An initial investment is the money a business owner needs to start up a firm. It might include the business owner's own money, money borrowed from an array of sources including family and friends or banks, or capital raised from investors. The term initial investment is also used as the money a business owner uses to invest in a capital investment venture such as a piece of equipment or a building.

IRR
The higher a projects internal rate of return, the more desirable it is to invest in the project. Some ways to use the IRR method are: • Discounted Cash Flow Analysis - Find the interest rate return that you would receive as your investment return rate. • Capital Budget Planning - Go through the capital budget process so that you make the best economic decision. • Discounted Cash Flow Analysis - When you calculate IRR you will have one number for an objective comparison between capital projects. • Investment Calculator - Determine if a potential investment is a good choice or not. • Compound Rate of Return - Understand the compounding effect of interest on investments. ("Calculating internal rate,")

Deciding between investments

You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.5 million at the end of the first year and its revenues will grow at 2% per year for every year after that.

a. Which investment has the higher IRR?

a)

Since IR is defined as the rate of return that makes the NPV = 0:

...Finance for managers
Chapter 7— NetPresentValue and Other Investment
Question 1 : List the methods that a firm can use to evaluate a potential investment.
There are discounted and non-discounted cash-flow capital budgeting criteria to evaluate proposed investments. They are
1) Netpresentvalue: NPV is a discounted cash flow technique, which is the difference between an investment’s market value and its cost.
NPV = Presentvalue of cash inflow- Presentvalue of cash outflow
The investment should be accepted if the netpresentvalue is positive and rejected if it is negative.
2) Profitability index: PI is a discounted cash flow technique in which presentvalue of an investment’s future cash inflows divided by its initial cash outflow. It is also called benefit/cost ratio.
PI = PV of cash inflows / PV of cash outflows
If PI is positive, it will be accepted otherwise reject.
3) Internal rate of return: IRR is the discount rate that equates the presentvalues of cash inflows with the initial investment associated with the project thereby causing NPV = 0
If IRR ≥ required rate of return the project is...

...Assignment 1
1. Suppose you discover a treasure chest of RM10 billion in cash
a. Is this a real or financial asset?
b. Is society any richer for the discovery?
c. Are you wealthier?
d. Is anyone worst off as a result of the discovery?
2. The average rate of return on investment in large stocks has outpaced that on investments in T-Bills by about 8% since 1926 in US. Why, then, does anyone invest in T-Bills?
3. You see an advertisement for a book that claims to show how you can make RM1 million with no risk and with no money down. Will you buy the book? Why?
4. You are bullish on Telekom stock. The current market price is RM50 per share, and you have RM5,000 of your own to invest. You borrow an additional RM5,000 from your broker at an interest rate of 8% per year and invest RM10,000 in the stock.
a. what will be your rate of return if the price of Telekom stock goes up by 10% during the next year? (ignore dividend)
b. How far does the price of Telekom stock should have fall for you to get a margin call if your maintenance margin is 30% of the value of the short position?
5. The composition of the Fingroup Fund portfolio is as follows:
|Stock |Shares |Price (RM) |
|A |200,000 |35...

...Netpresentvalue
In finance, the netpresentvalue (NPV) or netpresent worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the presentvalues (PVs) of the individual cash flows. In case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in presentvalue terms, once financing charges are met.
The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputting a price; the converse process in DCF analysis, taking as input a sequence of cash flows and a price and inferring as output a discount rate (the discount rate which would yield the given price as NPV) is called the yield, and is more widely used in bond trading.
Formula
Each cash inflow/outflow is discounted back to its presentvalue (PV). Then they are...

...
To Apex Investment Partners:
According to my analysis of the Accessline’s proposed term sheet, I do not believe that Apex would serve its own interests, or those of its investing partners, by investing in Accessline according to the terms proposed. By investing at the proposed valuation, according to the proposed control and incentive structure, Apex would be shouldering a disproportionate share of the risk should Accessline fail to meet its performance targets, or require fresh inflows of capital from future investment rounds. Nor can Accessline take the sort of steps necessary to protect its investment in the case of management failure.
Should Apex make a counter-offer, I would suggest the following terms:
Valuation:
Accessline’s projected revenues in 1999 are $208m. Using the average price/revenue ratio of 3com and Boston Technologies, it seems reasonable to expect an IPO valuation at 3.67 times revenues, producing gross proceeds of $764m with a presentvalue of $116m (using our 60% discount rate). Assuming that Accessline meets this revenue target, and that no future funding is required, Apex will take a slight loss on its required rate of return, barring the voluntary distribution of the dividend from the board of directors, on which we are not offered a seat. The present price per share at such an exit would be approximately $7.84.
However, given...

...discussion of why NPV is the optimal method to evaluate different projects.
There are eight projects that require the same initial investment but generate different cash flows in the future.
We apply four evaluation methods including: simple return on investment, payback method, IRR and NPV. Compare the result and rank it based on outcome. The discussion is as following:
1）
According to the excel calculation, each project’s rate on investment is:
The formula of rate on investment is:
In the case, the cost of investment is 2000.
Project
P1
P2
P3
P4
P5
P6
P7
P8
Rate on Investment
65.5%
8.25%
400.00%
78.05%
110.00%
10.00%
28.00%
107.50%
The rank of projects based on the rate of return.
P3 > P5 > P8 > P4 > P1 > P7 > P6 > P2
2)
The Payback Period’s definition is the length of time is required to recover the cost of investment. Applying the definition, we calculate the payback period of each project.
Project
P1
P2
P3
P4
P5
P6
P7
P8
Payback Period
6.06
14.2
15.00
6.05
7.14
0.91
1.89
6.04
According to the diagram, the rank of projects based on the payback period is like:
P3 > P5 > P1 > P4 > P1 > P7 > P6 > P2
3)
The Internal Rate of Return definition is a discount rate that makes the NPV (netpresentvalue) of all cash flow from particular project is zero.
The NPV formula is:
where = net cash flow during the...

