Journal of Business & Economics Research November 2006 Volume 4, Number 11

Transcription

1 Usig Th Ficil Mgm Sysm To Mk Th Wog Dcisio Dvid A. Sgld, (E-mil: Uivsiy of Miob, Cd ABSTRACT my sul i udivsm poblms d subopiml sgis usd o boos -m pfomc h xps of h fuu. To solv hs poblms, w msu, CFMAC, is dvlopd. This pp dscibs h yps of poblms ssocid wih h Ficil Mgm Sysm h icluds us of h msu d compsio schms oud by popos. A w ul msu, csh flow mius moizd cpil (CFMAC) is dvlopd o ddss h poblms ih o. INTRODUCTION S Sw d Compy dvlopd d dmkd s pfomc msu d commd is us i vluig d compsig mgs. sds fo coomic vlu ddd ; howv, i dos o show how much vlu is ddd o compy o ui o v o o-y bsis. I fc, my b posiiv duig ims wh vlu is big dsoyd o my b giv duig ims wh vlu is big ddd. Whil hs som bfis ov igs s msu usd fo vluio d compsio, i posssss som of h sm poblms. Evluio d compsio bsd o ih o igs my sul i icivs fo mgs o void vlu-ddig pojcs o o pusu vlu-dsoyig civiy. I som css, xcbs his poblm. To b fi, svl uhos oh h Sw suppo h us of (s, fo xmpl, Tully, 993, Diks d Pl, 997, Ricm l, 2000). Oh uhos big foh vious ciicisms of (.g., Km d Push, 997, Kys l, 200, Fdz, 200, McL, 2003). I his pp, I discuss wo picul poblms ih wih h Ficil Mgm Sysm (wih s pfomc msu id o compsio). I dscib w msu of ul pfomc h limis som of h poblms ssocid wih d comm o visig mgm compsio schms so h h iciv is giv o mk uly vlu-ddig dcisios. Fis, hough, I povid bif viw of wh is d how i ls o h mo fmili ul pfomc msu clld igs. HOW DOES COMPARE TO EARNINGS? Rcll fom y ioducoy ccouig x h igs quls vus lss xpss. Expss iclud (mog oh ims) vious l opig xps ims, llocio fo h us of sss (dpciio), coss ssocid wih db ficig (is), d xs. I h simpls ss, wihou cosidig cculs, diffs fom igs i h ddiiol cos, h cos of quiy ficig, is subcd. 2 S Sw (99) fo hoough discussio o. Chp 4 dfis d mks h gum h b usd fo gol sig, cpil budgig, pfomc ssssm, iciv compsio, d commuicio (p. 9). Chp 6 discusss iciv compsio schms bsd o. 2 To kp his p of h lysis simpl, I ssum h h quiy quivl djusms suggsd by S Sw (of which 64 possibl djusms hv b idifid) o quid. Ths djusms mily o udo h followig: vious ocsh xpss d svs (wih h xcpio of dpciio) lik goodwill moizio, h o-cpilizio of R&D ud GAAP, d diffcs bw pod (ud GAAP) d cul xs. 43

2 Mo fomlly, is dfid s follows: NOPAT Cpil WACC wh NOPAT is opig pofi f x fom h fim, cpil is h ol db d quiy mous usd o fud h fim, d WACC is h wighd vg cos of cpil dfid s follows: Db Equiy WACC K T K 2 d c Db Equiy Db Equiy wh K d d K h bfo-x coss of db d quiy spcivly d T c is h copo x. Expdig h NOPAT m i quio, d subsiuig (Db + Equiy) fo Cpil so s o muliply hough h ms i WACC, w s h is quivl o h followig: Rv Exp Dp T Equiy K Db K T 3 c wh Rv is vus, Exp is xpss xcludig dpciio, d Dp is dpciio. No h sic igs dfid s d c Eigs Rv Exp Dp I 4 T c d is (dod s I) quls Db K, i is sy o s h 3 d Eigs Equiy 5 K WH IS BETTER THAN EARNINGS? Th mi dvg of hvig mgs cosid isd of jus igs is h i focs mgs o cosid whh NOPAT is g h h ovll cos of cpil (i uis of cucy) usd o g i (s quio ). Equivlly, i focs mgs o cosid whh h sidul igs vilbl o quiy holds g h h oppouiy cos of h quiy (i uis of cucy) usd o fic h fim (s quio 5). This is impo bcus fim h cosisly gs posiiv ccouig igs h lss h h oppouiy cos of h quiy mployd o g hm is, i ffc, dsoyig vlu. Aoh dvg of is h h svl djusms o h mov h biliy o us cculs o ificilly ics i (s is do mo sily wih igs). This sm dos o imply h limis cculs. Dpciio of sss, cpilizio d moizio of som coss (.g., R&D, mkig, iig d sucuig coss) s sss, d cpilizio of opig lss io db ll foms of cculs h commdd (s Sw 994). SO WHAT IS WRONG WITH? Sw (99) d oh uhos gu h c o oly b mployd h fim lvl, bu lso h divisio d low lvls d should b usd fo cpil budgig, vluio, d mgm compsio. Thus w c imgi h fo vy pojc mg cosids, h implicios should b lyzd. Th poblm 3 Fo simpliciy, I ssum h h cu cos of db is h sm s wh h db ws issud so h is chgs o h icom sm qul h cu cos of db ficig. 44

