Mastering Financial Modelling in Microsoft Excel 3rd edn, 3rd Edition

15

Investment analysis

Introduction

Investment model revisited

Payback period

Accounting return

Net present value

Internal rate of return

Benefit/cost ratio

Management tests – cash flow, etc.

Scenarios

Sensitivity analysis and charts

Capital rationing

Summary

INTRODUCTION

Companies invest capital in a range of projects, which may result in positive cash flows and thereby add value to the company and repay all the providers of capital. This includes both shareholders and debt providers as discussed in Chapter 13 on the cost of capital. It follows from the cost of capital logic that a company should invest in projects that provide a return above the cost of capital and reject projects that fail this test. Such decisions are linked to strategy, ...