Tài chính doanh nghiệp - Chapter 14: Risk and managerial options in capital budgeting

Chapter 14Risk and Managerial Options in Capital Budgeting© 2001 Prentice-Hall, Inc.Fundamentals of Financial Management, 11/eCreated by: Gregory A. Kuhlemeyer, Ph.D.Carroll College, Waukesha, WIRisk and Managerial Options in Capital BudgetingThe Problem of Project RiskTotal Project RiskContribution to Total Firm Risk: Firm-Portfolio ApproachManagerial OptionsAn Illustration of Total Risk (Discrete Distribution)ANNUAL CASH FLOWS: YEAR 1PROPOSAL A State Probability Cash FlowDeep Recession .05 $ -3,000Mild Recession .25 1,000Normal .40 5,000Minor Boom .25 9,000Major Boom .05 13,000Probability Distribution of Year 1 Cash Flows.40.05.25Probability-3,000 1,000 5,000 9,000 13,000Cash Flow ($)Proposal A CF1 P1 (CF1)(P1)$ -3,000 .05 $ -150 1,000 .25 250 5,000 .40 2,000 9,000 .25 2,250 13,000 .05 650 S=1.00 CF1=$5,000Expected Value of Year 1 Cash Flows (Proposal A) (CF1)(P1) (CF1 - CF1)2(P1) $ -150 ( -3,000 - 5,000)2 (.05) 250 ( 1,000 - 5,000)2 (.25) 2,000 ( 5,000 - 5,000)2 (.40) 2,250 ( 9,000 - 5,000)2 (.25) 650 (13,000 - 5,000)2 (.05) $5,000Variance of Year 1 Cash Flows (Proposal A)Variance of Year 1 Cash Flows (Proposal A) (CF1)(P1) (CF1 - CF1)2*(P1) $ -150 3,200,000 250 4,000,000 2,000 0 2,250 4,000,000 650 3,200,000 $5,000 14,400,000Summary of Proposal AThe standard deviation = SQRT (14,400,000) = $3,795 The expected cash flow = $5,000An Illustration of Total Risk (Discrete Distribution)ANNUAL CASH FLOWS: YEAR 1PROPOSAL B State Probability Cash FlowDeep Recession .05 $ -1,000Mild Recession .25 2,000Normal .40 5,000Minor Boom .25 8,000Major Boom .05 11,000Probability Distribution of Year 1 Cash Flows.40.05.25Probability-3,000 1,000 5,000 9,000 13,000Cash Flow ($)Proposal BExpected Value of Year 1 Cash Flows (Proposal B) CF1 P1 (CF1)(P1)$ -1,000 .05 $ -50 2,000 .25 500 5,000 .40 2,000 8,000 .25 2,000 11,000 .05 550 S=1.00 CF1=$5,000 (CF1)(P1) (CF1 - CF1)2(P1) $ -50 ( -1,000 - 5,000)2 (.05) 500 ( 2,000 - 5,000)2 (.25) 2,000 ( 5,000 - 5,000)2 (.40) 2,000 ( 8,000 - 5,000)2 (.25) 550 (11,000 - 5,000)2 (.05) $5,000Variance of Year 1 Cash Flows (Proposal B)Variance of Year 1 Cash Flows (Proposal B) (CF1)(P1) (CF1 - CF1)2(P1) $ -50 1,800,000 500 2,250,000 2,000 0 2,000 2,250,000 550 1,800,000 $5,000 8,100,000 Summary of Proposal B The standard deviation of Proposal B -($266.67)What is the “new” project value?Project Abandonment $ 2,238.32 $ 1,331.29 $ 1,059.18 $ 344.90 $ 72.79-$ 199.32 -$ 1,280.95 -$900(.20) $1,200 (.20) -$400*(.60) $450Year 1123(.60) $1,200(.30) $ 900(.10) $2,200(.35) $ 900(.40) $ 600(.25) $ 300(1.0) $ 0Year 2*-$600 + $200 abandonmentSummary of the Addition of the Abandonment Option* For “True” Project considering abandonment optionThe standard deviation* = SQRT (740,326) = $857.56 The expected NPV* = $ 71.88 NPV* = Original NPV + Abandonment Option Thus, $71.88 = -$17.01 + Option Abandonment Option = $ 88.89