Introdução ao Orçamento de Capital

CAPITAL BUDGETING 1 INTRODUCTION Capital budgeting is the allocation of funds to longlived capital projects A capital project is a longterm investment in tangible assets A companys capital budgeting process and prowess are important in valuing a company 2 CLASSIFYING PROJECTS Replacement Projects Expansion Projects New Products and Services Regulatory Safety and Environmental Projects Other 4 3 BASIC PRINCIPLES OF CAPITAL BUDGETING Decisions are based on cash flows The timing of cash flows is crucial Cash flows are incremental Cash flows are on an aftertax basis Financing costs are ignored 5 COSTS INCLUDE OR EXCLUDE A sunk cost is a cost that has already occurred so it cannot be part of the incremental cash flows of a capital budgeting analysis An opportunity cost is what would be earned on the nextbest use of the assets An incremental cash flow is the difference in a companys cash flows with and without the project An externality is an effect that the investment project has on something else whether inside or outside of the company Cannibalization is an externality in which the investment reduces cash flows elsewhere in the company eg takes sales from an existing company project 6 CONVENTIONAL AND NONCONVENTIONAL CASH FLOWS Conventional Cash Flow CF Patterns 7 5 4 3 2 1 Today CF CF CF CF CF CF CF CF CF CF CF CF CF CF CF CF CF CONVENTIONAL AND NONCONVENTIONAL CASH FLOWS Nonconventional Cash Flow Patterns 8 5 4 3 2 1 Today CF CF CF CF CF CF CF CF CF CF CF CF CF CF CF CF CF CF INDEPENDENT VS MUTUALLY EXCLUSIVE PROJECTS When evaluating more than one project at a time it is important to identify whether the projects are independent or mutually exclusive This makes a difference when selecting the tools to evaluate the projects Independent projects are projects in which the acceptance of one project does not preclude the acceptance of the others Mutually exclusive projects are projects in which the acceptance of one project precludes the acceptance of another or others 9 PROJECT SEQUENCING Capital projects may be sequenced which means a project contains an option to invest in another project Projects often have real options associated with them so the company can choose to expand or abandon the project for example after reviewing the performance of the initial capital project Optionality is valuable 10 CAPITAL RATIONING Capital rationing is when the amount of expenditure for capital projects in a given period is limited This exists when there is a limit on how much can be spent on capital projects If the company has so many profitable projects that the initial expenditures in total would exceed the budget for capital projects for the period the companys management must determine which of the projects to select The objective is to maximize owners wealth subject to the constraint on the capital budget Capital rationing may result in the rejection of profitable projects 11 4 INVESTMENT DECISION CRITERIA Net Present Value NPV Internal Rate of Return IRR Payback Period Discounted Payback Period 12 NET PRESENT VALUE The net present value is the present value of all incremental cash flows discounted to the present less the initial outlay NPV CFt 1rt n t1 Outlay 21 Or reflecting the outlay as CF0 NPV CFt 1rt n t0 22 where CFt Aftertax cash flow at time t r Required rate of return for the investment Outlay Investment cash flow at time zero If NPV 0 Invest Capital project adds value If NPV 0 Do not invest Capital project destroys value 13 EXAMPLE NPV Consider the Hoofdstad Project which requires an investment of 1 billion initially with subsequent cash flows of 200 million 300 million 400 million and 500 million We can characterize the project with the following endofyear cash flows What is the net present value of the Hoofdstad Project if the required rate of return of this project is 5 14 Cash Flow millions Period 1000 0 200 1 300 2 400 3 500 4 EXAMPLE NPV Time Line Solving for the NPV NPV 1000 200 1 005 1 300 1 005 2 400 1 005 3 500 1 005 4 NPV 1000 19048 27211 34554 41135 NPV 21947 million 15 4 3 2 1 0 500 400 300 200 1000 EXAMPLE NPV Time Line Solving for the NPV NPV 1000 200 1 005 1 300 1 005 2 400 1 005 3 500 1 005 4 NPV 1000 19048 27211 34554 41135 NPV 21947 million 16 4 3 2 1 0 500 400 300 200 1000 INTERNAL RATE OF RETURN The internal rate of return is the rate of return on a project The internal rate of return is the rate of return that results in NPV 0 CFt 1 IRRt n t1 Outlay 0 23 Or reflecting the outlay as CF0 CFt 1 IRRt n t0 0 24 If IRR r required rate of return Invest Capital project adds value If IRR r Do not invest Capital project destroys value 17 EXAMPLE IRR Consider the Hoofdstad Project that we used to demonstrate the NPV calculation The IRR is the rate that solves the following 18 Cash Flow millions Period 1000 0 200 1 300 2 400 3 500 4 0 1000 200 1 IRR 1 300 1 IRR 2 400 1 IRR 3 500 1 IRR 4 A NOTE ON SOLVING FOR IRR The IRR is the rate that causes the NPV to be equal to zero We cannot solve directly for IRR but rather