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CFML_A01v3. QXD 8/6/08 three or more: 51 PM Page 1 Lecturer’s Guideline Corporate Economical Management Last edition Glen Arnold For more lecturer materials please visit: www. pearsoned.

co. uk/arnold ISBN 978-0-273-71064-6 © Pearson Education Limited 08 Lecturers implementing the main textual content are authorized to down load and backup this guide as required. CFML_A01v3. QXD 8/6/08 3: 51 PM Web page 2 Pearson Education Limited Edinburgh Gate Harlow Kent CM20 2JE England and Associated Companies around the world Visit us on the World Wide Web in: www. pearsoned. co. uk ––––––––––––––––––––––––––––––––––– Initially published beneath the Financial Occasions

Pitman Submitting imprint in 1998 Second release published 2002 Third model published 2006 Fourth edition published 2008 © Monetary Times Specialist Limited 98 © Pearson Education Limited 2002, june 2006, 2008 The right of Glen Arnold to get identified as writer of this Function has been true by him in accordance with the Copyright, Designs and Patents Act 1988. ISBN-978-0-273-71064-6 Every rights appropriated. Permission can be hereby offered for the material in this newsletter to be produced for OHP transparencies and student handouts, without exhibit permission from the Publishers, intended for educational purposes only.

In every other cases, no component to this newsletter may be produced, stored in a retrieval system, or transmitted in any kind or in any respect, electronic, mechanical, photocopying, recording, or otherwise devoid of either the prior written authorization of the Web publishers or a driving licence permitting constrained copying in great britain issued by Copyright Certification Agency Ltd., Saffron Residence, 6-10 Kirby Street, Birmingham EC1N 8TS. This book is probably not lent, resold, hired out or otherwise disposed of by way of trade in any kind of binding or perhaps cover apart from that in which it can be published, with no prior agreement of the Writers.

CFML_A01v3. QXD 8/5/08 5: 16 PM HOURS Page several CONTENTS Preamble Location of answers to questions and problems SUPPLEMENTARY MATERIAL TO GET CHAPTERS Chapter 1 The financial world Chapter a couple of Project evaluation: Net present value and internal charge of return Chapter three or more Project evaluation: Cash flow and applications Phase 4 The decision-making process for investment appraisal Phase 5 Task appraisal: Capital rationing, taxation and pumpiing Chapter six Risk and project evaluation Chapter six Portfolio theory Chapter almost eight The capital asset pricing unit and multi-factor models Phase 9 Inventory markets Part 10 Elevating equity capital

Chapter 11 Long-term debt finance Part 12 Short-term and medium-term finance Part 13 Treasury and seed money management Part 14 Wall street game efficiency Part 15 Benefit management Chapter 16 Strategy and worth Chapter 18 Value-creation metrics Chapter 18 Entire company value measurement Chapter nineteen The cost of capital Chapter 20 Valuing stocks and shares Chapter 21 years old Capital composition Chapter twenty-two Dividend policy Chapter twenty-three Mergers Section 24 Derivatives Chapter twenty-five Managing exchange-rate risk © Pearson Education Limited 2008 5 6th 7 10 14 20 24 up to 29 33 38 40 43 47 fifty-one 54 49 59 sixty four 66 72 74 seventy seven 81 84 86 91 96 3 CFML_A01v3.