3 wih is h i is o-piod msu s igs d csh flows. This y s, dspi is m, dos o msu coomic vlu ddd his y bcus i dos o cosid how dcisio md his y ffcs csh flows i fuu ys. Sw (99, 994) dscibs d Hm (2000) povs how h ps vlu of fuu s gd by pojc is h sm s h pojc s NPV. Thus, if h ps vlu of fuu s fom pojc usd o dmi h pojc s ccpc, h coc dcisio (cosis wih diiol NPV) will b md. Howv, wh likig o mg s compsio, Sw (99, 994) suggss sysm h is cully bckwd lookig isd of fowd. H dvocs sblishig bous bk. Th -bsd bous h is d i o y is pilly pid ou i h y d h s is bkd d pid ou i fuu ys. This is supposd o mk mgs fowd lookig s hy icip bouss o b pid i fuu ys. Ufouly, h cu-y bous mg civs oly flcs wh ws ldy i h bk d wh hs b ddd o h bk d dos o look fowd o fuu ys mous. Whil Sw discusss how h ps vlu of fuu s is quivl o NPV, h ps vlu of fuu s is simply o usd i h compsio schms! Fo picul y s bous, oly s fom h y d pio ys usd. 4 Th is o pioi so o xpc mgs o void sho sighd sgis h boos cu (d h cu bous) h xps of h fuu s (d bouss) jus s mgs wih igs-bsd bouss hv b kow o boos cu igs d bouss h xps of h fuu. Coc cpil budgig dcisios ulikly if mgs cu bouss bsd o cu d ps s d poilly pliz hm fo mkig posiiv NPV dcisios. Such bouss obscu h fc h h NPV (o h ps vlu of ll fuu s) lly dmis if vlu is big ddd o compy. Two gl poblms is wih h us of d such -bsd compsio sysms; hs dscibd blow. Poblm : Ngiv Cuss Rjcio Of A Posiiv NPV Ivsm Poblm (s Tbl blow) is xmpl of how vlu ddig pojc my cully show giv s i h y i is dopd d v i fuu ys. A mg mos cocd bou h cu bous (o v h x coupl bouss) my jc such pojc bcus of h wo ys of giv s (d hus dpssd -m bouss). Ass Puchss (Sls) Tbl Poblm : A ivsm wih posiiv NPV bu giv iiil 's Clculios ssum copo x of 40% d WACC of 0%. Cpil is clculd s cpil coibud o h pojc lss ccumuld coomic dpciio d quls sss s show. Dp. N Asss Rv. Exp. Flow NOPAT Cpil x WACC 0 $00,000 $0 $00,000 $0 $0 -$00,000 $0 $0 $2,500 $97,500 $0,000 $6,000 $3,400 $900 $0,000 -$9,00 2 $0 $2,500 $95,000 $40,000 $24,000 $0,600 $8,00 $9,750 -$,650 3 $0 $2,500 $92,500 $80,000 $48,000 $20,200 $7,700 $9,500 $8,200 4 $0 $2,500 $90,000 $80,000 $48,000 $20,200 $7,700 $9,250 $8,450 5 $0 $2,500 $87,500 $80,000 $48,000 $20,200 $7,700 $9,000 $8, $85,000 $2,500 $0 $50,000 $30,000 $98,000 $0,500 $8,750 $,750 NPV = $8,686 NPV of 's = $8,686 IRR = 2% 4 Th is som discussio bou usig p of h ul bous o buy sock opios; s, fo xmpl, Sw (994), S, Sw, d Chw (995). Psumbly, if h mgs pfomc hs sigific impc o h sock pic, h his givs mgs iciv o mk vlu-ddig dcisios. 45

