INVESTMENT APPRAISAL

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/Investme
  nt_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.!

• 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
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'.
10
J Bloggs Metals being critical of data
provided.!
Does this fit with the Co corporate objectives?
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'.
11
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?

12
Your go individually

• Get a calculator!

13
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

• 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)
• Wouldnt bother with the 100th round-up!
• 2 years and 3 months

14
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
15
Payback..answers
CASH IN
CASH OUT
NET CASH FLOW

• 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

16
ARR answers.
CASH IN
CASH OUT
NET CASH FLOW

• 2,000,000 1,500,000 500,000 / 5 100,000 /
  1,500,000 0.066667 x 100 6.67

17
Another exercise to do
18
A quick-ish activity for you to practice on!

• Calculate the payback, ARR NPV on a 5 discount
  rate.

19
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.

20
A quick-ish activity for you to practice on!

• ARR 60 50 10 / 3 3.33 / 50 0.6667 x 100
  66.67

21
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.

22
Your task. To finish for HWK

• Dantex activity worksheet