Gestin de Proyectos Informticos Richard Ramrez-Anormaliza rriamireza@gmail.

com Milagro, Abril 2013

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Estudio financiero
Determina

en ltimo trmino su aprobacin o rechazo.

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Herramientas del estudio financiero

Anlisis Flujo VAN TIR Periodo
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de rentabilidad

de caja

de recuperacin de inversin

Project Evaluation
2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Created by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha, WI

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Project Evaluation: Alternative Methods

Payback Period (PBP) Internal Rate of Return (IRR) Net Present Value (NPV) Profitability Index (PI)

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Independent Project
For

this project, assume that it is independent of any other potential projects that Basket Wonders may undertake. Independent -- A project whose acceptance (or rejection) does not prevent the acceptance of other projects under consideration.
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Payback Period (PBP)

0
-40 K

1
10 K

2
12 K

3
15 K

4
10 K

5
7K

PBP is the period of time required for the cumulative expected cash flows from an investment project to equal the initial cash outflow.
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Payback Solution (#1)

0
-40 K (-b)

1
10 K 10 K

2
12 K 22 K

3 (a)
15 K 37 K(c)

4
10 K (d) 47 K

5
7K 54 K

Cumulative Inflows

PBP

=a+(b-c)/d = 3 + (40 - 37) / 10 = 3 + (3) / 10 = 3.3 Years

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Payback Solution (#2)

0
-40 K -40 K

1
10 K -30 K

2
12 K -18 K

3
15 K -3 K

4
10 K 7K

5
7K 14 K

PBP
Cumulative Cash Flows

= 3 + ( 3K ) / 10K = 3.3 Years

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Note: Take absolute value of last negative cumulative cash flow value.

PBP Acceptance Criterion

The management of Basket Wonders has set a maximum PBP of 3.5 years for projects of this type. Should this project be accepted? Yes! The firm will receive back the initial cash outlay in less than 3.5 years. [3.3 Years < 3.5 Year Max.]
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PBP Strengths and Weaknesses

Strengths: Strengths :

Weaknesses: Weaknesses :

Easy to use and understand Can be used as a measure of liquidity Easier to forecast ST than LT flows

Does not account for TVM Does not consider cash flows beyond the PBP Cutoff period is subjective

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Internal Rate of Return (IRR)

IRR is the discount rate that equates the present value of the future net cash flows from an investment project with the projects initial cash outflow. CF1 ICO = (1+IRR)1
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CF2 (1+IRR)2

+...+

CFn (1+IRR)n

IRR Solution
$10,000 $12,000 $40,000 = + + (1+IRR)1 (1+IRR)2 $15,000 $10,000 $7,000 + + (1+IRR)3 (1+IRR)4 (1+IRR)5 Find the interest rate (IRR) that causes the discounted cash flows to equal $40,000.
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IRR Solution (Try 10%)

$40,000 = $10,000(PVIF10%,1) + $12,000(PVIF10%,2) + $15,000(PVIF10%,3) + $10,000(PVIF10%,4) + $ 7,000(PVIF10%,5) $40,000 = $10,000(.909) + $12,000(.826) + $15,000(.751) + $10,000(.683) + $ 7,000(.621) $40,000 = $9,090 + $9,912 + $11,265 + $6,830 + $4,347 = $41,444 [Rate is too low!!]
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IRR Solution (Try 15%)

$40,000 = $10,000(PVIF15%,1) + $12,000(PVIF15%,2) + $15,000(PVIF15%,3) + $10,000(PVIF15%,4) + $ 7,000(PVIF15%,5) $40,000 = $10,000(.870) + $12,000(.756) + $15,000(.658) + $10,000(.572) + $ 7,000(.497) $40,000 = $8,700 + $9,072 + $9,870 + $5,720 + $3,479 = $36,841 [Rate is too high!!]
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IRR Solution (Interpolate)

.05 X .10 .15 X .05 $41,444 $36,841 $1,444 $4,603 IRR $40,000

$1,444 $4,603

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IRR Solution (Interpolate)

.05 X .10 .15 X .05 $41,444 $36,841 $1,444 $4,603 IRR $40,000

$1,444 $4,603

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IRR Solution (Interpolate)

.05 X .10 .15 $41,444 $36,841 $1,444 $4,603 IRR $40,000

X = ($1,444)(0.05) $4,603

X = .0157

IRR = .10 + .0157 = .1157 or 11.57%

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IRR Acceptance Criterion

The management of Basket Wonders has determined that the hurdle rate is 13% for projects of this type. Should this project be accepted? No! The firm will receive 11.57% for each dollar invested in this project at a cost of 13%. [ IRR < Hurdle Rate ]
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IRR Strengths and Weaknesses

