Risk Assessment and Investment Appraisal Tools

Investment decision is an important factor for investors and businesses, because they want to get the required return from the investment or increase capital of investment. The companies have many investment opportunities in related and unrelated businesses, But all not given the same gains. The investors have to choose which investment opportunity could give adequate return for them.

The companies have used different investment appraisal tools to assess the return, risk of the project/ investment. Such tools are Payback period, Accounting Rate of Return, Net Present Value (NPV), Internal Rate of Return (IRR) and Discounted Cash Flow (DCF). These tools give a clear relationship about project risk and returns, efficiency and future outcomes. Some investment has high risk and high return, for example Air line industry.

The NPV assess the time value for money, also NPV shows whether it could increase the value of the project. The positive NPV of the project/investment worthwhile, but on the other hand negative NPV should be worthless, due to negative cash flow from the project. The positive NPV should increase shareholder wealth as well as achieve the organisation goal.  For example the British Nuclear Fuels Ltd’s plan to open a new reprocessing plant at the Sellafield nuclear power station in 2001. But the Irish Government was opposed to this decision. According the BBC, the UK government and British Nuclear Fuels Ltd’s argument for opening the plant was focused around the “significant economic benefits” the scheme could have also have net present value of £216m.  

Payback period is an estimate the time taken to recover the original capital. However, in the shortcoming some investment decision does not deliver the perfect return. For example the Kraft acquired Cadbury, the Kraft paid 40% premium for the above deal. The Kraft shareholders of Warren Buffett were unhappy about the acquisition. Because, they are know definitely going to lose in this acquisition.

The Credit Crunch

The credit crisis started in the US, the analysis links the credit crises to the sub-prime mortgage business. This is a bank give high risk loan to people with poor credit histories. The Collateralised Debt obligations (CDOs) sold on to investors globally. This source of CDOs increases the liquidity in the market places. The CDOs are AAA rate assets, rates of return were huge. The bank were issuing long term mortgage against investing in assets.

The house prices falling but interest rate rising, this lead to people cannot pay their mortgages. Therefore investors suffer looses and they cannot reluctant to take more CDOs. The credit market is rumblings as bank are reluctant to lend each other.

The sub-prime mortgage crisis is quickly effect all over the world. The US federal bank and EU central bank tries to make money available for bank to borrow with lower interest rate. But the liquidity crisis not solve, bank remain trouble with lending each other. The cash become a rare; businesses were finding is difficult to fund. The lack of credit leads to job losses, bankruptcies and increase in living cost.  The public were severing problems with this crisis.  The Lehman Brothers was the first major bank to collapse in the credit crisis.

The solution was made by the US government agrees a $ 700bn bail – out that plan to borrow the money from world financial market and the UK government launches its own bail out. The banks have to confidence with the housing market. The most important banks have to planning the risk and spreading the risk in different portfolio. So how these bankers were did?

Therefore specific regulation would be most useful to the investment assets, which will help to avoid the problems again in the world. If the same mistake will be come in the future, that could be far more serious than before. Therefore bank have to strict control in credit system.

International Mergers and Acquisitions

Mergers and Acquisitions is an opportunity for investment in different countries. There are many reasons behind such as competitive advantage, economics of scale, increase product portfolio and market entry. Also companies can gain synergy through combined of two entities.  If the particular company is cannot create that synergy because they have some kind of value. But other company have other kind of knowledge. Therefore combined entity creates value greater than the separate entities.

In the recent news Alpha Natural resources and Massey energy agree to $8.5 billion combination. This is creating a premier coal operator in the US and a global leader in metallurgical coal supply. Alpha Natural Resources is one of the America’s premier goal suppliers with coal production capacity of greater than 90 million tons a year. The Massey Energy company is the largest coal producer in central Appalachia.

In this merger activity the Massey Energy company share holders received 1.025 shares of Alpha common stock at the closing share price value of $69.33 as at 28^th January 2011 and $10 in cash for each share of Massey common stock.  This represents that the Massey Energy received 21% premium of their current share price.

After the mergers the shareholders of Alpha owned approximately 54% and Massey owned 46% of the combined entity. Therefore the both company shareholders will gain on the advantage of industry leader in the robust production portfolio. However it has the scale to capitalize for further growth opportunities in global environment.

As predicted by the Alpha’s chief executive officer, Mr. Crutchfield, we have a proven history of successful integration inception in 2002. And he further stated we will build strong track record through strategic growth, this is not a just combination of assets but it focus on people, environment and community in the future.

In this transformational deal of merger has created shareholder value that is evidence from the above deal in the short run.  In the future, can create the value or destroy the value?

Foreign Direct Investment (FDI)

Foreign direct investment plays a key role in the development of economy for countries in the Middle East such as Dubai, Malaysia, Bahrain.

The recent news reported foreign direct investment in Dubai increased to 30 percent in the year 2011 compare it to 2010. Since its development and there are several agreements with the other countries such as South American and Chinese. This helped by rising confidence as its debt problems ease and influx of South American and Chinese companies.

The latest available data from the central bank shows that in 2009 direct investment in to the UAE as a whole plummeted to Dh14.7billion from Dh50.4billion in 2008, but the data does not give the breakdown of Dubai. While increasing investor confidence has seen more than 40 entries in Dubai, the new companies coming from Brazil, Chile, China, Korea, United States and Europe. According to A.T Kearney’s 2010 foreign direct investment confidence index, the UAE is the most attractive investment destination in the Middle East. Middle East is ranked at 11^th in the world wide. But the 2010 foreign direct investment confidence index ranked, Dubai is one of the top 25 global destinations, Supported by the city rankings of Dubai which ranked 1^st place in the Middle East.

Approximately 70 percent of the global FDI inflows are going to the Middle East, but most of the inflows are invested in Dubai. Because Dubai’s of unique locations, infrastructure and value proposition as a factor for the investors. In addition city is as demonstrating an ease of doing every business.  

The FDI enhances economic development effectively in Dubai. It has generated massive profit from increases in FDI, this lead to increase in job vacancies and better life style. Therefore lower level of interest rate, the public easy to borrow and invest new business opportunities. The Dubai has grown quickly than other countries.