4 I is cl h y bous schm fo y h plizs h mg fo low o giv i y lds o h wog icivs. Such -bsd compsio schm plizs h mg fo ccpig h pojc bcus of h giv icml i y (d y 2) if h pojc is ccpd. If h pojc is jcd, h icml is zo d o giv icml bous ffc occus. I his book, Sw (99) dscibs svl -bsd compsio schms. Som us gs bsd o ps suls. O suggss focsig io h fuu d usig h focss s gs (his mhod is dowplyd s oo complx d h suggsio is h if goig his f, mgs migh jus s wll b giv commo sock i hi ui). Sw (99), Sw (994), S l (995) d ohs suggs likig mgm compsio o lvls d, i picul, o gowh i bsd o cu d ps vlus; Wllc (997) povids, s xmpl, such compsio sysm usd by C Compy. Sw (99) povids fily compl dscipio of such compsio schm s follows: Fo hos fo whom h ddiiol ccucy of pojcios is o woh h sl, my collgu Dvid Glssm, hs dvisd wh my b h simpls d mos lg, bu sill hoiclly soud ppoch, o h i pcic hs m wih g husism mog opig popl. Dvid commds bdoig h cocp of g ily d isd bsig h bous o pc of h ul chg i d pc of h lvl of (bu oly if is posiiv), s follows: = M% chg i + M2% wh M = pc of h chg i, o m whh h chg is posiiv o giv d M2 = pc of, if is posiiv, d 0% if is giv. (p. 247) Rxmiig h s i Poblm, w c s h compsio schm h wds ih icsig o posiiv (s suggsd by Sw d his collgu) will svly pliz h mg by lowig h bous pid i y (d possibly y 2) i spi of h fc h cocly ccpig h pojc h y cully dds $8,686 o h cu vlu of h compy. So, h is h poblm: fo y is giv bu h vlu ddd by ccpig h pojc is posiiv $8,686. Th fo y dos o show how much vlu is ddd by ccpig h pojc i y. Th poblm of h sig of uig cou o h sig of NPV illusd i Poblm c b glizd o mulipl busiss siuios. Rcllig h quivlc of NPV d h ps vlu of fuu s dmosd by Sw (99) d povd by Hm (2000), w c sfom quio s follows: NOPAT Cpil WACC NPV 6 WACC WACC wh h subscip,, idics h im piod of h obsvd vibls. Th mou, Cpil, fs o h cpil mployd h bgiig of h h piod; oh subscipd mous occu h d of h y. Th umb,, is dfid s h ol umb of piods of h ivsm pojc. L PVN b ps vlu opo fo h sis of NOPAT mous d PVC b ps vlu opo fo h sis of Cpil mous ov h lif of h pojc. S Appdix fo dild dscipio of PVN d PVC. Equio 6 c h b wi s follows: NPV NOPAT PVN Cpil WACC PVC 7 will b lss h zo wh NPV is g h zo wh h followig wo codiios hold simulously: NOPAT Cpil WACC 8 46

5 d NOPAT PVN Cpil WACC PVC. 9 I ffc, h cu giv (h suls if quio 8 is u) d is giv coibuio o NPV is ovcom by gowig NOPAT o ducig Cpil such h, vully, h ps vlus of fuu posiiv s domi d mk ovll NPV posiiv (h sul if quio 9 is u). Assum quio 8 is sisfid, i.., < 0, h, upo xmiig PVN d PVC (s Appdix, quios A-A4), i is sy o s how quio 9, h posiiv NPV, is sisfid. O obvious siuio is wh pojc s csh flows follow ypicl lifcycl (s low, gow pidly, lvl off, vully dcli o sop). A scod siuio iss wh NOPAT mis cos bu cpil dcss hough im du o ss sls o dpciio. Th fc h hs wo xmpls o coivd d occucs, bu commo o my pojcs mg my lyz, should giv dvocs pus bfo commdig -bsd compsio sysms lik h os pviously miod. I could b gud h fo som so mgs lss myopic d lss cocd bou hi cu bouss wh hy us umbs isd of igs, csh flow, o oh umbs bcus hy should b bl o s h vul posiiv s d h vul posiiv ffcs o fuu bouss. Ufouly, h immdi (y d y 2) umbs pp mo xm h igs o csh flow umbs. flow is cully posiiv $3,400 d igs $900 mius is f x cily mo h h of giv $9,00. Thus, lhough Sw (99) is coc i h usig will hlp duc h o of ccpig pojcs h do o cov hi cos of cpil d hv giv NPV s; i is lso u h usig (d his commdd -bsd compsio sysm) my lso coibu o h o of jcig posiiv NPV pojcs. Thus my iduc udivsm poblm. Wllc (997) fids h liv o cool fims, dops of duc w ivsm d ics h disposiio of sss. H lso fids h ov 24 moh piod suoudig h dopio of h is o sisiclly sigific cumuliv vg boml u (CAAR) fo dops. I fc, 22 of h fims Wllc sudid hd posiiv cumuliv boml us (CAR s) whil 4 hd giv CAR s. Ths suls cosis wih boh h voidc of giv NPV pojcs by som fims d udivsm poblm i oh fims. Ufouly, h poblms wih d -bsd compsio sysms do o sop h. Poblm 2: Posiiv s Fom Ngiv NPV Sgis W hv s h h my b giv h im coomic-vlu-ddig ivsm is md. Nx I show how my b posiiv wh coomic-vlu-dsoyig dcisio is md. Essilly, w s his siuio if w xmi quios 8 d 9 d vs h iquliis. A commo sgy wh his occus is wh mg is o mipul his o h bous by kig opig cios h boos cu pfomc h xps of fuu pfomc. Cosid compy h slls is poduc o disibuos h sll o cosums. If mg givs icivs o disibuos o puchs xcssiv ivoy i h cu y, h cu pfomc fo h mg will look b (v wh msud by ). Howv, i h x y h disibuo likly will o puchs s my uis s hy c u dow hi ivoy. I ddiio, fo som poducs, h my b fuh losss s cosums bcom dissisfid fom puchsig sl o obsol poducs h hv b hld by h disibuo. 5 As c b s i Tbl 2, his opig sgy h c b usd o mipul igs is qully ffici mipulig. Now cosid h mg s bous by pplyig h mgm bous sysm commdd by Sw d Glssm (Sw, 99), usig Sw s xmpl vlus of M=0%, M2=5%, d bous bk h pys o hid ou p y. W c s i Tbl 3 h h mipuld sgy h lds o h ducd vlu (d ducd NPV) suls i high y bous, high cumuliv bouss ov h fis 6 ys, d lso high ps vlu of bouss ov h fis 6 ys. 5 S, fo xmpl, Buough d Hly (990) fo xmpls of h commo us of lodig RJ Ryolds d oh obcco compis (p. 58) d RJR Nbisco (p. 5). 47

