1. Slide 10.1 INTO Exeter and Long-term Investment Decisions Steve Astbury B.A.(Hons.) FCMA

2. Slide 10.2 Why choose the south west? One of UK’s most popular regions – voted “top county” by Country Life magazine 2 ½ hours from London by train Flights to Exeter International Airport via Paris and Amsterdam Excellent transport links within the UK Region of outstanding natural beauty Mild climate

3. Slide 10.3 Why University of Exeter Top 10 in all major UK league tables (The Times and Sunday Times 2015, Complete University Guide 2015, and the Guardian University Guide 2016 ) In the top 100 Universities globally (Times Higher Education World Rankings, CWTS Leiden Ranking 2015) A safe and international campus (over 5600 international students from more than 130 different countries)

4. Slide 10.4 Why INTO Exeter £53m investment in purpose built teaching facility opened in 2011 Located at the heart of beautiful Streatham Campus All programmes designed to mirror the university’s teaching styles and content Guaranteed progression subject to final results Full university status and access to all facilities including over 200 student-led societies 107 Nationalities in Centre since 2007 Purpose-built accommodation with on-site catering Dedicated student services including welfare, visa and range of social programmes to integrate with University More than 90% of students get a job or further study place within six months of graduating

5. Slide 10.5 Prepares students for direct entry in to the first year of an undergraduate degree programme Combines academic study, intensive English language preparation and study skills Choice of start dates One academic year (9 months) or extended option (12 months) International Foundation programme

6. Slide 10.6 International Year One programme Successful completion allows entry in to the second year of an undergraduate degree at university Enhance knowledge of academic theory and practice Improves language skills and research skills for undergraduate study Choice of start dates On completion of foundation, A-levels or local equivalent

7. Slide 10.7 Aimed at students who want to study Master’s degree programmes Improve study skills and English language in the context of your chosen subject Choice of start dates Must have a first degree or equivalent International Graduate Diploma

8. Slide 10.8 Making Long-term Investment Decisions

9. Slide 10.9 LEARNING OUTCOMES You should be able to: Identify and discuss the four main investment appraisal methods found in practice Explain the nature and importance of investment decision making Explain the methods used to monitor and control investment projects Discuss the strengths and weaknesses of various techniques for dealing with risk in investment appraisal

10. Slide 10.10 The nature of investment decisions Large amounts of resources are often involved It is often difficult and/or expensive to bail out of an investment once undertaken

11. Slide 10.11 The scale of investment by UK businesses Source: Annual reports of the businesses concerned for the financial years ending in 2013 Business Expenditure on additional non-current (fixed) assets as a percentage of: Annual sales End-of-year revenue non-current assets Wm Morrison Supermarkets plc 5.6 11.1 Vodafone plc 32.4 12.0 Marks and Spencer plc 8.3 13.2 Severn Trent Water Ltd 24.4 6.3 Go-Ahead Group plc 2.3 10.6 J D Wetherspoon plc 7.9 10.2 British Sky Broadcasting plc 9.0 17.8 Ryanair Holdings plc 6.4 6.0

12. Slide 10.12 Investment appraisal methods Basis of calculation Profit Cash

13. Slide 10.13 What is the difference? Only long-term difference Depreciation Non-cash expense Already subtracted to arrive at profit

14. Slide 10.14 Average annual profit Average investment to earn that profit ARR = Accounting rate of return (ARR) × 100%

15. Slide 10.15 YearProfit 0 15 215 3 45 Total40 Average profit10 Average investment50 ARR20% Project with £100k investment

16. Slide 10.16 ARR decision rule Where competing projects exceed the minimum rate, the one with the highest ARR should be selected For a project to be acceptable, it must achieve at least a minimum target ARR

17. Slide 10.17 Problems with ARR Ignores the timing of cash flows Use of average investment Use of accounting profit Competing investments