QXD 8/5/08 4: 16 PM Page some Supporting resources Visit www. pearsoned. co. uk/arnold to find valuable online resources Companion Site for students? Learning objectives for each chapter? Qmc (question multiple choice ) questions with instant reviews to help test out your learning? Informationen to relevant, specific Internet resources to facilitate complex independent exploration? A wide selection of FEET articles, further to those present in the publication, to provide actual examples of economical decision making in practice? Interactive on the net flashcards that allow the target audience to check definitions against the search terms during revision Searchable on-line glossary To get instructors? Full, downloadable Instructor’s Manual which include answers for all those question material in the book? A new set of above 800 PowerPoint slides that could be downloaded and used as OHTs Also: The regularly maintained Companion Website supplies the following features:? Search tool to help find specific components of content? Email-based results and profile equipment to send effects of quizzes to teachers? Online help and support to assist with website use and fine-tuning For more information please contact your regional Pearson Education sales rep or check out www. earsoned. co. uk/arnold CFML_A01v3. QXD 8/5/08 5: 16 EVENING Page your five PREFACE Information is designed to aid lecturers and tutors employing Corporate Economical Management fourth edition. Ancillary material intended for chapters For every chapter: • The learning final results are defined. • Tips and principles are shown. • Methods to selected statistical problems (those marked with an asterisk in the main book) are provided. Remember that there is generally more than one possible correct solution to a problem. Distinct answers, which will nevertheless follow the logic with the argument shown in the text message, may be appropriate.

Overhead projected transparency experts Also available on the website in PowerPoint® for getting are above 800 selected figures, tables and key points reproduced in a form suited to creating expense projector transparency masters. These are arranged inside the order in which they appear in Corporate Monetary Management. The learning objectives and summary details from the chapters are also included. Glen Arnold © Pearson Education Limited 2008 your five CFML_A01v3. QXD 8/5/08 4: 16 EVENING Page 6 LOCATION OF ANSWERS TO QUESTIONS AND PROBLEMS (No answers given to those in final column)

Chapter Zero Answered in Appendix VII Answered in Lecturer’s Guidebook 1 Article answer needed (see text) All (see note in Appendix VII) 2 one particular, 2, some, 5, six 3, 7 3 you, 2, several, 6, on the lookout for, 11, 13, 15 5, 5, six, 8, 15, 12, 16 4 1, 2, 4, 5 3 5 1, 2, 3, 5, 6, 9, 15 4, several, 8 6th 1, some, 5, 6, 7, almost 8, 9, twelve, 11 a couple of, 3, doze 7 you, 2, a few, 7, almost 8, 9, 12, 11, doze, 13, 15 4, your five, 6, 14a, b, c 8 1, 3, 5, 5, 7, 8, on the lookout for, 10 6, 7, almost 8, 9 14d 2, 6th, 11 being unfaithful 1–11 twelve 12 almost eight 1–7, 9–11, 13–19 14 1, a couple of, 3, some, 5, 6, 10, 14, 13, 18 7 almost 8, 9, doze, 14, 12-15, 17–20 12 1, 2, 4, 9, 10, 11 5, doze 3, 6th, 7, almost eight, 13, 14, 15 13 1, 5, 5, 7, 9, 12 3a, six, 8, 23, 25a, 3b, 11, 12, 13–22, 24, 25b, 25c 14 a couple of 15 8, 9 you, 3–17 several, 10 sixteen 1–6 1–4 17 one particular, 5, 6, 7 18 1, 2 19 two, 3 1 20 three or more, 4, five, 6, 7, 9 eight, 10 you, 2 twenty one 2, several, 6a, 9 1 some, 5, 6b, 7, almost 8 22 some, 5, 8 23 six 1, a few, 4, a few 2, six, 8, on the lookout for 24 you, 2, a few, 4, 5, 7, 12 6, almost 8, 9 14, 12, 13 25 1, 2, several, 8a, 10, 11 4, 9 a few, 4b, your five, 6, 8b 6 two, 3, some, 4a almost 8 1, a couple of, 3, 4, 7 © Pearson Education Limited 2008 CFML_CH01v3. QXD 29/7/08 17: 25 Webpage 7 EXTRA MATERIAL TO GET CHAPTERS Part 1 THE FINANCIAL UNIVERSE L GETTING OUTCOMES It really is no good learning mathematical tactics and theory if you shortage an overview of what finance is about.

