Capital asset investment: strategy, tactics & tools
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| Main Author: | |
|---|---|
| Format: | Book |
| Language: | English |
| Published: |
Chichester
Wiley & Sons
2002
|
| Series: | Wiley finance series
|
| Online Access: | Inhaltsverzeichnis |
| Physical Description: | XIV, 318 S. graph. Darst. |
| ISBN: | 0470845112 |
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MARC
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Record in the Search Index
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| adam_text | Contents Preface xiii
Acknowledgments xv
1 Introduction: the big picture, environment, terminology, and preview 1
Magnitude of capital investment 1
General perspective on capital investment 3
Capital budgeting 5
Cash flows 6
Cost of capital 6
Risk and uncertainty 7
Risk 1
Uncertainty 8
2 The Objective of capital budgeting 9
A normative model for capital budgeting 10
Basic valuation model 11
Operational adaptation 11
The cash flows 12
Cash flows and the public sector 12
3 Estimating basic project characteristics 13
Project types 13
Project characteristics 14
Initial cost 15
Sunk cost 1^
Components of initial cost 16
Useful life n
Physical deterioration 18
Technological obsolescence 19
Cash flows 19
Cash inflows (cash receipts) 21
Cash outflows 22
vi Contents Taxes and depreciation 23
Depreciation 23
Straight-line depreciation 24
Double-declining-balance depreciation 24 ;;
Sum-of-the-years digits depreciation 24
Comparison of the basic depreciation methods 25
Example 3.1 25
Example 3.2 26
Example 3.3 26
ACRS Depreciation 27
Canadian depreciation 28
Investment tax credit 29
Inflation 30
4 Cost of capital 31
Introduction 31
Cost of capital components 31
Debt 31
Preferred stock 32
Common stock and retained earnings 33
Example 4.1 34
Overall cost of capital 34
Optimal capital structure 36
Interaction of financing and investment 38
Cautionary note 38
5 Traditional methods that ignore time-value of money 39
Payback and naive rate of return ,39
Payback 39
The naive rate of return 41
Strong points of payback 41
Weak points of payback 41
Unrecovered investment 43
Accounting method: alias average return on average investment 43
Strong points of accounting method 43
Weak points of accounting method 44
Comprehensive example 44
6 Traditional methods that recognize time-value of money: the net present value 47
Unequal project size 51
The profitability index 51
Unequal project lives 51
Level annuities 53
Summary and conclusion 53
Strong points of NPV 53
Weak points of NPV 54
I
Contents vii
7 Traditional methods that recognize time-value of money: the internal rate
of return 55
j Definition of the IRR 55
I A caution and a rule for IRR 58
j Payback and IRR relationship 58
j Mathematical logic for finding IRR 59
Interval bisection 60
¦ Newton-Raphson method 61
; Strong points of IRR 62
Weak points of IRR 62
A digression on nominal and effective rates 62
Investment-financing relationship 62
Nominal rate and effective rate 63
Clarification of nominal and effective rates 63
IRR with quarterly cash flows 64
8 Reinvestment rate assumptions for NPV and IRR and conflicting
rankings 65
Reinvestment rate assumptions for NPV and IRR 65
Conflicting rankings and fisher s intersection 68
Relationship of IRR and NPV 72
Adjusted, or modified, IRR 72
Summary and conclusion 73
9 The MAPI method 75
The concept of duality 75
The MAPI framework 77
Challenger and defender 77
Capital cost 77
Operating inferiority 78
Physical deterioration 79
Technological obsolescence 79
Two basic assumptions 79
Adverse minimum 80
First standard assumption 80
Second standard assumption 80
Application of the MAPI method 80
The problem of capacity disparities 82
Conclusion 83
10 The problem of mixed cash flows: I 85
Internal rate of return deficiencies 85
Example 10.1 85
Descartes rule 85
Example 10.2 86
The Teichroew, Robichek, AND Montalbano (TRM)
