The competing investments problem
1 / 12

The Competing Investments Problem - PowerPoint PPT Presentation

  • Uploaded on

The Competing Investments Problem. Many companies evaluate more projects than they actually have money for Your boss asks you to do a design for something - you bring it to your boss - he smiles thanks you says it looks good - and then doesn’t put it in the budget

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
Download Presentation

PowerPoint Slideshow about 'The Competing Investments Problem' - raven

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
The competing investments problem
The Competing Investments Problem

  • Many companies evaluate more projects than they actually have money for

    • Your boss asks you to do a design for something - you bring it to your boss - he smiles thanks you says it looks good - and then doesn’t put it in the budget

  • Companies may not consider opportunities that don’t make required return

    • All alternatives that make return are not guaranteed investments

More competing investments
More Competing Investments

  • Some investments are mutually exclusive

    • if you build your new Zebra24 auto plant in DeSoto, you may not be able to build it in Nashville

  • What do you do when you have a bunch of invest and earn problems competing for the same space?


  • Need to recognize that Discounted Cash Flow Analysis may be a requirement to be a competing alternative - it isn’t necessarily the final say

  • Do the subtract one cash flow from another trick and look at the merits of choosing one over the other

The subtract alternative
The Subtract Alternative

  • Investment alternatives may not have the same lives

    • creates potential long negative cash flows at end of comparison

  • All investments may not be of equal size

    • big profitable investments make more money than little ones

    • Is picking the biggest alternative the way to maximize wealth? (Max NPV)

      • Often the fact that alternatives compete means other opportunities are coming

Have an irr contest
Have an IRR Contest

  • IRR blows up on “unconventional cash flows”

    • an alternatives list raises the chances that one or more will have blow-ups in them

  • You can tweek a messed up IRR but now you have an investment that is being evaluated on external market conditions against one that is all internal

The competing investments problem

  • PVR was designed for comparing invest and earn cash flows of unequal duration and magnitude

    • It tells you how many dollars of positive NPV you get for every dollar invested

      • This is how it gets around the largest investment wins problem

  • Investments with highest PVR are stronger

Have a pvr contest
Have a PVR Contest

  • More alternatives than you know what to do with implies lots of opportunities for your required rate

    • Can have unconventional cash flows without loosing meaning

      • Need to be aware that very large negative flows that will take planning to handle still need external investments

      • Don’t have to go external to get a number like IRR - not getting apples and oranges

Pvr is not a surrogate for irr
PVR is not a Surrogate for IRR

  • PVR values cash at your required rate of return

  • Interest rates (especially high ones) shift emphasis to short range returns

    • A highest IRR contest will put emphasis on quick money - not necessarily most

    • PVR values all money at required rate - will maximize the cash you get at your required rate

  • Answers are not equal

Even when money rules comparative decisions don t have just one right answer
Even when Money Rules Comparative Decisions Don’t have Just One Right Answer

  • An IRR contest (if you can pull it off - unconventional cash flow problems) tends to give answers that maximize wealth if you can jump in and out of investments

    • Some of the Wall Street raiders of the 80s and 90s

    • Good for Slash and Burn strategy

How do you value money
How Do You Value Money? Just One Right Answer

  • IRR = Slash and Burn

  • PVR chooses investments that maximize your wealth at your required rate within investments

    • Lets you choose richest portfolio of what is offered now

    • Does tempt people to look in the crystal ball as to what will be offered next (do I hold back part of the money?)

Continued Just One Right Answer

  • The outside investment world is important

    • an investment that pays out quick will have a good IRR or PVR, but if the present set of opportunities is unusually rich - paying out onto a flat market may not be maximizing future wealth

  • Net Future Value

    • discount money into a future pot at rate of return outside the investment

    • See what makes you richest

Nfv or nfw
NFV or NFW Just One Right Answer

  • Gives you the ability to see impacts in and out of investments

    • now left unequal length and unequal magnitude uncovered

    • May set an arbitrary “get rich date” in the future for unequal length - still may have a pick big tendency.