Exercise 63 Multi Attribute Utility Theory
Now, the investment issue in Exercise 6-2 is reconsidered. It is assumed that it is possible to measure 'company growth' in terms of the number of employees NE , and 'securing independence' in terms of the amount of outside capital required OC . For these items and for the long-term profit LP it is assumed that preferences are mutually preferential independent and that the following data for the three Alternatives A, B and C can be forecasted with certainty. Tab. 6-9 Data for alternatives A, B...
Characteristics and Classification of Investment Projects
Investments can be considered from different points of view. According to the cash flow oriented perspective an investment project can be characterised by a stream of cash flows starting with an initial investment outlay - a cash outflow. The basic task for investment decision-making then will be to ascertain whether the future benefits from the investment will make the initial outlay worthwhile. An investment project is a series of cash inflows and outflows, typically starting with a cash...
Annuity Method
The annuity method AM uses the same discounted cash flow model as the NPV method. The only change is a different target measure, the annuity An annuity is a series of cash flows of equal amounts in each period of the total planning period. The annuity can be regarded as an amount that an investor can withdraw in every period when undertaking the investment project. The annuity of an investment project is equivalent to the NPV of that project, i.e. it is possible to equate both measures...
Average Rate of Return Method
The average rate of return ARR method differs from the PCM in regard to its target measure. The ARR method combines a profit measure with a capital measure to focus on the return expressed as a rate of interest earned on the capital invested. Both the profit measure and the capital measure can be defined differently. Average capital tie-up can be used as the capital measure, while the profit measure can be determined by adding average profit and average interest. This leads to the following...
Internal Rate of Return Method
The internal rate of return IRR method, considered next, is largely analogous to the NPV method. Only two assumptions are modified - concerning the reinvestment of free cash flow surpluses and the balancing of capital tie-up and economic life differences. Also, a different target measure is considered the internal rate of return. The internal rate of return is the rate that leads to a NPV of zero when applied as the uniform discount rate. The internal rate of return represents the interest...
Exercise 32 Net Present Value Method and Internal Rate of Return Method
A company has to decide between three investment projects. The characteristics of these are as follows Tab. 3-7 Characteristics of the three investment projects A, B, and C Tab. 3-7 Characteristics of the three investment projects A, B, and C The economic life of all three projects is 5 years. The uniform discount rate is 10 . a Calculate the net present values of the investment projects and assess the relative profitability of each. b Calculate the projects' internal rates of return.
Exercise 41 Compound Value Method Critical Debt Interest Rate Method and VoFI
Two investment projects are available, with the following relevant cash flows Tab. 4-2 Cash flows of the investment projects I and II a Use the compound value method to decide which project to accept. Assume a credit interest rate of c 5 and a debt interest rate of d 8 . Calculate the compound values of the two projects, assuming i Mandatory account balancing. ii Prohibited account balancing. b Calculate the critical debt interest rate, assuming i Mandatory account balancing. ii Prohibited...
Preface
Investment decisions are of vital importance to all companies, since they determine both their potential to succeed and their ultimate cost structure. Investments usually entail high initial cash outflows and thus tie up substantial funds. Sound investment decisions are important, therefore. Yet, due to a highly complex and rapidly changing business environment they remain a challenging management task. Effective appraisal methods are valuable tools to support investment decisions. They have...
Investment Appraisal Methods as Tools for Investment Planning
Investment appraisal methods, as outlined in this book, are relevant to all the decisions that form part of the investment planning process. Understanding the different investment appraisal methods, their assumptions, limitations and possible usages will lead to an increased understanding of investment decision-making and an informed choice of methods. This should greatly enhance decision-making in regard to both single investment projects and investment programmes. The key questions to be...
MultiTier Model of Simultaneous Investment and Financing Decisions Hax and
The multi-tier model for simultaneous investment and financing decisions described in this section was developed by both Hax and Weingartner independently, in almost identical form. Most of the assumptions underlying Dean's model apply to this model also. However, unlike Dean's model, the Hax and Weingartner model is multi-tier in that the investment and financing projects considered may commence at different times. The objective included in the model is, again, to maximise the compound value...
Net Present Value Method
The net present value method focuses on selecting projects that maximise the 'net present value' NPV generated for the company Net present value is the net monetary gain or loss from a project, computed by discounting all present and future cash inflows and outflows related to the project. Using the NPV method, all future cash flows related to an investment project are discounted back to time 0 i.e. t 0 , taken to represent the start of the investment project. The NPV represents a specific kind...
Chapter 7 Simultaneous DecisionMaking Models
Decisions about investment programmes often involve simultaneous choices about types and numbers of investment projects. Additionally, models used for simultaneous decision-making might need to accommodate choices within a range of company areas such as financing, production, sales, human resources and tax policy. In this chapter, the finance and production areas - because of their relevance and close connections with investment decisions - are selected to illustrate ways of supporting...
Compound Value Method
The compound value CV method is a dynamic investment appraisal method that uses the compound value as its target measure - i.e. all cash flows are compounded to the end of the investment project. The compound value is the overall net monetary gain or loss resulting from the investment project and is related to the end of its economic life. The method is characterised by three assumptions about the capital market. First, it is assumed that different interest rates exist a debt interest rate for...
The Assessment of Foreign Direct Investments
5.2.1 Special Characteristics of Foreign Direct Investments A foreign direct investment FDI includes the establishment, expansion or acquisition of sales outlets, storage or production plants abroad, and the direct influencing of the decisions made by a foreign company unit. The investing 'home' company sustains cash outflows in its domestic currency i.e. the 'home currency' to finance assets in the 'investment country', so that future cash flow surpluses may be achieved in the currency of that...
Static Payback Period Method
The target measure used for the static payback period SPP method is the time it takes to recover the capital invested in the project. It can be calculated based on average figures or on total figures. Average figures are used here. The payback period of an investment project is the period after which the capital invested is regained from the average cash flow surpluses generated by the project. The SPP method offers a measure of the risk connected with an investment. Judging the absolute and...
Visualisation of Financial Implications VoFI Method
The visualisation of financial implications VoFI method is based on the ideas of Heister 1962 that were later developed by Grob 1993 . Its defining feature is a comprehensive financial plan that considers all cash flows connected with an investment project. The VoFI comprehensive financial plan considers the economic consequences of an investment project, specifically in regard to The amounts and proportions of internal funds and debt capital used. The amounts and timing of debt redemption from...
Profit Comparison Method
As the name suggests, the profit comparison method PCM differs from the cost comparison method because it considers both the cost and revenues of investment projects. The target measure is the average profit, which is determined as the difference between revenues and costs. Apart from this difference, all of the other assumptions made in the CCM continue to apply for PCM. Absolute profitability is achieved if an investment project leads to a profit greater than zero. Relative profitability is...
Chapter 2 Static Methods
This chapter considers simple 'static' analysis methods that assess the profitability of an investment for a time span of one average period. These methods focus on a single financial measure, so other target measures are ignored. The term 'profitability' is, unless otherwise specified, used throughout this book to indicate the achievement of positive or higher economic returns from an investment project. However, it should not be confused with the concept of 'accounting profit', which includes...
Springer
Fakult t f r Wirtschaftswissenschaften Th ringer Weg 7 09107 Chemnitz Germany Prof. Deryl Northcott School of Business The Auckland University of Technology ISBN 978-3-540-39968-1 e-ISBN 978-3-540-39969-8 Library of Congress Control Number 2007937123 2008 Springer-Verlag Berlin Heidelberg This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation,...