Presentation Prj. Appr

7/31/2019 Presentation Prj. Appr

1/25

Group:-

NEERAJ KUMARSAURABH JAINPRESTEGE VARGHESE JOHNRAJ KISHORERAHUL PARIHAR


2/25

(A)Portfolio related risk measures.

The return of security or investment is generally measured as holding periodReturn which is defined as:-

Cash inflow during the period + [ending value begging value]-----------------------------------------------------------------------------

Beginning value

Ex- If a capital investment requires an initial outlay of Rs 100,000, generates a cash

flow of Rs 5000, and has end-of-the-period value of Rs 110,000, the holdingperiod return

Holding period return = 5000 (110,000 100,000)--------------------------------- = 15%

100,000


3/25

Key measures used in portfolio analysis

a) Varianceb) Co-variancec) Co-relationd) Beta

[B] Mean Variance Portfolio construction

The Two-asset portfolioExpected return and standard deviation of return for a two-asset portfolio are

E(Rp) = Wa*E(Ra) + Wb*E(Rb)

The n- asset portfolioWhen more than two assets are combined in a portfolio, the expected portfolio

returns and the standard deviation of portfolio return are-

E(Rp) =


4/25

[C] Feasible reason and Efficient Frontier

[D] Risk Return Preference

[E] Optimal Portfolio

[F] Optimal portfolio with lending and borrowing at a Riskless Rate

[G] Portfolio Theory and Capital Budgeting.


5/25

[H] Capital asset pricing model

Assumptions-a) Individuals are risk averseb) Individual seek to maximize the expected utilities of their portfolios over a

single period planning horizon.c) Individuals have homogeneous expectations.d) Individuals can borrow and lend freely at the risk less rate of return.

e) Market is perfect, there is no taxes , no transaction cost, ssecurities arecompletely divisible.f) Quantities of risky securities in the market is given.

Capital Market Line

Security Market Line

Relation Between SML & CML


6/25

Developing the inputs required for applying the CAPM.

a) Risk-Free Rate

b) Market Risk Premium- Historical Risk Premium- Forward Looking Risk Premium.

c) Beta

Estimation Issues

Adjusting Historical Beta


7/25

CAPITAL ASSET PRICING MODEL AND CAPITAL BUDGETING

A) Equity Beta And Asset Beta.

Processure for calculating a projects required rate of return.


8/25

Every project being considered is independent.

A project is being considered for implementation now or

never.

The economic life of a project is fixed.

The investment & financing aspect of a project areindependent.

The cash flows of a project may be estimated on the basisof current prices.


9/25

There are mutually exclusive projects.

Project can be deferred by one or more years.

The economic life of a project is not predetermined &

fixed. The investment & financing side of a project are related.

Inflation is explicitly considered in evaluating the project.

+

Evaluation of overseas investment proposals. Investment in capabilities.


10/25

Choice between mutually exclusive projects of unequallife.

Optimal timing decision.

Determination of economic life. Interrelationship between investment and financial

aspects.

Inflation & capital budgeting.

International capital budgeting.

Investment in capabilities.


11/25

Machine A

Standard Model

Costs Rs. 75,000

Lasts 5 Years

Operating Cost Rs.12,000

PV Cost= 75,000+12,000+12,000+12,000+12,000+12,000

(1.12) (1.12)^2 (1.12)^3 (1.12)^4 (1.12)^5

= 1,18,260

Machine B

Economy Model

Costs Rs. 50,000

Lasts 3 Years

Operating Cost Rs.15,000

PV Cost = 50,000+15,000+15,000+15,000

(1.12) (1.12)^2 (1.12)^3

= 85,030Present Value Cost (PV Cost)Discount Rate = 12%


12/25

UAE = PV Cost

PVIF A r,n

= 118,260 = 32,804

3.605

UAE = PV Cost

PVIF A r,n

= 86,030 = 35,816

2.402

Machine B Machine A

Unique Annual Equivalent (UAE)

or

Equivalent Annual Cost (EAC)


13/25

Examine alternative dates (t) when the investment canbe made.

Estimate the net future value as of each alternative dateand convert the same to its current value.

Choosing the timing that has the highest current value.


