Chapter 11 Principles PrinciplesofCorporateFinance Tenth Edition Investment, Strategy, and Economic...
-
Upload
elwin-jennings -
Category
Documents
-
view
232 -
download
1
Transcript of Chapter 11 Principles PrinciplesofCorporateFinance Tenth Edition Investment, Strategy, and Economic...
Chapter 11 PrinciplesPrinciples
ofof
CorporateCorporate
FinanceFinance
Tenth Edition
Investment, Strategy, and Economic Rents
Slides by
Matthew Will
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved
McGraw Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
12- 2
McGraw Hill/Irwin
Topics Covered
Look First To Market ValuesEconomic Rents and Competitive
AdvantageExample - Marvin Enterprises
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
12- 3
McGraw Hill/Irwin
Department Store Rents
[assumes price of property appreciates by 3% a year]
Rental yield = 10 - 3 = 7%
000,000,1$10.1
8...
10.1
8100
10NPV
000,000,1$10.1
13.98
10.1
87.88...
10.1
21.78
10.1
781092
NPV
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
12- 4
McGraw Hill/Irwin
Department Store Rents
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
12- 5
McGraw Hill/Irwin
Do Projects Have Positive NPVs?
Rents = profits that more than cover the cost of capital
NPV = PV (rents)
Rents come only when you have a better product, lower costs or some other competitive edge
Sooner or later competition is likely to eliminate rents
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
12- 6
McGraw Hill/Irwin
Competitive Advantage
Proposal to manufacture specialty chemicals
Raw materials were commodity chemicals imported from Europe
Finished product was exported to Europe
High early profits, but . . .
. . . what happens when competitors enter?
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
12- 7
McGraw Hill/Irwin
Polyzone Production NPV
Year 0 Year 1 Year 2 Year 3-10
Investment 100Production, Millions of pounds per year 0 0 40 80Spread, dollars per pound 1.2 1.2 1.2 1.2Net revenues 0 0 48 96Production costs 0 0 30 30Transport 0 0 4 8Other costs 0 20 20 20Cash flow -100 -20 -6 38
NPV (at r=8%) = $63.6 million
U.S. Company (figures in millions)
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
12- 8
McGraw Hill/Irwin
Polyzone Production NPV
Year 0 Year 1 Year 2 Year 3-10
Investment 100Production, Millions of pounds per year 0 0 40 80Spread, dollars per pound 0.95 0.95 0.95 0.95Net revenues 0 0 38 76Production costs 0 0 30 30Transport 0 0 0 0Other costs 0 20 20 20Cash flow -100 -20 -12 26
NPV (at r=8%) = 0
European Company (figures in millions)
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
12- 9
McGraw Hill/Irwin
Polyzone Production NPV
0 1 2 3 4 5 - 10Investment 100Production, Millions of pounds per year 0 0 40 80 80 80Spread, dollars per pound 1.2 1.2 1.2 1.2 1.1 0.95Net revenues 0 0 48 96 88 76Production costs 0 0 30 30 30 30Transport 0 0 4 8 8 8Other costs 0 20 20 20 20 20
Cash flow -100 -20 -6 38 30 18NPV (at r= 8%)= -9.8
Year
U.S. Company w/ European Competition (figures in millions)
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
12- 10
McGraw Hill/Irwin
Marvin Enterprises
Capacity, Millions of Units
Technology Industry MarvinCapital Cost per
Unit ($)Manufacturing
Cost per Unit ($)Salvage Value per
Unit ($)
First generation (2017) 120 _ 17.5 5.5 2.5
Second generation (2025) 120 24 17.5 3.5 2.5
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
12- 11
McGraw Hill/Irwin
Marvin Enterprises
Demand = 80 (10 - Price)
Price = 10 x quantity/80
Demand for Garbage Blasters
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
12- 12
McGraw Hill/Irwin
Marvin Enterprises
Value of Garbage Blaster Investment
million
million
million
t
t
227$72299benefit Net
72$2.1
124plant existingPV Change
299$
25.1
10
2.1
3610100Plant New NPV
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
12- 13
McGraw Hill/Irwin
Marvin Enterprises
•VALUE OF CURRENT BUSINESS: VALUE
At price of $7 PV = 24 x 3.5/.20 420
•WINDFALL LOSS:
Since price falls to $5 after 5 years,
Loss = - 24 x (2 / .20) x (1 / 1.20)5 - 96
•VALUE OF NEW INVESTMENT:
Rent gained on new investment = 100 x 1 for 5 years = 299
Rent lost on old investment = - 24 x 1 for 5 years = - 72
227 227
TOTAL VALUE: 551
CURRENT MARKET PRICE: 460