diploma in management & leadership level 5 week1 lesson 1 resource management by anjum sattar...
TRANSCRIPT
Diploma in Management & Leadership Level 5
Week1 Lesson 1 Resource Management
By Anjum Sattar
Email [email protected]
Apr
20,
202
3
Water Only
1
Aims and Objectives.
Aim (s) Introduction to investment appraisalTypes of investment appraisal
Objective(s )Learner will be able to…. Define investment appraisal Differentiate between investment appraisal methodsDescribe time/ value of money
Apr
20,
202
3
2
Background Knowledge• What do we know about investment appraisal
Apr
20,
202
3
3
Investment appraisal Investment appraisal is a business concept which compares
expected future income to be derived from an investment with the expenditure of incurring the investment. In non-profit making organizations where investments are not made with the objective of earning a return, the concept may not always be directly applicable. In such organizations, investment appraisal techniques may be used to compare alternative proposals in order to provide the best value for the money spent Bodie Zvi and Merton Robert (1998).
Investment appraisal is used to look at a potential capital investment by a firm and measure it’s potential value to the firm. There is more than one method of Investment Appraisal, and each different method allows the potential return on the investment to be examined in a different way Atrill Peter (2006).
.
Apr
20,
202
3
4
Investment appraisal methodsPayback PeriodDiscounted paybackNet present value Internal rate of returnSensitivity analysisBreak-even analysisAccounting rate of return
Apr
20,
202
3
5
Time value of money• What a difference between £1 now and £1 in a
year’s time? • Factors change the value of money
• Interest cost• Inflation• Other risks to materialise the money
• For example: the annual interest rate is 10%, I lend you £1 now and will get back after 1 year, how much worth of that £1 in a year’s time?• ? x (1+10%) = £1• ? = £0.91
• 10% is called “cost of capital”; “?” is called the “discount factor”
Apr
20,
202
3
6
Payback period
The payback period is the amount of time taken for the net cash flow resulting from an investment to match (=), the initial cost of the investment (F9 Kaplan book ACCA.
Formula Payback period = Initial investment/Annual cash flow
This formula is only applicable if equal cash flows
Apr
20,
202
3
7
Advantages /Disadvantages of Payback method
Advantages Simple to use.Assists with cash flowEffective when technology is fastChangingDisadvantages of Payback methodIgnores flows of cash over the lifetime ofthe project. Ignores total profitability.
Apr
20,
202
3
8
Payback Example - 1
Apr
20,
202
3
9
Payback Example - 1
Apr
20,
202
3
10
Payback period
•Look on cumulative cash flow in end of year 3 ( 400) left to meet initial investment and year four our cash flow is 500 so our payback period should be three years and some months. • 400/500 =0.8 years so 0.8x12 = 10 . Now payback 3 year and 10 months.
Apr
20,
202
3
Year Cash Flow Cumulative Cash flow
o (3100) (3100)
1 1000 (2100)
2 900 (1200)
3 800 (400)
4 500 100
5 500 600
11
Discounted Cash Flow/NPV• .DCS techniques are used in calculating the net present value of a series of
cash flows. This measures the change in shareholder wealth now as a result of accepting a project. NPV = present value of cash inflows less present value of cash outflows .. If the NPV is positive, it means that the cash inflows from a project will yield a return in excess of the cost of capital, and so the project should be undertaken if the cost of capital is the organisation's target rate of return. .. If the NPV is negative, it means that the cash inflows from a project will yield a return below the cost of capital, and so the project should not be undertaken if the cost of capital is the organisation's target rate of return. .. If the NPV is exactly zero, the cash inflows from a project will yield a return which is exactly the same as the cost of capital, and so if the cost of capital is the organisation's target rate of return, the project will have a neutral impact on shareholder wealth and therefore would not be worth undertaking because of the inherent risks in any project.
Apr
20,
202
3
12
NPV Pros(advantages) /Cons( disadvantages)
Pros Direct link to shareholder wealth, consider time
value of money, uses all cash flows, absolute measure return.
Cons Difficult to explain, require a cost of capital, rather
complex.
Apr
20,
202
3
13
DF 10%Example of NPV
Apr
20,
202
3
14
Net Present value
13-15
Year Cash Flow DF8% PV
0 (120000) 1 (120000)
1 50000 0.926 46300
2 60000 0.857 51420
3 80000 0.794 63520
4 40000 0.735 29400
NPV 70640
Apr
20,
202
3
15
Activity • Calculate Payback period / Net Present value ( using cheat
sheet)
Year Cash flow
0 (1900)
1 300
2 500
3 600
4 800
5 500
Apr
20,
202
3
16
Payback/ Net Prevent value Application
• Payback and NPV method both useful to make any investment decision , either going to buy new machine, new building etc.
• All big organization using project appraisal to measure cost/benefits
• Helpful to measure which project is more valuable compare to other projects
Apr
20,
202
3
17
Useful resource to enhance understanding in project appraisal
www.opentuition.comwww.accaglobal.comCMI Unit 5004 bookYoutube.com Wikispaces.com / bradrc www.cima.comACCA F9 book of Kaplan , BPP
Apr
20,
202
3
18
Bibliography • Bodie Zvi and Merton Robert (1998) Finance first edition
pp62-65 Published by Prentice-Hall Inc New Jersey.• Atrill Peter (2006) Financial Management for decision Makers
4th edition pp60-68 Published by Pearson Education England• ACCA F9 Kaplan press
Apr
20,
202
3
19
Apr
20,
202
3
• Assignment discussion
Summary . Q & A
20
Apr
20,
202
3
Next Session.
In Next Session we are going to Learn ……
•Internal rate of return•Sensitive analysis
Tuesday 07/08/2012 01:30 – 4:30 21