6 Ass Puchss (Sls) Dp. N Asss Rv. Exp. Flow NOPAT Cpil x WACC 0 $00,000 $0 $00,000 $0 $0 -$00,000 $0 $0 $2,500 $97,500 $47,500 $28,500 $2,400 $9,900 $0,000 -$00 2 $0 $2,500 $95,000 $47,500 $28,500 $2,400 $9,900 $9,750 $50 3 $0 $2,500 $92,500 $47,500 $28,500 $2,400 $9,900 $9,500 $400 4 $0 $2,500 $90,000 $47,500 $28,500 $2,400 $9,900 $9,250 $650 5 $0 $2,500 $87,500 $47,500 $28,500 $2,400 $9,900 $9,000 $ $85,000 $2,500 $0 $47,500 $28,500 $97,400 $9,900 $8,750 $,50 m m2 NPV = $,986 NPV of 's = $,986 0% 5% IRR = 0.5% Pl B: Mipuld Opig Sgy Ass Puchss (Sls) Dp. N Asss Tbl 2 Poblm 2: Posiiv icml iiil fom giv NPV sgy Clculios ssum copo x of 40% d WACC of 0%. Cpil is clculd s cpil coibud o h pojc lss ccumuld coomic dpciio d quls sss s show. Pl A: Oigil (Opiml) Opig Sgy Rv. Exp. Flow NOPAT Cpil x WACC 0 $00,000 $0 $00,000 $0 $0 -$00,000 $0 $0 $2,500 $97,500 $5,000 $30,600 $3,240 $0,740 $0,000 $740 2 $0 $2,500 $95,000 $45,000 $27,000 $,800 $9,300 $9,750 -$450 3 $0 $2,500 $92,500 $46,000 $27,600 $2,040 $9,540 $9,500 $40 4 $0 $2,500 $90,000 $47,000 $28,200 $2,280 $9,780 $9,250 $530 5 $0 $2,500 $87,500 $47,500 $28,500 $2,400 $9,900 $9,000 $ $85,000 $2,500 $0 $47,500 $28,500 $97,400 $9,900 $8,750 $,50 NPV = $,90 NPV of 's = $,90 IRR = 0.5% Cosidig h suls i bls 2 d 3, clly h iciv giv o h mg is o follow h vludsoyig sgy s i suls i high -m, h highs immdi bous, cumuliv bous, ps vlu of bouss d blc lf i h bous bk. Is Th A B Wy Th? To void h gl poblm of sigs codicig h NPV sig, (if i is o b usd) ds o b clculd. Fo h mos p, ccous fo h cos of cpil by kig h WACC d muliplyig by h mou of cpil mployd o dmi h ul cpil chg. 6 I siuios wh h is o iiil NOPAT o wh NOPAT mus gow bfo i covs h cpil chg, h my b giv wh NPV is posiiv. Cosid w msu h I do CFMAC (csh flow mius moizd cpil). Rh h chgig dpciio d cpil chg o g, h f-x csh flows ducd by popoio mou of h iiil cpil o g CFMAC. Th popoio usd is bsd o idx of ps vlu, PI, ohwis kow s h pofibiliy idx. Fo ll pojcs (o fo fims), usig his mhod poducs ul CFMAC mous h lwys 6 Sw (994) idics h fo ivsms wih log-dfd pyoffs, w hv lso dvlopd pocdu fo kpig such cpil off h books (fo il vluio puposs) d h gdully dmiig i io h mg s il cpil ccou (pg 77). Ufouly, spcifics o povidd. 48

