Rsm 332

UT Easy4.0 RSM333 Midterm 学习材料

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Happy New Year!

正式开始上课啦！小伙伴们认真起来!

Class 1: Project Evaluation

4 EVALUATION METHODS: NPV, PI, IRR, payback period

NPV: [pic 2]        

Profitablility Index: PV inflow/PV outflow. It's PV!
(two projects both earn 200 in pv, from NPV method you would be indifferent, but if you know you invest a thousand, or a million, then which would you choose? PI reflects that) [pic 3]

IRR: to find the one and only discount rate that makes NPV of project = 0. Then compare the IRR with the required rate of return (K) not going to be asked about calculation in exam

IRR VS NPV: [pic 4]

[pic 5]

Payback Methods:
simple payback
discounted payback 
see example 

[pic 6]

Tax Shield on CCA (capital cost allowance): [pic 7]

[pic 8]

Asset pool closing: Special Case:

[pic 9]

Don’t worry about the middle part if SV is not greater than capital cost
if question mentions asset pool closing, or if SV > UCC, include the latter part.
NOT LIKELY BE TESTED, THE QUESTION WILL MENTION SPECIFICALLY ABOUT ASSET POOL CLOSING 如果老师真的想考的话

When doing project evaluation, check that you have considered the items listed below and avoid making careless mistakes!

Initial cost, Opportunity costs, PVCCATS, Working capital flows (both in and out), Annual after-tax cash flows, Salvage (ending cash flow, )

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Past Exam Question:

Your firm is considering launching a new product. The project will cost $720,000 to initiate, have a four year lifespan, and a salvage value of $80,000. Sales are projected at 190 units per year; the price per unit will be $21,000, variable costs per unit are $15,500, and fixed costs are $640,000 per year. $50,000 worth of working capital will need to be invested immediately but this amount will be recovered at the end of the project. The required rate of return on the project is 14%, the corporate tax rate is 35% and the CCA rate on the assets required is 20%

a) Should you initiate the project? (4 marks)

Answers”

a) included working capital flows (1 mark), PVCCATS = $129,381 (1 mark), yearly after tax

cash flow = $263,250 (1 mark), NPV = $203,386 (1 mark)

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Capital budgeting Lecture 2:

compare NPV of existing asset to the new asset (remember to ignore sunk cost of existing asset – initial cost already paid out etc.)

Chain replication approach ( For example, replicate 2 year three times, and 3 year twice to a total of 6 years time horizon) ( not important)(不好用所以这里不详细介绍了，有兴趣的同学我课后讲解)