BASICS OF INVESTMENTS Economic Reasons for a Project

QUESTIONS ABOUT PROJECTS:  WHY SHOULD AN INVESTMENT BE MADE IN A PROJECT?  WHY SHOULD AN INVESTMENT BE MADE IN A SPECIFIC PROJECT?  WHY SHOULD AN INVESTMENT BE MADE AT THIS TIME?

INVESTMENT CONSIDERATIONS  TECHNICAL RISK - IS THE TECHNOLOGY AT A RESEARCH, DEVELOPMENT, PROTOTYPE, OR COMMERCIALLY DEMONSTRATED LEVEL.  MARKET RISK FOR THIS PRODUCT - IS THE MARKET NEW, INCREASING, SATURATED AT THE CURRENT PRICE?  WHAT IS THE POTENTIAL FOR COMPETITIVE PRODUCTS?

EVALUATION OF ECONOMIC FACTORS  NEED TO KNOW COST TO BUILD PLANT (CAPITAL COST),  COST TO OPERATE PLANT (COST OF MANUFACTURE),  COST TO FINANCE PLANT,  FINAL PRODUCT PRICE REQUIRED TO SATISFY COMPANY PROFITABILITY CRITERIA.  WHAT IS THE RISK TO MAKE THIS PROFIT VERSUS MORE CONSERVATIVE (GOVERNMENT NOTES) INVESTMENTS?

OTHER RISK COMPONENTS  TECHNICAL RISK - DETERMINE CURRENT STATUS OF TECHNOLOGY BY COMPLETING A REVIEW OF ALL AVAILABLE DATA - PRIVATE AND IN PUBLIC DOMAIN - INCLUDING PATENTS.  RAW MATERIAL AVAILABILITY

DEVELOPMENT OF DESIGN  DETERMINE DESIGN BASES –NEED: PHYSIOCHEMICAL CHARACTERISTICS OF ALL BASE CASE AND ALTERNATE PROCESS COMPONENTS PHYSIOCHEMICAL CHARACTERISTICS OF ALL BASE CASE AND ALTERNATE PROCESS COMPONENTS ALL PROCESS CONDITIONS FOR UNIT OPERATIONS ALL PROCESS CONDITIONS FOR UNIT OPERATIONS AND ALL PRODUCT SPECIFICATIONS. AND ALL PRODUCT SPECIFICATIONS.  DETERMINE DESIGN CRITERIA - CLIENT SPECIFIC DESIGN REQUIREMENTS

DESIGN SEQUENCE  BASIC ENGINEERING - DEVELOP FLOWSHEETS AND OTHER DIAGRAMS NECESSARY TO DEMONSTRATE PLANT CAN BE CONSTRUCTED AND TO SERVE AS A BASIS FOR DETAILED DESIGN.  DETAILED TECHNICAL DESIGN - COMPLETE AN ESTIMATE TO A LEVEL OF DETAIL NECESSARY TO PROVIDE CAPITAL AND OPERATING COST ESTIMATES ADEQUATE TO MAKE A DECISION TO PURSUE THE PROJECT. CONTINGENCY SPECIFIES THE AMOUNT OF DETAIL IN THIS DESIGN

BUSINESS RISK  MARKET RISK - NOT INCLUDED IN THIS PROJECT AND REQUIRES ACTIVITY BY SALES AND MARKETING PERSONNEL. NOT INCLUDED IN THIS STUDY.  COMPLETE MARKET STUDY FOR PRODUCT - EITHER BY CLIENT OR ENGINEER, TO DETERMINE POTENTIAL ANNUAL SALES AT SPECIFIC PRICE LEVELS. DETERMINE WHAT COMPETITIVE PRODUCTS ARE AVAILABLE.