At the end of this section the reader will have a balanced perspective on the purpose and benefit of the fund function, for both the corporate and business and national level. More specifically, the reader must be able to: ¦ illustrate alternative thoughts about the purpose of the company and show the value to any enterprise of clearness on this point, ¦ illustrate the impact from the divorce of corporate control from daily managerial control, ¦ describe the position of the financial manager, ¦ detail the significance of financial intermediaries, ¦ display an understanding of the function of the significant financial institutions and markets. K EY POINTS AND IDEAS Firms should certainly clearly specify the objective of the enterprise to realise a focus to get decision making. ¦ Sound financial management is essential for the achievement of stakeholder goals. ¦ A lot of stakeholders could have their comes back satisfied – given just enough to make their particular contribution. One particular (or more) group(s) could have their comes back maximised – given virtually any surplus in the end others have been completely satisfied. ¦ The believed objective in the firm to get finance is always to maximise shareholder wealth. Reasons: – sensible, a single goal leads to clearer decisions, – the contractual theory, – survival in a competitive world, it is better intended for society, – counters is a tendency of managers to pursue goals for his or her own gain, – that they own the organization. ¦ Maximising shareholder riches is maximising purchasing electric power or increasing the flow of reduced cash flow to shareholders more than a long time horizon. ¦ Income maximisation can be not the same as shareholder wealth maximisation. Some elements a profit comparison does not permit are: – future leads, – risk, – accounting problems, © Pearson Education Limited 08 7 CFML_CH01v3. QXD 29/7/08 17: twenty-five Page almost eight Glen Arnold, Corporate Financial Management Lecturer’s Guide, fourth edition – communication, – additional capital. Corporate governance. Large corporations usually have a separation of ownership and control. This may lead to managerialism where agent (the managers) consider decisions mainly with their pursuits in mind rather than those of the principals (the shareholders). This can be a principal-agent problem. Several solutions: – link bureaucratic rewards to shareholder prosperity improvement, – sackings, – selling stocks and the takeover threat, – corporate governance regulation, – improve details flow. ¦ The productivity of development and the wellbeing of consumers could be improved together with the introduction involving to a dicker economy. Banking institutions and markets encourage development and improvement by mobilising savings and encouraging investment. ¦ Financial managers contribute to firms’ success primarily through expense and fund decisions. Their very own knowledge of financial markets, investment appraisal methods, treasury and risk management techniques are essential for company growth and stability. ¦ Financial institutions inspire the flow of saving into purchase by behaving as broker agents and advantage transformers, thus alleviating the conflict of preferences between the primary buyers (households) as well as the ultimate borrowers (firms). Advantage transformation is the creation of the intermediate secureness with qualities appealing to the primary investor to draw funds, that are then distributed around the ultimate borrower in a kind appropriate to them. Types of advantage transformation: – risk change, – maturity transformation, – volume alteration. ¦ Intermediaries are able to convert assets and encourage the flow of funds because of their economies of scale vis-a-vis the individual buyer: – efficiencies in gathering information, – risk growing, – transaction costs. ¦

The supplementary markets economic securities encourage investment by enabling buyer liquidity (being able to sell quickly and cheaply to another investor) when providing the firm with long-term money. ¦ The financial services sector has grown to get of great financial significance in britain. Reasons: – high income elasticity, – international comparison advantage. ¦ The monetary sector indicates remarkable dynamism, innovation and adaptability over the last three decades. Deregulation, new-technology, globalisation and the rapid advancement new financial products have characterised this sector. Banking sector: – Price tag banks – high-volume and low-value business. – From suppliers banks – low-volume and high-value organization. Mostly fee based. – Foreign banks – mostly Eurocurrency transactions. – Building societies – even now primarily little deposits aggregated for mortgage loan lending. – Finance houses – work with purchase, renting, factoring. almost eight © Pearson Education Limited 2008 CFML_CH01v3. QXD 29/7/08 17: 25 Page on the lookout for Glen Arnold, Corporate Financial Management Lecturer’s Guide, 4th edition ¦ Long-term savings institutions: – Pension money – key investors economic assets. Insurance funds – life peace of mind and endowment policies present large purchase funds. ¦ The risk spreaders: – Device trusts – genuine trusts which are open-ended investment cars. – Expense trusts – companies which usually invest in additional companies’ financial securities, especially shares. – Open-ended expenditure companies (OEICs) – a hybrid between unit and investment trusts. ¦ The danger takers: – Private equity cash – invest in companies certainly not quoted on the stock exchange. – Hedge funds – wide selection of investment or perhaps speculative strategies outside regulators’ control. ¦ The markets: The amount of money markets happen to be short-term from suppliers lending and borrowing marketplaces. – The bond marketplaces deal in long term bond debts issued simply by corporations, government authorities, local authorities etc, and usually have got a secondary market. – The foreign exchange market – one currency is usually exchanged for another. – The share marketplace – principal and second trading in companies’ shares takes place within the Official List of the Greater london Stock Exchange, techMARK and the Alternative Investment Marketplace. – The derivatives marketplace – LIFFE (Euronext. liffe) dominates the ‘exchange-traded’ derivatives market in options and futures.