7 cosis i sig wih h NPV. I ffc, his mhod is wy o cosisly d cocly moiz h cpil h is usd o g posiiv csh flows. Bk Bfo Bk Af 0 $0.00 -$00 -$0.00 -$0.00 -$3.33 -$ $50 $32.50 $25.83 $8.6 $ $400 $45.00 $62.22 $20.74 $ $650 $57.50 $98.98 $32.99 $ $900 $70.00 $35.99 $45.33 $ $,50 $82.50 $73.6 $57.72 $5.44 Sum $3,50 $ $62.06 NPV $,986 $80.88 $02.93 Pl B: d Rsuls fo Mipuld (Low NPV) Opig Sgy Tbl 3 -Bsd s fo Opiml Sgy vs. Low-NPV Mipuld Sgy Th is clculd s p Sw (99) wh M is muliplid by h chg i d M2 is muliplid by h (wh posiiv). M d M2 vlus 0% d 5% spcivly d h sm s h xmpl vlus i Sw (99). Th is dposiid io h Bk ch y. O hid of h Bk is pid ou s ch y followig h dscipio of Sw (99). PV clculios ssum discou of 0% (h sm s h fim's WACC). Pl A: d Rsuls fo Oigil (Opiml) Opig Sgy Bk Bfo Bk Af 0 $0.00 $740 $.00 $.00 $37.00 $ $450 -$9.00 -$ $5.00 -$ $40 $5.00 $2.00 $7.00 $ $530 $75.50 $89.50 $29.83 $ $900 $82.00 $4.67 $47.22 $ $,50 $82.50 $76.94 $58.98 $7.96 Sum $2,90 $ $65.04 NPV $,90 $89.93 $09.49 THE CFMAC METHOD Fis dmi h pojc s NPV uilizig h iiil quid ivsm d subsqu csh flows (f x) xcludig is coss o is x shilds. 7 Nx, dmi h pojc s PI clculd s follows: PI 0 0 CF ( ) CF ( ) 0 wh CF + is im s csh flow if i is posiiv, ohwis i is s o zo; CF is im s csh flow if i is giv, ohwis i is s o zo; is h umb of csh flows ov h lif of h pojc d is h ppopi discou (.g., = WACC fo pojcs of qul isk o h fim). 7 No: APV mhodology h icluds h vlu of db x shilds d oh ficig bfis my lso b usd. 49

8 Nx dmi h ul moizd cpil (AC) mous s follows: AC CF PI Filly h csh flow mius moizd cpil, CFMAC, fo im piod is clculd s follows: CFMAC CF AC 2 CFMAC ssilly chgs off gis ch posiiv csh flow popoio mou of h cpil usd o g h csh flow. L PV + d PV ps h ps vlus of h posiiv d giv csh flows spcivly. Th popoio of AC o h ps vlu of cpil (i.., o h PV mou) is bsd o h popoio of h posiiv csh flow o h ps vlu of ll posiiv csh flows (PV + ). 8 As log s h NPV is posiiv, h pojcd CFMAC will b posiiv fo ch pojcd posiiv csh flow. If NPV is giv, h pojcd CFMAC will b giv fo ch pojcd posiiv csh flow. This impovs upo clculio h llows pojcd o b giv v wh posiiv NPV pojc is big ccpd d posiiv coomic vlu (i h u ss) is big ddd. Tbls 4 d 5 giv xmpls of pojcd CFMAC mous d comp hm o h cospodig pojcd mous i h coxs of poblms d 2 dscibd bov. Poblm Rvisid Wih CFMAC Fis cosid CFMAC i h cox of Poblm. Rcll h h ivsm i poblm hd posiiv NPV d hd smll iiil csh flows h gw ov h lif of h pojc. I Tbl 4, w s h h CFMAC sigs ll posiiv d ll cosis wih h posiiv NPV. Rcll h poblm wih ws h h giv iiil suls pplid o bous schm my cully pliz h mg fo ccpig h posiiv NPV pojc. Wih bous schm s p Sw (99) s oulid bov, plcig h mous wih CFMAC mou will ld o posiiv bous ffc fo h mg i y h h giv ffc h us cou o h dsid ccp/jc dcisio. Aoh isig fu o o bou h CFMAC clculios is h h lgs AC d h lgs CFMAC mous occu i h ys h hv h lgs pojcd csh flows. Thus w s h fil y hvig h lgs CFMAC bcus of h domic of h slvg vlu i h ovll NPV clculio fo h pojc. No, hough, h h fil y lso hs h lgs AC llocio so h h bsolu ffc of h $77,800 high csh flow (compd o y 5) is flcd i CFMAC big $6,28 high h h y 5 mou. Fo, h fil ss vlu is oly impo s i ffcs h iim yly dpciio mous. Alhough h imig of dpciio mous dos o ffc h ps vlus of ll s (s Hm, 2000), picul y s s my b mipuld hough mipulio compoous dpciio. If dpciio is dfd o l ys, iiil suls my b ovsd d ld o ovly high -m bouss fo mgs. Kys l (200) hv oh cocs gdig h us of dpciio i. 8 This is show by dividig boh sids of quio by PV d subsiuig PV + /PV io PI. AC PV PV CF CF PI PV PV PV CF PV 50

