Introduction to investment and finance Introduction to investment and finance Introduction to investment and finance vIntroduction to investment and finance Introduction to investment and finance Introduction to investment and finance Introduction to investment and finance Introduction to investment and finance Introduction to investment and finance
LARS WØLDIKE PETERSEN INTRODUCTION TO INVESTMENT AND FINANCE Download free eBooks at bookboon.com Introduction to Investment and Finance 1st edition © 2017 Lars Wøldike Petersen & bookboon.com ISBN 978-87-403-1646-9 Peer review by Mark Leslie Hughes, Erhvervsakademi Aarhus, Denmark Download free eBooks at bookboon.com CONTENTS INTRODUCTION TO INVESTMENT AND FINANCE CONTENTS Preface Goal of the book Investment and finance Investment 10 1.1 Introduction to investment 10 1.2 Conclusion 12 Investment assumptions 13 2.1 Introduction 13 2.2 Time of investment and start of business 13 2.3 Cash earnings 13 2.4 Cash investments 15 2.5 Taxes 16 2.6 Interest amounts 16 2.7 Relevant amounts 16 2.8 None committed amounts 17 www.sylvania.com We not reinvent the wheel we reinvent light Fascinating lighting offers an ininite spectrum of possibilities: Innovative technologies and new markets provide both opportunities and challenges An environment in which your expertise is in high demand Enjoy the supportive working atmosphere within our global group and beneit from international career paths Implement sustainable ideas in close cooperation with other specialists and contribute to inluencing our future Come and join us in reinventing light every day Light is OSRAM Download free eBooks at bookboon.com Click on the ad to read more CONTENTS INTRODUCTION TO INVESTMENT AND FINANCE 2.9 Opportunity amounts 18 2.10 Marginal amounts 19 2.11 Discount rate 19 2.12 Investment horizon 19 Investment evaluation methods 20 3.1 The Net Present Value Method 20 3.2 Internal Rate of Return Method 22 3.3 The Annuity Method 23 3.4 The Pay-Back Method 25 Investment motives 30 4.1 Investment in additional capacity 31 4.2 Investment in a new project 34 4.3 Rationalization investments 37 Critical values in investments 39 Choosing between investment evaluation methods 45 Investments and taxation 48 7.1 Introduction 48 7.2 General assumptions on taxes 49 Investment and inflation 57 8.1 Introduction 57 8.2 Investment including inflation – one inflation rate 57 8.3 Investment including inflation – multiple inflation rates 65 Investment and working capital 69 9.1 Introduction 69 9.2 Including working capital in investment evaluations 70 10 Replacement of investments 78 10.1 Introduction 78 10.2 The no-replacement situation 79 10.3 The identical replacement situation 83 10.4 Replacement of old technology with new technology 87 11 What to include in real life? 90 Download free eBooks at bookboon.com CONTENTS INTRODUCTION TO INVESTMENT AND FINANCE 12 Financing 91 12.1 Introduction 91 12.2 Equity financing 92 12.3 Debt financing 92 13 Financing considerations 95 13.1 Introduction 95 13.2 Business environment 95 13.3 Loan terms 97 14 Amortization of loans 107 14.1 Introduction 107 14.2 Standing loan (bullet loan) 107 14.3 Serial loan 110 14.4 Annuity loan 113 15 Evaluation of loans 117 15.1 Introduction 117 15.2 Evaluation of a standing loan (bullet loan) 118 15.3 Evaluation of a serial loan 120 15.4 Evaluation of an annuity loan 122 15.5 Evaluation loans – overview 125 16 Evaluation of other credit 126 16.1 Introduction 126 16.2 Overdraft accounts (non-scheduled amortization) 126 16.3 Trade creditors 130 17 Financial planning 132 17.1 Introduction 132 17.2 Finding the right financing package 132 17.3 Evaluation of cost of the financial package 139 Download free eBooks at bookboon.com CONTENTS INTRODUCTION TO INVESTMENT AND FINANCE Exercises 148 Exercises for Chapter 1.0 148 Exercises for Chapter 3.0 149 Exercises for Chapter 4.0 153 Exercises for Chapter 5.0 155 Exercises for Chapter 6.0 157 Exercises for Chapter 7.0 158 Exercises for Chapter 8.0 160 Exercises for Chapter 9.0 162 Exercises for Chapter 10.0 165 General exercises in investment 167 Exercises for Chapter 14.0 195 Exercises for Chapter 15.0 196 General exercises in finance 198 Download free eBooks at bookboon.com PREFACE INTRODUCTION TO INVESTMENT AND FINANCE PREFACE GOAL OF THE BOOK he overall goal of this book is to train and assist business students in carrying out investment and inance evaluations on an academic level We will make it our primary goal to train business students in avoiding accepting investments which are not proitable We assume that most shareholders would appreciate this approach for their business managers Concerning inance, we will make it our primary goal to train business students in considering more than