Strengths: Strengths :

Weaknesses: Weaknesses :

Accounts for TVM Considers all cash flows Less subjectivity

Assumes all cash flows reinvested at the IRR Difficulties with project rankings and Multiple IRRs

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Net Present Value (NPV)

NPV is the present value of an investment projects net cash flows minus the projects initial cash outflow.
CF1 NPV = (1+k)1
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CF2 (1+k)2

CFn - ICO +...+ n (1+k)

NPV Solution
Basket Wonders has determined that the appropriate discount rate (k) for this project is 13%. $10,000 $12,000 $15,000 NPV = + + + (1.13)1 (1.13)2 (1.13)3 $10,000 $7,000 + $40,000 4 5 (1.13) (1.13)
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NPV Solution
NPV = $10,000(PVIF13%,1) + $12,000(PVIF13%,2) + $15,000(PVIF13%,3) + $10,000(PVIF13%,4) + $ 7,000(PVIF13%,5) - $40,000 NPV = $10,000(.885) + $12,000(.783) + $15,000(.693) + $10,000(.613) + $ 7,000(.543) - $40,000 NPV = $8,850 + $9,396 + $10,395 + $6,130 + $3,801 - $40,000 = - $1,428
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NPV Acceptance Criterion

The management of Basket Wonders has determined that the required rate is 13% for projects of this type. Should this project be accepted? No! The NPV is negative. This means that the project is reducing shareholder wealth. [Reject as NPV < 0 ]
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NPV Strengths and Weaknesses

Strengths: Strengths :

Weaknesses: Weaknesses :

Cash flows assumed to be reinvested at the hurdle rate. Considers all cash flows.

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Accounts for TVM.

May not include managerial options embedded in the project. See Chapter 14.

Net Present Value Profile

Net Present Value

$000s 15 10 5 0 -4 0

Sum of CFs

Plot NPV for each discount rate.

IRR NPV@13%

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6 9 12 Discount Rate (%)

15

Profitability Index (PI)

PI is the ratio of the present value of a projects future net cash flows to the projects initial cash outflow.
CF1 PI = (1+k)1
+

CF2 CFn +...+ 2 (1+k) (1+k)n

<< OR >>

ICO

PI = 1 + [ NPV / ICO ]
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PI Acceptance Criterion
PI = $38,572 / $40,000 = .9643 (Method #1, 13-33) Should this project be accepted? No! The PI is less than 1.00. This means that the project is not profitable. [Reject as PI < 1.00 ]
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PI Strengths and Weaknesses

Strengths: Strengths :

Weaknesses: Weaknesses :

Same as NPV Allows comparison of different scale projects

Same as NPV Provides only relative profitability Potential Ranking Problems

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Evaluation Summary
Basket Wonders Independent Project

Method Project Comparison Decision PBP IRR NPV PI

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3.3 11.47% -$1,424 .96

3.5 13% $0 1.00

Accept Reject Reject Reject

Other Project Relationships

Dependent

-- A project whose acceptance depends on the acceptance of one or more other projects. Mutually Exclusive -- A project whose acceptance precludes the acceptance of one or more alternative projects.
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Potential Problems Under Mutual Exclusivity

Ranking of project proposals may create contradictory results. A. Scale of Investment B. CashCash-flow Pattern C. Project Life
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A. Scale Differences
Compare a small (S) and a large (L) project.
END OF YEAR 0 1 2
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NET CASH FLOWS Project S Project L -$100 0 $400 -$100,000 0 $156,250

Scale Differences
Calculate the PBP, IRR, NPV@10%, and PI@10%. Which project is preferred? Why?
Project IRR NPV PI

S L
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100% 25%

231

3.31 1.29

$29,132

B. Cash Flow Pattern

Let us compare a decreasing cash-flow (D) project and an increasing cash-flow (I) project.
END OF YEAR 0 1 2 3
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NET CASH FLOWS Project D Project I -$1,200 -$1,200 1,000 100 500 600 100 1,080

Cash Flow Pattern

Calculate the IRR, NPV@10%, and PI@10%. Which project is preferred?
Project D I
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IRR 23% 17%

NPV $198 $198

PI 1.17 1.17

Examine NPV Profiles

600 Net Present Value ($)

400

Plot NPV for each project at various discount rates. NPV@10% IRR

-200

200

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10 15 20 Discount Rate (%)

25

Fishers Rate of Intersection

Net Present Value ($) -200 0 200 400 600

At k<10%, I is best!