18. Slide 10.18 Payback period (PP) Time taken for initial investment to be repaid out of project net cash inflows

19. Slide 10.19 YearProfitDepreciationCash FlowCum. Cash 0(100) 152530(70) 2152540(30) 315254010 452530 Total40 Payback =2 years +(30/40) x 12 months 2 years9 months Project with £100k investment (zero residual value)

20. Slide 10.20 PP decision rule If competing projects have payback periods shorter than maximum payback period, the one with the shortest payback period is selected Project should have a shorter payback period than the required maximum payback period

21. Slide 10.21 Problems with PP Does not take timing of cash flows fully into account Ignores cash flows after PP Does not take risk fully into account Not related to wealth maximisation objective Arbitrarily determined target payback period

22. Slide 10.22 The cumulative cash flows of three separate projects Project 1 Project 3 Project 2 Yr 1 Cash flows (£000) 200 800 600400 900 0 500300 100 700 Y2Y2 Yr 3 Yr 1 Yr 2 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Y1Y1 Payback period Initial outlay Yr 3 Yr 4 Yr 5 Y5Y5 Y4Y4

23. Slide 10.23 Interest foregone Inflation Required return Risk premium The factors influencing the returns required by investors from a project

24. Slide 10.24 Time value of money Assume interest rate is 10% £1 today is worth ? in one years time Answer £1.10 How much do you need to invest today to get £1 in a year? Answer £0.909 Therefore £1 in a years time is not worth £1 today (only £.909) How much do you need to invest to get £1 in 2 years time? Answer £0.826 To get £1 in 3 years time? = £0.751 The further you go into the future, the less the value of £1 today

25. Slide 10.25 Present value of £1 receivable at various times in the future, assuming an annual financing cost of 10 per cent 5432 1 0 6 789 Years into the future 10 20 30 40 50 60 70 80 90 100 Pence £1

26. Slide 10.26 YearCash Flow Discount factor Present Value 0(100)1 130.90927.27 240.82633.04 340.75130.04 430.68320.49 NPV10.84 ConclusionDo the project Project with £100k investment (zero residual value & 10% discount factor)

27. Slide 10.27 NPV decision rule If competing projects have positive NPVs, the one with the highest NPV is selected If project NPV is positive, it should be accepted; if it is negative it should be rejected

28. Slide 10.28 Why NPV is better than ARR and PP The whole of the relevant cash flows The objectives of the business The timing of the cash flows NPV fully addresses each of the following:

29. Slide 10.29 Internal rate of return (IRR) The discount rate, which, when applied to the future project cash flows, produces a zero NPV IRR used to compare projects with different capital outlays

30. Slide 10.30 IRR decision rule If competing projects exceed minimum IRR requirement, the one with the highest IRR is selected Project must meet a minimum IRR requirement. (The opportunity cost of finance)

31. Slide 10.31 YearCash Flow Discount factor 10% Present Value Discount factor 20% Present Value 0(100)1 1 130.90927.27.83324.99 240.82633.04.69427.76 340.75130.04.57923.16 430.68320.49.48214.46 NPV10.84(9.49) IRR =14.90% Project with £100k investment (zero residual value)

32. Slide 10.32 The relationship between the NPV and IRR methods NPV (£000) Cost of capital (%) 10 20 30 40 50 60 70 0 1020 30 40 IRR −10 0

33. Slide 10.33 Problems with IRR Does not directly address wealth maximisation Ignores the scale of investment Has difficulty with unconventional cash flows

34. Slide 10.34 Some practical points related to investment appraisal Past costs Common future costs Opportunity costs Taxation Year-end assumption Cash flows not profit flows Interest payments Non-financial factors

35. Slide 10.35 The main investment appraisal methods Investment appraisal methods Discounted cash flow methods Net present value Internal rate of return Accounting rate of return Payback period Non-discounted cash flow methods

36. Slide 10.36 Investment appraisal in practice Many surveys have shown the following features: NPV and IRR have become increasingly popular Continued popularity of the PP and ARR methods Businesses tend to use more than one method Larger businesses rely more heavily on NPV and IRR than smaller businesses

37. Slide 10.37 Thank you for your attention Any Questions?