just the cost of inancing So many companies have sufered bankruptcy because they did not carefully consider the many other aspects of inancing such as currency rates, interest rates and reinancing risks We also assume that most shareholders would appreciate this approach for their business managers INVESTMENT AND FINANCE In practical business life, investments and the inance of investments are very often closely connected Business managers cannot carry out any investments without thinking about how to inance them However even though investments cannot be carried out without inance, they are often not connected in such a way that investment and inance are linked together as a package Since this is the often the case, the company can shop around for the inancing of its investments he investment proposal does not normally involve a certain build-in inance case he company can put together the inancing interdependent of the investment It can spread the inance over multiple inancial sources such as bank and credit institutions, vendors and, of course, also by raising capital on the stock exchange Sources are many and complex his being said, there are of course exceptions Some inance sources are dependent on the investment at hand Evaluating investments which include a speciic build in inance package is however outside the scope of this book In real life, the case could be that certain countries around the world ofer export inancing In export inancing, the inance and the investment are closely linked together Download free eBooks at bookboon.com PREFACE INTRODUCTION TO INVESTMENT AND FINANCE In this book, we choose to keep the investment and inance evaluation apart his, however, leaves the discussion of what to look at irst Since most investments start as a necessity for the company, this will be considered irst and then inancing afterwards One could argue that without inancing there will be no investment his is of course true – certainly the inancial crisis showed us this So, in some periods inancing would have to be considered irst while in other periods inancing is plenty In this book investments will be considered irst simply because there is no sense in pursuing inancing for investments which are not proitable hey should be dropped immediately! Download free eBooks at bookboon.com INVESTMENT INTRODUCTION TO INVESTMENT AND FINANCE 1.1 INVESTMENT INTRODUCTION TO INVESTMENT When a company is considering starting a new business activity or continuing a business activity, it can be necessary to make “investments” In contrast to cash capacity costs (ixed costs), which are paid during the year when they are used in the company, investments are made once and paid and then used over a longer period Investments are often said to be “multiple period costs” An example of this can be seen below: Example A company is considering buying a new machine at a price of 500.000 his machine is expected to be used for the next years, after which it is expected to be sold for an amount of 30.000 (residual value) he earnings from the investment are expected to be 140.000 on an annual basis he investment horizon is set at years his investment, where 500.000 is tied up in the machine, has been made because it is expected to generate earnings during the next years of 140.000 on an annual basis Had the machine not been purchased the amount of 500.000 could have been used for other purposes he money could have been spent on inancial investments like bonds and shares, which could have earned interest Or if the company was going to take up a loan for the investment, it would have paid interest hat way the company can always ind alternative investments for its money here is usually also a long time frame between making the investment and the inlow of earnings Since there is a time gap between the cash outlow (the investment) and the cash inlow (earnings), the amounts cannot be compared to determine if the investment is proitable or not Cash in diferent time periods cannot be compared since interest has to be taken into consideration he example below will illustrate this point: Download free eBooks at bookboon.com 10 ... bookboon.com CONTENTS INTRODUCTION TO INVESTMENT AND FINANCE CONTENTS Preface Goal of the book Investment and finance Investment 10 1.1 Introduction to investment 10 1.2 Conclusion 12 Investment assumptions... inance and the investment are closely linked together Download free eBooks at bookboon.com PREFACE INTRODUCTION TO INVESTMENT AND FINANCE In this book, we choose to keep the investment and inance... bookboon.com 12 © Deloitte & Touche LLP and affiliated entities Click on the ad to read more INVESTMENT ASSUMPTIONS INTRODUCTION TO INVESTMENT AND FINANCE 2.1 INVESTMENT ASSUMPTIONS INTRODUCTION here are