...debt to tangible net worth.
5. A measure of profitability and not short-term liquidity is the
a. Accounts receivable turnover ratio.
b. Sales to working capital ratio.
c. Total asset turnover ratio.
d. Acid-test ratio.
6. Return on investment (ROI) is a term often used to express income earned on capital invested in a business unit. A company’s ROI would be increased if
a. Sales increased by the same peso amount as express and total assets increased.
b. Sales remained the same and expenses were reduced by the same peso amount that total assets increased.
c. Sales decreased by the same peso amount that expenses increased.
d. Sales and expenses increased by the same percentage that total assets increased.
(CMA adapted)
7. When a balance sheet amount is related to an income statement amount in computing a ration;
a. The balance sheet amount should be converted to an average for the year.
b. The income statement amount should be converted to an average for the year.
c. Both amounts should be converted to market value.
d. Comparisons with industry ratios are not meaningful.
(PhilCPA adapted)
8. Ratios are used for many purposes in financial statement analysis. In order to determine the return on investment for a company, the numerator of the fraction used should be
a. Net income.
b. Income before nonrecurring items.
c. Income before nonrecurring items and before income taxes....

...any analysis.
2. Estimation of the value of the company’s shares using:
* Dividend valuation model (DDM):
You are expected to use the CAPM to estimate the discount rate needed in the DDM.
* Also, you are expected to estimate the beta needed. You cannot pick a beta value estimated elsewhere (e.g., Bloomberg) and use it in your report. Attach details of your work as an appendix.
* Adjust your raw beta using appropriate methodology
* It is important to explain the data utilised in estimating the beta.
* Also explain the proxies you use for the risk-free rate and the market portfolio. Indicate any advantages or disadvantages if there are any.
* The estimation of the expected market risk premium is crucial. You must carefully explain what you do and any assumption you make.
Risk Premium Estimation. Two approaches you could use to estimate the Equity Risk Premium:
* Assume that expected return on the market portfolio is related to a Macroeconomic variable, e.g., GDP. Then use the expected changes in the macroeconomic variable, with appropriate probabilities to estimate expected return on the market portfolio. Subtract the RFR from the expected return estimated and arrive at your equity risk premium. Don’t forget to multiply this by the beta value.
* Implied equity premium. This assumes that the overall market is correctly priced.
The valuation model suggests value...

...Tesca team we were able to create a comprehensive capital budget and cash flow analysis for the proposed refrigerator project.
Through our analysis we found that the cost of capital of the project to be 13.487% and a Weighted Average Cost of Capital (WACC) to be at a value of 9.70%. Factoring in the WACC into our projections we found that if the demand maintains at an average rate the project will be at a positive NetPresentValue of $5,997,505.31 with an IRR of 13.21%, a profitability index of 8.84, and an approximate payback period of 6.84 years. Please see Exhibits below for a snapshot of the capital budget and NPV values.
This information seemed to be very promising for the project in general. However, our continued analysis showed the project to be very sensitive to the sales price per unit of the refrigerator. We used the average demand scenario to produce a sensitivity analysis and found that with just a 5% decrease in the sales price of the refrigerator the NPV quickly dipped into a negative value thus showing the project to be extremely sensitive to the sales price of the refrigerator.
Our scenario analysis also exposed a strong probability of the project giving a negative NetPresentValue and giving a probable low Internal Rate of Return of only 4.01%. This is mainly due to the projects sensitivity to the sales price of...

3279 Words |
17 Pages

Share this Document

{"hostname":"studymode.com","essaysImgCdnUrl":"\/\/images-study.netdna-ssl.com\/pi\/","useDefaultThumbs":true,"defaultThumbImgs":["\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_1.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_2.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_3.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_4.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_5.png"],"thumb_default_size":"160x220","thumb_ac_size":"80x110","isPayOrJoin":false,"essayUpload":false,"site_id":1,"autoComplete":false,"isPremiumCountry":false,"userCountryCode":"DE","logPixelPath":"\/\/www.smhpix.com\/pixel.gif","tracking_url":"\/\/www.smhpix.com\/pixel.gif","cookies":{"unlimitedBanner":"off"},"essay":{"essayId":35198299,"categoryName":"Organizations","categoryParentId":"3","currentPage":1,"format":"text","pageMeta":{"text":{"startPage":1,"endPage":4,"pageRange":"1-4","totalPages":4}},"access":"premium","title":"Investments: Net Present Value and Investment","additionalIds":[17,7,93,5],"additional":["Literature","Education","Education\/Greek System","Computer Science"],"loadedPages":{"html":[],"text":[1,2,3,4]}},"user":null,"canonicalUrl":"http:\/\/www.studymode.com\/essays\/Investments-Net-Present-Value-And-Investment-811039.html","pagesPerLoad":50,"userType":"member_guest","ct":10,"ndocs":"1,500,000","pdocs":"6,000","cc":"10_PERCENT_1MO_AND_6MO","signUpUrl":"https:\/\/www.studymode.com\/signup\/","joinUrl":"https:\/\/www.studymode.com\/join","payPlanUrl":"\/checkout\/pay","upgradeUrl":"\/checkout\/upgrade","freeTrialUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fcheckout%2Fpay%2Ffree-trial\u0026bypassPaymentPage=1","showModal":"get-access","showModalUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fjoin","joinFreeUrl":"\/essays\/?newuser=1","siteId":1,"facebook":{"clientId":"306058689489023","version":"v2.8","language":"en_US"},"analytics":{"googleId":"UA-32718321-1"}}