MODUL PERKULIAHAN
Entrepreneurship
and Innovation
Management
Investment Analysis
Fakultas
Program Studi
Ekonomi
Magister
Management
TatapMuka
07
Kode MK
DisusunOleh
35007
Dr. M. Ali Iqbal, M.Sc
Abstract
Kompetensi
Kriteria-kriteria berinvestasi seperti
mengitung NPV, IRR dan Payback,
motif melakukan investasi karakteristik
instrument dan metode-metode
penilaian investasi
•
Mahasiswa diharapkan dapat
memahami kriteria-kriteria berinvestasi
seperti mengitung NPV, IRR dan
Payback, motif melakukan investasi
karakteristik instrument dan metodemetode penilaian investasi
Pembahasan
Before an investments is made, the firm will like to evaluate whether it will create value. To
determine the desirability of investment proposals, we can use several analytical tools such as: Net
Present Value (NPV), Equivalent Annual Cost (EAC), the Profitability Index (PI), the Internal Rate of
Return (IRR), the Modified Internal Rate of Return (MIRR), the payback period, and discounted
payback period.
Net Present Value
The net present value (NPV) is the difference between the present value of cash inflows and the cash
outflows. NPV estimates the amount of wealth that the project creates. Decision Criteria:
Investment projects should be accepted if the NPV of project is positive and should be rejected if the
NPV is negative.
Calculating an Investment’s NPV. The NPV of an investment proposal can be defined as follows:
Using the NPV Rule
Your firm is considering whether to invest in a new product. The costs associated with introducing
this new product and the expected cash flows over the next four years are listed below. (Assume
these cash flows are 100% likely). The appropriate discount rate for these cash flows is 20% per
year. Should the firm invest in this new product?
Costs:
2012
($ million)
Promotion and advertising
100
Production & related costs
400
Other
100
Total Cost
600
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•
Initial Cost: $600 million and r = 20%
•
The cash flows ($million) over the next four years:
•
Year 1: $200; Year 2: $220; Year 3: $225; Year 4: $210
•
Should the firm proceed with the project?
Using NPV, concluded
Year
Cash Flow
Present Value
Factor
PV(Cash Flow)
0
(600.00)
1.00
(600.00)
$200.00
(1.20)1
166.67
2
$220.00
(1.20)2
152.78
3
$225.00
(1.20)3
130.21
$210.00
(1.20)4
101.27
1
4
(49.07)
NPV =
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Decide on a Solution Strategy
•
We need to analyze if this is a good investment opportunity. We can do that by computing
the Net Present Value (NPV), which requires computing the present value of all cash flows.
•
We can compute the NPV by using a mathematical formula, a financial calculator or a
spreadsheet.
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Solve
• Using Mathematical Formula
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Analyze
•
The project requires an initial investment of $600.00 and generates futures cash flows that
have a present value of $649.07. Consequently, the project cash flows are $49.07 more than
the required investment.
•
Since the NPV is positive, the project is an acceptable project.
Internal Rate of Return (IRR) Rule
IRR is that discount rate, r, that makes the NPV equal to zero. In other words, it makes the present
value of future cash flows equal to the initial cost of the investment.
T
CFt
t
t = 0 (1+ r)
NPV = 
T
CFt
t
t = 0 (1+ IRR)
0
IRR Rule
Accept the project if the IRR is greater than the required rate of return (discount rate).
Otherwise, reject the project. Calculating IRR:
Like Yield-to-Maturity, IRR is difficult to
calculate. Need financial calculator, trial and error, excel or Lotus Spreadsheet, easy to first
calculate NPV then use the answer to get a first good guess about the IRR.
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IRR Illustrated
Initial outlay = -$200
Year
Cash flow
1
2
3
50
100
150
Find the IRR such that NPV = 0
150
0
=
50
-200 +
+
(1+IRR)1
50
=
(1+IRR)1
100
+
(1+IRR)2
(1+IRR)3
200
100
+
(1+IRR)2
150
+
(1+IRR)3
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11-12
IRR Illustrated
• Trial and Error
Discount rates NPV
0%
$100
5%
68
10%
41
15%
18
20%
–2
IRR is just under 20% -- about 19.44%
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Net Present Value Profile
Net present value
120
Year
Cash flow
0
1
2
3
4
– $200
50
100
150
0
100
80
60
40
20
0
– 20
– 40
Discount rate
2%
6%
10%
14%
18%
22%
IRR
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Payback Rule
Payback period = the length of time until the accumulated cash flows from the investment
are equal to or exceed the original cost. Payback rule: If the calculated payback period is
less than or equal to some pre-specified payback period, then accept the project. Otherwise
reject it.
