AGEC 407 Investment Analysis Time value of money –$1 received today is worth more than $1 received in the future Why? –Earning potential –Risk –Inflation

AGEC 407 Investment Analysis Future value –value of an investment at some future date –investment earns interest during each time period –compounding: when interest in re-invested

AGEC 407 Investment Analysis Present value –value today of a sum of money to be received at some future date –$1 dollar in the future is worth less than $1 today –future values are discounted to the present time period

AGEC 407 Investment Analysis To determine the profitability of an investment, need to know: –initial cost –net cash revenues –terminal value –discount rate

AGEC 407 Investment Analysis Analyzing investments –payback period –simple rate of return –net present value –internal rate of return

AGEC 407 Investment Analysis Financial feasibility of investment –impact on cash flow –separate decisions to accept an investment how to finance the investment

AGEC 407 Investment Analysis Additional factors –taxes –inflation –risk

AGEC 407 Investment Analysis Steps for NPV investment analysis: 1.estimate initial cost 2.calculate discount rate 3.estimate cash revenues and expenses over life of investment 4.calculate net cash revenues, depreciation, and taxes 5.calculate after-tax net cash revenue, capital gains, and after-tax terminal value

AGEC 407 Investment Analysis Steps for NPV investment analysis: 6.calculate present values of after-tax net cash revenues and terminal value 7.sum present values 8.subtract initial cost 9.gives you NPV for investment