Investment Selection Methods: Static and Dynamic
Static Methods to Select Investments
The easiest way to compare investments is to use static methods (that don’t depend on the time of the cash flows). These are approximations but they are very easy to calculate, so we will use them to make a first evaluation.
Methods:
- Payback
Used to find out when our investment will be recovered. The sooner, the better. To calculate the period, we will check the cash flows. When our investment is covered by those cash flows, we will consider the investment has been
Read MoreCorporate Finance: Key Concepts and Valuation Methods
Lecture 1
Fisher Separation Theorem
The optimal investment decisions of a firm are unrelated to the consumption desires of its shareholders. The capital market serves to separate the two decisions. Thus, a firm can best act in its shareholders’ interest by investing in projects with the highest Net Present Value (NPV).
Annuity
Capital Budgeting Rule
Take all projects with a positive NPV. Between mutually exclusive projects, pick the project with the highest NPV.
Principles of Valuation
- Value additivity
- No
Corporate Finance: Budgeting, Debt, Equity, and Leverage
T.2: Capital Budgeting
- Value of the project: €150,000
- To calculate the years horizontally, input the revenues (45) and then calculate 45 + (45 * 0.1)
- Depreciated value of investment = Cost of investment – Book Value
- (-) Depreciation = DVI / Salvage Value or Value of the project * % Depreciation
- EBIT = +Sales (Price per unit * number of units) – Cost of goods sold (variable cost * number of units) – Operating expenses – Depreciation
- (-) Taxes = EBIT * (% tax)
- (+) Depreciation
- (-) Change in receivables
Spectrometer Purchase Analysis: Investment & Cash Flow
Spectrometer Purchase Analysis
Let’s analyze the proposed purchase of a spectrometer for the R&D department. The base price is $140,000, with an additional $30,000 for modifications. The equipment falls into the MACRS 3-year class and will be sold after 3 years for $60,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment requires an $8,000 increase in net operating working capital (spare parts inventory). The project will save the firm $50,000 per year in before-tax
Read MoreMong Kok Ltd Financials: Translated Accounts Analysis
Mong Kok Ltd: Translated Accounts as at 30 June 2018
| HK$ | Exchange Rate | A$ | |
|---|---|---|---|
| Sales | 595,000 | 0.85 | 505,750 |
| Cost of Sales | 400,000 | 0.85 | 340,000 |
| 195,000 | 165,750 | ||
| Expenses | 100,000 | 0.85 | 85,000 |
| 95,000 | 80,750 | ||
| Tax Expense | 20,000 | 0.85 | 17,000 |
| Profit for the Period | 75,000 | 63,750 | |
| Retained Earnings (1/7/17) | 450,000 | 366,000 | |
| 525,000 | 429,750 | ||
| Dividend Paid | 25,000 | 0.80 | 20,000 |
| Retained Earnings (30/6/18) | 500,000 | 409,750 | |
| Share Capital | 200,000 | 0.80 | 160,000 |
| General Reserve | 100,000 | 0.80 | 80,000 |
| FCTR | (25,750) | ||
| 800,000 | 624,000 | ||
| Current Assets | 250,000 | 0.78 | 195,000 |
| Property, Plant & |
Stock Market Anomalies: Value, Size, and Momentum
Cross-Section Predictability of Stock Returns
Ideally, all securities should have equal expected risk-adjusted returns, eliminating any alpha (α). However, empirical studies have identified several cross-sectional anomalies, including the value premium, size effect, and momentum. These anomalies result in the formation of groups of stocks with different average returns.
Predictability of returns?
- Yes: Behavioral finance-based explanations.
- No: The asset-pricing model used is misspecified.
Investment
Read More