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Über dieses Buch

This textbook introduces readers to the most relevant aspects of Investment Evaluation in the context of enterprise evaluation. It utilises a clear didactic concept and concisely presents representative cases, supported by calculations and their step-by-step, Excel-based solutions. In addition, the book analyses the respective benefits of the calculation models discussed from a management standpoint.

Inhaltsverzeichnis

Frontmatter

1. Introduction to Investment Evaluation

Abstract
In this chapter, the reader will deal with the basics of investment evaluation. The aim is to make the reader aware of what exactly the business administration discipline’s theoretical area of “investment theory” covers and on which assumptions the academic model simplifies the complex reality in order to obtain a decision. The goal of investment evaluation will be elaborated and the knowledge should be gained that it is an academic model, whose results are not identical to reality, but are to be interpreted in consideration of the assumptions made. In detail, the following goals should be achieved in this section:
  • The relevance of the investment calculation is to be documented and evaluated with empirical information from the point of view of the national economy, companies and private households.
  • The goal of investment calculation should be worked out. Thereby, different possible questions and asset concepts, which can belong to the aim of an investment calculator, are presented.
  • The investment calculation is to be differentiated from other business management studies of internal accounting.
  • The different groups of investment calculation methods are distinguished from each other, the individual methods are assigned to the groups.
  • The reader should be made aware of the importance of the various investment calculation methods, taking into account their chronological development and the computing capacities available at that time.
  • Ideal-typical organisational systematisation for the allocation of investment-calculating instances in a company are discussed depending on the size of the company and the capital commitment through investments.
  • The process organisation of the investment calculation is discussed in detail,
  • The problems of data collection and the consequences of the obtained results for realistic representation are discussed and.
  • The general purpose and the operational benefit of the investment calculation are discussed in principle.
After reading the chapter, the reader should be able to define what investment calculation is, what it means from different perspectives, what its goal is, what different procedures exist and what its limitations are.
Kay Poggensee, Jannis Poggensee

2. Static Investment Calculation Methods

Abstract
In this chapter, the reader will deal with static investment calculation methods. The aim is to make the reader aware of the criticism that can be levelled at the static methods and of the risks involved in their application in terms of transferring the results into practice as an investment decision. The general assumptions of the static investment calculation methods are presented, as well as the four most well-known static investment calculation methods, their criteria, their formulas, their risks in detail and their application to practical problems. Also, their quick applicability due to simple data collection and calculation techniques is presented. In detail, the following sub-goals shall be achieved:
  • The working method of statics in general and the assumptions of this investment calculation method group should be learned.
  • The criticism of the static procedures should be worked out extensively.
  • The risks of transferring the calculation results of the static investment calculation procedures as an investment decision into practice should be disclosed and documented very clearly.
  • The reader should be able to assemble the static formulas from a set of relevant calculation elements according to the problem and the relevant static investment calculation method.
  • The cost comparison calculation as a static investment calculation method should be known in detail, defined and criticised as a single method, the possible calculation formulas should be presented and applied to practical cases.
  • The profit comparison calculation as a static investment calculation method should be known in detail, defined and criticised as a single method, the possible calculation formulas should be presented and applied to practical cases, the profitability calculation as a static investment calculation method should be known in detail, defined and criticised as a single method, the possible calculation formulas should be presented and applied to practical cases.
  • The profitability calculation as a static investment calculation method should be known in detail, defined and criticised as a single method, the possible calculation formulas should be presented and applied to practical cases.
  • The static amortisation calculation as a static investment calculation method should be known in detail, defined and criticised as a single method, the possible calculation formulas should be presented and applied to practical cases and.
  • All procedures should be applied to a practical problem in a case study.
After reading the chapter, the reader should be able to define what static investment calculation methods are, what value they have for practical application, what criticisms and dangers there are in transferring the calculation results into practice and how the methods work in detail. The reader should be able to set up the corresponding formulas independently after reading the chapter. In order to be able to achieve these goals, it is necessary to follow the offered exercise calculations independently doing the mental calculation, with the pocket calculator or with the spreadsheet.
Enjoy your work!
Kay Poggensee, Jannis Poggensee

3. Dynamic Investment Calculation Methods

Abstract
After you have already become acquainted with the basics and thus the terminology of investment calculation and the static investment calculation methods in the previous two chapters, the aim of this section is to present the dynamic investment calculation methods and their application. As a result of this chapter you should be able to
  • Know the five dynamic investment calculation methods.
  • Know the assumptions of dynamic investment calculation methods.
  • Know the mathematical way to determine the methods.
  • Know the decision criteria of the methods.
  • Apply the dynamic investment calculation methods to practical cases.
  • Interpret the calculation results of the dynamic investment calculation methods.
  • Apply the dynamic investment calculation methods appropriately to your practical operational investment problems and.
  • Use the results of the dynamic investment calculation methods appropriately for your practical operational decision problems.
In order to achieve these goals, it is necessary to follow the offered exercise calculations independently with the pocket calculator or spreadsheet.
Enjoy your work!
Kay Poggensee, Jannis Poggensee