Example: Payback
• Example: Consider the previous investment project.
The initial cost is $600 million. It has been decided that
the project should be accepted if the payback period is 3
years or less. Using the payback rule, should this project
be undertaken?
Year
Cash Flow
Accumulated Cash Flow
1
$200.00
$200
2
220.00
3
225.00
$420
4
210.00
$645 > $600
$855
• Pay back= 2 years+ (600-420)/225 = 2.8 years
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Motives for Direct Foreign Investment (DFI)
DFI can improve profitability and enhance shareholder wealth, either by boosting revenues
or reducing costs.
Revenue-Related Motives
1. Attract new sources of demand, especially when the potential for growth in the home
country is limited.
2. Enter profitable markets.
3. Exploit monopolistic advantages, especially for firms that possess resources or skills
not available to competing firms.
4. React to trade restrictions.
Cost-Related Motives
1. Fully benefit from economies of scale, especially for firms that utilize much
machinery.
2. Use cheaper foreign factors of production.
3. Use foreign raw materials, especially if the MNC plans to sell the finished product
back to the consumers in that country.
4. Use foreign technology.
5. React to exchange rate movements, such as when the foreign currency appears to
be undervalued. DFI can also help reduce the MNC’s exposure to exchange rate
fluctuations.
6. Diversify sales/production internationally.
The optimal method for a firm to penetrate a foreign market is partially dependent on the
characteristics of the market. For example, if the consumers are used to buying domestic
products, then licensing arrangements or joint ventures may be more appropriate. Before
investing in a foreign country, the potential benefits must be weighed against the costs and
risks. As conditions change over time, some countries may become more attractive targets
for DFI, while other countries become less attractive. Horizontal integration is the
production abroad of a differentiated product that is also produced at home. Vertical
integration (backward) allows a corporation to obtain control of a needed raw material and
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thus ensure uninterrupted supply at lowest possible cost, or acquire later stages in the
production process, or ownership of sales or distribution networks abroad (forward).
Private Valuation Approaches
Income
Approach
• Based on the present value of
expected future cash flows or income
Market
Approach
• Based on pricing multiples from sales
of similar companies
Asset-Based
Approach
• Based on the value of the company’s
net assets (assets minus liabilities)
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Income Approach: Three Methods
Free Cash Flow: Based on the present value of future estimated cash flows and terminal
value using a risk-adjusted discount rate. PV of expected future cash flows + PV of terminal
value
Capitalized Cash Flow: Based on a single estimate of economic benefits divided by an
appropriate capitalization rate.
Residual Income (Excess earnings): Based on an estimate of the value of intangible assets,
working capital, and fixed assets
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Capitalized Cash Flow Method
Vf = FCFF1/(WACC – gf)
• Vf = Value of the firm
• FCFF1 = Free cash flow for next 12
months
• WACC = Weighted average cost of capital
• gf = Sustainable growth rate of FCFF
Ve = FCFE1/(r – gf)
• r = Required return on equity
• g = Sustainable growth rate of FCFE
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Excess Earnings Method
Residual income = Normalized earnings – (Return on working capital) – (Return on fixed
assets)
Value of intangible assets =
RI  (1  g )
rg
Value of the firm = Working capital + Fixed assets + Intangible assets
Example: Excess Earnings Method
Working capital
$400,000
Fixed assets
$1,600,000
Normalized earnings
$225,000
Required return for working capital
Required return for fixed assets
12%
Growth rate of residual income
3%
Discount rate for intangible assets
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18%
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Example: Excess Earnings Method
- Return on working capital = 5% x $400,000 = $20,000
- Return on fixed assets = 12% x $1,600,000 = $192,000
- Residual income = $225,000 – $20,000 – $192,000 = $13,000
- Value of intangible assets = ($13,000 x 1.03) / (0.18 – 0.03) = $89,267
- Value of firm = $400,000 + $1,600,000 + $89,267 = $2,089,267
Market Approach: Three Methods
Guideline Public Company
• Based on the observed multiples of comparable
companies
Guideline Transactions
• Based on pricing multiples from the sale of entire
