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Topics Covered
- Case Study: Hermès Inc.
- Internal rate of return method
- Net actual value method
- Profitability index method
Talk Citation
Aernoudt, R. (2023, September 28). Investment analysis [Video file]. In The Business & Management Collection, Henry Stewart Talks. Retrieved October 8, 2024, from https://doi.org/10.69645/URZA5759.Export Citation (RIS)
Publication History
Other Talks in the Series: Key Concepts in Financial Management
Transcript
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0:00
My name is Rudy Aernoudt.
I'm a professor at the
University of Ghent in Belgium.
Welcome to this talk on
investment analysis
which follows
the talk on financial
management.
The concept and in fact,
now we're going to speak about
how to decide on investments.
0:19
If you speak about investment,
we are speaking about buying
fixed assets, not
floating assets.
Fixed assets means
assets that are
needed to make the
enterprise cycle happen,
but do not be part of it.
For instance, if I say
lorry is a fixed asset,
well mostly, yes, of course, if
I'm working for a company
that is selling and buying
lorries.
So what counts is how it
is used in the company.
If you have fixed assets,
fixed assets do work for
different enterprise cycles and
therefore we have to depreciate.
If we invest,
the first thing is
that the expenses,
be careful, I do not say
costs I say expenses.
The expenses we
have to do today,
the revenues we have
them tomorrow, perhaps.
If you make an
investment analysis,
we have to compare if the
expenses we have to do today
are worse in function of
the revenues that we might
have in the next years.
1:23
I will make a concrete case.
It's about a company
called Hermes,
which is a production
company in the steel sector.
This company has to
invest 6.2 million in
the first year and 8.5
million in the second year.
This is an investment
of 14.7 million.
There was an investment
before which has
taken place eight years ago,
it was an investment
of 10 million
depreciated over 10 years,
so this means that we still have
a residual value of 2 million.
Totally the question is,
shall this investment be
worth and what is the aspect,
the investment will lead to
annual savings of about
7.8 million a year.
The investment does not lead
to more turnover but it's
an investment that involves
cost saving for the company.
The question is now, if you
compare those expenses
with the revenues,
is the investment worth doing?
To summarize, the
actual investment value
of the investment is 12.7
million and we'll generate
a cash flow of 5.7 million,
which is in fact the
7.8 which has been
recalculated based on
the fiscal advantages.
With those two parameters,
we can forget the rest
of those two parameters.
We're going to look at if the
investment is worth doing.