4. Selection of Alternatives and Investment Programme Planning

Abstract
In this chapter, you learn how to select the appropriate investment programme from several worthwhile investment projects. The aim of this section is, therefore, to present the techniques for alternative selection of investments and investment programme planning, and to make you familiar with them. As a result of this section, you
  • Have identified the problem of selecting alternatives among several worthwhile investment projects using the techniques of dynamic investment calculation.
  • Know the reasons for the lack of the possibility to select alternatives among several worthwhile investment projects using the techniques of dynamic investment calculation.
  • Know the techniques of removing the reinvestment premise and fictitious investment to select alternatives among several worthwhile investment projects.
  • Are able to use the techniques of removing the reinvestment premise and fictitious investment to select alternatives among several worthwhile investment projects.
  • Know the problem of the ambiguity of the internal rate of return method and you are able to resolve it.
  • Know and you are able to apply the utility value analysis as a technique for considering multidimensional target functions in investment decisions.
  • Know and you are able to apply the technique of account development planning as a technique for taking liquidity into account when making investment decisions.
  • Know the Dean Model and you are able to apply it to problems of operational investment practice.
  • Understand and evaluate differences in account development planning techniques and the Dean Model.
  • Know and you are able to apply linear optimisation as a technique for considering multidimensional objective functions and liquidity in investment decisions.
  • Are able to interpret the results of programme planning with linear optimisation.
In order to achieve these goals, it is necessary to follow the offered exercise calculations independently with the pocket calculator or spreadsheet.
Enjoy your work!
Kay Poggensee, Jannis Poggensee

5. Optimum Useful Life and Optimum Replacement Time

Abstract
After you have already become acquainted with the basics of investment calculation in the previous chapters in the form of terminology, static investment calculation methods, dynamic investment calculation methods as well as selection and programme problems, the aim of this chapter is to present the economic optimisation of the useful life, which has so far been considered an exogenous variable, and to let you determine the economic useful life under various aspects. As a result of this chapter you:
  • Know the optimisation of the useful life as an economic problem.
  • Know the assumptions used in the calculation of useful life.
  • Can make the various case distinctions in the useful life calculation.
  • Know the mathematical determination path of the procedures for calculating the useful life.
  • Know the decision criteria of the procedures.
  • Are able to apply the procedures for useful life optimisation to practical cases.
  • Are able to interpret the results of the useful life calculation.
  • Are able to apply the possibilities of determining the optimum useful life by calculation to your practical operational investment problems in an appropriate manner.
  • Are able to use the results of the useful life calculation appropriately for your practical operational decision-making problems.
In order to achieve these goals, it is necessary to follow the offered exercise calculations independently with the pocket calculator or spreadsheet.
Enjoy your work!
Kay Poggensee, Jannis Poggensee

6. Investment Decisions in Uncertainty

Abstract
The aim of this chapter is to take risk into account in investment decisions. Up to now, we have assumed that all calculation elements are known with certainty, both when applying the static and dynamic investment calculation methods in Chaps. 2 and 3, and when making investment programme decisions in Chap. 4 and investment duration decisions in Chap. 5. This is, of course, only true in very rare cases. For example, if we consider a savings bond with a fixed interest rate as a form of financial investment and hold it for the entire term, then from a practical point of view all calculation elements are known with certainty for the entire term. Some theoretical concerns about this view should be ignored here. If, in the context of a comparison of alternatives, this financial investment is to be compared with an operational investment, in which, for example, a new branch of industry is to be established in the company, it usually makes no sense to compare the two classically determined net present values considering fictitious investment and the removal of the reinvestment premise. The probability that the data of the planned operational investment will occur exactly as planned is much lower. Even if the investment data were planned very elaborately and are based on industry information and experts, the residual value of a production facility is, for example, much more difficult to determine than the repayment amount of a fixed-rate savings bond. This was already indicated in Sect. 1.9. In the case of two equal net present values or other target values of the dynamic investment calculation methods, the rational investment decision of a cautious businessman would certainly be to invest in the safe savings certificate instead of the investment alternative with the same net present value, which, however, would be more likely to deviate from the planned value. But what should the rational investment decision be if the net present value of the safer investment is less than the net present value of the more uncertain alternative? This chapter deals with the rational decision of the investor in such a situation.
There are generally two approaches to taking risk into account in investment calculations. The theoretically better approach is to consider the risk–benefit of an investment decision. Here, the investor must specify a risk–benefit function or, if the probability of occurrence of the environmental situation is unknown, the investor uses the so-called ad hoc decision rules as defined decision routines. This procedure of determining the risk–benefit is quite complex and, theoretically, requires a high degree of abstraction. Furthermore, risk–benefit functions of investors are not intertemporally stable, i.e. the investor’s attitude at the beginning of the investment does not have to be valid at the end of the investment anymore. We will deal with these techniques in Sects. 6.5–6.8 in this chapter.
As an alternative to this procedure, there are the correction procedures and sensitivity analyses, which change the data set of the considered investment object in order to determine the effects on the target values of the investment calculation. These procedures are, theoretically, not very complex and are also strongly criticised in the academic investment theory, but in practice, they are widely used and they are also a good hand to structure decision problems of investment calculation under uncertainty. These techniques are discussed in Sects. 6.3–6.4 in this chapter.
The consideration of risk is always an important issue for an investor. This will become even more important in the future due to corporate financing reasons. The consideration of risk is particularly important for German companies, as they generally have considerably less equity capital than their international competitors. The regulations of Basel II and III, which aim to achieve an international competition equality of banks, determine how much liable and limited equity capital a credit institution must back for a transaction. Previously, for Basel I, this was a uniform 8%, but today it varies according to the risk of the individual transaction. The riskier a transaction is for a credit institution, the more it must be backed by equity capital, which is then not available for other profitable activities. A debtor or credit-seeking company should, therefore, always give its creditor or credit institution the opportunity to be classified as safe as possible. To this end, credit institutions generally use ratings to assess the creditworthiness of their debtors. This assessment also includes risk analyses that the debtor carries out in his company. This makes the risk analysis of investments with the current regulations of Basel II and III even more important for companies.
In order to achieve these goals, it is necessary to follow the offered exercise calculations independently with the pocket calculator or spreadsheet.
Enjoy your work!
Kay Poggensee, Jannis Poggensee

Backmatter

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