companies
Prior Transaction Method
• Based on actual transactions in the stock of the
private company
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Guideline Public Company Method
Identify
group of
comparable
public
companies
Derive pricing
multiples for
the guideline
companies
Adjust pricing
multiples for
relative risk
and growth
prospects
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Guideline Transactions Method
Most relevant for valuing the controlling interest
in a private company
Transaction data based on public filings by
parties to the transaction or from certain
transaction databases
Factors to consider in
assessing pricing
multiples:
• Synergies
• Contingent consideration
• Noncash consideration
• Availability of transactions
• Changes between transaction
and valuation dates
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Guideline Transactions Method
Most relevant for valuing the controlling interest
in a private company
Transaction data based on public filings by
parties to the transaction or from certain
transaction databases
Factors to consider in
assessing pricing
multiples:
• Synergies
• Contingent consideration
• Noncash consideration
• Availability of transactions
• Changes between transaction
and valuation dates
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Prior Transaction Method
Underlying Principle
• Based on actual transactions in the stock of the subject
company
• Based on either the actual price paid or the multiples implied
from the transaction
• Most relevant when valuing the minority equity interest of a
company
Advantages
• Provides the most meaningful evidence of value since it based
on actual transactions in the company’s stock
Disadvantages
• It can be a less reliable method if transactions are infrequent
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Example: Guideline Public Company
Method
Market value of debt
Normalized EBITDA
$6,800,000.00
$28,000,000.00
Average MVIC/EBITDA
multiple
9.00
Control premium from past
transactions
20.00%
Discount for increased risk
18.00%
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Example: Guideline Public Company Method
Public price multiple will be deflated by 18 percent. Due to increased risk of private firm
If buyer is strategic. A control premium of 20 percent from previous transactions is applied
If buyer is nonstrategic.No control premium is applied.
Example: Guideline Public Company Method Strategic Buyer
Risk adjustment: 9.0 × (1 – 0.18) = 7.4
Control premium: 7.4 × (1 + 0.20) = 8.9
Value of firm: 8.9 × $28,000,000 = $249,200,000
Value of equity: $249,200,000 – $6,800,000 = $242,400,000
Example: Guideline Public Company Method Financial Buyer
Risk adjustment: 9.0 × (1 – 0.18) = 7.4
The control premium is not applied
Value of firm: 7.4 × $28,000,000 = $207,200,000
Value of equity: $207,200,000 – $6,800,000 = $200,400,000
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Asset-Based Approach
Underlying Principle
•The value of ownership is equivalent to the fair value of its assets less
the fair value of its liabilities
Rarely Used for Going Concerns
•Difficulty in valuing
•intangible assets
•special purpose tangible assets
•individual assets
Most Appropriate for
•Resource firms
•Financial services firms
•Investment companies (real estate investment trusts, closed-end
investment companies)
•Small businesses with limited intangible assets or early stage companies
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Valuation Discounts/Premiums
Discounts
• Amount or percentage deduction from the value of an
equity interest
Lack of Control Discount (DLOC)
• Reflects the absence of some or all control
• DLOC = 1 – [1/(1 + Control premium)]
Lack of Marketability Discount (DLOM)
• Reflects the absence of marketability
• Applied when valuing a noncontrolling interest
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DLOC Example
Given a control premium of 19 percent
 1 
DLOC  1  
  16.0%
1  0.19 
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Valuation Discounts
Estimated Value
of Equity Interest
Estimated Value
of Equity Interest
Pro rata value of
equity interest
Pro rata value of
equity interest
Lack of control
discount
x (1 – Control
discount)
Lack of marketability
discount
x (1 – Marketability
discount)
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Valuation Discounts
Given a DLOC of 20 percent & DLOM of 16 percent
Total discount  1  [(1  DLOC)(1  DLOM)]
Total discount  1  [(1  0.20)(1  0.16)]  32.8%
DaftarPustaka
Hisrich, Robert D dan Michael P Peters (2002),’Enterpreneurship’, Mc Graw Hill, New York
Lambing (2000), ’Enterpreneurship’, Mc Graw Hill, New York
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