INVESTMENT DECISIONS

Prepared by: Mohammed Kamdar, Azmatallah Latief & Rashied Small

2 Investment Decision

Capital investment

Return on investment

INVESTMENT DECISIONS
3
Investment Decision-making Process

INVESTMENT DECISIONS
4 Risk & Returns – Decision-making

Risk measures the potential Return on investment measures

deviation of the return from the the profit/loss realised in the
expected return investment

INVESTMENT DECISIONS
5 Risk & Returns – Decision-making

Investment decision-making
involves an act of balancing
the risks and return of a
project

Investment decision must

always ensure that the
expected return exceeds the
related risk – maximisation of
return on investment

INVESTMENT DECISIONS
6 Group Activity 1

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7 Investment Decision-making Techniques

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8 Accounting Rate of Return - ARR

Accounting Rate of Return

Measures the profitability of
the investment – average
annual profit return

Accounting Rate of Return

Average annual profit
Net investment

INVESTMENT DECISIONS
9 Group Activity 2

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10 Group Activity 3

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11 Payback Period

Payback Period
Measures the time it takes to
recover the cash investment in
the project

INVESTMENT DECISIONS
12 Payback Period

Payback Period
Advantages:
• Easy to understand
• Adjust for uncertainty
Disadvantages:
• Ignores the time value of cash
• Ignores cash flows beyond
payback period
• Biased against long-term
projects
• Biased towards front-loaded
cash flows

INVESTMENT DECISIONS
13 Group Activity 4

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14 Group Activity 5

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15 Net Present Value

Net present Value

Measures the discounted cash
flows for the project

Decision-making
• NPV = 0 – the project break-
even at the expected return
• NPV > 0 – project yields a return
higher then expected return
• NPV < 0 – project yield negative
return and will incur losses

INVESTMENT DECISIONS
16 Group Activity 6

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17 Net Present Value

Unequal useful lives

• NPV is affected by the time
value of cash
• Unequal lives is evaluated
based on the annualised
equivalent

Net present value

Annuity discount factor

INVESTMENT DECISIONS
18 Group Activity 7

INVESTMENT DECISIONS