Understanding Investments: Types, Planning, and Efficiency

1. Investments

2. Investments can be defined as a sacrifice of a certain present value in order to achieve future higher but uncertain value.In the frame of a building company it concerns mainly about a purchase of a long term tangible, intangible and financial property. Whole investments in a company IG = IN + IR IN ... Net Investments: expansion of a production or creation of a new business IR ... Restoring investments: the main objective is to restore mugged and consumed parts of property IG ... Gross investments: whole investments of a company Modernization investments Rationalization investments Investments

3. Investments according to the subject of investing • Real investments • Direct business in the production or services • Purchase of real estate (lands, buildings), art collections, art subjects or precious metals (gold, silver, platinum, palladium) • Financial investments • Monetary deposits • Obligations, Savings notes • Shares (stocks) • Insurance • Financial participation on business of partners (sleeping partnership) • Derived commercial papers (options, term contracts) • Intangible investments • Investments into education, science, research and development • Advertisement or social services Investments

4. Investment space– yield (returns, revenues), degree of liquidity and risk running in the time Yield (returns, revenues) • All incomes coming from an investment from the moment of investing of first sum of money till the moment of the last income from an investment (sale or liquidation of an investment) Degree of liquidity • Possibility to change our investment back to the ready money Risk • Expresses possible deviation of real revenues, costs and time from the planned values Investments

5. Degrees of liquidity Investments

6. Degrees of risk Investments

7. Planning and efficiency of investments Planning of investments • Assurance of sale possibilities of a company • Plan of the production creation • Analysis of needs and availability of production factors • ? Needs of expansion of existing capacities? • Investment Investments

8. Analysis of economic efficiency of investments • Whole investment costs – needed capital • Yield (returns, revenues) of a project • Operating (production) costs of a project • Assignment of economic and financial efficiency indexes Investments

9. Whole investment costs – needed capital • Purchase of long-term property • Pieces of land, buildings, machines and machinery, patents, intangible industrial rights,… • Purchase of working capital • Stocks and supplies – raw materials, materials, subsidiary materials, … Investments

10. Yield (revenues) of a project R = Q . c where Q ... amount of products c ... unit price of the product Revenues: • Revenues for sold products • Revenues for supplied services • Financial revenues Investments

11. Operating (production) costs of a project Cp = M + W + Dep + Other Classification of costs according to the consumption of the input (production) factors: • material • wages • depreciation • other costs And next • financial Investments

12. Profit / lost profit = revenues – production costs – financial costs after tax profit = profit – income tax Investments

13. Investment efficiency - static methods Profitability • Profitability = profit x 100/capital[%] Pay-off period • represents number of years for that the project is possible to generate revenues for covering of investment costs. Investments

14. Example of the pay-off period assignment Example: Company AB would like to purchase machinery with the investment costs 4 mil. CZK. The lifetime of the machinery is 8 years. Expected values of revenues in particular years are in the table (in thousands crowns). Calculate pay-off period PP = 4 + (4000-3950)/1130 = 4.05 Investments

15. Investment efficiency - dynamic methods • NPV – Net Present Value • IRR – Internal Rate of Return Investments

16. Net present value (NPV) describes arising of company’s property owing to realization of a project respecting the time value of money Kde: PV … Present value IN … Investment costs r … Discount rate n … Lifetime of a project (length of the judged period in years) NPV > 0 possible to invest, good project NPV = 0possible to invest, good project NPV < 0 not to invest, profitability is lower then required Investments

17. Example of the NPV assignment Investor speculates about the purchase of a building for 2 mil. crowns with requirement of 15% appreciation of invested money. Expected future returns (incomes) is represented by rent in the amount of 400 thousands crowns annually. At the end of the fourth year we suppose the sale of the property for 2.25 mil. crowns NPV = PV - IN = 2428 - 2000 = 428 tis.Kč Value of NPV of the project is positive, requirement for the 15% appreciation was filled. Investments

18. Internal rate of return – IRR expresses average percentage annual gain of a project for the whole judged period (lifetime of the project) Way of the IRR assignment • Estimate of IRR of the project • Calculation of NPV for this IRR • Comparison with decision making criteria: • NPV = 0 ... Estimate is perfect • NPV > 0 ... Estimate is low • NPV < 0 ... Estimate is high • Process will be repeated until it will be achieved one positive and one negative value of NPV • Using of the formula for the IRR calculation where r1...estimated IRR for positive NPV • r2...estimated IRR for negative NPV Investments