Investment Appraisal Tools

Investment Appraisal Tools

Investment is a very crucial parts in a business if they are to survive in the long-term. Investment decisions are not a simple matter of looking at an investment and saying 'Yes that looks profitable' and going ahead. Most businesses will have a choice of a range of investment projects and they need to have a basis for comparing them to evaluate which is the best.

Before making any decision in deciding any investment, the managers should estimate the investment project using investment appraisal tools. There are numbers of investment tools that the company might use in order to assess the potential risk, return, opportunity cost, payback time (period) of each investment, with the aim of better understanding about their investment. Tools that being use as the investment appraisal tools are; 

Payback period
This is the first and one of the simplest appraisal techniques. You simply need to look at the financial returns that the project is expected to generate over all the years of its life and compare these to how much it cost. You then look at how long the investment takes to payback its original cost. The faster the payback, the better.
Average rate of return
This method also looks at the returns (the net cash flows) over the years of the investment. It then works out how much the average return is over the lifetime of the project, divided by the original cost to get a percentage return. The higher the return, the better.
Discounted cash flow
This is the most sophisticated and complex of the methods as it takes into account the time value of money. In other words, it takes account of the fact that a return in several years is worth a lot less than having the same return in your hand now. Therefore future returns need to be discounted to see what they would be worth now. Once this has been done, then it is easier to evaluate what the investment may be worth.
Net Present Value
NPV is difference between the present value of the future cash flow from the investment and the amount of investment. Present value of expected cash flows is computed by discounting them at the required rate return. In addition, a positive NPV means a better return, and a negative NPV means a worse return, than the return from zero NPV.


The Merger between Vodafone and Mannessman is expected to deliver post-tax cashflow savings of approximately GBP 200m per annum ($330m) by the year ending 31 March 2002, resulting in a net present value of approximately GBP 2.1 billion ($3.5 billion), together with significant additional cashflow benefits from revenue enhancements and new products. Moreover, the Merger provides an outstanding platform for rapid growth and expansion, accelerating customer growth through acquisitions, new licenses and leadership in next generation mobile technology. such conclusion are assessed based on consumer appraisal tools. It is believed to say that a good investment managers should count and estimate the company's return on investment using the investment appraisal tools.

Notes: sorry for re-posting due to some font problems that automatically change when I post this Blog. Thank you

Investment Appraisal Tools

Investment is a very crucial parts in a business if they are to survive in the long-term. Investment decisions are not a simple matter of looking at an investment and saying 'Yes that looks profitable' and going ahead. Most businesses will have a choice of a range of investment projects and they need to have a basis for comparing them to evaluate which is the best.

Before making any decision in deciding any investment, the managers should estimate the investment project using investment appraisal tools. There are numbers of investment tools that the company might use in order to assess the potential risk, return, opportunity cost, payback time (period) of each investment, with the aim of better understanding about their investment. Tools that being use as the investment appraisal tools are; 

Payback period
This is the first and one of the simplest appraisal techniques. You simply need to look at the financial returns that the project is expected to generate over all the years of its life and compare these to how much it cost. You then look at how long the investment takes to payback its original cost. The faster the payback, the better.

Average rate of return
This method also looks at the returns (the net cash flows) over the years of the investment. It then works out how much the average return is over the lifetime of the project, divided by the original cost to get a percentage return. The higher the return, the better.

Discounted cash flow
This is the most sophisticated and complex of the methods as it takes into account the time value of money. In other words, it takes account of the fact that a return in several years is worth a lot less than having the same return in your hand now. Therefore future returns need to be discounted to see what they would be worth now. Once this has been done, then it is easier to evaluate what the investment may be worth.

Net Present Value
NPV is difference between the present value of the future cash flow from the investment and the amount of investment. Present value of expected cash flows is computed by discounting them at the required rate return. In addition, a positive NPV means a better return, and a negative NPV means a worse return, than the return from zero NPV.


The Merger between Vodafone and Mannessman is expected to deliver post-tax cashflow savings of approximately GBP 200m per annum ($330m) by the year ending 31 March 2002, resulting in a net present value of approximately GBP 2.1 billion ($3.5 billion), together with significant additional cashflow benefits from revenue enhancements and new products. Moreover, the Merger provides an outstanding platform for rapid growth and expansion, accelerating customer growth through acquisitions, new licenses and leadership in next generation mobile technology. such conclusion are assessed based on consumer appraisal tools. It is believed to say that a good investment managers should count and estimate the company's return on investment using the investment appraisal tools. 

Impact of Credit Crunch on Asian Countries

The impacts of the credit crunch (which was originated from the US) hit emerging Asian countries the most (Emerging Asia: China, India, Korea, Hong Kong, Malaysia, Indonesia, Vietnam, Thailand and Philippines) rather than other Asian countries. The reason was that emerging Asian countries have a more open market and economical relations with the US (Hong et al, 2009). However, the impacts have been limited up to now as Asian countries only have very little exposure to what is called toxic assets: subprime mortgages and other related products (James et al, 2008). The reason that Asian countries had little exposure to the toxic assets came from the great Asian crisis in 1997/98. Asian countries have to move backward in terms of economic development during the 1997/98 crisis which has also become a big advantage for them. As the result of moving backwards, Asian countries were reluctant to enter the market of complex and sophisticated financial products (which was known later as ‘toxic assets’). 