Fishers Rate of Intersection

At k>10%, D is best!

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10 15 20 Discount Rate ($)

25

C. Project Life Differences

Let us compare a long life (X) project and a short life (Y) project.
END OF YEAR 0 1 2 3
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NET CASH FLOWS Project X Project Y -$1,000 -$1,000 0 2,000 0 0 3,375 0

Project Life Differences

Calculate the PBP, IRR, NPV@10%, and PI@10%. Which project is preferred? Why?
Project X Y
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IRR 50% 100%

NPV $1,536 $ 818

PI 2.54 1.82

Another Way to Look at Things

1. Adjust cash flows to a common terminal year if project Y will NOT be replaced.
Compound Project Y, Year 1 @10% for 2 years.

Year CF

0 -$1,000

1 $0 IRR* = 34.26%

2 $0

3 $2,420

Results:
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NPV = $818

*Lower IRR from adjusted cash-flow stream. X is still Best.

Replacing Projects with Identical Projects

2.
0 -$1,000

Use Replacement Chain Approach (Appendix B) when project Y will be replaced.

1 $2,000 -1,000 $1,000 IRR* = 100% 2 3

$2,000 -1,000 $1,000

$2,000 $2,000

-$1,000 Results:
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NPV* = $2,238.17

*Higher NPV, but the same IRR. Y is Best. Best

Capital Rationing
Capital Rationing occurs when a constraint (or budget ceiling) is placed on the total size of capital expenditures during a particular period.
Example: Julie Miller must determine what investment opportunities to undertake for Basket Wonders (BW). She is limited to a maximum expenditure of $32,500 only for this capital budgeting period.
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Available Projects for BW

Project
A B C D E F G H
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ICO
$ 500 5,000 5,000 7,500 12,500 15,000 17,500 25,000

IRR
18% 25 37 20 26 28 19 15 $

NPV
50 6,500 5,500 5,000 500 21,000 7,500 6,000

PI
1.10 2.30 2.10 1.67 1.04 2.40 1.43 1.24

Choosing by IRRs for BW

Project
C F E B

ICO
$ 5,000 15,000 12,500 5,000

IRR
37% 28 26 25

NPV
$ 5,500 21,000 500 6,500

PI
2.10 2.40 1.04 2.30

Projects C, F, and E have the three largest IRRs. The resulting increase in shareholder wealth is $27,000 with a $32,500 outlay.
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Choosing by NPVs for BW

Project
F G B

ICO
$15,000 17,500 5,000

IRR
28% 19 25

NPV
$21,000 7,500 6,500

PI
2.40 1.43 2.30

Projects F and G have the two largest NPVs.

The resulting increase in shareholder wealth is $28,500 with a $32,500 outlay.
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Choosing by PIs for BW

Project
F B C D G

ICO

IRR
28% 25 37 20 19

NPV
$21,000 6,500 5,500 5,000 7,500

PI
2.40 2.30 2.10 1.67 1.43

$15,000 5,000 5,000 7,500 17,500

Projects F, B, C, and D have the four largest PIs. The resulting increase in shareholder wealth is $38,000 with a $32,500 outlay.
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Summary of Comparison
Method Projects Accepted PI NPV IRR F, B, C, and D F and G C, F, and E Value Added $38,000 $28,500 $27,000

PI generates the greatest increase in shareholder wealth when a limited capital budget exists for a single period.
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Multiple IRR Problem*

Let us assume the following cash flow pattern for a project for Years 0 to 4: -$100 +$100 +$900 -$1,000 How many potential IRRs could this project have? Two!! There are as many potential IRRs as there are sign changes.
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* Refer to Appendix A

NPV Profile -- Multiple IRRs

75
Net Present Value ($000s)

Multiple IRRs at k = 12.95% and 191.15%

50 25 0

-100
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40

80 120 160 Discount Rate (%)

200

Practica 1

Una firma de ingenieros consultores quiere decidir entre comprar o alquilar automviles. Se calcula que los automviles de tamao medio costarn $8.300 y tendrn un valor probable de reventa a los 4 aos de $2.800. El costo anual de combustible y repuestos se supone de $950 el primer ao, con incrementos de $50 anuales. De otra parte la compaa podra alquilar los mismos automviles a $3.500 anuales pagaderos al comienzo de cada ao. Como el precio de alquiler incluye algn mantenimiento, se calcula que los costos anuales de operacin y mantenimiento seran $100 menos que si compraran los autos. Si la tasa de retorno mnima para la compaa es 18%, qu alternativa debe seleccionar?

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Deber.Deber. - Individual

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