Investment analysis

Published on September 28, 2023   8 min
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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.
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.
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.