analysis 87
viii Contents The TRM algorithm 89
Example 10.3 89
Example 10.4 91
Example 10.5 92
The unique, real internal rate of return: caveat emptor! 94
A new theorem 96
Theorem 96
Proof 96
Corollary I 96
11 The problem of mixed cash flows: II 97
The Wiar method 97
Example 11.1. An application of the Wiar method 98
Sinking fund methods 99
The initial investment method 100
The traditional sinking fund method 100
Initial investment and traditional sinking fund methods 100
Example 11.2 101 J
Example 11.3 102 J
Example 11.4 103 I
Example 11.5 104 J
The multiple investment sinking fund method 107 |
Strong points of the methods 108 ;
Weak points of the methods 109 J
11A Appendix: the problem of mixed cash flows III—a two-stage method
of analysis 110
Relationship to other methods 110
The two-stage method 111
Example 11 A. 1 111
Example 11 A.2 114 j
Formal definition and relationship to NPV 114 j
Payback stage 115 1
Borrowing rate 116 I
Example 11 A.3 116
Conclusion 117
A brief digression on uncertainty 117
12 Leasing 119
Alleged advantages to leasing 119 ;
Analysis of leases 120
Traditional analysis 120
Example 12.1 121
Alternative analysis 122
Analysis 124
Implications 125
Contents ix
Practical perspective 126
Summary and conclusion 127
Appendix 128
13 Leveraged leases 131
Definition and characteristics 131
Methods: leveraged lease analysis 132
Application of the methods 132
Example 13.1 132
Example 13.2 133
Analysis of a typical leveraged lease (Childs and Gridley) 137
Example 13.3 137
Conclusion 139
14 Alternative investment measures 141
Additional rate of return measures 141
Geometric mean rate of return 141
Average discounted rate of return 142
Example 14.1 142
Time-related measures in investment analysis 144
Boulding s time spread 145
Macaulay s duration 146
Unrecovered investment 147
Summary and conclusion 148
15 Project abandonment analysis 149
The Robichek-Van Home analysis 149
An alternate method: a parable 151
Comparison to R-VH 155
A dynamic programming approach 156
Summary and conclusion 158
16 Multiple project capital budgeting 159
Budget and other constraints 159
General linear programming approach 159
Mutual exclusivity 161
Contingent projects 161
Zero-one integer programming 162
Example 16.1 164
Goal programming 165
Summary and conclusion 169
16A Appendix to multiple project capital budgeting 170
17 Utility and risk aversion 177
The concept of utility 177
1
x Contents
Attitudes toward risk 178
Calculating personal utility 180
Whose utility? 184
Measures of risk 185
J. C. T. Mao s survey results 187
Risk of ruin 188
Summary 189
18 Single project analysis under risk 191
The payback method 191
Certainty equivalents: method I 192
Example 18.1 192
Certainty equivalents: method II 193
Risk-adjusted discount rate 194
Example 18.2 195
Computer simulation 195
Example 18.3 196
Lewellen-Long criticism 200
19 Multiple project selection under risk: computer simulation and other
approaches 203
Decision trees 203
Example 19.1 205
Other risk considerations 207
Example 19.2 A comprehensive simulation example 207
Conclusion 214
20 Multiple project selection under risk: portfolio approaches 215
Introduction 215
Example 20.1 215
Generalizations 216
Project independence 217
Project indivisibility 217
Multiple project selection 218
Finding the efficient set 220
The Sharpe modification 222
Relating to investor utility 223
Epilogue 223
21 The capital asset pricing model 225
Assumptions of the CAPM 225
The efficient set of portfolios 225
Portfolio choices 226
Enter a risk-free investment 226
The security market line and beta 228
The CAPM and valuation 230
The CAPM and cost of capital 231
Contents xi
The CAPM and capital budgeting 232
Comparison with portfolio approaches 232
Some criticisms of the CAPM 233
The arbitrage pricing theory (APT) 234
Factors — what are they? 235
APT and CAPM 236
Development of the APT 237
22 Multiple project selection under risk 239
