WELCOME TO U ALL FOR ONE DAY GUEST LECTURE

ON SIFD

INTRODUCTION

Investment Decisions:Traditional Approach or

NDCFModern or DCFDecisions under Risk &

Uncertainty

NDCF OR TRADITIONAL

PAY BACK METHOD

ACCOUNTING RATE OF RETURN OR AVERAGE RATE OF RETURN

MODERN OR DCF

NET PRESENT VALUE METHOD

INTERNAL RATE OF RETURN METHOD

PROFITABILITY INDEX METHOD

DEPRECIATION

STRIGHT LINE METHOD

% METHOD

WTRITTEN DOWN VALUE METHOD

EQUIVALENCE OF NPV OR IRR

These two methods will give same results in respect of conventional and independent projects.

Conventional – Investment followed by series of cash inflows.

Independent – which does not depend on other projects.

Profitability Index

PI = PV / C0EPVI- Excess present value index- only decision making can be done.

CHAPTER - VIII

FINANACIAL DISTRESS:

When a firm is unable to meet scheduled payment or cash flows position indicate that it will soon be unable to do so.

Issues faced by a firm in Financial Distress

Is the in ability of the firm to meet scheduled debt payment or a temporary cash flows problem. Or it is a permanent problem caused by asset value having fallen below an obligation.

If it is temporary the agreement with creditors that gives the firm to recover. However if it s long run asset value have truly delivered then economic loss have occurred.

“Worth more dead than achieve” business is more valuable if it were maintained and continued in operation or liquidated and sold off in piece.

Should control the firm while it is being liquidated or rehabilitated should the present management be replaced or trustee be replaced.

BANKRUPTACY

When a company finds it self in the worst possible situation with a poor competitive position in an industry with a few prospectus ,management has only a few alternatives all of them dissatisfiers. Because no one is interested for buying a weak co.

Causes of financial distressLawyer’s feesAccountant FeesCourt feesManagement TimeEmployee MoraleLow ProductivityIncrease labor turnover.

Effects of financial distress

-Ve effect on firms valueRelationship with stake holders

will damages.Stop or cut short credit availabilityDirect relationship between

customer an vendor will improve.Demotivation of employees

LIQUIDATION

It is a legal term refers the procedure through which affairs of a company are wound up by law.

Appointment of a liquidator.

Collects the assets and pays the debts.

Distribution of surplus in accordance with the rights of the members.

Types of liquidation

Compulsory winding up of the court

Voluntary winding up by the members or creditors.

Winding up under the supervision of the court.

LIQUIDATION

Liquidation and insolvency are different

A solvent company can also be liquidated

SETTLEMENTS OR ORDER OF PAYMENTS

Expenses of winding up including liquidators remuneration

Creditors (debentures) secured by a floating charge on the assets of the company.

Preferential creditors.

In secured creditors

Surplus if any among others.

RE ORGANIZATION

Formal reorganization

Informal reorganization is should be handled informally because informal reorganization is faster and less costly than formal bankruptcy.

Formal reorganization involves so many cost like courts fees, auditors fees, legal charges, mangers remuneration, disruption that occur customer, suppliers & employees>

Informal reorganization: it is easy to reorganize it informally if the problems are temporary by using “workouts”

CHAPTER - II

RISK:

The variability ;in the return over a period of time is known as risk.

Ex: Government securities and company

TYPES OF RISKS

3 TYPES THEY ARE:Certainty or No risk.Uncertainty: It is a situation where the probability of the particular event are not known and the future cannot be foreseen.Chances of future loss can be foreseen because of past experience .

Uncertainty factors

Date of completion

Level of capital oyutlay required

Level of selling rice

Level of revenue

Level of operating costs.

Taxation notes.

RISK ANALYSIS INPROJECT SELECTION

Acceptability depends on cash flows and risk.

Cash flows means operational cash receipts less operation expenditures.

Risk related to the volatility of the expected outcome.

Greater the risk greater the return.

