WELCOME TO U ALL
FOR ONE DAY GUEST
LECTURE
ON
SIFD
INTRODUCTION
Investment Decisions:
Traditional Approach or
NDCF
Modern or DCF
Decisions under Risk &
Uncertainty
NDCF OR TRADITIONAL
PAY BACK METHOD
ACCOUNTING RATE
OF RETURN OR
AVERAGE RATE OF
RETURN
MODERN OR DCF
NET PRESENT VALUE
METHOD
INTERNAL RATE OF
RETURN METHOD
PROFITABILITY INDEX
METHOD
DEPRECIATION
STRIGHT LINE
METHOD
% METHOD
WTRITTEN DOWN
VALUE METHOD
EQUIVALENCE OF NPV OR IRR
These two methods will give same
results in respect of conventional and
independent projects.
Conventional – Investment followed
by series of cash inflows.
Independent – which does not
depend on other projects.
Profitability Index
PI = PV / C0
EPVI- Excess
present value indexonly decision making
can be done.
CHAPTER - VIII
FINANACIAL DISTRESS:
When a firm is unable to
meet scheduled payment
or cash flows position
indicate that it will soon
be unable to do so.
Issues faced by a firm in
Financial Distress
Is the in ability of the firm to
meet scheduled debt payment
or a temporary cash flows
problem. Or it is a permanent
problem caused by asset
value having fallen below
an obligation.
If it is temporary the
agreement with creditors that
gives the firm to recover.
However if it s long run asset
value have truly delivered then
economic loss have occurred.
“Worth more dead than achieve”
business is more valuable if it
were maintained and continued
in operation or liquidated and
sold off in piece.
Should control the firm while
it is being liquidated or
rehabilitated should the
present management be
replaced or trustee be
replaced.
BANKRUPTACY
When a company finds it self in
the worst possible situation
with a poor competitive
position in an industry with a
few prospectus ,management
has only a few alternatives all
of them dissatisfiers. Because
no one is interested for buying
a weak co.
Causes of financial
distress
Lawyer’s fees
Accountant Fees
Court fees
Management Time
Employee Morale
Low Productivity
Increase labor turnover.
Effects of financial distress
-Ve effect on firms value
Relationship with stake
holders will damages.
Stop or cut short credit
availability
Direct relationship between
customer an vendor will
improve.
LIQUIDATION
It is a legal term refers the
procedure through which affairs of
a company are wound up by law.
Appointment of a liquidator.
Collects the assets and pays the
debts.
Distribution of surplus in
accordance with the rights of the
members.
Types of liquidation
Compulsory winding up of
the court
Voluntary winding up by the
members or creditors.
Winding up under the
supervision of the court.
LIQUIDATION
Liquidation and
insolvency are
different
A solvent company
can also be
liquidated
SETTLEMENTS OR ORDER OF
PAYMENTS
Expenses of winding up including
liquidators remuneration
Creditors (debentures) secured by
a floating charge on the assets of
the company.
Preferential creditors.
In secured creditors
Surplus if any among others.
RE ORGANIZATION
Formal reorganization
Informal reorganization is should be
handled informally because informal
reorganization is faster and less
costly than formal bankruptcy.
Formal reorganization involves so
many cost like courts fees, auditors
fees, legal charges, mangers
remuneration, disruption that occur
customer, suppliers & employees>
Informal reorganization: it is easy to
reorganize it informally if the problems
are temporary by using “workouts”
CHAPTER - II
RISK:
The variability ;in the return over a
period of time is known as risk.
Ex: Government securities and
company
TYPES OF RISKS
3 TYPES THEY ARE:
Certainty or No risk.
Uncertainty: It is a situation where
the probability of the particular event
are not known and the future cannot
be foreseen.
Chances of future loss can be
foreseen because of past experience
.
Uncertainty factors
Date of completion
Level of capital oyutlay
required
Level of selling rice
Level of revenue
Level of operating costs.
Taxation notes.
RISK ANALYSIS INPROJECT
SELECTION
Acceptability depends on cash flows
and risk.
Cash flows means operational cash
receipts less operation expenditures.
Risk related to the volatility of the
expected outcome.
Greater the risk greater the return.
