Investment
Analysis:
First
Principles
Invest in projects that
yield a return greater than the minimum acceptable hurdle rate. The hurdle rate
should be higher for riskier projects and reflect the financing mix used -
owners’ funds (equity) or borrowed money (debt).
Returns on projects
should be measured based on cash flows generated and the timing of these cash
flows; they should also consider both positive and negative side effects of
these projects. Choose a financing mix that minimizes the hurdle rate and
matches the assets being financed. If there are not enough
investments that earn the hurdle rate, return the cash to stockholders. The form of returns - dividends and stock buybacks - will depend
upon the stockholders’ characteristics.
What is an investment or a project?
Any decision that
requires the use of resources (financial or otherwise) is a project. Broad strategic decisions
- Entering new areas of business
- Entering new markets
- Acquiring other companies
Tactical decisions
- Management decisions
- The product mix to carry
- The level of inventory and
credit terms
- Decisions on delivering a
needed service
- Lease or buy a distribution
system
- Creating and delivering a
management information system
What is Risk?
Risk, in traditional
terms, is viewed as a ‘negative’. Webster’s dictionary, for instance, defines
risk as “exposing to danger or hazard”. The Chinese symbols for risk,
reproduced below, give a much better
Description of risk. The
first symbol is the symbol for “danger”, while the second is the symbol for
“opportunity”, making risk a mix of danger and opportunity
Therefore,
A danger results
into opportunity that create a living in a means of mind blowing/thinking on
the way to earn a living.
"Think, Innovate, Create"
