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FINANCE

FINANCE. Review of Questions and Problems Part II: Chapter 4-6. Main Contents. Understand the concept of the time value of money and discounted cash flow （ DCF ） techniques to make decisions Complete calculatioins by Excel!

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FINANCE

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  1. FINANCE Review of Questions and Problems Part II: Chapter 4-6

  2. Main Contents • Understand the concept of the time value of money and discounted cash flow（DCF）techniques to make decisions • Complete calculatioinsby Excel! • Ensure that the meanings and some key components of titles are understand • Complete your homework independently!

  3. Chapter 4: Time Value of Money and Discounted Cash Flow Analysis • Problems of homework: • 4.20.a –discount rate used to determine the PV of the cash flows of the project • the opportunity cost of capital 4%:P112 market capitalization rate/risk-adjusted rate/hurdle rate • IRR/yield to maturity --cash inflows: positive /cash outflows: negative

  4. 4.25.c –explain why we would reject a project that has an IRR greater than its cost of capital • IRR rule: P116 Investment: IRR> cost of capital Borrowing: IRR< cost of capital • IRR rule can give bad or wrong decisions under some cases: multiple cash flows: not be unique or not exist different investment scale: unsatisfying choice

  5. 4.31.c--SOLUTION: • Step 1: Find the monthly payments on alternative 1: • Step 2: Find the present value of the above payments at a 9% APR to see how much lower it is:

  6. Problems of homework: grasp the meanings of title complete calculations by Excel familiarity with the book Chapter 5 Life-Cycle Financial Planning

  7. Saving for Retirement-5.4 • Key Components: • Taxes equal to 7.5% of salary must be deducted • 12,000 social security benefit after age 65 must be considered • Solutions: • 4.b The same date

  8. 4.c-calculate PV/FV/PMT of different cash flows on corresponding date（starting or ending of the year/month）.

  9. 养老金计划（Pension Plans）-5.5 • 养老保险金制度的三大支柱，即退休人员的三 种收入来源： • 社会保险养老金（国家基本养老保险） • 企业年金（企业补充养老保险） • 个人商业养老保险

  10. 相关概念： • 缴费率：职工在工作期间的缴费比率，一般为工资的 一定比例 • 退休给付：职工退休后可得的养老金数额 • 替换率：个人进入退休期所领取的养老金与进入退休期 上一年度工资的比例，或者是，进入退休期社 会平均养老金与进入退休期上一年度社会平均 工资的比例。该比例一般为70％左右。 • 工资增长率和利率 • 税收优惠

  11. 养老金计划的基本模式 • 从退休职工享受养老金的来源来看，分为： • 现收现付制：以同时期正在工作的一代人的缴费或税收支付已经退休一代人的养老金。换言之，以当年缴费或税收支付当年养老金，对融资不做任何积累。通常通过税收、雇主和雇员以工资为基础的缴费等方式为养老金养老金融资 • 基金制：雇主或雇员以工作期间劳动收入的一部分缴费以形成某项投资基金，并由缴费及其投资收益为基础支付养老金的制度

  12. 养老金给付＝若干年的平均工资*系数*工作年限养老金给付＝若干年的平均工资*系数*工作年限 基数 替代率 • 按养老基金的运作方式，分为： • 固定给付型（Defined-Benefit）：事先确定职工退休后每月可享受的退休金，再根据基金的运营情况、职工年龄、服务年限等逐年计算雇主或雇员的缴费额；多数情况下，雇员不缴费，养老费用全部由雇主负担，雇主缴费额取决于经办机构的投资收益状况

