Project Appraisal: Investment

Opportunities
Presented By
Bidisha Sarkar

MISSION VISION CORE VALUES

CHRIST is a nurturing ground for an individual’s Excellence and Service Faith in God | Moral Uprightness
holistic development to make effective contribution to Love of Fellow Beings
the society in a dynamic environment Social Responsibility | Pursuit of Excellence
 Tools for Identifying Investment Opportunities

There are several tools or frameworks that are helpful in

identifying promising investment opportunities. The more popular
ones are:

• Porter model
• Life cycle approach
• Experience Curve
 Porter Model
According to Michael Porter the profit potential of an industry depends
on the combined strength of the five basic competitive forces as shown
below
Forces Driving Industry Competition

Potential
Entrants

Threat of New
Entrants
Bargaining
Power of Bargaining
THE INDUSTRY
Suppliers Power of Buyers
Suppliers Rivalry Among Buyers
Existing Firms

Threat of
Substitute
Products

Substitutes
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The Bottom Line

Porter's analysis framework defines the important criteria to determine
the stability of a corporation. High threat levels typically signal that
future profits may deteriorate and vice versa. For example, a hot firm in a
growing industry might quickly become obsolete if barriers to entry are
not present. Likewise, a company selling products for which there are
numerous substitutes will not be able to exercise pricing power to
improve its margins, and it may even lose market share to its
competitors.

The qualitative measures introduced by Michael Porter in Porter's five-

force framework allow investors to draw conclusions about a corporation
that are not immediately apparent on the balance sheet but will have a
material impact on future performance. Although quantitative factors
such as the price/earnings and debt/equity ratio are often the primary
concerns for investors, qualitative criteria play an equal role in
uncovering stocks that will provide long-term value.
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 Life Cycle Approach
Many industrial economists believe that most products evolve through a
life cycle that has four stages:

• Pioneering stage
• Rapid growth stage
• Maturity and stabilisation stage
• Decline stage

Investment in the pioneering stage, per se, may have a low return and
negative NPV. However, it may create options for participating in
growth.
Most products evolve through a life cycle. The broad stages and
the investment returns in these stages are as follows:

Stage Investment Return

 Pioneering  May have negative NPV
but may create options
for participating in
growth stage
 Rapid growth  Positive NPV
 Maturity  NPV – neutral
 Decline  Negative
 Experience Curve
 The experience curve shows how the cost per unit behaves with respect to
the accumulated volume of production

Cost per unit ( Present value) 100

80

60

40

10 20 40 80

Accumulated volume of production

 The key factors that contribute to decline in unit cost with respect to the
accumulated volume of production are learning effects, technological
improvements, and economies of scale
 Scouting for Project Ideas
 Analyse the performance of existing industries
 Examine the inputs and outputs of various industries
 Review imports and exports
 Study plan outlays and governmental guidelines
 Look at the suggestions of financial institutions and development agencies
 Investigate into local materials and resources
 Analyse economic and social trends
 Study new technological developments
 Draw clues from consumption abroad
 Explore the possibility of reviving sick units
 Identify unfulfilled psychological needs
 Attend trade fairs
 Stimulate creativity for generating new product ideas
 Hope the chance factor will favour you
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Sources of Positive NPV

 Economies of scale

 Product differentiation

 Cost advantage

 Marketing reach

 Technological edge

 Government policy


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