BM204 BUSINESS INVESTMENT ANALYSIS 2.pptx

The purpose of this module is to enable students to analyze 21st century production and service operation systems and their relationship with all other functions and activities in the organization, as well as understand how organisations can create competitive advantage through their production and operational processes. The objectives of the course are as follows: 1. To increase understanding of the problems and opportunities faced by the operations manager in manufacturing and service operations. 2. To develop an ability to apply operations management concepts in a variety of settings. 3. To craft efficient and innovative operations strategies that will enhance organisational competitiveness 4. To develop an understanding of operations management techniques in order to be able to evaluate recommendations made by technical specialist in the field

1. INTRODUCTION BUSINESS INVESTMENT ANALYSIS BM 204

2. This encompasses the kinds of real and financial assets , where and how they are bought and sold. Thus the investment process is concerned with how an investor should proceed in making decisions about which real and financial assets to invest in, how extensive the investments should be and when the investment should be made ( timing ). Real assets refers to physical assets such as property, plant, equipment and machinery. They represent assets that are used to produce goods and services. 1/24/2021 2 Bm 204 Investment Environment Defined

3. On the other hand financial assets are paper based assets represented on contracts between the deficit units and the surplus units . They can be represented by bond contracts, share certificates, forward contracts, futures contracts e.t.c In other words financial assets are claims to the income generated by real assets. Financial assets (securities) are traded in various financial markets. 1/24/2021 3 Bm 204 Cont..

4. Investment in its broadest sense is the sacrificing of current funds in the hope of getting higher future returns . It is also the current commitment of money or other resources in the expectation of reaping higher future benefits/return. Thus the investor has to be rewarded for sacrificing current consumption , time value of money as well as for bearing the uncertainties of the particular investment (risk) for instance: 1/24/2021 4 Bm 204 Investment Defined

5. If an investor gives up $100 today, expecting to get $108 a year from today, his rate of return is 8% assuming zero inflation. However if the investor expects inflation to be 4% a year from now, then his Required Rate of Return (RRR) becomes (8%+4%)= 12% and this is referred to as the nominal interest rate. If the investor further assumes that repayment will not be certain (risk) , he will require an additional reward for bearing this risk of say 5% (risk premium) , such that the investor’s RRR becomes (8%+4%+5%)=17% a year from today. 1/24/2021 5 bm204 Cont..

6. From the above scenario investment can formally be defined as current commitment of money for a specific period of time in order to derive higher future return that will compensate the investor for: The period funds are committed ( sacrificing of current consumption ) The expected rate of inflation ( Time value of money ) The uncertainty of future payments ( Risk ) N.B It is important at this point to differentiate the various participants in financial markets, that is speculators, hedgers, arbitrageurs and investors . 1/24/2021 6 Cont..

7. These are market participants who try to generate a positive return by outguessing the future direction of the market. Speculators bet on the future direction of the market, that is, if they anticipate that the price of a specific asset is likely to rise in the near future, they buy the asset now so as to dispose later at a higher price. If the speculator is correct in his analysis and forecasts he realizes a speculation profit but if he is wrong in his analysis he experiences a speculation loss. 1/24/2021 7 Bm 204 Speculators

8. The basic objective of hedging is to protect one’s investment against a perceived risk exposure , thus the aim is to reduce the risk of their transactions. Hedgers therefore enter into transactions for purposes of managing potential risks by avoiding their impact should they occur. The major risk exposures normally managed through hedging are those of price fluctuations, be they price increases or decreases. Hedging involves both hedgers and speculators entering into some agreement or transaction to cover a particular position or to make a profit respectively. 1/24/2021 8 bm204 Hedgers

9. These are buyers and sellers who try to generate a positive return (profit) by taking advantage of temporary profit opportunities created by discrepancies among prices of the same product in different markets . Arbitrageurs do not speculate but basically thrive on pricing discrepancies caused by information asymmetry in different markets of the same product. Arbitrageurs realize a return by buying a product from the cheaper market and resell at a higher price in the dearer market thus obtaining an arbitraging profit . 1/24/2021 9 Arbitrageurs

10. This represents a group of market participants who sacrifice current consumption of their funds for a reward in future. More importantly, their funds are used for productive purposes by the recipient, which is beneficial to the economy at large. Therefore, investing has a value addition characteristic as opposed to the above three. 1/24/2021 10 Investors

11. 1/24/2021 11 bm204 The End