Investment Appraisal Flashcards
Sensitivity analysis advantages
- Facilitates management subjective judgement
- Identifies areas critical to project success
- Relatively straight forward
Sensitivity analysis disadvantages
Assumes variable changes are independent
Ignores probability
Does not give us a decision
Simulation advantages
More than one variable can be changed at once
Takes into account probability
Simulation disadvantages
Still no decision made
Time consuming and or expensive
Assumptions may not be relevant and reliable
What are all of the real options
Follow on, abandonment, timing, growth & flexibility
Follow on option
Ability to launch future projects off the back of this one, or further extend this project
Abandonment option
The ability to exit early and sell all assets
Timing option
Delay the start of the project and wait for desirable market
Growth option
Dip your toe in the water with a smaller investment and then grow
Flexibility option
Change suppliers, materials or locations when a cheaper one becomes available
Overseas project risks (6)
Quotas, tariffs, compliance, restrictions on foreign companies, nationalisation and minimum shareholding by residents
Strategies to mitigate overseas project risk (4)
Negotiation with gov, insurance (nationalisation), production strategies, management structure
Shareholder Value analysis factors
1 Sales growth rate 2 operating profit margin 3 CT rate 4 investment in NCA 5 investment in working cap 6 cost of cap 7 life of projected cash flows
Using SVA
Split into competitive advantage and residual period (annuity of lump sum using p/E)
Discount at WACC to find value of business (this is value of debt & equity)
Deduct the market value of debt to find the mv of equity
Real cash flows
Exclude inflation - and so should discount rate