RISK METHODSA) General Techniques: i. Risk Adjusted Rate of return ii. Certainty equipment coefficient.B) Quantitative Techniques i. Sensitivity Analysis ii. Probability analysis iii. Std Deviation. iv. Coefficient of variation v. Decision Tree

Risk Adjusted Rate of Return

This is is on e of the method of incorporating risk into CBD. It is based on the assumption that the investor except a higher rate of return on risk projects as compared to less risky projects. RADR is a composite that takes into account of both risk and time factors.

RADR = Risk free rate of return + risk premium. Like NPV and IRR it will accept.

Certainty Equilant Coefficient Method

The estimated cash flow are reduced to conservative level by aplying a correction factor termed as sCE coefficient.

CE Coefficient = Risk less cash flows

Risky Cash flows

Probability of Analysis

The probability of a particular out come of an event is simply preparation of times this outcome would occur if the event were repeated a greater number of times.

Ex: throwing a die, possibility of head or trial.

Decision Tree Analysis

It is a graphic display of relationship between a resent ;decision and possible future events future decision and their consequences.

In other words it is as pictorial representation in tree form which indicates the magnitude, probability and inter relationship to all possible outcomes. It links the event chronological.

Chapter - III

Critical analysis of appraisal

techniques

Why to do investment appraisals

Cash is invested in most profitable projects

Realistic project’s budgets are established

Measures can be taken to eliminate risk.

Discounted Pay Back period

Conventional pay back period does not take into account the time value of money.

Def: It is the ratio between initial cash outlays and discounted annual cash inflows

DPB = Initial cash outlays/Discounted annual cash inlflows.

Discounted Pay Back periodAdvantages: Address time value of money. Easy to understand, it does not accept negative NPV projects/investments. It is biased towards liquidity.

Disadvantages: It still ignores cash flows beyond the payback period.

Large cash flows projects should be rejected.

Post Pay Back

It is a type of Break-even measure. The economic life beyond the pay back period is referred to as the post-pay back duration. If post-pay back is zero the investment is worthiness. Zero post pay back duration means that the present value of the future cash flows is less than the projects initial investment.

Bail-Out pay back

It is the time that a project will take care for the cumulative cash flows from operations plus the disposal value of the equipment in a particular period equal the initial investment. It considers the differences in the behavior of the disposal values of projects investment and it is a useful risk indicator.

Return on InvestmentIt is also called as return on capital

employed.

ROI = PBIT/ Capital Employed * 100

Gross Capital Employed: Fixed Assets+ Current Assets

Net Capital Employed: Total Assets-Current Liabilities

Owners capital employed: FA+CA-Out side liabilities (Both long-term and short-term)

Equivalent annual cost

It is a time-adjusted method of calculating an equal annual cost over the life of an investment. It discounts and compounds cost amounts at a specified interests rate in such a way as to convert them all into annuity amounts.

EAC= Capital recovery and return+ interest on salvage+ Other costs.

Terminal value methodUnder this method it is assumed that each cash flow is reinvested in another projects at certain rate of interests. It is also assumed that each cash flows is reinvested elsewhere immediately until the termination of the project.

Valuation: Terminal value is liquidated

TV of an ongoing form. TV of debt, Common stock.

NPV Mean VarianceIt is applied during pre-feasibility stage of the project acceptance. Projects can be compared by graphing the NPV probability functions. The decision maker will have to decide what weights to apply to higher mean NPV versus greater risks.

Hertz Model

It is also called as method of statistical trials. It involves first the random selection of an outcome for each variable of interests, the combining of these outcomes with any fixed amounts and calculation if necessary to obtain one trial outcome in terms of the desired answer.

Hertz Model

It is utilized nine variables and later on combined into three different variables. Such as

1. market analysis

2. investment cost analysis

3. operating and fixed cost analysis.

Information and data bank in project selection

Initial stage: About product description. About feasibility study. Concept document. Project charter

Planning Stage:

Execution Stage:

Control Stage: Scope of control, schedule of control, cost control, quality control, risk control.

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