Module 15 Investment Decisions Omar El-Kheshen – omar@arabacademy.com Learning Objectives By the end of this module you should understand: 1. The three steps in the investment process 2. The concept of present value and its application in investment appraisal: Discounted cash flow Net present value Internal rate of return 3. When to use these three techniques in evaluating projects 4. The impact of risk, uncertainty and inflation in the investment decision, particularly the application of sensitivity analysis 5. How to calculate a company’s cost of capital for discounting purposes. Omar El-Kheshen – omar@arabacademy.com Agenda 15.1 Introduction 15.2 The Investment Process 15.3 Concept of Present Value 15.4 Discounted Cash Flow Approach 15.5 Net Present Value (NPV) 15.6 Discounted Cash Flow (DCF) Rate of Return 15.7 Comparison of Net Present Value and DCF Rate of Return 15.8 Investment Appraisal in Non-Revenue and Not-for-Profit Situations 15.9 Risk and Uncertainty and Inflation 15.10 Risk and Uncertainty 15.11 Payoff or Payback Period 15.12 Sensitivity Analysis 15.13 Risk Analysis 15.14 The Key Investment Factors 15.15 Projected Average Cost of Capital 15.16 Average Cost of Capital 15.17 Opportunity Cost, Risk and the Cost of Capital 15.18 Investment Appraisal and Inflation 15.19 Post-Assessment/Continuous Post-Audit of Capital Expenditure Projects Omar El-Kheshen – omar@arabacademy.com There are two types of decisions facing management: investment and operating; the investment decision is more important Investment Decision Operating Decision A decision whose impact extends beyond the immediate operating period A decision which has its impact within the operating period In Financial Reporting These two terms are Synonymous with: Capital Revenues This module is primarily concerned with the financial aspects of the investment decisions underlying capital expenditures Omar El-Kheshen – omar@arabacademy.com