TYPICAL MARKET RESEARCH  EXAMPLE FROM NET

ALTERNATE INVESTMENTS  COMPARE THIS PROJECT WITH OTHER ALTERNATE INVESTMENTS - WHAT ARE RISK VERSUS RETURN VALUES  CONSIDER A PERSONAL EXAMPLE FOR IRA INVESTMENTS

IRA OPTIONS (

PROJECT ECONOMICS  COMPLETE CAPITAL COST ESTIMATE  COMPLETE OPERATING COST ESTIMATE  EXAMINE FINANCING OPTIONS - WHAT FRACTIONS OF THE INVESTMENT SHOULD BE BORROWED VERSUS OWNER EQUITY.  CASH FLOW - ESTIMATE THE ACTUAL CASH FLOW OVER THE LIFE OF THE PROJECT AND USE THIS TO DETERMINE THE DISCOUNTED RATE OF RETURN

COST ESTIMATE DETAIL  DEPEND UPON THE DETAIL OF INFORMATION IS AVAILABLE  HOW THE RESULTS ARE INTENDED FOR USE.  REFER TO ATTACHED KE 1096 AS AN EXAMPLE

DEFINITIONS APPLIED TO ESTIMATES  ACCURACY APPLIED TO ESTIMATES AND REPRESENTS THE VALUE + THE FINAL ACTUAL VALUE, APPLIED TO ESTIMATES AND REPRESENTS THE VALUE + THE FINAL ACTUAL VALUE, BASED ON THE INFORMATION USED FOR PREPARING THE ESTIMATES. BASED ON THE INFORMATION USED FOR PREPARING THE ESTIMATES.  CONTINGENCY INDICATES THE COMPLETENESS OF THE FINAL DESIGN; I.E., THAT FRACTION WHICH HAS NOT BEEN SPECIFICALLY DEFINED. INDICATES THE COMPLETENESS OF THE FINAL DESIGN; I.E., THAT FRACTION WHICH HAS NOT BEEN SPECIFICALLY DEFINED. CAN BE AS SIMPLE AS THE TYPE OF PAINT ON BUILDINGS, WHICH COULD SLIGHTLY INFLUENCE FINAL COSTS. CAN BE AS SIMPLE AS THE TYPE OF PAINT ON BUILDINGS, WHICH COULD SLIGHTLY INFLUENCE FINAL COSTS.

INFLATION IN ESTIMATES  THE ENDLESS CIRCLE AND THE RELATIONSHIP WITH THE VALUE OF MONEY.  COMPARE ECONOMIC FACTORS IN TWO YEARS (BASED ON A VALLEY ECONOMY):

INFLATION COMPARISON

INFLATION CALCULATION  INFLATION RATE  CPI /inflation/Consumer_Pr ice_Index/HistoricalCP I.aspx?rsCPI_currentP age=0

INFLATION CALCULATIONS

HISTORY OF INFLATION RATES  TO SHOW THE IMPACT OF VARIOUS EVENTS SOURCE:

FUTURE/PRESENT WORTH  INTEREST FROM AN INVESTMENT INCREASES PRESENT WORTH TO FUTURE WORTH  FOR SIMPLE INTEREST (PAID EVERY PERIOD AND NOT COMPOUNED): P = INITIAL DEPOSIT (PRESENT WORTH)P = INITIAL DEPOSIT (PRESENT WORTH) F = FUTURE WORTH (INITIAL DEPOSIT PLUS INTEREST)F = FUTURE WORTH (INITIAL DEPOSIT PLUS INTEREST) N = NUMBER OF PERIODSN = NUMBER OF PERIODS i = SIMPLE INTEREST RATE PER PERIODi = SIMPLE INTEREST RATE PER PERIOD

DISCRETE COMPOUNDED INTEREST  INTEREST EARNED ON INTEREST

EFFECTIVE/NOMINAL INTEREST RATE  DISCRETE INTEREST RATES INTEREST PER PERIOD: i INTEREST PER PERIOD: i NOMINAL ANNUAL INTEREST: r NOMINAL ANNUAL INTEREST: r m = NUMBER OF PERIODS PER YEAR m = NUMBER OF PERIODS PER YEAR EFFECTIVE ANNUAL INTEREST: EFFECTIVE ANNUAL INTEREST:

CONTINUOUS INTEREST  CONTINUOUS COMPOUND AMOUNT FACTOR  EFFECTIVE INTEREST RATE

INFLATION IMPACTS  INFLATION DECREASES FUTURE WORTH ON NONINVESTED MONEY: WHERE ƒ = EFFECTIVE INFLATION RATE PER PERIOD  FOR COMPOUNDED INVESTMENTS:

