Investment Appraisal (eBook)

Preface 6
Guided Tour of the Book 8
Contents 10
List of Figures 14
Part I: Introduction 17
1: Capital Budgeting and Investment Decisions 18
1.1 Characteristics and Classification of Investment Projects 18
Key Concept 18
Key Concept 21
1.2 Investment Planning and Investment Decisions 21
1.2.1 Investment Planning as Part of the Management Process 21
1.2.2 Investment Planning as Part of the Capital Investment Decision-Making Process 23
1.2.3 Strategic Analysis Tools Supporting the Capital Investment Decision-Making Process 34
1.3 Investment Appraisal Methods as Tools for Investment Planning 38
Key Decisions 38
Further Reading - Part I 40
Part II: Basic Methods of Investment Appraisal 42
2: Static Methods 43
Key Concept 43
2.1 Cost Comparison Method 45
Key Concept 45
2.2 Profit Comparison Method 51
Key Concept 51
2.3 Average Rate of Return Method 53
Key Concept 53
2.4 Static Payback Period Method 56
Key Concept 56
Key Concept 56
Assessment Material 58
Exercise 2.1 (Cost Comparison Method) 58
Exercise 2.2 (Cost Comparison Method) 59
Exercise 2.3 (Profit Comparison, Average Rate of Return and Payback Method) 60
3: Discounted Cash Flow Methods 61
3.1 Introduction 61
3.2 Net Present Value Method 64
Key Concept 64
Key Concept 65
3.3 Annuity Method 75
Key Concept 75
Key Concept 75
3.4 Internal Rate of Return Method 77
Key Concept 77
Key Concept 78
Key Concept 83
3.5 Dynamic Payback Period Method 85
Key Concept 85
Key Concept 85
3.6 Data Collection 87
Assessment Material 93
Exercise 3.1 (Net Present Value Method and Annuity Method) 93
Exercise 3.2 (Net Present Value Method and Internal Rate of Return Method) 93
Exercise 3.3 (Dynamic Investment Appraisal Methods) 94
Further Reading - Part II 95
Part III: Advanced Methods and Applications of Investment Appraisal 98
4: Compounded Cash Flow Methods 99
4.1 Compound Value Method 99
Key Concept 99
Key Concept 100
4.2 Critical Debt Interest Rate Method 104
Key Concept 104
Key Concept 104
4.3 Visualisation of Financial Implications (VoFI) Method 106
Key Concept 107
Key Concept 107
Assessment Material 114
Exercise 4.1 (Compound Value Method, Critical Debt Interest Rate Method and VoFI Method) 114
Exercise 4.2 (Dynamic Investment Appraisal Methods) 115
5: Selected Further Applications of Investment Appraisal Methods 117
5.1 Income Taxes and Investment Decisions 117
5.1.1 Taxes and the Net Present Value Method 117
5.1.2 Taxes and the Visualisation of Financial Implications (VoFI) Method 122
5.2 The Assessment of Foreign Direct Investments 124
5.2.1 Special Characteristics of Foreign Direct Investments 124
5.2.2 Net Present Value Model and the Assessment of Foreign Direct Investments 127
5.2.3 The Visualisation of Financial Implications (VoFI) Method and the Assessment of Foreign Investments 133
5.3 Models for Economic Life and Replacement Time Decisions 137
5.3.1 Overview 137
5.3.2 Optimum Economic Life Without Subsequent Projects 139
Key Concept 139
Key Concept 140
5.3.3 Optimum Economic Life with a Limited Number of Identical Subsequent Projects 142
Key Concept 143
Key Concept 144
5.3.4 Optimum Economic Life with an Unlimited Number of Identical Subsequent Projects 145
Key Concept 146
Key Concept 146
Key Concept 147
5.3.5 Optimum Replacement Time with an Unlimited Number of Identical Subsequent Projects 149
