 Hey guys, it's MJ the student's act tree and we're going to be looking at project appraisal, which is chapter 10 in subject CT1 and the idea behind this chapter is Let's say you're a business manager or you're a CEO or some high-powered guy and you've got various Projects that you can undertake. There's project a which is to build a stadium and do all this type of stuff Project B is to open an airline company and project C is to I don't know invent some new type of robotics and As a CEO you have to choose which of these three projects to go into Now instead of just relying on your gut feel or what you want to do What you can do is look at these measures that we've got over here To help you with your decision. They're going to quantify The various projects and they're going to like I said help you make your decision on which one to pursue Because each project is a series of cash flows So you invest some money into building the stadium or into researching the robotics or went to buying the planes and Then there will be a series of incomes or positive cash flows such as ticket sales of the stadium passengers on the airplane and selling the robots To some evil genius who wants to take of the world, you know, so you will have some Expenses and you will have some income and this happens across a timeline So you have your positive cash flows and your negative cash flows your very first measure Which is one of the most important ones is this net present value and what it does is it simply discounts all the positive cash flows? adds them together and Subtracts them from all the present value of all the negative cash flows or the expenses So you discount your revenue and you subtract it from the discount of your expense and that will give you the net present value The higher that value the better Shows you you're gonna be making more money However, this can be Distorted, let's say the stadium You know, it's gonna cost millions to build and you're gonna get millions Integra revenue so your net present value is gonna be in the millions Whereas researching the robot might just require a few hundred thousand and you might get a few hundred thousand back That net present value will be much smaller So therefore when we have two projects with different Absolute cash flows we look at the internal rate of return and what this does is it looks at How much return you're getting on your capital? So how much each dollar or each pound is making for you and the higher that value the better It is it means your money is being used more efficiently and to calculate it you set your Your equation of value so you have all your income on one side You have all your expense on the other side You have that discount value on both of them and you choose an interest rate Such that the net present value equals zero so or where you have the income equals the out go So what you can do is use the net present value formula, but instead of calculating The NPV you set the NPV to be zero and you solve for I you may have to use Interpolation in order to calculate your I because you may not be able to find it just using pure mathematics Then another important one are these payback periods. You've got the discounts of payback period and the normal payback period and this is the earliest time It takes for the overall project to become positive with regards to its cash flow So this is a bit of a liquidity measure So what you want is because normally you have your negative cash flows in the beginning And then you have your positive cash flows at the end What you want is the net effect to be positive as soon as possible So when you build let's say the stadium there may be a long period before You can start generating profit because the stadium has been constructed Whereas if you went into the airline project Once you bother the aircraft you can start selling tickets straight away And it might be very soon before you cover all your costs Then finally you can look at the accumulated profit Which is kind of like the net present value But on the other side of the timeline right at the end where you accumulate all your revenue And you subtract subtracted from the accumulated value of all your expenses Now there are other Measures that you can take and anyone interested in the subject. Please check out my video on CA1 Project Appraisal as you'll see there's other things that can influence a project Emotion and better for strategy and business reputation and the effort required to do each of these things and experience It gets quite complicated, but as far as CT1 these are the five measures you need to know I've got a little example here if anyone just wants to Pause it there and Then pause it there just to see what if you want to do a little example and see the numbers behind us. I do want to move on to the various rates of returns Rates of returns are used to calculates and rank Asset managers and to see who made the most money who was the best investor So we're gonna be looking at the money weighted rates return the time weighted rates of return and then the linked rates of return The money weighted rates return is the simplest and another formula looks really confusing, but it's not it's very simple What we're doing here is F stands for the fund value at time zero and we have the fund value at the end and Then what we do is we're solving for I that's the value we want to find out and the higher that value the better it is for our fund manager and T is the time of the duration So this is our formula and let's have a quick example to just get these numbers make it to make sense so what we do is Calculate the money weighted rates of return between these two dates. We start with our fund value here, which is the very beginning I've just Gone rid of all the excess there is to make it simpler So we have a hundred at the beginning. It's gonna be three years So I've got my three over there plus all my cash flow. So I'm just looking at the cash flows That's there's a 20 there and that's gonna go with two years And that's just one year because that's way on the timeline And then that's my final fund value and then what I want to do is Calculate this equation of value to find my interest rate I have to use a little bit of interpolation and I see 6.32 percent Another one you can do is the time weighted rate of return. This one is a little bit more complicated I mean, it's not as intuitive you can see we're dividing stuff I do get a little bit confused with this and I have made a mistake on my formula that is supposed to be a plus not a time so don't Let's always check out on me. I don't make these city mistakes But what this time weighted rates of return what it's doing is it's also looking at the fund values in between So if we do have the exact same example We can see That we remember we solving for I and see is our duration We have the very first fund value off the beginning which is that one there of The cash flow right at the beginning, which is that sorry cash flow at the beginning will always be zero Because the fund value that would be incorporated in the fund value. So of the starting value With our first one we then multiply that By the fund value you can see t1 and t1 over there plus the cash flow and then over the next one value and we keep repeating this and then We solve for I and it gives us this value here Now this is better when it comes to comparing managers because it's not very dependent on the cash flows So what we're gonna see or what what happens sometimes is? Managers go through good times and they go through bad times if I'm going through a bad investment time And I don't have a cash flow and then I go through a very good time and I do get this injection And that's what the cash is. It's additional money being added to my fund Then it's gonna look like oh wow look at me I'm so great and brilliant and that will distort the value compared to someone who got that cash injection During the bad time and they didn't get it there Whereas the time waited rate of return kind of eases that out by looking at the fund values so Like I said in CA1 you go into this much more in much more depth But for now you just need to know the following pros and the following cons So across the money waited rate of return The big advantage is that you don't need to know the fine values At each end of each year and that's very useful because it takes it is sometimes difficult to calculate those fine values in The exam you will be given those values. So don't worry about that The disadvantages as we've mentioned It's very sensitive to the timing and the amount of the cash flow You need to know all the cash flows and the equation may not have a unique solution because remember we used linear interpolation Whereas the time waited rate of return it eliminates the effect of cash flow amounts and timing which is very good when comes to comparing Asset managers the solution always exists However, you also need to know all the cash flows and you need to know the fund values at all the cash flows And job that's basically those of the two then there's the final one the linked internal rates of return Using the exact same set of examples we can use this formula gain Remember we're going to try and work out what this final I is over here and what we do is we calculate a whole bunch of Eternal interest rates for the first few years. So we have a hundred plus twenty Equals that and we work out each of them and then we link them all together Like I said these first glance if you're looking at if you haven't read anything on this chapter and you're looking at this video for The first time you're probably gonna be like what on earth is going on But read through your course notes do some examples You'll find that this is actually very easy These are like free marks in the exam and remember just this pros and cons There'll be a mark or two by mentioning those. So I don't know. I find this chapter very easy So I may have rushed through this video So if there's anything that you're unclear on or want to ask me further Please let me know in the comment section below and I'll do my best to give you a more in-depth Answer and job that is chapter 10 and next up. We will be doing chapter 11, which is investments Thanks guys for watching and remember to subscribe like share and do all those other YouTube things Hope you enjoy the rest of your day. Cheers