RISK METHODS
A) General Techniques:
i. Risk Adjusted Rate of return
ii. Certainty equipment coefficient.
B) Quantitative Techniques
i. Sensitivity Analysis
ii. Probability analysis
iii. Std Deviation.
iv. Coefficient of variation
v. Decision Tree
Risk Adjusted Rate of Return
This is is on e of the method of incorporating
risk into CBD. It is based on the assumption
that the investor except a higher rate of return
on risk projects as compared to less risky
projects. RADR is a composite that takes into
account of both risk and time factors.
RADR = Risk free rate of return + risk
premium. Like NPV and IRR it will accept.
Certainty Equilant Coefficient
Method
The estimated cash flow are reduced
to conservative level by aplying a
correction factor termed as sCE
coefficient.
CE Coefficient = Risk less cash flows
Risky Cash flows
Probability of Analysis
The probability of a particular out
come of an event is simply
preparation of times this outcome
would occur if the event were
repeated a greater number of times.
Ex: throwing a die, possibility of head
or trial.
Decision Tree Analysis
It is a graphic display of relationship
between a resent ;decision and
possible future events future decision
and their consequences.
In other words it is as pictorial
representation in tree form which
indicates the magnitude, probability
and inter relationship to all possible
outcomes. It links the event
chronological.
Chapter - III
Critical
analysis of
appraisal
techniques
Why to do investment
appraisals
Cash is invested in most profitable
projects
Realistic project’s budgets are
established
Measures can be taken to eliminate
risk.
Discounted Pay Back period
Conventional pay back period does not
take into account the time value of
money.
Def: It is the ratio between initial cash
outlays and discounted annual cash
inflows
DPB = Initial cash outlays/Discounted
annual cash inlflows.
Discounted Pay Back period
Advantages: Address time value of
money. Easy to understand, it does
not accept negative NPV
projects/investments. It is biased
towards liquidity.
Disadvantages: It still ignores cash
flows beyond the payback period.
Large cash flows projects should be
rejected.
Post Pay Back
It is a type of Break-even measure.
The economic life beyond the pay
back period is referred to as the postpay back duration. If post-pay back is
zero the investment is worthiness.
Zero post pay back duration means
that the present value of the future
cash flows is less than the projects
initial investment.
Bail-Out pay back
It is the time that a project will take
care for the cumulative cash flows
from operations plus the disposal
value of the equipment in a particular
period equal the initial investment. It
considers the differences in the
behavior of the disposal values of
projects investment and it is a useful
risk indicator.
Return on Investment
It is also called as return on capital
employed.
ROI = PBIT/ Capital Employed * 100
Gross Capital Employed: Fixed
Assets+ Current Assets
Net Capital Employed: Total AssetsCurrent Liabilities
Owners capital employed: FA+CA-Out
side liabilities (Both long-term and
short-term)
Equivalent annual cost
It is a time-adjusted method of
calculating an equal annual cost over
the life of an investment. It discounts
and compounds cost amounts at a
specified interests rate in such a way
as to convert them all into annuity
amounts.
EAC= Capital recovery and return+
interest on salvage+ Other costs.
Terminal value method
Under this method it is assumed that
each cash flow is reinvested in
another projects at certain rate of
interests. It is also assumed that each
cash flows is reinvested elsewhere
immediately until the termination of
the project.
Valuation: Terminal value is liquidated
TV of an ongoing form. TV of debt,
Common stock.
NPV Mean Variance
It is applied during pre-feasibility
stage of the project acceptance.
Projects can be compared by
graphing the NPV probability
functions. The decision maker will
have to decide what weights to apply
to higher mean NPV versus greater
risks.
Hertz Model
It is also called as method of
statistical trials. It involves first the
random selection of an outcome for
each variable of interests, the
combining of these outcomes with
any fixed amounts and calculation if
necessary to obtain one trial outcome
in terms of the desired answer.
Hertz Model
It is utilized nine variables and later
on combined into three different
variables. Such as
1. market analysis
2. investment cost analysis
3. operating and fixed cost analysis.
Information and data bank in
project selection
Initial stage: About product
description. About feasibility study.
Concept document. Project charter
Planning Stage:
Execution Stage:
Control Stage: Scope of control,
schedule of control, cost control,
quality control, risk control.
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