Nevertheless there is a thriving over-the-counter marketplace. There are not any numerical concerns in this part, answers could possibly be found via reading the written text. © Pearson Education Limited 2008 being unfaithful CFML_CH02v3. QXD 29/7/08 seventeen: 26 Web page 10 Part 2 JOB APPRAISAL: NET PRESENT VALUE AND INSIDE RATE OF RETURN L EARNING RESULTS By the end from the chapter the student should be able to show an understanding of the fundamental theoretical justifications to get using reduced cash flow techniques in analysing major investment decisions, based on the concepts of that time period value involving and the option cost of capital.

More specifically the student should be able to: ¦ calculate net present value and internal rate of return, ¦ show a great appreciation of the relationship between net present value and internal charge of returning, ¦ identify and explain at least two potential problems that can arise with internal charge of return in specific circumstances, ¦ demonstrate understanding of the propensity intended for management to favour a percentage measure of purchase performance and be able to use the customized internal charge of come back. KEY POINTS AND CONCEPTS ¦ Time benefit of money provides three element parts every single requiring payment for a hold off in the invoice of cash: the pure period value, or impatience to consume, – pumpiing, – risk. ¦ Chance cost of capital is the produce forgone within the best offered investment substitute – the danger level of the alternative being the same as for the project under consideration. ¦ Taking account of times value of money and option cost of capital in task appraisal contributes to discounted cash flow analysis (DCF). ¦ Net present worth (NPV) is the present value of the future cash flows following netting the actual initial cash flow. Present beliefs are achieved by discounting at the opportunity cost of capital.

NPV = CF0 + ¦ (1 + k)2 + , CFn (1 + k)n 0 accept zero reject CF1 1+r & CF2 (1 + r)2 + , CFn (1 + r)n =0 The internal rate of return decision rule is usually: IRR IRR 10 CF2 Internal level of return (IRR) is the discount charge which, when ever applied to the cash flows of your project, leads to a zero net present value. It is an ‘r’ resulting in the following formulation being authentic: CF0 & ¦ 1+k + The net present benefit decision rules are: NPV NPV ¦ CF1 chance cost of capital – agree to opportunity expense of capital – reject © Pearson Education Limited 2008 CFML_CH02v3. QXD 29/7/08 seventeen: 26 Web page 11

Glen Arnold, Company Financial Management Lecturer’s Guidebook, 4th edition ¦ IRR is poor at handling situations of unconventional money flows. Multiple solutions is most likely the result. ¦ There are circumstances when IRR ranks one project above another, whereas NPV positions the projects in the contrary order. This kind of ranking trouble becomes an essential issue in situations of mutual exclusivity. ¦ The IRR decision regulation is corrected for financing-type decisions. ¦ NPV procedures in total amounts of money. IRR is actually a percentage measure. ¦ IRR assumes that intra-project funds flows could be invested for a price of come back equal to the IRR.

