Assessing the Impact of XML/EDI with Real Option Valuation

von Dr. Shermin Voshmgir

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[1.] Svr/Fragment 070 02 - Diskussion
Zuletzt bearbeitet: 2020-05-25 19:57:30 [[Benutzer:|]]
BauernOpfer, Copeland Weston 1992, Fragment, Gesichtet, SMWFragment, Schutzlevel sysop, Svr

Typus
BauernOpfer
Bearbeiter
SleepyHollow02
Gesichtet
Yes.png
Untersuchte Arbeit:
Seite: 70, Zeilen: 2-8, 10-15, 17-29
Quelle: Copeland Weston 1992
Seite(n): 27, 28, 29, 36, Zeilen: 27: 12 f., 19 ff.; 28: 2 ff.; 29: last paragraph; 30: 17 f.; 36: 5 ff.
[5.2.1 Static Methods]

Accounting Rate of Return: The ARR is the average after tax profit divided by the initial cash outlay. It is very similar to the Return on Assets, or the return on investment. Copeland and Weston (1999: 28) do not regard the ARR as an appropriate capital budgeting technique as it uses accounting profits instead of cash flows and it does not consider the time value of money.

Pay-Off-Method (Pay Back Method): The payback period is the number of years it takes to recover the initial outlay. [...] If management were adhering strictly to the project, it would choose the project with the shortest payback period. The difficulty of the payback method is that it does not consider all cash flows and it fails to discount them. Copeland and Weston (1992: 26-28) reject the Payback Method because it violates three of four properties that are desirable in capital budgeting techniques as stated above (1,2 and 3).

[5.2.2 Dynamic]

Internal Rate of Return (IRR): The IRR on a project is defined as that rate, which equates the present value of the cash outflows and inflows, i.e. where the NPV is zero. Hence this is the rate of return on invested capital that the project is returning to the firm. If the IRR criterion is used and the projects are independent, any project that has an IRR greater than the opportunity cost of capital will be accepted. According to Copeland and Weston (1992: 36) the IRR rule errs in several ways. First, it does not obey the value additivity principle, and consequently managers who use the IRR cannot consider projects independently of each other. Second, the IRR rule assumes that funds invested in projects have opportunity costs equal to the IRR of the projects. This implicit reinvestment rate assumption violates the requirement that cash flows be discount at the market determined opportunity cost of capital. Finally, the IRR rule can lead to multiple rates of return whenever the sign of cash flow changes more than once.


Copeland, T.E. & Weston, J.F. 1988 [sic], Financial Theory and Corporate Policy, 3rd ed., Addison-Wesley, Reading, Massachusetts.

1. The Payback Method

The payback period for a project is simply the number of years it takes to recover the initial cash outlay on a project.

[...]

If management were adhering strictly to the payback method, it would choose project A, which has the shortest payback period. [...] The difficulty with the payback method is that it does not consider all cash flows and it fails to discount them.

[page 28]

We reject the payback method because it violates (at least) the first two of the four properties that are desirable in capital budgeting techniques.8

2. The Accounting Rate of Return

The accounting rate of return (ARR) is the average after-tax profit divided by the initial cash outlay. It is very similar to (and in some uses exactly the same as) the return on assets (ROA) or the return on investment (ROI), and they suffer from the same deficiencies.

[...]

The problem with the ARR is that it uses accounting profits instead of cash flows and it does not consider the time value of money.

[page 29]

4. Internal Rate of Return

The internal rate of return (IRR) on a project is defined as that rate which equates the present value of the cash outflows and inflows. In other words, it is the rate that makes the computed NPV exactly zero. Hence this is the rate of return on invested capital that the project is returning to the firm.

[page 30]

If we use the IRR criterion and the projects are independent, we accept any project that has an IRR greater than the opportunity cost of capital, which is 10%.

[page 36]

The IRR rule errs in several ways. First, it does not obey the value-additivity principle, and consequently managers who use the IRR cannot consider projects, independently of each other. Second, the IRR rule assumes that funds invested in projects have opportunity costs equal to the IRR for the project. This implicit reinvestment rate assumption violates the requirement that cash (lows be discounted at the market-determined opportunity cost of capital. Finally, the IRR rule can lead to multiple rates of return whenever the sign of cash flows changes more than once.

Anmerkungen

The source is given three times, but no quotation marks are used.

Sichter
(SleepyHollow02) Schumann



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