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【正文】 (10%)(50%)=5% $2023, $1000 (10%)(50%)=5% Total 100%(b) Determine possible NPV for each bination State NPVj Probability 1 1000+7000()+10000()=4624 2 1000+7000()+ 9000()=3797 3 1000+2023()+ 2023()=6530 4 1000+2023()+ 1000()=7356 Total (c) Compute Expected NPV and Variance E(NPV)=4623(63%)+3797(27%)+(6530)(5%)+(7356)(5%)=$3242 S(NPV)=[? (NPVj 3242)2 ?Probability]1/2 =$3254 Advanced Topics in Capital BudgetingVI. Project Abandonment1. Why to Abandon a Project?(1) Economic Environment (2) Market Competition(3) ProductConsumption Cycle (4) Technological Changes(5) Management Team(6) Wrong Estimation in Capital BudgetingSales Test Growth Mature Decline t 廈門大學(xué)吳世農(nóng)2. When to Abandon a Project? (1) Project Abandonment Under Certainty Suppose that a firm invests $10000 in a project, K=10%, n=5. The following table contains the project’s data for making the accept/reject decision and the abandonment decision. Year 1 2 3 4 5 NCF 5000 4000 3000 2023 1000 Salvage(F) 7000 5000 3000 1000 0(a) Is the project acceptable? NPV= 5000()+4000()+3000()+2023()+1000() 10000 = $2089 0, so the project should be accepted!(b) Should be the project be abandoned after its operation? Yes, because the project’s NCFs rend to decline year by year! (c) When to abandon the project? The firm should abandon the project when the NPV is maximized! The following Calculation show Max(NPV) appears when n=3. Why? Advanced Topics in Capital Budgeting(c1) NPV for 5year Operation: NPV= 5000()+4000()+3000()+2023()+1000() 10000 = $2089 (c2) NPV for 4year Operation: NPV= 5000()+4000()+3000()+2023()+1000() 10000 = $2157 (c3) NPV for 3year Operation: NPV= 5000()+4000()+3000()+3000()10000 = $2355=Max(NPV) (c4) NPV for 2year Operation: NPV= 5000()+4000()+5000()10000 = $1979 (c5) NPV for 1year Operation: NPV= 5000()+7000()10000 = $908廈門大學(xué)吳世農(nóng)(2) Project Abandonment Under Uncertainty Suppose that a firm considers a project which initial outlay is $10000, K=10%, n=2, and its NCFs and associated probabilities were shown in the previous section (see IV). If the firm expected that salvage value(F) by the end of period 1 is $3000 while nothing left by the end of period 2, will this project is acceptable? If yes, should be it abandoned after operation? (a) Is the project acceptable? By putation from Section IV, E(NPV)0, so the project must be accepted! E(NPV)=4623(63%)+3797(27%)+(6530)(5%)+(7356)(5%)=$3242 S(NPV)=[? (NPVj 3242)2 ?Probability]1/2 =$3254 (b) When to Abandon the Project? Year1 or Year2? (b1): If the project is abandoned at the end of year 2, then E(NPV)=$3242 S(NPV)=$3254 Advanced Topics in Capital Budgeting(b2): If the project is abandoned at the end of year 1, then E(NPV)=4623(63%)+3797(27%)+(5455)(5%)+(5455)(5%)=$3392 S(NPV)=[? (NPVj 3392)2 ?Probability]1/2 =$2971 The results above e from the following table: State NPVj Probability 1 1000+7000()+10000()=4624 2 1000+7000()+ 9000()=3797 3 1000+(2023+3000)() =5455 4 1000+(2023+3000)() =5455 Total (b3) Decisions The first, the results suggest that abandoning the project at the end of year 1 shows a larger NPV and less standard deviation by a parison to NPV and standard deviation resulted from abandoning the project at the end of year 2, so the project should be abandoned at the end of year1. 廈門大學(xué)吳世農(nóng) The second, the project will not be abandoned by the end of year 1 if the NCF=$70000 in the first year, but will be abandoned if the NCF = $2023 in the first year. (3) Optimal Project Life for Continuos Variable in Capital Budgeting (a) Continuos Variable in Capital Budgeting In practice, some firm may be faced with some capital budgeting problems which variables such as price, profit and cash flow are continuous variables, for instance, brewery industry, forests plantation, raising chicken, and son on. There are two questions needed to answer for these case: (a1) What is NPV for a Project with continuos variables? (a2): How to determine an optimal life for these projects? (b) Illustration Suppose that an investment in a winery will produce the aftertax profit ($ per bottle) on a bottle of red wine can be approximately by the following equation: Profit= (3t) 1/2 where t=
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