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INVESTMENT PROJECTS

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Contents

Investment projects and company value

Discussion of course participant experiences with investment projects

Summary - typical project types & goals

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Investment Projects and Company Value

[15 min]

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Companies & projects

Think of a company as a collection of projects that fit together

A project could be – A production process or equipment– A product – An information or management system– etc.

Projects should be evaluated on how they help the company as a whole

So - what are the company’s goals?

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Company goals The basic goal of any organisation:

– “Survive and prosper!” Economic survival depends on:

– Generating income (profits, cash flows)– Raising capital from investors & lenders

that supports generation of income The key question:- do investors &

lenders view the company’s income as an adequate return on their capital investment ??

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Investors and lenders (1)

Two main potential sources– Investors ( = owners, shareholders,

‘equity’)– Lenders ( = ‘debt’)– (Sometimes called ‘financial stakeholders’)

Both types will require a reasonable return on their capital — or may withdraw their support

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Investors and lenders (2)

Withdrawal of support by investors & lenders could mean collapse of company

So, for any potential new project, first ask ... “Will this help to keep our investors & lenders happy ??”

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Company value So what do investors/lenders seek? Value is what investors & lenders

consider worth paying NOW for the company’s expected future income

Value NOW — called ‘present value’ This must exceed the cost of raising

capital from investors & lenders

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Company value - Acme (1)

As an example, let’s consider a company called Acme A small metal plating firm in a developing country Products include candlesticks, picture frames, screws, nuts, bolts, & other metal-plated products 75 employees

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Company value - Acme (2)

What is the value of Acme to its investors & lenders if they expect:

- Acme will continue in business indefinitely into the future?- Acme will generate sustainable net income of $12,000 per year?- Investors/lenders expect a return of at least 20% on their capital?

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Company value - Acme (3)

Acme’s value is then:$12,000 = $60,000 20%

If investors/lenders consider Acme to be a risky company and require 30%, then Acme’s value will be less:

$12,000 = $40,000 30%

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Discussion of Course Participant Experiences

with Investment Projects[30 min]

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Questions for discussion

Think of examples of capital investment projects that have been implemented (or funded) by your organization

What were the specific goals of the projects?

What was the typical investment size? Would you consider any of those

projects to be Cleaner Production (CP) projects?

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Investment Projects — Summary

[15 min]

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Investment projects (1)

An investment project might focus on:– A production process– Production or other equipment– A product – An information or management system– etc.

Investment projects might focus on existing equipment, processes, or products or focus on brand-new ones

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Investment projects (2)

Some investment projects require only a moderate investment of time/labour

Others require more significant up-front capital (i.e., investment funds) for the purchase of physical assets such as equipment

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Investment projects (3)

Timing and frequency of investment projects and amount of investment capital required may vary with:– Industry sector — Company size– Company location —State of the

economy– etc.

However, for long-term survival, most companies periodically need capital for investment projects

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Typical project types & goals (1)

Maintenance– Maintain existing equipment & operations

Improvement– Modify existing equipment, processes, and

management & information systems to improve efficiency, reduce costs, increase capacity, improve product quality, etc.

Replacement– Replace outdated, worn-out, or damaged

equipment or outdated/inefficient management & information systems

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Typical project types & goals (2)

Expansion– e.g., obtain and install new process

lines, initiate new product lines Safety

– Make worker safety improvements Environmental

– e.g., reduce use of toxic materials, increase recycling, reduce waste generation, install waste treatment

Others...

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Single project-Multiple benefits

A single investment project often has multiple benefits

Cleaner Production projects are typical - they often have multiple benefits– e.g., a project that is implemented to

improve product quality also reduces the use and purchase cost of toxic chemicals, as well as disposal costs

So, do not place your project idea into a single narrow category — think broadly about all the possible benefits

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Project implementation process

Capital budgeting– Identify company goals & strategies;

identify potential projects; evaluate projects; select projects to implement

Project financing– Identify potential sources of capital; raise

external capital if needed Project implementation & assessment

– Implement project; monitor progress & control; review & learn for next time!