9 Tbl 4 Compiso of Pojcd CFMAC d fo h Posiiv NPV Pojc fom Poblm Also show, fo compso, h ul csh flows d igs mous. Clculios ssum copo x of 40% d WACC of 0%. Fo, cpil is clculd s cpil coibud o h pojc lss ccumuld coomic dpciio d quls sss s show. PI is clculd s h ps vlu of iflows ov h ps vlu of ouflows (i bsolu vlu ms). Amoizd cpil, AC, is qul o h pojcd posiiv csh flow dividd by h pojcd PI. Pojcd CFMAC is h pojcd posiiv csh flow mius moizd cpil. If h pojcd posiiv csh flow is cully giv, h CFMAC is s o zo. Ass Puchss (Sls) Dp. N Asss Rv. Exp. Flow Eigs Amoizd Cpil fo CFMAC CFMAC 0 $00,000 $00,000 -$00,000 $2,500 $97,500 $0,000 $6,000 $3,400 $900 -$9,00 $3,28 $272 2 $2,500 $95,000 $40,000 $24,000 $0,600 $8,00 -$,650 $9,753 $847 3 $2,500 $92,500 $80,000 $48,000 $20,200 $7,700 $8,200 $8,586 $,64 4 $2,500 $90,000 $80,000 $48,000 $20,200 $7,700 $8,450 $8,586 $,64 5 $2,500 $87,500 $80,000 $48,000 $20,200 $7,700 $8,700 $8,586 $,64 6 -$85,000 $2,500 $0 $50,000 $30,000 $98,000 $0,500 $,750 $90,68 $7,832 NPV = $8,686 $8,686 $8,686 Tx 40% PI.0869 A his poi i should b cl h vluig ivsms bsd o d yig mgs bouss o cu d hisoicl my ld o h wog dcisios. Th so is h h iiil s (o which mgs will b mos ssiiv s hy ffc hi -m bouss) my hv sigs h u cou o h sig of h pojc s NPV. To mk h coc ivsm dcisio, mg lly mus look msus lik NPV o CFMAC (if ul msu is dsid so h i c b id o bouss). Th x qusio o ddss is whh CFMAC oupfoms i h cox of mg cosidig mipulig opig sgy o boos -m pfomc h xps of boh log-m pfomc d NPV. H w u o poblm 2. Poblm 2 Rvisid Wih CFMAC Th d fom Tbl 2 is ow usd o clcul CFMAC mous d is psd i Tbl 5. Wh is immdily visibl is h wih h sm mipulio of csh flows, i is much mo difficul o mipul CFMAC h. Th so fo his is h CFMAC llocs moizd cpil, AC, o piod bsd o h siz of h csh flow i h piod dividd by h pojc s PI (s quio ). Bcus h mipuld sgy hs boh high csh flow i y d low PI, boh h umo d domio fo AC cus i o b lg fo y hus dmpig h ffc o CFMAC of h lg csh flow i h piod. This suls i CFMAC (csh flow mius AC) oly isig fom $24 o $247 much lss dmic h h iss fom -$00 o +$740. Thus, mg hs much mo difficuly i mipulig his o h bous if i is id o h y CFMAC umb isd of h y umb. 5