  13. 固定缴费型（Defined-Contribution）：雇主或雇员按规定比例出资，记入个人账户，其中雇主的缴费是固定的，并不承担风险，但必须提供一系列投资选择供雇员投资时参考，雇员自行决策、自担风险，养老金给付取决于缴费额和投资收益的高低 固定缴费型（Defined-Contribution）：雇主或雇员按规定比例出资，记入个人账户，其中雇主的缴费是固定的，并不承担风险，但必须提供一系列投资选择供雇员投资时参考，雇员自行决策、自担风险，养老金给付取决于缴费额和投资收益的高低 • 货币购买计划（Money Purchase Plan）：利用公式提前定义雇主的缴费额，如，支付雇员工资的6%，或支付与雇员相同的缴费 • 利润分享计划（Profit Sharing Plan）：在利润基础上以现金或股利形式向雇员直接支付，如，缴纳税前利润的10%

  14. Defined-benefit Pension Plan-5.5 • Revised Questions: • Assume that the salaries in later years remain 50,000 in real terms until retirement and the expected rate of inflation is 4% • Annual pension benefit will be equal to 1% * (50,000* 1.0425) * 40 = $53,316.73 The inflation rate is 4%

  15. Investing in Human Capital-5.7 • Solutions: • Step 1: First find the FV of tuition and forgone salary at end of 2 years: • Step 2: Find the increase in salary which has this amount as its PV: Two or more figures can be operated or compared onlyif they are the figures on the same date!

  16. Key Components: Ordinary wrong calculation: 400*12*3 values on different date cann’t be operated directly, you must discount or compound them 400 lease fee is paid monthly starting immediately immediate annuity / ordinary annuity Methods used to make decision: discount or compound cash flows of alternatives to compare the investment cost Buy or Lease a Car-5.9

  17. Solutions: • Compare the PVs of investment cost of alternatives: • Compare the FVs:

  18. Compare the PMTs

  19. Analysis the News-5.11 • Key components: • Ignorance of the time value of money • Assume an interest rate, say 5% • Analysis require that you should point out the errors and give the right calculations So, after 250 month, i.e. at age 85 and 10 months, Mary will eventually pull ahead. Begin at the age of 65

  20. Key components: net income / incremental cash flows. understand correctly working capital when you calculate cash flows. deal with salvage value correctly when calculate the deprecation. annualized capital cost method to compare projects with different lives/decision horizons. Chapter 6 Analyze Investment Projects

  21. NPV is the difference between the PVs of all future cash inflows minus the PVs of all current and future cash outflows To find the incremental cash flows resulting from investment—Depreciation belongs to non-cash expense Net Income=(1-tax rate)*(revenues-cash expenses-Dep) Incremental Cash Flow =Net Income +Depreciation =(1-tax rate)*(revenues-cash expenses-Dep) +Dep =(1-tax rate)*(revenues-cash expenses) +tax rate*Dep Net Income/Incremental Cash Flows Accounting profit Tax shield

  22. An Example: 6.7 to calculate the incremental cash flow

  23. Working capital (=current asset-current liability) is investment capital to cover expenses before any cash is collected from sale That is to say, Case 1: you pay the amount equal to net working capital at the beginning of operation and you will receive it at the end of operation Case 2: you needn’t spend money at the beginning because current liability is enough to met the investment capital of current asset. However, at the end of operation, you must pay the difference in amount between current liability and current asset to liquidate your liability Working Capital-6.13

  24. Solution: • to calculate the incremental cash flows in each year. • According to case 2, 7,000 net working capital which is • saved because of purchasing of computer • is a cash inflow at the beginning of decision horizon • is a cash outflow at the end of decision horizon

  25. to calculate PVs of each cash flows and then get NPV.

  26. Annualized Capital Cost-6.23 • To compare the alternatives with different decision horizons • Steps: • Forecast the cash flows in each year • Calculate the NPV of alternatives • Obtain the annualized capital cost-annualized NPV

  27. Salvage Value/Depreciation in 6.23 • Forecast correctly the annual cash flows of alternatives:

  28. Salvage value is the resale value of the machine at the end of life of machine, so the salvage value is a cash inflow when we calculate the NPV of the alternative two

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