Is It Still a Good Investment? - Part 1

Abstract

This and the chapter that follows are really a single chapter divided into two, simply in order to have chapters of a reasonable length. The same practical example that we developed in Chapter 9 is used to illustrate the principles discussed in these two parts. At the end of Chapter 9 we reflected upon whether or not the proposed project whose cash flows we had estimated were a good investment. Invest £1 million, and over four years get your money back, plus £420k. The conclusion we drew was that it looked pretty good; not spectacular maybe, but certainly a better return than could be earned by putting the money in the bank for four years. As you might expect, however, financial people are unlikely to be satisfied with such a woolly-sounding judgement as “pretty good”, and over many years they have developed various numeric methods for evaluating investment opportunities a little more objectively. It is these methods that we shall examine in these two chapters. We shall cover them in a convenient sequence rather than one that reflects their order of importance. Their relative importance will become apparent.