Asian countries have undergone a massive reformation and restructuring from the crisis happened about a decade ago. Therefore, the level of economic sustainability has improved significantly since then. Moreover, the shape of Asian banks has also improved significantly throughout the years (James et al, 2008). Adams (2008) stated that the main improvements that Asian banks have are consolidation and rationalization, much better transparency and disclosure, enhanced of foreign ownership and high decrease in government’s ownership. As the result of the crisis, Asian banks have also enhanced its level of supervision and structured regulations regarding risks. Thus, they were well-prepared to face risks and managed to prevent subprime products. 

The crisis did have an impact on Asian market. It came through several channels such as banks and short-term credit markets. 

Until May 2008, the total of world largest banks and securities’ write-down and credit losses was US$379 billion. From his amount, only $19.5 billion came from Asia. Despite the low impact from direct exposure, the indirect exposure has much greater impact on Asian banks. It was due to the exposure to the US and European financial institutions that possessed a lot of toxic assets. Those financial institutions include AIG, Bear Stearns, Fortis, Lehman Brothers and UBS which were huge institutions with a very wide international networking and business deals in Asia (James et al, 2008).

Lehman Brothers was probably the most affected financial institution by the US subprime mortgage. As one of the largest US investment banks, the company could not sustain the consequences that came up through the vast investments in toxic assets. Therefore, it declared bankruptcy on 15 September 2008.

Impacts of Lehman’s bankruptcy on Asian banks have not been significant. Asian countries which were affected the most economically were China, Taiwan (Taipei) and Korea. Below is the table of list of banks which affected the most by Lehman Brothers in emerging Asia.

Bank	Economy	Exposure (million US$)
Citibank (Hong Kong, China branch)	Hong Kong, China	275
Mega Financial	Taipei, China	200
Industrial and Commercial Bank of China	China	152
Banco de Oro	Philippines	134
Bank of China	China	129
Bangkok Bank	Thailand	101
Bank of Nova Scotia (Singapore branch)	Singapore	93
Development Bank of the Philippines	Philippines	90
Shin Kong Fin	Taipei, China	80
Metropolitan Bank and Trust Company	Philippines	71

Source: Reuters (2008)

Commercial banks still are the biggest influence on the Asian financial systems. Therefore, the regulators put extensive supervision and evaluation to the banking systems. It was proven that the Asian banking systems were solid during the US credit crisis in 2007. About 75% of clothing production from Asian manufacturers was exported to the US. 

Reference:

Adams, C. (2006) Global Current Account Imbalances. Lee Kuan Yew School of Public Policy, National University of Singapore.

James, W. E., Park, D., Jha, S., Jongwanich, J., Terada-Hagiwara, A. & Sumulong, L. (2008) 'The US Financial Crisis, Global Financial Turmoil, and Developing Asia: Is the Era of High Growth at an End?', ADB Economics Working Paper Series, 139.Kiseok, H., Lee, J. & Tang, H. C. (2009) 'Crises in Asia: Historical perspectives and implications', Journal of Asian Economics.

Kiseok, H., Lee, J. & Tang, H. C. (2009) 'Crises in Asia: Historical perspectives and implications', Journal of Asian Economics.

Merger between HP and Compaq

Mostly most of the company are aiming to maximise the profit of their shareholders, especially in doing so the company should decrease their competitors or hence they can do some acquisition and merger between two big company. HP and Compaq are deciding to merge both of their company having an aim to be the number 1 worldwide position In Servers, PCs and Hand-helds, and Imaging and Printing; Leading Positions In IT Services, Storage, Management Software. These two company are doing the highest deal in computer industry for $24 millions and affected to 160 country and over 140,000 employees all over the world.

While the facts is the both of the company are lossing their share price 21.5% for Hp and 15.7% for compaq in their second day of merger. In addition, in the second week the Hp stock are decreasing againt for over 17% that really make all the business anlyst are wondering about the lost of these merger. Thinking about the goal of these both company in doing their merger such as Hp; by having an economic scale with Compaq that consider as very low in PC indsutry are really a mistake. Both of their competitors are really having an advantage of these merger, for instance Lexmark that rose their share price for over 60% and Dell's the leading PC company are rose for 90%.

These loss are really shrink these two company, from having a very succesful company that having huge market share in Printing and computer industry into loosing almost all of their market share. According to IBS business center research, declining of Hp are mainly because an over-optimism that the company has. without any enough strategy and knowladge in the industry it leads to a failure in the intergration of managment. Despite that there are some differences in target management attitudes and cultured differences that form a non-focused in interal company. The Directors of Hp at that time also can be consider as having a high managerial motivates such a having a high status and emperial building. Most of the study are suggested that it is very hard to succed in having an acquisition and mergers both in shor-term objectives or long-term objectives.  

Nike in Indonesia

FDI is a very useful technique in order to minimize the cost of the products and also increase the company territory internationally. There are some advantages in using this FDI which are increase of the employments effects in side the country and also  minimize the cost of the company that leads into maximize in the profit of the company. 


Nike as one of the biggest international company they are start to move their factory and start to use an FDI as their strategy to minimize their cost.  In order to improve their profit the company are moving their factory to the low cost labour country such as indonesia, thailand china and etc.


Since 2005 Nike has open their factory in China (124), Thailand (73), United States (49), and in Indonesia (39). Most of their products that they sold in UK are coming from third world. In indonesia they are start to improve their production and also the quality of the products. There are some potential benefits that the company get such as capital, technology, and management skills and know how to manage the company in a better way, in addition International company such as Nike are making a employment effects to the Indonesian, for example in opening the factory in indonesia it means that they are using a lot local workers that will effect the Indonesian economics in a better way.


There are one question that might be rising trough this issues, are there any long term benefits that the country might gets such as employment training that Bostawana gets or the Indonesia might gets any potential costs such as impact to the government decision, environmental damage and human rights??