must either iterate trying different values of IRR until the NPV is zero or use a financial calculator or spreadsheet program to solve for IRR In this example IRR 12826 19 0 1000 200 1 012826 1 300 1 012826 2 400 1 012826 3 500 1 012826 4 PAYBACK PERIOD The payback period is the length of time it takes to recover the initial cash outlay of a project from future incremental cash flows In the Hoofdstad Project example the payback occurs in the last year Year 4 20 Accumulated Cash flows Cash Flow millions Period 1000 1000 0 800 200 1 500 300 2 100 400 3 400 500 4 PAYBACK PERIOD IGNORING CASH FLOWS For example the payback period for both Project X and Project Y is three years even through Project X provides more value through its Year 4 cash flow 21 Project Y Cash Flows Project X Cash Flows Year 100 100 0 20 20 1 50 50 2 45 45 3 0 60 4 NET PRESENT VALUE PROFILE The net present value profile is the graphical illustration of the NPV of a project at different required rates of return 27 Net Present Value Required Rate of Return The NPV profile crosses the horizontal axis at the projects internal rate of return The NPV profile intersects the vertical axis at the sum of the cash flows ie 0 required rate of return RANKING CONFLICTS NPV VS IRR The NPV and IRR methods may rank projects differently If projects are independent accept if NPV 0 produces the same result as when IRR r If projects are mutually exclusive accept if NPV 0 may produce a different result than when IRR r The source of the problem is different reinvestment rate assumptions Net present value Reinvest cash flows at the required rate of return Internal rate of return Reinvest cash flows at the internal rate of return The problem is evident when there are different patterns of cash flows or different scales of cash flows 28 EXAMPLE RANKING CONFLICTS Consider two mutually exclusive projects Project P and Project Q Which project is preferred and why Hint It depends on the projects required rates of return 29 End of Year Cash Flows Project Q Project P Year 100 100 0 33 0 1 33 0 2 33 0 3 33 142 4 NPV PROFILES PROJECT P AND PROJECT Q 31 30 20 10 0 10 20 30 40 50 0 2 4 6 8 10 12 14 NPV Required Rate of Return NPV of Project P NPV of Project Q NPV PROFILES PROJECT P AND PROJECT Q 32 30 20 10 0 10 20 30 40 50 0 2 4 6 8 10 12 14 NPV Required Rate of Return NPV of Project P NPV of Project Q Choosing on the basis of the IRR may not be optimal THE MULTIPLE IRR PROBLEM If cash flows change sign more than once during the life of the project there may be more than one rate that can force the present value of the cash flows to be equal to zero This scenario is called the multiple IRR problem In other words there is no unique IRR if the cash flows are nonconventional 33 EXAMPLE THE MULTIPLE IRR PROBLEM Consider the fluctuating capital project with the following end of year cash flows in millions What is the IRR of this project 34 Cash Flow Year 550 0 490 1 490 2 490 3 940 4 EXAMPLE THE MULTIPLE IRR PROBLEM 35 120 100 80 60 40 20 0 20 40 0 8 16 24 32 40 48 56 64 NPV millions Required Rate of Return IRR 2856 IRR 34249 POPULARITY AND USAGE OF CAPITAL BUDGETING METHODS In terms of consistency with owners wealth maximization NPV and IRR are preferred over other methods Larger companies tend to prefer NPV and IRR over the payback period method The payback period is still used despite its failings The NPV is the estimated added value from investing in the project therefore this added value should be reflected in the companys stock price 36 5 CASH FLOW PROJECTIONS The goal is to estimate the incremental cash flows of the firm for each year in the projects useful life 38 5 4 3 2 1 0 AfterTax Operating Cash Flow AfterTax Operating Cash Flow AfterTax Operating Cash Flow AfterTax Operating Cash Flow AfterTax Operating Cash Flow Investment Outlay Terminal Nonoperating Cash Flow Total After Tax Cash Flow Total After Tax Cash Flow Total After Tax Cash Flow Total After Tax Cash Flow Total After Tax Cash Flow Total After Tax Cash Flow INVESTMENT OUTLAY Capital expenditure Start with Increase in working capital Subtract Initial outlay Equals 39 AFTERTAX OPERATING CASH FLOW Sales Start with Cash operating expenses Subtract Depreciation Subtract Operating income before taxes Equals Taxes on operating income Subtract Operating income after taxes Equals Depreciation Plus Aftertax operating cash flow Equals 40 EXAMPLE CASH FLOW ANALYSIS 42 0 Year Investment outlays 10000 Fixed capital 1000 Net working capital 11000 Total EXAMPLE CASH FLOW ANALYSIS 43 4 3 2 1 Year Annual aftertax operating cash flows 12000 16000 14000 5000 Sales 3500 9800 11200 8400 Cash operating expenses 741 1481 4445 3333 Depreciation 759 2719 355 267 Operating income before taxes 266 952 124 093 Taxes on operating income 493 1767 231 174 Operating income after taxes 741 1481 4445 3333 Add back depreciation 3248 1234 4676 3507 Aftertax operating cash flow EXAMPLE CASH FLOW ANALYSIS 44 4 Year Terminal year aftertax nonoperating cash flows 325 Aftertax salvage value 1000 