49215 Telecommunications Industry Management

Faculty of Engineering 49215 – Telecommunications Industry Management

STRATEGIC MANAGEMENT
INVESTMENT ANALYSIS

Prepared by: Murat KIVILCIM muratk@eng.uts.edu.au Version 1.01 10 September 2004
(Revised August 2012)

The objective of this module is to provide the engineering students with some appreciation of simple financial investment analysis techniques to allow the student to work through investment proposals they may encounter during their careers, and be able to determine whether or not the investment proposal encountered is viable. This module assumes student has no prior knowledge of investment analysis techniques. Students who are experienced with investment measurements and investment evaluation are encouraged to review the contents of Section 1 and contribute by participating in class discussions and practical examples.

Investment Analysis

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49215 Telecommunications Industry Management

TABLE OF CONTENTS 1.0 Investment Evaluation .......................................................................................................... 3 1.1 Accumulated Net Cash Flows .............................................................................................. 3 1.2 Discounted Cash Flow Techniques ...................................................................................... 4 1.3 Internal Rate of Return ......................................................................................................... 9 1.4 Payback Period ................................................................................................................... 11 1.5 Practical Considerations When Evaluating Investment Options ........................................ 13 1.5.1 Investment Size ........................................................................................................... 13 1.5.2 Time Disparity in Realising Cash Flows ..................................................................... 13 1.6 Separating Investment and Financing Decisions ............................................................... 16 Attachment A – Discount Factor .............................................................................................. 18 Attachment B – Interest Factor ................................................................................................ 21

Investment Analysis

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49215 Telecommunications Industry Management

1.0 Investment Evaluation
The fundamental objective of investment evaluation is to determine the “investment worth” of the proposed solution by means of a set of indicators. Such indicators should be:    Consistent and applicable to all types of proposals, Simple to calculate, once all the relevant data is obtained, and Easy to understand, that is, capable of adequately summarising all the information relevant to the decision in a single parameter.

We would also expect such measurements to allow for simple adjustments so we can test for a range of uncertainties. In the following chapters we will discuss the most commonly used investment evaluation methodologies, namely:    Discounted Cash Flow (DCF) and Net Present Value (NPV) Payback Period Internal Rate of Return (IRR)

While the focus of this chapter is evaluation of investment options using financial measurements, it should be remembered that strategic importance of an investment or competing set of investment options is an equally important consideration for businesses to undertake. You will note that throughout this document whenever an investment decision is required we will use the words “on a purely financial basis” indicating that while the investment may or may not be viable on the basis of financial indicators, this is just the first step in the investment evaluation process. Strategic fit with business objectives and business drivers and ethical consideration will often cast the decisive vote.

1.1 Accumulated