10 Tbl 5 Compiso of Pojcd d CFMAC fo Poblm 2 Also show, fo compso, h ul csh flows d igs mous. Clculios ssum copo x of 40% d WACC of 0%. Fo, cpil is clculd s cpil coibud o h pojc lss ccumuld coomic dpciio d quls sss s show. PI is clculd s h ps vlu of iflows ov h ps vlu of ouflows (i bsolu vlu ms). Amoizd cpil, AC, is qul o h pojcd posiiv csh flow dividd by h pojcd PI. Pojcd CFMAC is h pojcd posiiv csh flow mius moizd cpil. If h pojcd posiiv csh flow is cully giv, h CFMAC is s o zo. Ass Puchss (Sls) Dp. N Asss Rv. Exp. Flow Amoizd Cpil fo CFMAC CFMAC 0 $00,000 $0 $00,000 $0 $0 -$00,000 $0 $2,500 $97,500 $47,500 $28,500 $2,400 -$00 $2,59 $24 2 $0 $2,500 $95,000 $47,500 $28,500 $2,400 $50 $2,59 $24 3 $0 $2,500 $92,500 $47,500 $28,500 $2,400 $400 $2,59 $24 4 $0 $2,500 $90,000 $47,500 $28,500 $2,400 $650 $2,59 $24 5 $0 $2,500 $87,500 $47,500 $28,500 $2,400 $900 $2,59 $24 6 -$85,000 $2,500 $0 $47,500 $28,500 $97,400 $,50 $95,504 $,896 m m2 NPV = $,986 $,986 $,986 0% 5% PI =.099 Pl B: Mipuld Opig Sgy Ass Puchss (Sls) Dp. Pl A: Oigil (Opiml) Opig Sgy N Asss Rv. Exp. Flow Amoizd Cpil fo CFMAC CFMAC 0 $00,000 $0 $00,000 $0 $0 -$00,000 $0 $2,500 $97,500 $5,000 $30,600 $3,240 $740 $2,993 $247 2 $0 $2,500 $95,000 $45,000 $27,000 $,800 -$450 $,580 $220 3 $0 $2,500 $92,500 $46,000 $27,600 $2,040 $40 $,85 $225 4 $0 $2,500 $90,000 $47,000 $28,200 $2,280 $530 $2,05 $229 5 $0 $2,500 $87,500 $47,500 $28,500 $2,400 $900 $2,69 $23 6 -$85,000 $2,500 $0 $47,500 $28,500 $97,400 $,50 $95,583 $,87 NPV = $,90 $,90 $,90 PI =.090 Tbl 6 shows h bous schm of Sw (99), dscibd li, s pplid o h CFMAC umbs. 52

11 Bk Bfo Bk Af CFMAC CFMAC Bk Bfo Bk Af 0 $ $0.00 -$00 -$0.00 -$0.00 -$3.33 -$6.67 $24 $36.2 $36.2 $2.07 $ $50 $32.50 $25.83 $8.6 $ $24 $2.07 $36.2 $2.07 $ $400 $45.00 $62.22 $20.74 $ $24 $2.07 $36.2 $2.07 $ $650 $57.50 $98.98 $32.99 $ $24 $2.07 $36.2 $2.07 $ $900 $70.00 $35.99 $45.33 $ $24 $2.07 $36.2 $2.07 $ $,50 $82.50 $73.6 $57.72 $ $,896 $ $ $94.8 $89.62 Sum $3,50 $ $62.06 Su $3,03 $ $55.6 NPV $,986 $80.88 $02.93 NP $,986 $24.63 $99.28 Tbl 6 Compiso of s Bsd o Pojcd vs. CFMAC fo Poblm 2 Pfomc bouss clculd s p Sw (99) wh M is muliplid by h chg i h vibl (ih o CFMAC) d M2 is muliplid by h lvl of h vibl (wh posiiv). M d M2 vlus 0% d 5% spcivly d h sm s h xmpl vlus i Sw (99). Th Pfomc is dposiid io h Bk ch y. O hid of h Bk is pid ou s ch y followig h dscipio of Sw (99). PV clculios ssum discou of 0% (h sm s h fim's WACC). Pl A: Oigil (Opiml) Opig Sgy -Bsd s CFMAC-Bsd s Pl B: Mipuld Opig Sgy -Bsd s CFMAC-Bsd s Bk Bfo Bk Af CFMAC CFMAC Bk Bfo Bk Af 0 $ $0.00 $ $.00 $.00 $37.00 $74.00 $247 $37.05 $37.05 $2.35 $ $ $9.00 -$ $5.00 -$ $220 $8.32 $33.02 $.0 $ $40.00 $5.00 $2.00 $7.00 $ $225 $.68 $33.69 $.23 $ $ $75.50 $89.50 $29.83 $ $229 $.90 $34.36 $.45 $ $ $82.00 $4.67 $47.22 $ $23 $.79 $34.70 $.57 $ $,50.00 $82.50 $76.94 $58.98 $ $,87 $ $ $90.84 $8.69 Sum $2,90 $ $65.04 Su $2,969 $330.4 $48.45 NPV $,90 $89.93 $09.49 NP $,90 $ $95.04 I his cs, h mg is b off o us h oigil sgy h givs h high NPV d o void yig o mipul h sgy. Bsd o CFMAC, h csh bous is oly slighly high i y ud h mipuld sgy ($2.35 vs. $2.07) bu h ps vlu of h bouss, h sum, d h d-of-y-6 blc i h bous bk ll high ud h oigil sgy. No: if diff pms fo h bous schm w usd, if ily diff schm ws usd, o if h mg hd im pfcs such h vy high discou ws pplid o fuu bouss, h i my b possibl h usig CFMAC-bsd bouss will sul i h mg choosig h low-npv mipuld sgy. Wh is impo o mmb, hough, is h bcus of h wy AC is clculd, i is much mo difficul o mipul CFMAC h. Two ky compos o h Ficil Sysm d h bous schm usd o moiv mgm. Rplcig wih CFMAC hlps o solv siuios s show i poblms d 2 bov. W should lso cosid plcig h bous schm fom o h lly oly wds cu d ps pfomc o o h wds cios h ffc fuu pfomc d h u cio of vlu wihi h fim. Discussio of such bous schm is lf o fuu pp. 53

