhe baKing
c ross over
otn &hey
Poin&
S>ezs v s O =NPVdas
C.roSs o ver
Pon b over

TRR
 profibability I ndey ( FI)
The Presen& value efan invest menb's Pu bt ash
ows Jivi Je by it inib ial cost

als calle bhe beneik- cost_ra&i9

Ral IP PI<1 rje-6
1 PI 1 aceasbe

P I = +r

A d vanpaqes and Disad vagaqes oy bhe (PL)

avahbaaes isadvan baqe s
neco r e v b
1- <losely relabed o WPV 1-may Lea se

enera lly Lead ing ko S

d ecisi bns in com Parijoh
is nbie il decisiohs
of Mtually e elusive
2-basy bo un )er sban nves m en
an coMm unicabe

3 may be seful when

avail a ble mves bmen
Punds cureLimibe
 hd van bages andis advan kags othe
Avanbaqes
PaybacK
dis a dyantaqes
1
Easy to n
ders ban d 1Iqnores the time value -} money
2- a
diusbi for wc
er baikby 2- Re
oLabersash SlowS yuires an rbitrar y cub-PF
P oinb
3 Biared bowar
3 I qko rer cash Plows beyoun d bhe
Liyuidty
cubePfP date

iased qq aihsb L-84-Germ

Pruebs

a dad Van baqes and advch haqes of Diseounbed

Pay bacHK
A Svah Bages
is a dran baqes
1- ine lu des bime Value } m
ay reee6
Pesigive

b
Mony NPV invesbmen
und ersban d
2-Fasy bo
Reguires an arbibrary eutoP

3- Does n t aceap &

Poin
d
neabive esbima be d I anores sash 3l o w s bey ouh

NPV inves bmenb Ehe cubDF} poinb

k owt d
ainsb Long- 6Prm
4 Biased iase d d
roec6s
Lig uidity
 idvansages andsad vanedes f AAR
A vait &a qes dis ndvah kaae s

1 s be cal calab 1Not a Lrue rate r ebul h

t
bime Value mony i qho 1e
Nee dedin or mafin 2
willus ally be a arbitrary benchmor
avaliable pVube
33- Bases h accouh &tnqlBooK)
Values hob cush flows an d

mar Ke b values

= ad van Aqes andis advahba ges o IRR

avan [aqe s di ad vah baaes

may f u l b
inmultiple
closely relabe d bo NPV no 6 e w wibh
Ca Swers o
hh cohveh bion alcash Plows
oPich Leading bo nbica
d ecisioh s
Lea dbo
incoes

may
asy to un de rsbavn d an
Rcis ion s in com pari Sohs

Commuhicabe mutu on lly eXclusive

nvesb mn bs
 h10 1- a Kihd Cap'b a inves menb Decisions

# Fivst Look

bebween
neremen al cash lowsthe difference
and
an d
a irm'S abur e cash flows with a proecb
bhose wihoub bhe Projec6
bha6
sband- alohe p rinciple the asunp tion
be bged bhe
evaluabion } pro je may en

P roee&'s in c rem ental sa_ h

Plows
been ihcare
incum d
s u n k Cosbs + AAcosb thab has alrea dy
d there Fore shoul d no&
an be ramoVe&an
cannb
be consi dere th dn
iMVes men b de cisio
bbive tha
bhe mos valuable al berh

=OPPor bunby cosbl

inves bm en6 is un d erbaKeh
is aven ap I apr b ieul ar

bhab
Plaws -} anew Praecg thab
the cash
erosien f P roje-br

bhe erp ehsSe Pirm erisin P

Com e ab
b
Sbatem uhbs Fin anial S6 a be en

r Forma Einaneial

Proecbtina fubure years o p

era
biong
bh«b6 resulis
results
the tar
taX saviha bha
saviha
shield
d e p reciatioh
ba
Prom epreciabdon deduebieh

ecalculabed

mulbiplied by
ep reciagion e rshi held

bhe corpo kafe ba rafe

# ro Fovmainancial S6abemen bs

Sales P.a
Variable cosb (y.

