Investment Appraisal and Capital Budgeting (1)

- looks at different investment choices available for the company

- evaluating the investment following the SAF model
- S is Suitability - whether the investment outcome / result will alter the direction of the company
- A is Acceptability = whether the outcome is acceptable to the company
- F is Feasibility = whether the company has enough capital to invest in that investment
- normally A and F can be measure but S is more to Qualitative characteristics of an Investment
- under the S criteria, a F&B (food and beverage) company investing in construction of residential property (houses) m
- Strategic Fit = matching the internal Strengths and Resources to the Opportunities in the Environment
- under the A criteria, it is not logical to accept an Investment that does not even cover costs
- under the F criteria, if available free cash flow is RM5 million, an investment costing > RM5 million is not acceptab

Payback Period Method

- looking at which investment has the fastest capital recovery period
- Capital Recovery Period = the time total Initial Capital Invested is recovered
- the shortest Payback Period will be chosen
- ignores any activity after the Payback Period
- ignores Time Value of Money*

ntial property (houses) may not be a Strategic Fit
Net Present Value (NPV)
- calculates the full profitability of an Investment
- includes Time Value of Money*
- uses a Discount Factor
- Discount Factor represents Required Return of Funds Provided
- absolute method

million is not acceptable

*Time Value of Money = The theory stating that money depreciates over time.
nds Provided
Illustration: Payback Period
An Investment GF requires Initial Capital of RM500,000 and has annual returns of
RM80,000 for 8 years. Calculate the Payback Period for GF.

Payback Period *Cash In - Cash Out

Year Cash In (RM) Cash Out (RM) Net Cash (RM) Balance (RM)

Illustration: Payback Period

An Investment GF requires Initial Capital of RM700,000 and has annual returns of
RM120,000 for 7 years. Calculate the Payback Period for GF.

Payback Period *Cash In - Cash Out

Year Cash In (RM) Cash Out (RM) Net Cash (RM) Balance (RM)

Illustration: Payback Period

An Investment BF requires Initial Capital of RM850,000 and has annual returns of
RM195,000 for 8 years with an annual servicing costs of RM35,000 paid annually. Calculate the Payback Period for

Payback Period *Cash In - Cash Out

Year Cash In (RM) Cash Out (RM) Net Cash (RM) Balance (RM)
ate the Payback Period for BF.
Tutorial 1: Payback Period
An Investment 1F requires Initial Capital of RM900,000 and has annual returns of
RM145,000 for 7 years. Calculate the Payback Period for 1F.

Payback Period
(Cash Inflow - Cash Outflow)
Year Cash Inflow Cash Outflow Net Cash Flow Balance
(RM) (RM) (RM) (RM)

Tutorial 2: Payback Period

An Investment 2F requires RM800,000 to start. The investment reaps annual income of
RM125,000 for 8 years while a servicing cost of RM20,000 is payable annually. Calculate the Payback
Period for 2F

Payback Period
(Cash Inflow - Cash Outflow)
Year Cash Inflow Cash Outflow Net Cash Flow Balance
(RM) (RM) (RM) (RM)

Tutorial 3: Payback Period

An Investment 3F requires RM1,200,000 to start. The investment reaps annual income of
RM220,000 for 7 years while a servicing cost of RM30,000 is payable annually. There is a special
maintenance cost of RM40,000 payable every 3 years. Calculate the Payback Period for 3F.

Payback Period
 (Cash Inflow - Cash Outflow)
Year Cash Inflow Cash Outflow Net Cash Flow Balance
(RM) (RM) (RM) (RM)
he Payback
Illustration: Net Present Value
An Investment GF requires Initial Capital of RM500,000 and has annual returns of
RM80,000 for 8 years. Calculate the NPV of the Investment at 10% Discount Factor.

Net Present Value

(Cash Inflow - Cash Outflow)
Year Cash Inflow Cash Outflow Net Cash Flow Discount Factor

NPV =

The company should not undertake this Investment as there is no capability of covering the returns required by the in

Illustration: Net Present Value

An Investment PF requires Initial Capital of RM1,050,000 and has annual returns of
RM235,000 for 9 years. There is a cost payable every 2 years of RM25,000. Calculate the NPV of the Investment at 9

(Cash Inflow - Cash Outflow)

Year Cash Inflow Cash Outflow Net Cash Flow Discount Factor
(RM) (RM) (RM)

NPV =
 DF = 1/(1+r)^n
(Net CF X DF)
Present Value (PV) r = Discount %
n = Number of Years

covering the returns required by the investors.

culate the NPV of the Investment at 9% Discount Factor.

(Net CF X DF)
Present Value (PV)
(RM)

-
Tutorial 1: Net Present Value
An Investment 1F requires Initial Capital of RM970,000 and has annual returns of
RM96,000 for 7 years. Calculate the NPV for 1F at Discount Factor 12%.
(Cash Inflow - Cash Outflow)
Year Cash Inflow Cash Outflow Net Cash Flow Discount Factor
(RM) (RM) (RM) 12%

NPV =

Tutorial 2: Net Present Value

An Investment 2F requires RM698,000 to start. The investment reaps annual income of
RM196,000 for 8 years while a servicing cost of RM25,000 is payable annually. Calculate the NPV
for 2F at 9% Discount Factor.

(Cash Inflow - Cash Outflow)

Year Cash Inflow Net Cash Flow Discount Factor
(RM) (RM) (RM) 9%

NPV =

Tutorial 3: Net Present Value

An Investment 3F requires RM1,750,000 to start. The investment reaps annual income of
RM350,000 for 8 years while a servicing cost of RM45,000 is payable annually. There is a special
maintenance cost of RM35,000 payable every 3 years. Calculate the NPV for 3F at 10% Discount Factor.

Year Cash Inflow Net Cash Flow Discount Factor

(RM) (RM) (RM) 10%
0 - 1,750,000 (1,750,000) 1.000
1 350,000 45,000 305,000 0.909
2 350,000 45,000 305,000 0.826
3 350,000 80,000 270,000 0.751
4 350,000 45,000 305,000 0.683
5 350,000 45,000 305,000 0.621
6 350,000 80,000 270,000 0.564
7 350,000 45,000 305,000 0.513
8 350,000 45,000 305,000 0.467
NPV =
 (Net CF X DF)
Present Value (PV)
(RM)

lly. Calculate the NPV

(Net CF X DF)
Present Value (PV)
(RM)

al income of
lly. There is a special
3F at 10% Discount Factor.

Present Value (PV)

(RM)
(1,750,000)
 277,273
252,066
202,855
208,319
189,381
152,408
156,513
142,285
(168,900)