AGEC 407

Investment Analysis

• Time value of money– $1 received today is worth more than $1

received in the future

Why?– Earning potential– Risk– Inflation

AGEC 407

Investment Analysis

• Future value– value of an investment at some future date– investment earns interest during each time

period– compounding: when interest in re-invested

AGEC 407

Investment Analysis

• Present value – value today of a sum of money to be

received at some future date– $1 dollar in the future is worth less than $1

today– future values are discounted to the present

time period

AGEC 407

Investment Analysis

• To determine the profitability of an investment, need to know:

– initial cost– net cash revenues– terminal value– discount rate

AGEC 407

Investment Analysis

• Analyzing investments– payback period– simple rate of return– net present value– internal rate of return

AGEC 407

Investment Analysis

• Financial feasibility of investment– impact on cash flow– separate decisions

• to accept an investment• how to finance the investment

AGEC 407

Investment Analysis

• Additional factors– taxes– inflation– risk

AGEC 407

Investment Analysis

• Steps for NPV investment analysis:1. estimate initial cost2. calculate discount rate3. estimate cash revenues and expenses over

life of investment4. calculate net cash revenues, depreciation,

and taxes5. calculate after-tax net cash revenue, capital

gains, and after-tax terminal value

AGEC 407

Investment Analysis

• Steps for NPV investment analysis:6. calculate present values of after-tax net cash

revenues and terminal value

7. sum present values

8. subtract initial cost

9. gives you NPV for investment