Fixed Ces>S
Dep recèabio) *

(yliadu
EBIT sak -Ve- Fc- Dep
borrate. EBI
EaXCbof ra) =>
EBTT-taX
Neb in com
-

cash low= proyteb operabinq

eash }| ow

P rojec /w ghs
Proje 6 7wEsha'hae
tm

Preje capib al spn din a

Op era bing cash ¥lows

&aX
ciabion
-

Ocf= E BTT+ Depre

roa ch
apP
Botb m- up bion
Net
incom t Dap¢e cio
oCf
6P-Doun aPPrach

taX
Sales-cosb
-

ocf
ch
shield opproa
t a x

b)
b)(1-T) +0ep reaiagiorn
Locf- (sales -ces
- ) 6 a X rube
 5 o 00 P-4
2.5
FC- 12odo
in ital ces6 - qoooo
h-yeat Lile
NWC 20000

ak rabe - 34%

Sales ( 5oseoy 4) 2 ao oo0

Vc (hoooo (15) 125OO

12 oo

FC
3oo
Deprecafabian ( doe00
EBrT 33
TaX 3zoeoYO1? 4 ) 1122

Ne6 incom
21 78

5178
t114 0=
ocF 33o0 0 + BeoDo -
-

6ar =

+Dep.
EBIT

1 7 8 + 3 0 o 0 0 -5 178o

+ Vep
N e t ineom (125ootf2on 51730

1122oo

o0 -
o s o
-

1 3 /o
Zoo
=
-
tax
Sales-cost
oolo3H)
132oe ») (|-0s3 4) t{3oo
6)(1-4)+ Dep
(b) =2o00 eo-
Gales- e=)
2oo
-
51 25o
41580 + 1o
 ++
N
b
 some
special Caseg o Dis eoun bed cash Flow
analysis
evaluating cosb-cub tin a Proposals
AA

Note (Sa lWaa l

P i t a l sperdin
(as tax
salvag
=salvage value x(1-b)

9sebb iney bhe bIV FÆPAICe

ales) l a , (webincow,)
aley
2Bid Price
Sales

Neb
 d evaluabioh
ch - pro jec an
alysis an

The possibiliby bheb errors in

risK
Forecec qsfina
proee be d cash *low will Lea d bo incon

deeisionr Also e s g ima bion is K

- The owhab hap Peu o

Scen ho
analysis detetninabioh
auesbious

Go NPy esbima es when we asK whafe -

to
happenS
whag
Sensiivity analysis I nvest iqabieh
is chanae
NPV when only one iable var

n
nario
o} sce
comb inabion
simul a pion analysiseA
sen sibiviby analysis
when
when bhe quanbiby
Bhe quanbiby
Cost bha6 change
Vuriable cosbsl-

ofu pub chanaes h a n a e wheh bhe

i Cps6s bhab neb
costs f bime
bime P erio
Perio
FiXed urinq parbi cula
Parbicular
during
pug chang es
uanbiby o¥ ub

the cha n
change
Ln ere menpal cosb
Dmarq ihal ot
in out pu6
when here is
a s mall ch an
thab o ceurS
 bha & ma de
breake even
Level? sa les
ace oun binq
Tero
Neb income e ule

c a s h break - evei 1- level o} sales thaG ma de

Zero
opeta bin cash Howl ecP) eule

bhas ma de
inancial brak -eveh Level 9 sales

WPV qule Zero

bo which a firm
Perubina
Leve raqeF The e q ree

Fixed cosb
or proe6 telies on

Leve ruue ( DoL)

deree o oP ernb in
cash Plow
chan i
o
pek aginq
the er cen baa
in qunnbiby
relabive go Bhe ercen gaqehanaes

Sol d

DeL =YAocf
ZA

i DoL g loJs

DoL 1+
Dol: ocf +Fc
OcF
 I-
bing brea K-even
aecoun
- O
Veb incom
w h e n

a l
NI = Zea

m aru) h)
calles (can &rbubion morg
Q- FC+D Nate -(P-v) is
P-> Price unib
(P- V cos6 unm6

rocP-D accoungina
b rea
K -even

W6 e
O-NI

eash breaK- ever 1

ANte sl
->
when oCF Zero cash break
even
aceubin

Ainanca
2 o

(P--

in ancial b yeak -eveh

when NPV-O &Note
ocf> NPV l oc F

zer o
+oCF
= > o :FC
L (P- Fackr
Nbe NPV= o = 4cPo)+ Ocfx anhuiby
NPP - O
rAsi ocf CFo
IRR b annuiby
Facbor
 Reburh, risk and the Securibyy
h 13
marKeb Line