14/25

Time Net Future Value (Rs.Mn)

0 20

1 28

2 33

3 36

4 38

Time Net Future Value (Rs.Mn)

0 20 = 20.00

(1.12)^0

1 28 = 25.00

(1.12)^1

2 33 = 26.30

(1.12)^2

3 36 = 25.62

(1.12)^3

4 38 = 24.15

(1.12)^4


15/25

INTERRLATIONSHIP BETWEEN INVESTMENT AND FINANCINGASPECTS

The weighted average cost of capital is based on the assumption that everyproject is financed by the samePropertions of debt and equity as found in the capital sturucture of firm.

Finanacing and Investment decision are likely to interrelated.

This may be done either by calculating the adjustedNPV or using the adjusted discount rate.


16/25

Adjusted Net Present Value

The adjusted NPV of a project is its NPV calculated after makingadjustments for the financing impact of the project

Adjusted NPV = Base case NPV +NPV of finanacing decisionsassociated with the project.


17/25

SOCIAL COST BENEFIT ANALYSIS

1) Rationale for SCBA2) UNIDO approach3) Net benefit in terms of economic (efficiency) prices.4) Savings impact and its value.5) Income distribution impact6) Adjustment for merit and demerit goods.

7) little-Mirrlees approach.8) Shadow Prices9) SCBA by financial Institution.10) Public sector investment decisions in India.


18/25

Rationale for SCBA

a) Market Imperfections

b) Externalitiesc) Taxes and subsidiesd) Concern for savinge) Concern for Re-distributionf) Merit wants


19/25

UNIDO approach

UNIDO approaches was first articulated in the Guidelines for project

Evaluation.

UNIDO came out with another publication Guide To Practical Appraisalin 1978.

It involves 5 stages-

a) Calculation of the financial profitability of the project measured at market price.b) Obtaining the net benefit of the project in terms of the economic (Efficiency)prices.

c) Adjust for the impact of the project on savings and investment.d) Adjust for the impact of the project on income distribution.e) Adjust for the impact of the project on merit goods and demerit goods whose

social value differ from their economic value.


20/25

Net benefit in terms of economic (efficiency) prices.

a) Shadow pricing : Basic issue

-choice of numeraire - concept of tradability - sources of shadow pricing

-Taxes(1)When a project result in diversion of non traded inputs which are

fixed in supply from other producers or addition to non tradedgoods, taxes should be included.

(2)When a project augments a domestic production by other producer,taxes should be excluded.

(3) For fully traded goods, taxes should be ignored

-consumer willingness to pay.


21/25

Savings impact and its value

a) Impact on saving

b) Value of saving

Income Distribution impact- Marginal utility of income = % decrease in income/ % increase in income.

-Weight attached to income =

Adjustment for merit and de-merit goodsMerit goods Whose social value is greater than economic value

De-merit goods Whose economic value is greater than social value.


22/25

LITTLE-MIRRLEES APROACH

Calculating accounting prices particularly for a foreign exchange savings andunskilled labor.

Considering the factor of equity.Use of DCF analysis

UNIDO L-M approach1) Measures cost and benefit in Measures cost and benefit interms of Domestic rupee. terms of International prices

2) Measure cost and benefit in terms of Measure cost and benefit in terms ofConsumption. uncommitted social income.

3) Stage by stage analysis of efficiency It However tends to view these consi-, savings , and redistribution. -derations together.


23/25

SHADOW PRICES[I]Shadow price of traded goods

It is simply the border price,

If goods are exported then its shadow price will be FOB.

If goods are imported then its shadow price will be CIF.

If foreign demand isnt perfectly elastic then the marginal export revenue will

be substituted to FOB price.

If foreign supply isnt perfectly elastic then the marginal import revenue willbe substituted to CIS price


24/25

[II]Accounting price of non traded goods- 2/3 marginal social cost + marginal social benefit.

Use of conversion factor

- Monetary cost of non-traded item is broken down into Tradable, Labor,Residual components.

Shadow wage rateSWR = c-1/s(c-m) or SWR = m+(c-c)+[1-1/s](c-m)

Accounting rate of return:


25/25

SCBA by financial Institution.

a)Economic rate of return.

b) Effective Rate of Protection

c) Domestic resource cost

PUBLIC SECTOR INVESTMENT DECISIONS IN INDIA

Initiatives to Improve the quality of Investments Decision

Project Appraisal Division

Public Investment Board.

Lacunae

Documents

Presentation Prj. Appr