2. Saifullah Memon 11in82,Saifullah Memon 11in82,
Masroor Ahmed 11in50Masroor Ahmed 11in50
Sagar Hussain 11in40Sagar Hussain 11in40
Faheem-u-Rehman 11in119Faheem-u-Rehman 11in119
Industrial Engineering andIndustrial Engineering and
ManagementManagement
Making InvestmentMaking Investment
DecisionDecision

3. When the investor invest the capital theyWhen the investor invest the capital they
focuses in these criteria while taking thefocuses in these criteria while taking the
decisiondecision
where should I invest ?
why should I invest ?
How much time duration is required
when I get pay back from my
investment ?
How much investment is required?
Is it a secure place ?

4. Learning objectives
understand
different forms
of investment
understand why
businesses
invest
assess investment
projects using
appropriate methods
of appraisal

5. What is investment?What is investment?
Definitions
1. The purchase of capital
goods
2. Expenditure by a business
which is likely to yield a
return in the future
Definitions
1. The purchase of capital
goods
2. Expenditure by a business
which is likely to yield a
return in the future

6. Types of investment
Capital goods
tools, vehicles,
computers, information
technology, machines
Construction
Spending on new
buildings bought or
constructed
Stocks
these include
finished goods and
work in progress
Public sector
investment
About 25% of all
investment, includes
building of schools,
roads, hospitals

7. Reasons for investment
To replace
work out /
obsolete
equipment
To replace
work out /
obsolete
equipment For research
and investment
For research
and investment
To minimise
costs or
improve quality
To minimise
costs or
improve quality
To grow the
business
this can be organic
growth or acquisitions
To grow the
business
this can be organic
growth or acquisitions

8. Factors affecting investmentFactors affecting investment
INVESTMENT
DECISION
?
MOTIVES
BUSINESS
CONFIDENCE
EXTERNAL
FACTORS
COST REVENUE
RETURN

9. Investment appraisalInvestment appraisal
Definition
How a private sector business
might objectively evaluate an
investment project to decide:
-whether or not it is profitable
-make comparisons between
different investment projects
Definition
How a private sector business
might objectively evaluate an
investment project to decide:
-whether or not it is profitable
-make comparisons between
different investment projects

10. What does appraisal stands forWhat does appraisal stands for
 Investment appraisal is also called capital budgeting is a
primarily planning process which facilitates the
determination of concern firms investment both long term
and short term.
 The components of firm that come under this kind of
capital investment appraisal include property,
equipment ,R & D (research and development) project,
advertising campaigns, new plants new machinery etc.
 In simple word, capital investment appraisal is the
budgeting of major capital and investment to company
expenditures
 For examples: capital investment appraisal in small
companies decide on future ventures into newer markets
as well expansion and inclusion of new activities.

11. The basis of investmentThe basis of investment
appraisalappraisal
 Compare the capital cost to the net cash flow
 Capital cost
 amount spent on the investment project
 Net cash flow
 estimated revenue generated from the project
minus
 estimated running costs of the project

12. There are two methods of appraisal areThere are two methods of appraisal are
therethere
1.1.PAY BACK PERIODPAY BACK PERIOD
2.2.AVERAGE RATE OF RETURN - ARRAVERAGE RATE OF RETURN - ARR
Methods of appraisalMethods of appraisal

13. Pay back periodPay back period
 The length of time required to recover the cost of an
investment. The payback period of a given investment or
project is an important determinant of whether to undertake
the position or project, as longer payback periods are
typically not desirable for investment positions.
AVERAGE RATE OF RETURN - ARR
The amount of profit, or return, that an individual can
expect based on an investment made. Accounting rate of
return divides the average profit by the initial investment
in order to get the ratio or return that can be expected.
This allows an investor or business owner to easily
compare the profit potential for projects, products and
investments

14. Payback - alternativePayback - alternative
 An alternative ‘formula’ for calculating payback is
 Years = last year in which cumulative cash flow is
negative
 Months =last negative cumulative cash flow
net cash flow in year after

15. Cumulative cash flowCumulative cash flow
 he cumulative cash flow is a term that can be used for
projects or a company. Cumulative cash flow is calculated
by adding all of the cash flows from the inception of a
company or project. For example, a company began
operating three years ago. The cash flow in year one was
five million dollars, the cash flow in year two was four
million dollars and the cash flow in year three was six
million dollars. The cumulative cash flow for the company
is five million dollars plus four million dollars plus six
million dollars for a total of $15 million

16. NET CASH FLOWNET CASH FLOW
 Net cash flow is simply cash inflows minus cash outflows
over a given period. For example, a company had cash
receipts of one million dollars and cash expenditures of
two million dollars last year. The net cash flow figure is
simply one million dollars minus two million dollars for a
net figure of negative one million dollars

17. DIFFERENCE B/W NET CASH FLOW ANDDIFFERENCE B/W NET CASH FLOW AND
CUMULATIVE CASH FLOWCUMULATIVE CASH FLOW
 Although both net cash flow and cumulative cash flow are
cash flow terms, they have different meanings. Net cash
flow is simply the cash receipts minus cash disbursements
over one period while cumulative cash flow is the sum of
all of the net cash flows that have been generated by a
company since inception. Analyzing cumulative cash flow
may help reveal the long term strength of a company
versus just analyzing net cash flow, which will probably be
on a very short time horizon

18. NET PRESENT VALUENET PRESENT VALUE
 The underlying principle of the NPV technique
is that money received in the future is worth
less that money received today
 To understand this idea you should calculate
the compound value of £100 invested over 5
years at a rate of interest of 10%
 what is £100 worth in 5 years time?
 what is £133 in three year’s time worth
today?

19. NET PRESENT VALUENET PRESENT VALUE
 Calculate present
values of annual
net cash flows
 = discounted net
cash flows
 Calculate present
values of annual
net cash flows
 = discounted net
cash flows
Sum the
present values
(discounted net
cash flows)
Sum the
present values
(discounted net
cash flows)
Calculate NPV
= total present values – initial cost of investment
Calculate NPV
= total present values – initial cost of investment