BASIC MATHS FOR FINANCE MTH 105

INVESTMENT APPRAISAL INVESTMENT APPRAISAL: A technique or method used to evaluate or assess the profitability of an investment project. Investment Decisions: Firms: investments in long term assets such as property, plant, equipment, etc Individuals

Investment Appraisal Decisions should be made carefully because: Investment require significant cash outflows Investments are made for a long term

Investment Appraisal Net Present Value Method (NPV): Uses discounted cash flows to evaluate investment projects.

NPV METHOD Find the NPV of project 1 given the following: I : initial investment r : required rate of return A, B, C, . . . Z : projected cash inflows n : no. of years

NPV METHOD Year Project A 1 A 2 B 3 C . . n Z

NPV METHOD NPV = Present value of – Present value of Solution: Find the present value of all cash inflows: (Discount all cash-inflows back to year zero and add). NPV = Present value of – Present value of cash inflows cash outflows

NPV METHOD Accept the project if: NPV ˃ 0 (positive NPV)

NPV METHOD Example: Find the NPV of a hostel investment project given the data below: - Is this project worth pursuing? Initial investment ( I ) = GH 5,000 Required rate of return ( r ) = 10%

NPV METHOD Year Hostel 1 800 2 900 3 1200 4 1400 5 1600 6 1300 7 1100

NPV METHOD Example 2 You want to invest in either a Hostel project or a Hotel project. Given the following data, which would you choose? I = GH 5,000 r = 10%

NPV METHOD Year Hostel project Hotel project 1 800 1100 2 900 1100 3 1200 1100 4 1400 1100 5 1600 1100 6 1300 1100 7 1100 1100

NPV METHOD Two or more investment projects: - Choose the one with the highest NPV