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Investment Decisions Present Value. Assessing investment opportunities Present Value & Net Present Value (NPV) Risk and Present Value Different types of investments To make an investment or not ? Choice between different investments Internal Rate of Return (IRR) Pay-back period (PBP)

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Venture Decisions Present Value Assessing speculation openings Present Value & Net Present Value (NPV) Risk and Present Value Different sorts of speculations To make a speculation or not ? Decision between various ventures Internal Rate of Return (IRR) Pay-back period (PBP) Which strategy is most suited ?

Assessing Investment openings Is it fascinating to make a venture ? Illustration I can purchase a house for 40.000 US$ ... .. what\'s more, offer the house following one year for 42.000 US$ Apparently the answer is ... YES it is intriguing I make a benefit of 2.000 US$ BUT : I had an other speculation probability to put the cash on a sparing record with a financing cost of 10% and make a benefit of ... 4.000 US$

Future Value of Money The fundamental standard is that the Future Value of cash is higher than its Present Value if C 0 is the sum today and in the event that i is the market financing cost we can ascertain the future estimation of this sum following one year FV 1 (C 0 ) = C 0 .(1+i) The Future Value of cash is equivalent to The underlying sum Plus the enthusiasm on this underlying sum

Future Value of cash We can utilize similar rule for longer periods We can compute the Future Value of C 0 following 2 years FV 2 (C 0 ) = C 0 .(1+i) 2 be careful : intensified premium it means that we figure the premiums on the premiums or after ... n years FV n (C 0 ) = C 0 .(1+i) n

Future Value of cash Example 1 The Future Value of 40.000 US$ If the market financing cost is equivalent to 10% After 4 years FV 4 (40.000US$) = 40.000.(1+0,10) 4 = 58.564 US$ Example 2 Calculate the Future Value of 1.200 MDong If the market loan fee is equivalent to 18% After 3 years

Net Future Value We can now characterize the Net Future Value of a venture It is equivalent to the contrast between The Future Cash stream produced by the speculation And the Future Value of the cash put resources into year 0 For an underlying venture C 0 If C 1 is the Cash stream created following one year We can figure the Net Future Value following 1 year NFV 1 (C 0 ) = C 1 - C 0 .(1+i)

Net Future Value The Net Future Value Can be certain it is ideal to make the speculation than to put the cash on a sparing record Can be negative don\'t make this speculation put your cash on a sparing record Example ascertain the NFV of the house I could purchase for 40.000 US$ and Sell following one year for 42.000 US$ i=10% NFV 1 (house) = 42.000 - 40.000.(1+0,1) = - 2.000 US$

Present Value of cash We can do the thinking the other route round and compute the Present Value of future measures of cash The fundamental guideline is that the Present Value of cash is lower than its Future Value If C 1 is the sum in one year And on the off chance that i is the market loan cost We can figure the Present Value of C 1 PV(C 1 ) = C 1/(1+i)

Present Value of cash We can utilize similar standard for longer periods We can ascertain the Present Value of a Cash stream C 2 inside 2 years PV(C 2 ) = C 2/(1+i) 2 ... on the other hand the PV of a Cash stream C n after n years PV(C n ) = C n/(1+i) n The loan fee used to compute the PV is known as the rebate rate

Net Present Value We can now characterize the Net Present Value of a venture It is equivalent to the contrast between T he Present Value of the Cash stream created by the speculation The underlying measure of cash contributed For the underlying venture C 0 If C 1 is the Cash stream produced following one year We can figure the Net Present Value NPV = C 1/(1+i) - C 0

Net Present Value The Net Present Value can be sure it is ideal to make the venture than to put the cash on a sparing record can be negative don\'t make this venture put your cash on a sparing record : you will win more

Net Present Value We can likewise extend the computation to numerous periods and numerous Cash streams For the underlying venture C 0 If C 1 is the Cash stream created following one year, C 2 following 2 years, ... Cj after j years we can ascertain the Net Present Value NPV = C 1/(1+i) + C 2/(1+i) 2 + C 3/(1+i) 3 + . . . + C j/(1+i) j + ... - C 0

Net Present Value Example : Calculate the Net Present Value of a speculation to purchase a house for 40.000 US$ at t = 0 creating the accompanying rents 3.200 US$ at t = 1 3.700 US$ at t = 2 3.850 US$ at t = 3 4.100 US$ at t = 4 5.000 US$ at t = 5 and sold for 57.500 US $ at t = 6 if the rebate rate i = 9% Do you purchase the house ?