Example 22.1: Al s Appliance Shop, revisited 240
Generalizations 241
Project independence — does it really exist? 242
Project indivisibility: a capital investment is not a security 243
Example 22.2: Noah Zark 244
Generalization on multiple project selection 246
Securities 247
Capital investments 247
Summary and conclusion 248
23 Real options 251
Acquiring and disposing: the call and put of it 251
More than one way to get there 252
Where are real options found? 252
Comparison to financial options 253
Flashback to PI ratio—a rose by another name... 253
Types of real options 254
Real option solution steps 255
Option phase diagrams 256
Complex projects 257
Estimating the underlying value 258
What to expect from real option analysis 258
Identifying real options — some examples 259
Contingent claim analysis 260
The binomial option pricing model 260
Example 23.1 Value of strategic flexibility in a ranch/farm 262
A game farm, recreational project 264
Option to switch operation 265
Case 1: 100 percent switch 265
Case 2: Mix operation 266
Option to abandon for salvage value 267
The option to expand operation (growth option) 268
Interaction among strategic options 269
Example 23.2 270
Contingent claim valuation: 270
The optimal exercise of the growth option and firm value 271
The abandon option and firm value 272
Current value of the firm 273
xii Contents The strategic dimension of the real-option analysis 273
Conclusion 273
Appendix: Financial mathematics tables and formulas 275
A. 1 Single payment compound amount. To find F for a given P 276
A.2 Single payment present worth factor. To find P for a given F 283
A.3 Ordinary annuity compound amount factor. To find F for a given R
received at the end of each period 291
A.4 Ordinary annuity present worth factor. To find P for a given R received at
the end of each period 299
Bibliography 307
Index 315
|
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| dewey-sort | 3658.152 |
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| discipline | Wirtschaftswissenschaften |
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| id | DE-604.BV025284646 |
| illustrated | Illustrated |
| indexdate | 2024-07-09T22:30:23Z |
| institution | BVB |
| isbn | 0470845112 |
| language | English |
| oai_aleph_id | oai:aleph.bib-bvb.de:BVB01-019918557 |
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| physical | XIV, 318 S. graph. Darst. |
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| publishDateSort | 2002 |
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| spelling | Herbst, Anthony F. Verfasser aut Capital asset investment strategy, tactics & tools Anthony F. Herbst Chichester Wiley & Sons 2002 XIV, 318 S. graph. Darst. txt rdacontent n rdamedia nc rdacarrier Wiley finance series HBZ Datenaustausch application/pdf http://bvbr.bib-bvb.de:8991/F?func=service&doc_library=BVB01&local_base=BVB01&doc_number=019918557&sequence=000002&line_number=0001&func_code=DB_RECORDS&service_type=MEDIA Inhaltsverzeichnis |
| spellingShingle | Herbst, Anthony F. Capital asset investment strategy, tactics & tools |
| title | Capital asset investment strategy, tactics & tools |
| title_auth | Capital asset investment strategy, tactics & tools |
| title_exact_search | Capital asset investment strategy, tactics & tools |
| title_full | Capital asset investment strategy, tactics & tools Anthony F. Herbst |
| title_fullStr | Capital asset investment strategy, tactics & tools Anthony F. Herbst |
| title_full_unstemmed | Capital asset investment strategy, tactics & tools Anthony F. Herbst |
| title_short | Capital asset investment |
| title_sort | capital asset investment strategy tactics tools |
| title_sub | strategy, tactics & tools |
| url | http://bvbr.bib-bvb.de:8991/F?func=service&doc_library=BVB01&local_base=BVB01&doc_number=019918557&sequence=000002&line_number=0001&func_code=DB_RECORDS&service_type=MEDIA |
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