This kind of biases the IRR calculations. ¦ If a percentage measure is required, maybe for conversation within an company, then the altered internal rate of come back (MIRR) is to be preferred towards the IRR. ANSWERS TO SELECTED QUESTIONS three or more Confused plc a Project C IRRs in 12. 1% and 286%. See Fig. 2 . 1 . NPV & 12. 1 – 286 Discount charge Fig. installment payments on your 1 Job D Simply no solution applying IRR. Discover Fig. 2 . 2 . & NPV Low cost rate – Fig. installment payments on your 2 n This problem illustrates two down sides of the IRR method. Regarding project C multiple solutions are likely, given the nonconventional income.

In the case of project D you cannot find any solution, not any IRR exactly where NPV sama dengan 0. c NPV Task C: &? 646 Job D: –? 200 Using NPV the accept/reject decision is straightforward. Task C is usually accepted and Project M is declined. © Pearson Education Limited 2008 11 CFML_CH02v3. QXD 29/7/08 seventeen: 26 Web page 12 Glen Arnold, Company Financial Administration Lecturer’s Guideline, 4th release 7 Seddet International task management A At 20%: –5, 266 & 2, 500? 2 . 1065 = 0,? IRR sama dengan 20% Task B For 7%: –8, 000 & 10, 500? 0. 8163 = +163 At 8%: –8, 500 + 10, 000? zero. 7938 = –62 IRR = several + 163 163 + 62 (8 – 7) = six. 7% Task C

In 22%: –2, 100 & 200? 0. 8197 & 2, nine hundred? 0. 6719 = +12. 45 By 23%: –2, 100 & 200? 0. 8130 + 2, 900? 0. 6610 = –20. 5 IRR = twenty two + doze. 45 12. 45 + 20. your five (23 – 22) = 22. 4% Project G At 16%: –1, 975 + 1, 600? zero. 8621 & 800? 0. 7432 = –1? IRR is slightly under 16%. The IRR exceeds the hurdle charge of 16% in the case of A and C. Therefore if all projects can be accepted these two should be carried out. b Rank under IRR: Project Project Project Job C A D M IRR twenty-two. 4% twenty percent 16% several. 7% best project c Project A –5, 266 + 2, 500? installment payments on your 2459 sama dengan 349 Task B –8, 000 & 10, 1000? 0. 6407 = –1, 593 Job C two, 100 + 200 & 0. 8621 + two, 900? zero. 7432 = 228 Task D –1, 975 & 1, six hundred? 0. 8621 + 800? 0. 7432 = –1 12 © Pearson Education Limited 2008 CFML_CH02v3. QXD 29/7/08 18: 26 Web page 13 Glen Arnold, Business Financial Managing Lecturer’s Guidebook, 4th release Ranking Task A Project C Project D Project W NPV 349 best job 228 –1 –1, 593 Project A ranks more than project C using NPV because it builds a larger excessive (value) above the required level of returning. NPV actions in overall amounts of cash and because job A is definitely twice the dimensions of project C it creates the NPV irrespective of a lower IRR. This record should discuss the meaning of your positive or perhaps negative NPV expressed in everyday dialect. It should refer to the time benefit of money and opportunity expense of capital and explain their meanings. As well the disadvantages of IRR should be reviewed: ¦ multiple solutions, ¦ ranking problem – link with the comparison of a percentage-based measure and an absolute moneybased measure, ¦ additivity impossible, ¦ the reinvestment assumption is flawed. © Pearson Education Limited 2008 13 CFML_CH03v3. QXD 29/7/08 17: 26 Site 14 Phase 3 PROJECT APPRAISAL: CASHFLOW AND APPLICATIONS LEARNING OUTCOMES

