BASICS OF INVESTMENTS

Economic Reasons for a Project

QUESTIONS ABOUT PROJECTS:

WHY SHOULD AN INVESTMENT BE MADE IN A PROJECT?

WHY SHOULD AN INVESTMENT BE MADE IN A SPECIFIC PROJECT?

WHY SHOULD AN INVESTMENT BE MADE AT THIS TIME?

INVESTMENT CONSIDERATIONS

TECHNICAL RISK - IS THE TECHNOLOGY AT A RESEARCH, DEVELOPMENT, PROTOTYPE, OR COMMERCIALLY DEMONSTRATED LEVEL.

MARKET RISK FOR THIS PRODUCT - IS THE MARKET NEW, INCREASING, SATURATED AT THE CURRENT PRICE?

WHAT IS THE POTENTIAL FOR COMPETITIVE PRODUCTS?

EVALUATION OF ECONOMIC FACTORS

NEED TO KNOW COST TO BUILD PLANT (CAPITAL COST),

COST TO OPERATE PLANT (COST OF MANUFACTURE),

COST TO FINANCE PLANT, FINAL PRODUCT PRICE REQUIRED TO

SATISFY COMPANY PROFITABILITY CRITERIA.

WHAT IS THE RISK TO MAKE THIS PROFIT VERSUS MORE CONSERVATIVE (GOVERNMENT NOTES) INVESTMENTS?

OTHER RISK COMPONENTS

TECHNICAL RISK - DETERMINE CURRENT STATUS OF TECHNOLOGY BY COMPLETING A REVIEW OF ALL AVAILABLE DATA - PRIVATE AND IN PUBLIC DOMAIN - INCLUDING PATENTS.

RAW MATERIAL AVAILABILITY

DEVELOPMENT OF DESIGN

DETERMINE DESIGN BASES –NEED: PHYSIOCHEMICAL CHARACTERISTICS

OF ALL BASE CASE AND ALTERNATE PROCESS COMPONENTS

ALL PROCESS CONDITIONS FOR UNIT OPERATIONS

AND ALL PRODUCT SPECIFICATIONS. DETERMINE DESIGN CRITERIA -

CLIENT SPECIFIC DESIGN REQUIREMENTS

DESIGN SEQUENCE BASIC ENGINEERING - DEVELOP FLOWSHEETS

AND OTHER DIAGRAMS NECESSARY TO DEMONSTRATE PLANT CAN BE CONSTRUCTED AND TO SERVE AS A BASIS FOR DETAILED DESIGN.

DETAILED TECHNICAL DESIGN - COMPLETE AN ESTIMATE TO A LEVEL OF DETAIL NECESSARY TO PROVIDE CAPITAL AND OPERATING COST ESTIMATES ADEQUATE TO MAKE A DECISION TO PURSUE THE PROJECT. CONTINGENCY SPECIFIES THE AMOUNT OF DETAIL IN THIS DESIGN

BUSINESS RISK

MARKET RISK - NOT INCLUDED IN THIS PROJECT AND REQUIRES ACTIVITY BY SALES AND MARKETING PERSONNEL. NOT INCLUDED IN THIS STUDY.

COMPLETE MARKET STUDY FOR PRODUCT - EITHER BY CLIENT OR ENGINEER, TO DETERMINE POTENTIAL ANNUAL SALES AT SPECIFIC PRICE LEVELS. DETERMINE WHAT COMPETITIVE PRODUCTS ARE AVAILABLE.

TYPICAL MARKET RESEARCH

EXAMPLE FROM NET

http://www.marketresearch.com/

ALTERNATE INVESTMENTS

COMPARE THIS PROJECT WITH OTHER ALTERNATE INVESTMENTS - WHAT ARE RISK VERSUS RETURN VALUES

CONSIDER A PERSONAL EXAMPLE FOR IRA INVESTMENTS

IRA OPTIONS (http://www.wachovia.com/)

PROJECT ECONOMICS

COMPLETE CAPITAL COST ESTIMATE COMPLETE OPERATING COST ESTIMATE EXAMINE FINANCING OPTIONS - WHAT

FRACTIONS OF THE INVESTMENT SHOULD BE BORROWED VERSUS OWNER EQUITY.