Present Value Special Cases It can be demonstrated that the Present Value of a vast arrangement of consistent Cash streams (C= C 1 = C 2 = C 3 = ...) is equivalent to this yearly Cash stream separated by the markdown rate PV = C/i

Present Value Special Cases (Gordon-Shapiro recipe) The Present Value of a limitless arrangement of Cash streams developing at a yearly steady rate can likewise be figured the Cash stream of year 1, C 1 , is equivalent to C the development rate is g C 2 = C.(1+g) C 3 = C.(1+g) 2 C 4 = C.(1+g) 3 . . . PV = C/(i – g)

Risk and Present Value Until now we utilized as rebate rate the market loan fee (i) This rate is essentially the "hazard free" financing cost financing cost for Government obligation But the speculations we will examine are not "chance free" Most future Cash streams are unverifiable We need to consider the dangers identified with the future Cash streams It is coherent to utilize a higher markdown rate for an interest in a hazardous venture The re is a hazard to accomplish bring down Cash streams than anticipated or even to lose all the Cash streams This higher hazard must be adjusted by a higher rebate rate ( higher return is expected to remunerate conceivable misfortunes )

Risk and Present Value So to compute the NPV of a dangerous venture it is legitimate to utilize a higher markdown rate than the "hazard free" loan fee r > i If the future Cash streams are completely sheltered then the rebate rate can be the "hazard free" financing cost The higher the hazard the higher the markdown rate A more unsafe dollar inside one year is worth not exactly a more secure dollar inside one year

Risk and Cost of capital For every organization or notwithstanding for every venture there is a particular rebate rate ( Cost of Capital ) It depends from the hazard related to the organization or to the venture The distinction between the rebate rate of a venture and the "hazard free" loan fee is known as the hazard premium

How high is the hazard premium ? It can be seen on the budgetary markets "All shares" hazard premium 2% to 4% contingent upon the timeframe Specific organization chance premium differs from industry to industry inside the business fluctuates from organization to organization somewhere around 1% and . . . 20% ... also, more Each particular venture has its own particular hazard premium Basically the hazard premium of the organization To be expanded if the hazard is higher than normal high danger of disappointment (research, oil investigation) To be brought down if the hazard is lower than normal or for key reasons union of position (piece of the overall industry, kill new contestant) long haul vision

To make a speculation or not ? The choice to make or not to make a speculation is for the most part a money related one . . . The speculation must bring an arrival NPV > 0 The organization must have the capacity to fund the venture existing trade new obligation paid-out capital increment There will dependably be cash to back a sound venture

To make a venture or not ? different viewpoints must considered with a significant money related effect . . . on the other hand not Strategy Opportunities and . . . missed open doors Barriers for new entrants Quality Image Location Visibility or nearness available Safety Regulations Environment, and so on. Social viewpoints Working conditions Loyalty of representatives and administration

To make a venture or not ? The enormous hazard is that other criteria . . . . . . may prompt choose to make unfruitful or inadequately beneficial speculations It can get to be unsafe in the event that it happens frequently or for huge sums "the Ego disorder" Sanction by the market or by the shareholders

Choice between various interests In many cases there is a decision to do between various ventures distinctive new items to dispatch diverse new areas for another production line diverse new machines for similar process The decision must be founded on realities and not on impressions maintain a strategic distance from choice criteria like : "I feel that . . ." "Trust my experience . . ." The best actuality is a genuine budgetary appraisal

Choice between various speculations Different sorts of decision : Mutually elite ventures distinctive answers for similar issue machine 1 … or machine 2 … or machine 3 Ranking of various open doors they should be possible at the same time the dangers are comparable there is sufficient cash to accomplish more than one anticipate however which one is the most gainful ? To make or not to make little capex proposed by the creation director

Mutually elite ventures The organization has the decision between various answers for tackle one issue There is no spending requirement But you need to pick the best arrangement Depending on the Cost of Capital of the organization Use tne NPV of every venture and pick the most elevated NPV

Saigon inn : a case of speculation decision To revamp the 130 rooms there are 3 options « Light Solution » Capex of 3.000 US$/room (add up to 0,39 Mio US$) Same add up to be reinvested like clockwork Unit rate increment of 6 US$ (from 80 US$) No adjustment in inhabitance : 30.000 evenings/year « Medium Solution » Capex of 20.000 US$/room + 0,4 Mio US$ for entryway (add up to 3 Mio US$) Valid for a long time Unit rate increment of 12 US$ (from US$) Higher inhabitance : 33.000 evenings/year Additional edge every night 72 US$ (60 initia