By the end on this chapter the reader will be able to determine and apply relevant and incremental cash flows in net present value calculations. The reader may also be able to recognise and cope with sunk costs, incidental costs and given overheads and be able to employ this kind of knowledge for the following: ¦ the substitute decision/the replacement unit cycle, ¦ the calculation of gross annual equivalent usually are, ¦ the make or perhaps buy decision, ¦ maximum timing of investment, ¦ fluctuating end result situations. KEY POINTS AND CONCEPTS ¦ Organic data need to be checked intended for accuracy, stability, timeliness, expense of collection, etc . ¦

Depreciation is definitely not a earnings and should end up being excluded. ¦ Profit can be described as poor substitute for cash flow. For instance , working capital alterations may be needed to modify the profit figures intended for NPV analysis. ¦ Analyse on the basis of incremental cash goes. That is, the between the money flows coming if the project is applied and the funds flows in the event the project is not executed: – opportunity costs associated with, claim, using a property which has an alternate employment happen to be relevant, – incidental results, that is, cashflow effects through the organisation, should be considered along with the obvious direct effects, sunk costs – costs which will not change regardless of the decision to proceed happen to be clearly unimportant, – given overhead is a non-incremental expense and is irrelevant, – curiosity should not be twice counted simply by both including interest being a cash flow and including this as a feature in the price cut rate. ¦ The replacement decision is definitely an example of the application of incremental earnings analysis. ¦ Annual equivalent annuities (AEA) can be employed to estimate the perfect replacement routine for a property under specific restrictive presumptions. The lowest common multiple (LCM) method is at times employed for unsuccsefflull assets. If to repair this machine or sell it and purchase a new machine is a very prevalent business dilemma. Incremental earnings analysis allows us to fix these types of challenges. Other applications include the timing of tasks, the issue of fluctuating output and the make or buy decision. 14 © Pearson Education Limited 08 CFML_CH03v3. QXD 29/7/08 seventeen: 26 Web page 15 Glen Arnold, Corporate and business Financial Administration Lecturer’s Guideline, 4th release A NSWERS TO PICKED QUESTIONS 4 Mercia plc a Pitch 1 Consultant’s fee – sunk expense Central cost to do business – unimportant Depreciation – irrelevant Period (years)? 000s 0