DISCOUNTING  CONVERTS FUTURE VALUES TO THE PRESENT VALUE  IS THE INVERSE OF COMPOUNDING  FOR COMPOUNDED INVESTMENT  COMPOUND DISCOUNT FACTOR

CONTINUOUS DISCOUNTING  PRESENT WORTH EQUATION  CONTINUOUS DISCOUNT FACTOR

SERIES DEPOSITS  DISCRETE INVESTMENTS FUTURE WORTH EQUATION (SCAF)  CONSTANT ANNUAL CASH FLOW FUTURE WORTH (CCAF)

SERIES PRESENT WORTH  DISCRETE INVESTMENTS  CONTINUOUS CASH FLOWS  SEE TABLES 7-3, 7-4 AND 7-5 FOR COMPILATION

SERIES APPLICATIONS  MORTGAGES – LOANS FOR HOMES  WHERE P 0 IS THE INITIAL AMOUNT, L IS THE PAYMENT EACH PERIOD, r IS THE NOMINAL INTEREST RATE, m IS THE NUMBER OF PERIODS EACH YEAR, n IS THE NUMBER OF YEARS

SERIES APPLICATIONS  ACCUMULATION OF FUNDS FOR A SPECIFIC PURPOSE; DOWN PAYMENT, RETIREMENT, COLLEGE EDUCATION, et. al.

PERSONAL INVESTMENT EXERCISE  EACH STUDENT IS TO INVEST $50,000 IN THE STOCK MARKET FOR THE DURATION OF THE CLASS.  STUDENTS MAY SELL AND BUY STOCKS ONCE EACH WEEK DURING THE SEMESTER  THE FINAL WINNER WILL HAVE THE MOST CASH AFTER SELLING THE STOCK NO LATER THAN THE LAST DAY OF CLASS

PI EXERCISE TRANSACTIONS  ALL STUDENTS START WITH A TOTAL OF $50,000 IN CASH (VIRTUAL)  BUYS/SELLS STUDENTS MAY HOLD UP TO 3 STOCKS AND CASH AT ANY POINT IN TIME STUDENTS MAY HOLD UP TO 3 STOCKS AND CASH AT ANY POINT IN TIME A 1% SALES COST IS ATTACHED TO EACH BUY AND SELL TRANSACTION A 1% SALES COST IS ATTACHED TO EACH BUY AND SELL TRANSACTION NO MORE THAN 3 BUY/SELL COMBINATIONS ARE ALLOWED IN EACH WEEK NO MORE THAN 3 BUY/SELL COMBINATIONS ARE ALLOWED IN EACH WEEK CASH POSITIONS ARE ALLOWED AT ANY TIME CASH POSITIONS ARE ALLOWED AT ANY TIME

PI EXERCISE RECORDS  ALL STOCKS MUST BE LISTED ON US EXCHANGES WITH VALUES > $1/SHARE  EACH STUDENT WILL GO TO THE YAHOO FINANCE PAGE AND CREATE A PORTFOLIO TO TRACK THE STOCKS – USE YOUR INITIALS FOR THE NAME OF THE FILE  A PRINTOUT OF THE PORTFOLIO STATUS IS TO BE SUBMITTED EACH FRIDAY, WITH A SUMMARY OF ANY ACTIVITY COMPLETED DURING THE WEEK; e.g. SOLD 500 SHRS OF STOCK $10, SALES COST = $50 SOLD 500 SHRS OF STOCK $10, SALES COST = $50 PURCHASED 400 SHRS OF STOCK $5, SALES COST = $20 PURCHASED 400 SHRS OF STOCK $5, SALES COST = $20 $3000 INTO CASH INVENTORY $3000 INTO CASH INVENTORY

PI EXERCISE SOURCES  STUDENTS CAN USE ANY SOURCE OF INVESTMENT INFORMATION AVAILABLE TO ALL STUDENTS, SUCH AS: CORPORATE ANNUAL REPORTS CORPORATE ANNUAL REPORTS STOCK RECOMMENDATIONS ON THE NET STOCK RECOMMENDATIONS ON THE NET STOCK RECOMMENDATIONS AT THE LIBRARY, VALUE LINE™ STOCK RECOMMENDATIONS AT THE LIBRARY, VALUE LINE™  STUDENTS WORK AS INDIVIDUALS