13.1 Ex pected Returns

and Var iance
return ona risKy
a
ss eb
bhe
expebed retuYns
the fubure
expectes in
L,Jlu
Nate
ER) ris KPree
visK yabe
P remium
rebrn)llit

ER)= yio
Notel

- ( (R-E, R
Var
ELR)

sbd
EX Sba
econ
Pre b
Boom
25x 75 5324|15.1977
» O3
ormal O5 2 1o 5,24 2,645

reseTioh O21 2 27881 55,776

17 74.4
EIR) a = 74,41
FR)= ER re8,3
t(@321)
Ho, 5X 2) re S5eioy
=(x25) mal
nori
Boom +10+ 62
7,5
E(R) =17 -1n..a2)
+(t1
R -ER).P 7).o5)
+(12o- 17.
(273,P4ke, 1)
= l 2 5 - 1 7 . 7 ) e 3 )

=53.2Ko3) +( 5,24x o 5)+

2,445
55,77
15,487 t

7 t7t, +1
13.2- Port Polas
Stochs
such aS
A qvoup a5sebs inyestor
an d bohd s held by an

Povtlio w e i a t
cen t aqe
ofaporbfolho's
The er
aariculay
h ab isin
obl Valu
a55e. SSe& va lue
a

ck wz Portfoilos botl
Value

Porbtle Expecbed returhs

SER)
XE(RJ+w X ELRJ+t +Wa ER,)
E(Rp) = W
dDeviatien
an d Sban&ot
Varianee
Pert}olie

PAX RA PotR
O4
EX economy - .15 O2
- Oo

recession
o15
o2
Worma
O18
o 12
o,4
Beom 3 w A -15a0
O75 wA
in A 2000
15,aoo
boted T7 in b>Wp o0 o5 -W
2op00 o06
have
ose you
SuPP
Rp WA
Vec a s i o t t b 7 5 1 - 0 1 5 )

t l e s25x92)

Lro,o625
(Kp) norwal >(e,75e,2
WAx ELRA)
+
VWg & F(R =0,265|=
(11)
+o29}o3)

E(Rp) e25Xo?1
7 5 Yos25
+ 5+lo5-65Jhos}|
4lo125-os245).os
0b25-0,265)2,032 Boem 0975 yo6
o +Oooo3 + o o244 (o25Kos),

O 0215 216
ouis7. s

0046 => os
Ann oun Cemenf5, SuYp ises, an d bxpecsed rtuvh

l Lu L
n geestne
GPP J

reburn- Expected vefurn + unexpe-fe d refw!

ofa
R =ER) +R

Avenqe Value ot U
will be Zer
a
=EKpecged part + SurP risesp
A nnou n cemeng
EUR)
afic
13,4 an d Un system
R i s K - syst emabic ihPlu ences
es
a
that
th inPlu en

rish A risK vis K

Systemabic
st Also, marhet
number o conasset
ave
ava dibjon$- GDP
interest Yabe
Such a s i eCono mi

inpa bion
th at
fhut aeets
afeebs
risK
Fis
A
is M a ssebs
a$seb
Un
systematic
smdl op
smdl qro
asset or Fis K
a sinae as5seb-sp
ecific
or
VsK
Also Uniyue

ULR
R= E(R) +
50
ELR)+ m + u n sy1te mabic
R s y s t m a b i c isk
 Kisk
Diversi i casion and per$foloi

The Princi ple Diversi) ieation sp rea din

inestm men t achos$ num ber o affets
a

will elimihate Some

but nob all. o}the

aiaal un sysb emabic Vs h

is essentially
alimi nated by
by
n
sys tenabic risK
assefs
di ver sification , so porb)lio with many
kas almes Mo unsysbemafic r isK

No. } asseb's t
ris
riyK
syskema
systemabi-

13,& and Beba for

for
bemab ic ish
y std

l- Je pen d
s
princi ple
a S s e b s e t e n d

malic risk
bhe sysbe refurn oin
on
expeebed temafic ris
The assety sys
bhu
on
ly oh

sybemaic ris
surina am eun t of systemabr
ea
beta coelieitnbl The
assef reldtive
hiskyy aSsef
in a art iculay
YisKPVesen b
aVeraqe risky asseb
6o bhab in w
avera q e mat Ke
PArisK pVRmiuw Rds
m arleb befa l P,) =1
B1= e risK
Portfo te beba
B1yiie risK
 The Security Ma Kes
inel M)
(SML)
ilae
ase5
( Pree ri,K ase ) ( i y
PsKy ases ) i j, i L
(P) ERp)
PisKy asse b -(o) io S