Return of net working capital 1325 Total terminal aftertax nonoperating cash flows EXAMPLE CASH FLOW ANALYSIS 45 4 3 2 1 0 Year 2559 3248 4676 3507 11000 Total aftertax cash flow 1881 2579 4009 3247 11000 Discounted value at 8 Net present value Internal rate of return EXAMPLE CASH FLOW ANALYSIS 46 4 3 2 1 0 Year 2559 3248 4676 3507 11000 Total aftertax cash flow 1881 2579 4009 3247 11000 Discounted value at 8 715 Net present value 11068 Internal rate of return Strategy presentation Top 15 Global Brandsmp4 SPREADSHEET MODELING Expected Optimistic Pessimistic 3 WHAT MAKES A GREAT INVESTOR CFA INSTITUTE ENTERPRISING INVESTORPDF 51 FUNDAMENTAL VS TECHNICAL ANALYSISPDF 52 AFTERTAX OPERATING CASH FLOW 54 How to forecast sales AFTERTAX OPERATING CASH FLOW 55 How to forecast sales Analyze organic revenue from an operational perspective The most standard breakdown is Historical US revenues Revenue per square foot 1007 1054 1100 1144 1172 1202 1226 1250 1275 Square footage per store thousands 147 147 147 147 148 148 148 148 148 Number of stores 514 527 543 558 566 574 582 590 598 US revenues 76087 81652 87803 93838 98176 102112 105603 109150 112843 International stores Revenue per square foot 904 958 968 997 1027 1058 1089 1122 1156 Square footage per store thousands 142 142 144 144 144 144 144 144 144 Number of stores 225 233 236 244 252 260 268 276 284 International revenues 28883 31696 32897 35031 37268 39612 42027 44593 47276 Membership fees Average fee per member 32 33 34 35 35 36 37 38 38 Number of members millions 90 94 99 102 104 108 110 114 116 Membership fees 2853 3140 3349 3539 3682 3899 4048 4286 4443 Ancillary businesses 21400 24900 28600 30900 33400 36100 39000 42100 45500 Total revenues 129223 141389 152649 163308 172525 181723 190677 200129 210061 AFTERTAX OPERATING CASH FLOW 57 This will clarify whether prices or quantities are driving growth Do not however confuse revenue per unit with price they can be different If revenue per unit is rising the change could be due to rising prices or the company could be shifting its product mix from lowprice to highprice items The operating statistics that companies choose to report if any depend on the industrys norms and competitors practices AFTERTAX OPERATING CASH FLOW 58 How to forecast sales Operational variables 1Sales area m2 2Number of stores 3Number of plants 4Number of students 5Number of cars 6Number of tables AFTERTAX OPERATING CASH FLOW 59 How to forecast sales Operational variables 1Sales area m2 2Number of stores 3Number of plants 4Number of students 5Number of clients 6Number of cars 7Number of tables 8Number of restaurants AFTERTAX OPERATING CASH FLOW 60 How to forecast sales Operational variables Price x Quantity Since 2013 Until 2027 AFTERTAX OPERATING CASH FLOW 61 How to forecast sales Analyze demand competition Porters 5 forces company and sector idle capacity operational e financial leverage sectors trends FEEDBACK 64 1 Evaluation is a form of affection 2 I could receive the files and congrats everyone 3 However I spent my time to make sure everyone is improving its skills ASSIGNMENT STANDARDS 1 Filename company name Zaraxlsx 2 Single file for the whole course You will add a new properly named tabs for each assignment Sales forecast 3 First tab Company name student names course and email address 4 Always state the what data you used and its source 5 Write 34 synthetic paragraphs explaining a What and why it happened Show me you understood the results b What you expect to happen Why Show me your interpretation makes sense 6 No bureaucracy Go straight to the point 7 Keep the tables clean 8 Take into account inflation 65 TIPS 66 Use the Earnings quarterly Release Forecasting by business unit Revenues m2 Rm2 Gross margin per bis unit TIPS 67 1 Look back as far as possible at least ten years Long time horizons will allow you to determine whether the company and industry tend to revert to some normal level of performance and whether shortterm trends are likely to be permanent 2 Disaggregate value driversboth ROIC and revenue growthas far as possible If possible link operational performance measures with each key value driver 3 If there are any radical changes in performance identify the source Determine whether the change is temporary permanent or merely an accounting effect 4 Perform your analysis on a finegrained level not just on the company as a whole Real insight comes from analysis of individual business units product lines and if the data exist even customers TIPS 68 1 Horizontal analysis 2 Volume and price growth must be consistent 3 Know the drivers 4 Why would the company be able to impose real price expansion 5 Why to volumes go up 5 fall to 3 then 2 and growth 4 make reasonable forecasts 6 Do not use extrapolate historical constant growth rate to forecast One have to assess if it will continue 7 Always forecast volume and value per unit few exceptions 8 Disclose the models currency 9 Have historical results Revenues Units sold or produced and unit in your model as well from 2013 onwards