Introduction

Introduction

Steps of investments

Alternatives

• Are there any alternatives?
• Is it the best investment?
• Is it worth it?
• Can I look somehwere else?

Cost of Capital

• How much capital do I need?
• How much will it cost?
• How will I raise the capital?

Certainty of predictions

• How certain am I that the investment will be successful?
• How much risk am I willing to take?
• How much risk can I afford to take?

Financing

Equity

• How much do I have?
• What alternatives?

Debt

• How much can I borrow?
• Conditions to borrow? (Interest Rate)

Returns

Investment Return

$\text{Investment Return} = \frac{\text{Annual Income}}{\text{Purchase Price} + \text{Cost}} \times 100$

Absolute Return

$\text{Absolute Return} = \text{Annual Income}$

Return on Interested Capital

$\text{Return on Interested Capital} = \frac{\text{Annual Income}}{\text{Invested Capital}} \times 100$

Return on Equity

$\text{Return on Equity} = \frac{\text{Annual Income}}{\text{Equity}} \times 100$

Comparing Cashflows

1. Time Value of Money (Net Present Value)
2. Risk (risk adjusted discount rate)

Net Present Value (NPV)

NPV needs to be > 0 in order to maximize value creation

$\text{NPV} = \sum_{t=1}^{} \frac{\text{Future Cashflow}}{(1 + \text{t})^{\text{n}}}$

n = duration of investment t = discount rate (usually 10%)

Internal Rate of Return (IRR)

IRR needs to > 10% in order to maximize relative period return

$\text{NPV} = 0 = \sum_{t=1}^{} \frac{\text{Future Cashflow}}{(1 + \text{IRR})^{\text{n}}}$

$\text{IRR} = (\sqrt[n]{\frac{\text{CF}}{\text{Initial}}} - 1) \times 100$

Payback Period

Payback needs to be the smallest in order to minimize payback time