Key Concept 149
Key Concept 150
5.3.6 Optimum Replacement Time with a Limited Number of Non-identical Subsequent Projects 152
Key Concept 153
5.4 Models to Determine Optimum Investment Timing 155
Assessment Material 164
Exercise 5.1 (Taxes in the Investment Appraisal) 164
Exercise 5.2 (Economic Life) 165
Exercise 5.3 (Economic Life) 165
Exercise 5.4 (Economic Life and Replacement Time) 166
Exercise 5.5 (Determining Economic Life) 168
Exercise 5.6 (Determining Economic Life with the Net Present Value, Internal Rate of Return and Compound Value Method) 168
Exercise 5.7 (Profitability Assessment and Investment Timing Decisions) 169
Further Reading - Part III 170
Part IV: Multi-Criteria Methods and Simultaneous Decision-Making 172
6: Multi-criteria Methods 173
6.1 Introduction 173
6.2 Utility Value Analysis 177
Key Concept 178
6.3 Analytic Hierarchy Process 181
Key Concept 187
6.4 Multi-attribute Utility Theory 194
Key Concept 199
6.5 PROMETHEE 203
Assessment Material 214
Exercise 6.1 (Utility Value Analysis) 214
Exercise 6.2 (Analytical Hierarchy Process) 216
Exercise 6.3 (Multi-attribute Utility Theory) 217
Exercise 6.4 (PROMETHEE) 218
7: Simultaneous Decision-Making Models 219
7.1 Static Model for Simultaneous Investment and Financing Decisions (Dean Model) 219
7.2 Multi-tier Model of Simultaneous Investment and Financing Decisions (Hax and Weingartner Model) 226
Key Concept 231
7.3 Multi-tier Model of Simultaneous Investment and Production Decisions (Extended Förstner and Henn Model) 236
Assessment Material 244
Exercise 7.1 (Dean Model for Simultaneous Financing and Investment Decisions) 244
Exercise 7.2 (Multi-tier Model for Simultaneous Financing and Investment Decisions) 245
Exercise 7.3 (Multi-tier Model for Simultaneous Financing and Investment Decisions) 245
Exercise 7.4 (Static and Multi-tier Models for Simultaneous Financing and Investment Decisions) 246
Exercise 7.5 (Extended Förstner and Henn Model) 248
Exercise 7.6 (Extended Förstner and Henn Model) 249
Further Reading - Part IV 250
Part V: Methods and Models that Incorporate Uncertainty 254
8: Methods and Models for Appraising Investment Projects Under Uncertainty 255
8.1 Decision Theory 256
8.2 Risk-Adjusted Analysis 261
8.3 Sensitivity Analysis 267
8.4 Risk Analysis 273
Key Concept 276
Key Concept 276
8.5 Decision-Tree Method 278
Key Concept 279
8.6 Options Pricing Models 288
Assessment Material 298
Exercise 8.1 (Sensitivity Analysis) 298
Exercise 8.2 (Sensitivity Analysis) 299
Exercise 8.3 (Sensitivity Analysis) 300
Exercise 8.4 (Decision-Tree Method) 301
Exercise 8.5 (Decision-Tree Method) 301
Exercise 8.6 (Decision-Tree Method) 302
Exercise 8.7 (Economic Life and Replacement Time Decisions Using the Decision-Tree Method) 303
Exercise 8.8 (Decision-Tree Method) 304
Exercise 8.9 (Decision-Tree Method) 305
9: Analysing Investment Programmes Under Uncertainty 307
9.1 Overview 307
9.2 Portfolio Selection 310
9.3 Flexible Planning 318
Further Reading - Part V 326
Solutions 330
2.1 330
2.2 330
2.3 330
3.1 331
3.2 331
3.3 331
4.1 331
4.2 334
5.1 336
5.2 337
5.3 338
5.4 338
5.5 338
5.6 338
5.7 340
6.1 340
6.2 340
6.3 341
6.4 341
7.1 342
7.2 343
7.3 343
7.4 344
7.5 345
7.6 346
8.1 347
8.2 347
8.3 348
8.4 348
8.5 350
8.6 352
8.7 354
8.8 357
8.9 359
References 361
Index 368