Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
Investment Decision-making            Ilona Kriauzaite, 2010
Content Investment Issues with investment appraisal Investment appraisal techniques:   Payback   Average Rate of Return (A...
InvestmentInvestment refers to the purchasing ofproductive capacity or capital expenditureCapital expenditure – Spending b...
Why invest? Businesses need to invest to grown They might want to increase capacity so they can produce more If they produ...
Investment Appraisal Looks at whether an investment project is worthwhile or not Can be used for all types of investment f...
Financial techniques ofinvestment appraisal These are all based on a number of assumptions:   All costs and revenues can b...
Problems with ForecastsThere may be problems with forecastsbecause:  Competitors could bring out new products /  change pr...
Investment Appraisal Types of investment appraisal:   Payback Period   Accounting Rate of Return (ARR)   Net Present Value...
Investment Appraisal The idea is that if you invest in the future you will have more incomes coming into the business Inve...
Payback Method This looks at how long it takes to pay back the initial cost of the investment Need to know how much revenu...
Payback method This allows you to compare projects – which one takes the shortest time to payback the initial investment I...
Advantages andDisadvantages of PaybackAdvantages               Disadvantages  Easy and simple to       Doesn’t look at  us...
Average Rate of Return Looks at the profit generated by the investment compared to the cost of the investment             ...
Advantages andDisadvantages of ARRAdvantages             Disadvantages  Looks at profits       Only looks at  Easy to comp...
Discounted cash flow This considers what money will be worth in the future Discounting – reduce value of future earnings t...
Net Present ValueOne way of discounting cash flow is looking atNPVThis method takes into account inflationarypressures and...
Net Present Value                        Future Value                PV = -----------------                            (1 ...
Discounted cash flow –Advantages and DisadvantagesAdvantages              Disadvantages  Looks at the            Can be di...
Qualitative techniques ofinvestment appraisalAs well as financial methods firms needto consider:  Corporate image – you ma...
Summary Investment is the process of purchasing fixed assets in order to increase capacity / productivity Investment appra...
Upcoming SlideShare
Loading in …5
×

Investment decision

16,394 views

Published on

Published in: Economy & Finance, Business

Investment decision

  1. 1. Investment Decision-making Ilona Kriauzaite, 2010
  2. 2. Content Investment Issues with investment appraisal Investment appraisal techniques: Payback Average Rate of Return (ARR) Discounted cash flow (NPV) Qualitative factors affecting decisions:
  3. 3. InvestmentInvestment refers to the purchasing ofproductive capacity or capital expenditureCapital expenditure – Spending by abusiness to buy fixed assets e.g. property,vehicles etc
  4. 4. Why invest? Businesses need to invest to grown They might want to increase capacity so they can produce more If they produce more then they can sell more and increase sales revenue They could also look to invest to increase the efficiency of their operations
  5. 5. Investment Appraisal Looks at whether an investment project is worthwhile or not Can be used for all types of investment from the purchase of a new piece of machinery to a whole factory It allows managers to make an informed choice regarding the viability of the project
  6. 6. Financial techniques ofinvestment appraisal These are all based on a number of assumptions: All costs and revenues can be forecast accurately for future years Key variables like interest rates will not alter That the business will be looking to maximise profits
  7. 7. Problems with ForecastsThere may be problems with forecastsbecause: Competitors could bring out new products / change prices altering sales and revenue Tastes and fashions may change causing an unexpected slump in demand The economy may change either upwardly or downwardly – recession or boom Costs can be affected by inflation and import prices
  8. 8. Investment Appraisal Types of investment appraisal: Payback Period Accounting Rate of Return (ARR) Net Present Value (discounted cash flow) Discounted cash flow
  9. 9. Investment Appraisal The idea is that if you invest in the future you will have more incomes coming into the business Investment appraisal methods look at the comparison of the future incomes with the cost of the initial investment
  10. 10. Payback Method This looks at how long it takes to pay back the initial cost of the investment Need to know how much revenue the asset will generate For example if a machine costs £50,000 and it produces items 50,000 items that retail for 50p each it will take 2 years to payback the initial investment
  11. 11. Payback method This allows you to compare projects – which one takes the shortest time to payback the initial investment It can take an investment less than a year to generate revenues that cover its cost
  12. 12. Advantages andDisadvantages of PaybackAdvantages Disadvantages Easy and simple to Doesn’t look at use and timings of understand payments Good if you just Doesn’t look at want a quick rate of incomes received return after payback Profit isnt calculated
  13. 13. Average Rate of Return Looks at the profit generated by the investment compared to the cost of the investment Average profit ARR = ---------------------------------------- ---- x 100 Initial cost of investment This gives the business a % figure showing the average rate of return Businesses can then compare this figure to how much they would get with alternative investments / the bank
  14. 14. Advantages andDisadvantages of ARRAdvantages Disadvantages Looks at profits Only looks at Easy to compare average profits with other methods Doesn’t look at of investment e.g. timings of putting money in payments the bank
  15. 15. Discounted cash flow This considers what money will be worth in the future Discounting – reduce value of future earnings to reflect opportunity cost of an investment Reasons why this exists: Risk Opportunity cost
  16. 16. Net Present ValueOne way of discounting cash flow is looking atNPVThis method takes into account inflationarypressures and interest ratesThe idea that the money increases in valueLooks at how much you would need to investnow to earn a certain amount in the futureAllows comparison of an investment by valuingall cash inflows from the investment at thepresent valueYou can compare what would happen if youinvested the money in other projects or justsaved it in the bank
  17. 17. Net Present Value Future Value PV = ----------------- (1 + i)nWhere i = interest rate n = number of years Cash flow x discount factor = present value Present Values can be found through valuation tables
  18. 18. Discounted cash flow –Advantages and DisadvantagesAdvantages Disadvantages Looks at the Can be difficult to opportunity cost of choose the right investing discount rate Considers cash Is very complex inflows and outflows for the lifetime of the investment
  19. 19. Qualitative techniques ofinvestment appraisalAs well as financial methods firms needto consider: Corporate image – you may reject an investment opportunity as it will reflect badly on your business Corporate objectives – also have to judge if the investment is aligned to your corporate objectives Environmental and ethical reasons – is the investment environmentally and ethically sound Industrial relations – what is the impact on the work force – does it decrease jobs?
  20. 20. Summary Investment is the process of purchasing fixed assets in order to increase capacity / productivity Investment appraisal techniques aim to assess the financial feasibility of investment options Investment appraisal techniques are based on a number of assumptions which may not be true Payback method looks at how long it will take to pay back the cost of the initial investment Average rate of return looks at the percentage rate of return on the investment Discounted cash flow (NPV) looks at the present values of any future revenues from the investment Qualitative factors affect investment decisions including corporate image, objectives, industrial relations and environmental and ethical reasons

×