Principles of Corporate Finance
Department Store Rents NPV = -100 + +... + = $ 1 million [assumes price of property appreciates by 3% a year] Rental yield = 10 ...
EXAMPLE: KING SOLOMON’S MINE Investment = $200 million Life = 10 years Production = .1 million oz. a year Production cost = $200 ...
EXAMPLE: KING SOLOMON’S MINE - continued If the gold price is forecasted to rise by 5% p.a.: NPV = -200 + (.1(420 - 200))/1.10 + ...
Do Projects Have Positive NPVs? w Rents = profits that more than cover the cost of capital. w NPV = PV (rents) w Rents come only ...
Competitive Advantage Proposal to manufacture specialty chemicals w Raw materials were commodity chemicals imported from Europe. ...
Marvin Enterprises Capacity Unit cost Technology Industry Marvin Capital Prodn. Salvage value 2011 120 - 17.5 5 2.5 2019 120 24 ...
Marvin Enterprises Prices Technology Production cost Interest on capital Interest on salvage Invest above Scrap below 2011 5.5 ...
Marvin Enterprises 5 6 7 10 Price 800 400 320 240 Demand Demand = 80 (10 - Price) Price = 10 x quantity/80 Demand for Garbage Bl ...
Marvin Enterprises NPV new plant = 100 x [-10 + Σ ((6 - 3)/1.2t ) + 10/1.25 = $299 million Change PV existing plant = 24 x Σ (1/ ...
Marvin Enterprises VALUE OF CURRENT BUSINESS: VALUE At price of $7 PV = 24 x 3.5/.20 420 WINDFALL LOSS: Since price falls to $5 ...
Marvin Enterprises 100 200 280 NPV new plant Change in PV existing plant Total NPV of investment 400 600 200 -200 NPV $m. Additi ...
u Making Sure Managers Maximize NPV Principles of Corporate Finance Brealey and Myers Sixth Edition Chapter 12 ...
Topics Covered w The capital investment process w Decision Makers and Information w Incentives w Residual Income and EVA w Accou ...
The Principal Agent Problem Shareholders = Owners Managers = Employees Question: Who has the power? Answer: Managers ...
Capital Investment Decision Project Creation “Bottom Up” Strategic Planning “Top Down” Capital Investments ...
Off Budget Expenditures ‹Information Technology ‹Research and Development ‹Marketing ‹Training and Development ...
Information Problems Consistent Forecasts Reducing Forecast Bias Getting Senior Management Needed Information Eliminating Confl ...
Growth and Returns 12 11 10 9 8 7 5 10 15 20 25 Rate of return, % Rate of growth, % Economic rate of return Book rate of return ...
Brealey & Myers Second Law The proportion of proposedThe proportion of proposed projects having a positive NPVprojects havin ...
Incentives w Reduced effort w Perks w Empire building w Entrenching investment w Avoiding risk Agency Problems in Capital Budget ...
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