Earthmoving Construction Admission sales Functional costs Authorities Senior managing Opportunity price Cash goes –1, 650 3>? two –100 –1, 650 Reduced Cash runs 1 –150 –1, 500 –200 +600 –100 –100 –50 +600 –100 –50 +150 zero +450 one hundred and fifty (1. 1)2 450/0. you (1. 1)2 + NPV = +? 2 . 193m Proposal 2 Central over head (? 70, 000) – irrelevant Consultants fees (? 50, 000) – sunk cost Time (years)? 000s 0 one particular 2 three or more –100 a few, 000 –4, 000 –400 –100 five, 000 –4, 000 –400 –100 Style , build Revenue Working costs Gear Executive Prospect cost Sale for club –9, 000 Income –9, 90 –100 Reduced cash flow –9, 100 –100 1 . one particular –100 +11, 000 500 + 500 (1. 1)2 +11, 500 + 14, 500 (1. 1)3 NPV = –? 137, 566 Recommendation: recognize proposal you IRR Proposal 1: twenty. 2% Proposal 2: being unfaithful. 4% © Pearson Education Limited 08 15 CFML_CH03v3. QXD 29/7/08 17: twenty six Page of sixteen Glen Arnold, Corporate Economic Management Lecturer’s Guide, next edition 5 Mines Foreign plc a Survey – sunk cost Time (years)? m Revenue (loss) Put depreciation Capital equipment Review 0 1 2 three or more 4 your five 0 zero –4. seventy five –2. you 0 –4. 75 0. 30 several. 9 2 . 0 four. 7 2 . 0 4. 7 installment payments on your 0 installment payments on your 9 2 . 0 1 ) 5 zero 0 zero 2 . zero –2. 0 2 . 0 2 . 25 –0. twenty-five 2 . 25 2 . 25 0 2 . 25 1 ) 75 +0. 50 1 ) 75 0 +1. 75 0. a hundred and twenty-five 0. 125 0. 125 0. 15 0 –0. 25 zero. 10 0 –0. twelve Debtor adjusting: Opening debtors Closing debtors Creditor adjustment Opening lenders Closing credit card companies 0 0. 15 +0. 15 Expenses Hire cost Cash reserves Authorities refund Earnings Discounted cash flow 0. a couple of 0. 15 0. 15 0. 10 0. a hundred and twenty-five –0. 05 +0. 025 0. 2 0. a couple of –0. you 0. 2 –1. 0 5. a hundred and twenty-five 0. a couple of +1. 0 +0. 2 –5. 75 –5. seventy five –6. 20 4. 05 6. 575 6. on the lookout for 8. 075 1 . eighty-five –6. twenty + 5. 05 & 6. 575 + 6. 9 & 8. 075 + 1 ) 85 1 . 12 (1. 12)2 (1. 12)3 (1. 12)4 (1. 12)5 (1. 12)5. 125 = –5. 75 – 5. 536 + several. 229 & 4. 680 + 4. 385 & 4. 582 + 1 ) 035 =? 6. 625m The maximum which MI should certainly bid in the auction is?. 625m. This additional cash outflow in time zero would cause a return of 12% becoming obtained. (Some students may time the final debtor and creditor obligations at period 5. twenty-five as time 6. ) b IRR = twenty nine. 4%. c Points to end up being covered: ¦ Time worth of money. ¦ Opportunity cost of money for any given risk class. ¦ Sunk expense. ¦ Take care of depreciation. ¦ Allocated overhead treatment. ¦ Cash shots. ¦ Hire cost – opportunity price. Comparison of NPV with other task appraisal strategies: Advantages over IRR: – measures in absolute numbers of money, – ranking problem, – multiple solution trouble. 16 Pearson Education Limited 2008 CFML_CH03v3. QXD 29/7/08 17: 21 Page 17 Glen Arnold, Corporate Financial Management Lecturer’s Guide, 4th edition ¦ Advantages over payback: – time benefit of money allowed for, – all cash flows considered, – money flows within just pay back period considered correctly. ¦ Advantages over ARR: – company theoretical foundation, time value of money, – defined decision criteria. several Reds plc One-year pattern: Time (years) 0 1 –10, 000 –12, 500 8, 000 – four, 000 NPV = –10, 000 – 4, 000? 0. 9009 = –13, 604 AEA = –13, 604 zero. 9009 sama dengan –? 12-15, 100 Two-year cycle: Time (years) 0 1 two –10, 000 –12, 000 –13, 1000, 500 –6, 500 NPV = –10, 000 – 12, 000? 0. 9009 – six, 500? zero. 8116 = –26, 086 AEA sama dengan –26, 086 1 . 7125 = –? 15, 233 Three-year pattern: Time (years) 0 1 2 3 –10, 1000 –12, 000 –13, 000 –14, 000 3, 500 –10, 500 NPV = –10, 500 – doze, 000? zero. 9009 – 13, 1000? 0. 8116 – 15, 500? zero. 7312 sama dengan –39, 039 AEA = –39, 039 2 . 4437 = –? 15, 975 Reds should certainly replace the machinery over a one-year routine. © Pearson Education Limited 2008 18 CFML_CH03v3. QXD 29/7/08 17: 26 Page 18 Glen Arnold, Corporate Financial Managing Lecturer’s Guide, 4th edition 8 Instant replacement: Period (years) 0 1>? +4, 000 –15, 100 +4, 000 –15, 100 0. 11 = –? 133, 273