B X- aXire
EIRP)y-y1ie
The Reward-bo- Ris Rasio
i

Rp)> isk pper

slope (smL) (ETR)
-

= by assets Peta

Basic Arqumehb
The asseb Je j la
(risky
(SmL)
resulbi
T h e Fun
dameb al
be
5 sliible m ust
ragio

risc l l aSSets ih the

-to
-

Peward

T the
he same Por

m ar Keb

EB)-RgE(Rs)-Rg
Line Jaployn
dplayiog

FA sbraighb d
sl.}ed eXpeede b rn
retur n
an
an
bively epeteb
Posi
L> A
ebetw'een e b e f w e h

SM
e R
SML-the
elation
ship
the othe
beta The
sope
marHe
Premium
on
o n
ri_K e
exxpeted
peted
et bebween
the
the
marK rafe
derenee r i s - Pree
an
d For (A)
Pursfoilo otl rabio

4ER)-Rg re ward
risk

b r i s k ra
gio
Por(B)/

Ward
re

ly
Price d3
Correcb
 M.delr (CAPM)
seb Prcma
T h e Capikl A
SML showin bhe
bhe
The eyaa gion o expected Yetun
be wee n
rel a fion shipe
and beta.

CAPM eguatiehl

E(R) R= + P:(FTR) -R
premim
m at Ke ris
it's depend s on
=>#Kp
Valee of money
bime
1- he pure
Sysbemabic
vis M
fer bearin
2-The
veward
premium E(R) - Rp
ri K
imarKeKe b
sys&emofi
ritk
anun
3-The

end
Bela

RF+Px
risk
ch 14 Cost o! capita
return thub eguity
) C o r t .F Eauityl The
inVest mekb
Inyesors requr on th
inthe rm
aPproa h *
model
Grwgh
1The Divi Den D

C q i t yd es i l e
P rabe

Cestta
Price per
sre

Estimaima bih3)>

ew rate)
refe
aVerae fo qrow th

A dvan baces his

apProach

an d use
to dnder stan d
e asy
bhis aPpreqch
disadvan buaes
comp
qhieS curtehPy
Pplicable t
only d
Paying Jiuidends

dvi dend co ,
aren 'F Yat
Yub
dPplicable
[} coDS
bunb
babb
ho& req semably reubh Ya
Ya be
be
a
a ravbh
rowin estimube d
Sensitive
to
tx breme ly
Censid eK r,sK
risK
Conider
-Pues
not explebly
The SML APp roach

) - R! + P{ER- )

RE
PsR

A dvan bags fot sysbemabi

Explicibly djusbs ds
as
Lon a
Lo
es ,
es,
-

comp ani
ani
Com
to all
pplicable
A bete lB)
estirafe
we ca He6
ar
d m
ecte

i s ad
vaH baes [he exp over
bime
ine
t e s & i m a t e

Vaty
-
Have which d ees
Premium
PisK
which se
also
al
bera
b e6a,
esbimate

-
Have be
Varier o V e be
Past t o presi
Predic
to
past
bh
6he

w we
are usinusin is e
always
whic h
the febwe
re liuble
L enders
Lenders
that
return

the
Debt l hon's
debt
d ebt

= cos
=>
ces6 the
o
reguire
veh
=Y R,
FV => pemim
Price
I Ro
% coun t = r >
Nobe
F.V>
price
 snlusis an d evalua 'eh

Cost} frele rre d stoc

as Pxed dividen d pais every

fveerre
tocK R.=
Dre d didend r ever

Crrn & P rC

itl(WAC )
Cosb -P Ca p
The wei ahtel ayerage eguly
average
) the cost
the
weighted
The debé-
ba co
an the affer sfock
+PPre
femed
p+E
V
te bad
deb eguiby
Xaue

W,
-W w
Ro) tlwp R,)
+{Wp.
R,)
WACC=(wg W , . R»)
[Rplt-T))
-w
e,)+(Wp tax vab
bible
is Je dne
ora
bisn
corp
eres& pai
d by
inb

Po tax purf J e s