12 CONCLUSIONS I spi of is m, lly dos o show h coomic vlu ddd duig picul im piod oly NPV dos h. is sho-m msu lik igs o csh flows d is subjc o my of h sm yps of mipulios by mgm. If mgm compsio is id o h lvl of o h chg i, h h possibiliy xiss h mgm will ud-ivs void kig posiiv NPV pojcs bcus of iiil giv suls. Th lso xiss h possibiliy h mgs will pusu vlu dsoyig sgis so s o boos -m d obi high bouss. If ul msu is dsid o complm NPV, h liv o such s CFMAC (csh flow mius moizd cpil) c b usd. Cpil is moizd i wy such h h yly mous popoiol o h csh iflows big gd. Thus, h CFMAC mous ch y lwys cosis i sig wih NPV d h udivsm poblm ih wih is voidd. CFMAC umbs lso mo difficul o mipul h d hus duc h liklihood of mgs mpig mipulios (o boos bouss) h sul i h dopio of subopiml sgis. REFERENCES. Buough, By, Hly, Joh, 990, Bbis h g: h fll of RJR Nbisco, Hp & Row Publishs, Nw ok. 2. Diks, Pul, A. d Pl, Ajy, 997, Wh is, d how c i hlp you compy?, Mgm Accouig, 79 (5), Fdz, Pblo, 200, d csh vlu ddd do NOT msu shhold vlu cio, wokig pp. 4. Hm, Josph C., 2000, O h quivlc of ps vlu d mk vlu ddd s msus of pojc s coomic woh, Th Egiig Ecoomis, 45 (2), Kys, Dvid E., Azmhuzjv, Mumi, d Mcky, Jms, 200, Ecoomic vlu ddd: ciicl lysis, Th Joul of Copo Accouig d Fic, 2 (2), Km, Joh K. d Push, Gog, 997, A mpiicl lysis of coomic vlu ddd s poxy fo mk vlu ddd, Ficil Pcic d Educio, 7 (), McL, Josi, 2003, A s s, Ficil Mgm (CIMA), July/Augus, Ricm, Sph S., Ch, Sv F., d Ll (dcsd), Moh, 2000, Do mgs pfom b ud bous schms?, wokig pp, hp://ss.com/bsc= S, J.M., Sw, G.B., III, d Chw, D.H., J., 995. Th Ficil mgm sysm. Bk of Amic Joul of Applid Copo Fic, 8 (2), Sw, G.B, III, 99, Th qus fo vlu: guid fo sio mgs, Hp Collis Publishs.. Sw, G.B., III, 994, : fc d fsy, Bk of Amic Joul of Applid Copo Fic, 7 (2), Tully, Shw, 993, Th l ky o cig wlh, Fou, 28 (6), Wllc, Jms S., 997, Adopig sidul icom-bsd compsio pls: Do you g wh you py fo? Joul of Accouig d Ecoomics, 24 (3),

13 APPENDIX : PVN AND PVC OPERATORS PVN is dfid s gl ps vlu opo fo h sis of NOPAT mous civd ov h lif of h pojc s follows: PVN WACC NOPAT WACC NOPAT NOPAT 2 NOPAT3... NOPAT 2 3 WACC NOPAT WACC NOPAT WACC NOPAT A. I h cs wh NOPAT gows cos, g, h PVN simplifis o h fomul fo h ps vlu fco fo gowig uiy s follows: PVN WACC g g WACC A.2 Muliplyig PVN by NOPAT givs h ps vlu of h i sis of NOPAT mous. PVC is dfid s gl ps vlu opo fo h sis of Cpil mous ov h lif of h pojc s follows: PVC WACC WACC Cpil 2 Cpil 3... Cpil 2 3 WACC Cpil WACC Cpil WACC Cpil NOPAT A.3 NOPAT I h cs wh Cpil gows (o shiks) cos, g, h PVC simplifis o h fomul fo h ps vlu fco fo gowig uiy s follows: PVC WACC g g WACC A.4 Muliplyig PVC by (WACC x Cpil ) givs h ps vlu of h i sis of cpil chgs. 55

14 NOTES 56