Alternative after one year: Time zero + 2>? –2, 500 –2, 500 1 three or more, 000 –15, 100 0. 9009 – 15, 100/0. 11 1 ) 11 three or more, 000? = –? 122, 966 Alternative after couple of years: Time 0 1 2 3>? –2, 000 –1, 000 +1, 500 –15, 100 –2, 000 –1, 000? 0. 9009 & 1, 500? 0. 8116 –15, 100/0. 11 (1. 11)2 sama dengan –? 113, 097 Suggestion: Commence replacement unit cycle after two years. 15 Curt plc Incremental funds flows Period (years) 0 –70, 1000 –28, 000 28, 1000 37, 500 47, 95 68, 410??? 0. 8621 0. 7432 0. 6407 0. 5523 0. 4761 2 several 4 your five 0 –70, 000 100, 000 –80, 000 –48, 000 110, 000 –82, 000 121, 000 –84, 000 133, 100 –86, 000 146, 410 –88, 000 twelve, 000 –70, 000 Current cash flows

New prepare 1 –28, 000 twenty-eight, 000 37, 000 47, 100 68, 410 = = sama dengan = = = –70, 000 –24, 139 20, 810 twenty three, 706 twenty six, 013 thirty-two, 570 8, 960 Good incremental NPV indicates that acceptance of the proposal to manufacture in one facility would add to shareholder wealth. 18 © Pearson Education Limited 08 CFML_CH03v3. QXD 29/7/08 seventeen: 26 Page 19 Glen Arnold, Company Financial Administration Lecturer’s Guide, 4th edition Other factors: several possibilities The relative bargaining strength of Curt as well as supplier. Probably a search for another supplier will be wise. Maybe it would be conceivable to negotiate a multi-year price contract.

Are there another incidental effects Curt hasn’t considered, electronic. g. manufacturing plant space consumption? 12 Netq plc End result per year: one particular, 000? zero. 3333? two 1, 500? 0. 3333? 0. 75? 2 you, 000? zero. 3333? 0. 5? two = 667 500 333 1, five-hundred Cost of total annual output one particular, 500? some =? 6th, 000 PHOTO VOLTAIC = 6, 000/0. 13 =? 46, 154 Both equally machines changed: Annual costs 1, 500? 1 . 70 =? a couple of, 700 PHOTOVOLTAIC = 18, 000 + 2, 700 0. 13 =? 34, 769 One particular machine is usually replaced: Older Output: first third of year second third of year last third of year New 333. three or more 166. six 0 five-hundred 333. a few 333. three or more 333. a few 1, 1000 Annual costs 500? 5 + you, 000? 1 ) 8 =? 3, 800 PV = 7, 500 + three or more, 800 =? 6, 231 0. 13 The lowest cost option should be to replace the two machines. 18 Opti plc Costs One-year replacement: PHOTOVOLTAIC = twenty, 000 – 6, 000/1. 1 sama dengan 14, 545 AEA = 14, 545/0. 9091 = 16, 000 Two-year substitute: PV = 20, 500 + 6, 000/1. 1 – one particular, 000/(1. 1)2 = twenty-four, 629 AEA = 24, 629/1. 7355 = 14, 191 Three-year replacement: PHOTOVOLTAIC = 20, 000 + 6, 000/1. 1 & 8, 000/(1. 1)2 & 4, 000/(1. 1)3 = 35, 072 AEA sama dengan 35, 072/2. 4869 sama dengan 14, 103 Four-year replacement: PV sama dengan 20, 000 + 6th, 000/1. you + almost eight, 000/(1. 1)2 + 10, 000/(1. 1)3 + 10, 000/(1. 1)4 = 46, 410 AEA = 46, 410/3. 1699 = 16, 641 The perfect replacement pattern is three years. © Pearson Education Limited 2008 9 CFML_CH04v3. QXD 29/7/08 seventeen: 27 Page 20 Section 4 THE DECISION-MAKING PROCEDURE FOR INVESTMENT APPRAISAL LEARNING OUTCOMES The key outcome expected from this section is that the reader is aware of both traditional and discounted income investment appraisal techniques as well as the extent with their use. The reader should also be aware that these approaches are a tiny part of the general capital-allocation planning process. The student is likely to gain familiarity with: ¦ the empirical evidence on techniques used, ¦ the computation of repayment, discounted payback and accounting rate of return (ARR)