1 Personal Finance: Another Perspective Investments 3: Securities Market Basics.
BASICS OF INVESTMENTS Economic Reasons for a Project.
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Transcript of BASICS OF INVESTMENTS Economic Reasons for a Project.
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BASICS OF INVESTMENTS
Economic Reasons for a Project
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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?
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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?
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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?
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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
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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
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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
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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.
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TYPICAL MARKET RESEARCH
EXAMPLE FROM NET
http://www.marketresearch.com/
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ALTERNATE INVESTMENTS
COMPARE THIS PROJECT WITH OTHER ALTERNATE INVESTMENTS - WHAT ARE RISK VERSUS RETURN VALUES
CONSIDER A PERSONAL EXAMPLE FOR IRA INVESTMENTS
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IRA OPTIONS (http://www.wachovia.com/)
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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
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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
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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.
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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):
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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
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INFLATION CALCULATION
INFLATION RATE
CPI
11
1
nn
P
SINFINFPS )(
http://inflationdata.com/inflation/Consumer_Price_Index/HistoricalCPI.aspx?rsCPI_currentPage=0
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INFLATION CALCULATIONS
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INFLATION CALCULATIONS
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HISTORY OF INFLATION RATES TO SHOW THE IMPACT OF VARIOUS EVENTS
SOURCE: http://inflationdata.com/inflation/Inflation/DecadeInflation.asp
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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
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DISCRETE COMPOUNDED INTEREST
INTEREST EARNED ON INTEREST
FactorAmountCompoundDiscretei
iPFn
n
)(
)()(
1
371
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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
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CONTINUOUS INTEREST
CONTINUOUS COMPOUND AMOUNT FACTOR
EFFECTIVE INTEREST RATE
)( 127 rNrN PeFe
)( 1571 reff ei
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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
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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
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CONTINUOUS DISCOUNTING
PRESENT WORTH EQUATION
CONTINUOUS DISCOUNT FACTOR
)( 327 rNe
FP
)( 3371
rNe
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SERIES DEPOSITS
DISCRETE INVESTMENTS FUTURE WORTH EQUATION (SCAF)
CONSTANT ANNUAL CASH FLOW FUTURE WORTH (CCAF)
i
iAF
N 11
r
eAF
rN 1
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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
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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
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SERIES APPLICATIONS
ACCUMULATION OF FUNDS FOR A SPECIFIC PURPOSE; DOWN PAYMENT, RETIREMENT, COLLEGE EDUCATION, et. al.
mrmr
LF
nm
11
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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
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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
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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
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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