1 INVESTMENT PROJECTS

2 Contents  Investment projects and company value  Discussion of course participant experiences with investment projects  Summary - typical project types & goals

3 Investment Projects and Company Value [15 min]

4 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?

5 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 ??

6 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

7 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 ??”

8 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

9 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

10 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?

11 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%

12 Discussion of Course Participant Experiences with Investment Projects [30 min]

13 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?

14 Investment Projects — Summary [15 min]

15 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

16 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

17 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

18 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

19 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...

20 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

21 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!