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INVESTMENT APPRAISAL

INVESTMENT APPRAISAL. CYNICS! What are the problems when using Investment appraisal?. Your answers might include. So why use them?. Mind Map. Virtual on line Investment Appraisal Calculator. http://www.tutor2u.net/assets/simulations/Investment_appraisal_simulator_v1.swf.

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INVESTMENT APPRAISAL

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  1. INVESTMENT APPRAISAL

  2. CYNICS! What are the problems when using Investment appraisal?

  3. Your answers might include

  4. So why use them?

  5. Mind Map

  6. Virtual on line Investment Appraisal Calculator • http://www.tutor2u.net/assets/simulations/Investment_appraisal_simulator_v1.swf Click here to run simulator Click here for instructions & worksheet

  7. Another set of calculations

  8. J Bloggs Metals – being critical of data provided….! Circle & annotate 4 points of particular concern about the accuracy of these forecasts. • J Bloggs Metals has decided to diversify into the frozen foods business. It is considering investing £1.5 million into launching a range of frozen meat products, after assessing the results of a market research survey. Marketing manager K Bloggs has made sales forecasts, and the cash flow forecasts have been based on these. CASH IN CASH OUT NET CASH FLOW The ARR is 6.7% and pay-back is 4 years, but K Bloggs is enthusiastic, as he believes 'the real money will be made after year 5'.

  9. Does this fit with the Co corporate objectives? J Bloggs Metals – being critical of data provided….! Metal CO starting a different sector • J Bloggs Metals has decided to diversify into the frozen foods business. It is considering investing £1.5 million into launching a range of frozen meat products, after assessing the results of a market research survey. Marketing manager K Bloggs has made sales forecasts, and the cash flow forecasts have been based on these. How accurate are these figures? What experience does he have with accounts? Is he ‘independent’ or biased? What type of research? How large? How reliable? CASH IN CASH OUT NET CASH FLOW Wrong figure! How can you predict external factors in 5 years time? What ‘relation to J Bloggs? The ARR is 6.7% and pay-back is 4 years, but K Bloggs is enthusiastic, as he believes 'the real money will be made after year 5'.

  10. Key issues for EVALUATION in exam! How reliable is the data? Who produced the data? What experience do they have? Has the data been exaggerated?

  11. Your go … individually Get a calculator!

  12. Payback… 2 years and ????? 2 years = £500 Yr 3 = 400 / 12 = £33.33 So to make up the £100 shortfall – you will need 3 extra months (100/33.33) Wouldn’t bother with the 100th round-up! = 2 years and 3 months Calculate payback & ARR • ARR • Total cash inflow - Initial cost • Answer / lifespan • Answer /initial cost x 100 • 1080 – 600 • = 480 / 4 • = 120/600 • =0.2 x 100 = 20%

  13. Using the Blogg activity • Was K Blogg right to say “The ARR is 6.7% and pay-back is 4 years”… CASH IN CASH OUT NET CASH FLOW

  14. Payback…..answers • Payback: • 4 years = £1,300,000 so need to still pay off £200,000 in the following months! • 700,000 / 12 = 58333.33…. So 200,000/58333.33 = 3.4 • Total payback in 4 years and 4 months CASH IN CASH OUT NET CASH FLOW

  15. ARR answers…. • £2,000,000 – £1,500,000 = 500,000 / 5 = 100,000 / 1,500,000 = 0.066667 x 100 = 6.67% CASH IN CASH OUT NET CASH FLOW

  16. Another exercise to do…

  17. A quick-ish activity for you to practice on! • Calculate the payback, ARR & NPV on a 5% discount rate.

  18. A quick-ish activity for you to practice on! • Payback = 2 years + ? Months • 30/12 = 2.5 p.m so £20 left to repay …. 20/2.5 = 8 months • So payback in 2 years and 8 months.

  19. A quick-ish activity for you to practice on! • ARR = 60 – 50 = 10 / 3 = 3.33 / 50 = 0.6667 x 100 = 66.67%

  20. A quick-ish activity for you to practice on! • NPV – you need to use the annual net return and take away the initial cost from the total value.

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