CASH FLOW - ESTIMATE THE ACTUAL CASH FLOW OVER THE LIFE OF THE PROJECT AND USE THIS TO DETERMINE THE DISCOUNTED RATE OF RETURN

COST ESTIMATE DETAIL

DEPEND UPON THE DETAIL OF INFORMATION IS AVAILABLE

HOW THE RESULTS ARE INTENDED FOR USE.

REFER TO ATTACHED KE 1096 AS AN EXAMPLE

DEFINITIONS APPLIED TO ESTIMATES

ACCURACY APPLIED TO ESTIMATES AND REPRESENTS

THE VALUE + THE FINAL ACTUAL VALUE, BASED ON THE INFORMATION USED FOR

PREPARING THE ESTIMATES. CONTINGENCY

INDICATES THE COMPLETENESS OF THE FINAL DESIGN; I.E., THAT FRACTION WHICH HAS NOT BEEN SPECIFICALLY DEFINED.

CAN BE AS SIMPLE AS THE TYPE OF PAINT ON BUILDINGS, WHICH COULD SLIGHTLY INFLUENCE FINAL COSTS.

INFLATION IN ESTIMATES

THE ENDLESS CIRCLE AND THE RELATIONSHIP WITH THE VALUE OF MONEY.

COMPARE ECONOMIC FACTORS IN TWO YEARS (BASED ON A VALLEY ECONOMY):

INFLATION COMPARISONYEAR COMPONENT VALUE ($) VALUE(HOURS) RATE($/hr)

1975 Annual Engineering Salary 20000 2000 101975 Cost of a House 40000 40001975 Cost of Auto 5000 5001975 Cost of Loaf of Bread 0.5 0.05

YEAR COMPONENT VALUE ($) VALUE(HOURS) RATE($/hr)2012 Annual Engineering Salary 90000 2000 452012 Cost of a House 500000 111112012 Cost of Auto 25000 5562012 Cost of Loaf of Bread 3 0.07

INFLATION CALCULATION

INFLATION RATE

CPI

11

1

nn

P

SINFINFPS )(

http://inflationdata.com/inflation/Consumer_Price_Index/HistoricalCPI.aspx?rsCPI_currentPage=0

INFLATION CALCULATIONS

INFLATION CALCULATIONS

HISTORY OF INFLATION RATES TO SHOW THE IMPACT OF VARIOUS EVENTS

SOURCE: http://inflationdata.com/inflation/Inflation/DecadeInflation.asp

FUTURE/PRESENT WORTH INTEREST FROM AN INVESTMENT

INCREASES PRESENT WORTH TO FUTURE WORTH

FOR SIMPLE INTEREST (PAID EVERY PERIOD AND NOT COMPOUNED):

• P = INITIAL DEPOSIT (PRESENT WORTH)• F = FUTURE WORTH (INITIAL DEPOSIT PLUS

INTEREST)• N = NUMBER OF PERIODS• i = SIMPLE INTEREST RATE PER PERIOD

)()( 271 iNPF

DISCRETE COMPOUNDED INTEREST

INTEREST EARNED ON INTEREST

FactorAmountCompoundDiscretei

iPFn

n

)(

)()(

1

371

EFFECTIVE/NOMINAL INTEREST RATE

DISCRETE INTEREST RATES INTEREST PER PERIOD: i NOMINAL ANNUAL INTEREST: r m = NUMBER OF PERIODS PER YEAR EFFECTIVE ANNUAL INTEREST:

)( 9711

m

eff m

ri

CONTINUOUS INTEREST

CONTINUOUS COMPOUND AMOUNT FACTOR

EFFECTIVE INTEREST RATE

)( 127 rNrN PeFe

)( 1571 reff ei

INFLATION IMPACTS

INFLATION DECREASES FUTURE WORTH ON NONINVESTED MONEY: WHERE ƒ = EFFECTIVE INFLATION RATE PER PERIOD

FOR COMPOUNDED INVESTMENTS:

fPF 1

N

N

f

iPF

)(

)(

1

1

DISCOUNTING CONVERTS FUTURE VALUES TO THE

PRESENT VALUE IS THE INVERSE OF COMPOUNDING FOR COMPOUNDED INVESTMENT

COMPOUND DISCOUNT FACTOR

)( 307

1

Ni

FP

)()(

3171

1

Ni

CONTINUOUS DISCOUNTING

PRESENT WORTH EQUATION

CONTINUOUS DISCOUNT FACTOR

)( 327 rNe

FP

)( 3371

rNe

SERIES DEPOSITS

DISCRETE INVESTMENTS FUTURE WORTH EQUATION (SCAF)

CONSTANT ANNUAL CASH FLOW FUTURE WORTH (CCAF)

i

iAF

N 11

r

eAF

rN 1

SERIES PRESENT WORTH DISCRETE INVESTMENTS

CONTINUOUS CASH FLOWS

SEE TABLES 7-3, 7-4 AND 7-5 FOR COMPILATION

N

N

ii

iAP

)(

)(

1

11

)( 1

1rrN

rN

ee

eAP

SERIES APPLICATIONS MORTGAGES – LOANS FOR HOMES

WHERE P0 IS THE INITIAL AMOUNT, L IS THE PAYMENT EACH PERIOD, r IS THE NOMINAL INTEREST RATE, m IS THE NUMBER OF PERIODS EACH YEAR , n IS THE NUMBER OF YEARS

nm

nm

mr

mr

mr

LP

1

11

0

SERIES APPLICATIONS

ACCUMULATION OF FUNDS FOR A SPECIFIC PURPOSE; DOWN PAYMENT, RETIREMENT, COLLEGE EDUCATION, et. al.

mrmr

LF

nm

11

PERSONAL INVESTMENT EXERCISE

EACH STUDENT IS TO INVEST $50,000 IN THE STOCK MARKET FOR THE DURATION OF THE CLASS.

STUDENTS MAY SELL AND BUY STOCKS ONCE EACH WEEK DURING THE SEMESTER

THE FINAL WINNER WILL HAVE THE MOST CASH AFTER SELLING THE STOCK NO LATER THAN THE LAST DAY OF CLASS

PI EXERCISE TRANSACTIONS

ALL STUDENTS START WITH A TOTAL OF $50,000 IN CASH (VIRTUAL)

BUYS/SELLS STUDENTS MAY HOLD UP TO 3 STOCKS AND

CASH AT ANY POINT IN TIME A 1% SALES COST IS ATTACHED TO EACH BUY

AND SELL TRANSACTION NO MORE THAN 3 BUY/SELL COMBINATIONS ARE

ALLOWED IN EACH WEEK CASH POSITIONS ARE ALLOWED AT ANY TIME

PI EXERCISE RECORDS ALL STOCKS MUST BE LISTED ON US EXCHANGES

WITH VALUES > $1/SHARE EACH STUDENT WILL GO TO THE YAHOO FINANCE

PAGE AND CREATE A PORTFOLIO TO TRACK THE STOCKS – USE YOUR INITIALS FOR THE NAME OF THE FILE

A PRINTOUT OF THE PORTFOLIO STATUS IS TO BE SUBMITTED EACH FRIDAY, WITH A SUMMARY OF ANY ACTIVITY COMPLETED DURING THE WEEK; e.g.

SOLD 500 SHRS OF STOCK A @ $10, SALES COST = $50 PURCHASED 400 SHRS OF STOCK B @ $5, SALES COST =

$20 $3000 INTO CASH INVENTORY

PI EXERCISE SOURCES

STUDENTS CAN USE ANY SOURCE OF INVESTMENT INFORMATION AVAILABLE TO ALL STUDENTS, SUCH AS: CORPORATE ANNUAL REPORTS STOCK RECOMMENDATIONS ON THE NET STOCK RECOMMENDATIONS AT THE

LIBRARY, VALUE LINE™ STUDENTS WORK AS INDIVIDUALS