TASK 3- INVESTMENT APPRAISEMENT.

• An investment is the use of money over time to increase value. In the hopes of earning greater future returns
than the investor or venture capitalist initially anticipated, capital can be invested in the form of money, time,
etc.
• The value of investments is typically not guaranteed to rise. The company might come out with less money.
Although the company can diversify its investments to lower risks, doing so may lower the amount of potential
income.
• Stocks, bonds, mutual funds, index funds, exchange-traded funds, certificates of deposit, retirement plans,
options, annuities, derivatives, and cryptocurrencies are the ten different types of investments.
• Investments are essential to every business because they foster growth and increase employee and owner
motivation as they know they have to pay dividends.
INVESTMENT DECISION.
Investment decisions are those that entail allocating the firm's various resources in a way that maximizes the venture
capitalist's return on investment. Long-term and short-term investment decisions can both be classified as investments. The
lack of resources is another issue that businesses must consider. It involves making long-term financial decisions. Budgeting
for capital investments is the term used. Diversifying investments can help lower risk, but it may also lower potential income.
There is a process of decision- making for investment that includes five steps to guide venture capitalists. These steps include:
1. Analyzing financial statement- financial managers must understand the current financial situation of the firm.
2. Definition of investment objectives- the venture capitalist should set investment goals- whether short-term or long-term.
They also need to be aware of their risk appetite.
3. Allocation of assets- based on the goals, venture capitalists should set aside some of their assets into stocks, bonds, real
estate, options and raw materials.
4. Choice of investment products- After narrowing down to a specific asset class, a venture capitalist must further select
specific assets or securities that is used to meet the requirements of an investments.
5. Monitoring and due diligence- Portfolio managers monitor the performance of each venture and its returns. If
performance is bad, the managers need to act quickly.
The choice to invest is influenced by a number of things. These include population growth, technological advancements, state
policies, consumer demands, trends, and economic growth.
INVESTMENT RISK.
Investment risk is the possible financial loss a venture capitalist could experience when making investments in
business possibilities in the hope of receiving high returns. Liquidity, amplification time, and security level are used
to rate it. To determine the risk involved with financial products, standard deviation is employed. Therefore,
managing investment risks requires having a solid understanding of the fundamental principles and ideas that
underlie risk and return strategies.
There are nine different types of risks, including market, liquidity, concentration, credit, reinvestment, inflation,
longevity, and international investment hazards.
When making huge investments, the venture capitalists should go through an evaluation process. This process is
called valuation process and includes the following steps taken by the venture capitalist:
1. Research all relevant details from the firm.
2. Brainstorming ideas in possibilities and problem-solving.
3. Consideration of financial and non-financial implications of investments and their alternatives.
4. Deciding whether to invest.
5. Implement plans and proposals, monitor each outcome and control it by comparing it to expected
consequences.
EARNINGS PER SHARE (EPS)

The net income of a firm is calculated as net income divided by the total number of outstanding common shares. It
is frequently used to calculate business value and displays the earnings per share of stock of a company.
There are numerous ways to calculate earnings per share, such as on a diluted basis or by omitting extraordinary
items or ceased activities.
Diluted and adjusted EPS are the two types of EPS.
Like any other financial metric, earnings per share is most useful when compared to competitors in the same
sector.
The formula for calculating earnings per share is as follows;
Earnings per share =
A higher EPS indicates higher value of the firm. This is because if a venture capitalists thinks the firm is making a
better return relative to the firm’s stock price, the venture capitalist will venture more.
EARNINGS YIELD.

Earnings yield is a financial measure representing the relationship between the LTM earnings of the firm and the
stock price per share of the firm. P/E (price-to-earning) is the inverse ratio of earnings yield.
The earnings yield is a good ROI indicator that is used to measure stock return. It is used to determine optimal
asset allocations and determine the assets which are undervalued or overvalued.
The formula of earnings yield is as follows:
Earnings yield = 100
A low yield rate shows that the firm's stock price is overvalued, and a high yield rate shows that the firm's stock
price is undervalued. However, growing companies value expansion heavily because of its growing value, so
returns are low even if the share price is rising. This ratio beneficial to venture capitalist interested in
investment returns than venture capitalist interested in long-term investment returns. 
PRICE EARNING RATIO (P/E)

Price earning ratio relates to a firm’s stock price to earnings per share.
Firms that aren’t making a profit or making a loss don’t have a price/ earning ratio because they don’t have any value to be placed
at the denominator.
In practice, two types of price/ earning ratios are used; forward price/ earning ratio and trailing price/ earning ratio.
For analysist, the P/E ratios are most valuable when compared to rivals in the same industry.
Venture capitalists use this ratio as a part of stock selection in the research process as it allows them to see is they are paid fair
returns.
To calculate the ratio, the formula is as follows:
P/E Ratio=
As a result of their larger expectations for future profits growth and stronger willingness to pay, businesses with high P/E ratios are
regarded as growth stocks. They might, however, be regarded as riskier investments because they are frequently more volatile.
Firms with low price-to-earnings ratios are frequently regarded as value stocks by venture capitalists. As the stock is trading below
its fundamental value, this indicates that it is undervalued. Venture capitalists are enticed to purchase the stock before the market
corrects it by the mispricing, which makes it appear to be a great deal.
Venture capitalists can uncover examples of low P/E firms that offer reliable dividend rates in well-established industries.
DIVIDEND COVERAGE RATIO.

How frequently a company may pay dividends to its shareholders is determined by the dividend coverage ratio.
This idea is used by venture capitalists to assess the risk of not making a profit. There is a modest danger that a
company won't be able to continue paying dividends at the same pace if it pays out a significant portion of its net
income in total yearly dividends. The company must borrow money to pay dividends if the ratio is less than 1,
which is unsustainable.
Payout ratio, dividend coverage ratio, free cash flow to equity ratio, and net debt to EBITDA are the four most
popular indicators.
Venture capitalist should evaluate dividend stocks using a combination of metrics. 
The formula of dividend coverage ratio is:
Dividend Coverage ratio =
A lower payout ratios are preferred over high payout ratios. Whereas, a high dividend payout ratio can indicate that
a firm may be struggling to sustain its dividend payout over the long term. 
ECONOMIC VALUE ADDED
Economic value added (EVA), also called economic profit, aims to calculate the true economic profit of a firm.
EVA is a measurement used to calculate the value a firm generates from its ventured capital.
However, EVA depends mostly on ventured capital and is best suited for high net worth companies. Companies
with intangible assets such as technology companies may not be suitable. 
The formula is: Net operating profit after taxes – (ventured capital × weighted average cost of capital)
A positive EVA indicates the firm’s earnings are able to meet this obligation and the remainder is for the firm’s
exclusive use.
A negative EVA shows that the firm’s profits are insufficient to pay returns to shareholders. If EVA is consistently
negative, venture capitalists may believe the firm is unable to generate adequate returns and reallocate their
funds elsewhere.
From an EVA measurement perspective, not all companies can positively contribute to EVA.
EVA is now recognized as a useful tool and all companies are interested in understanding and trying to maintain
investor psychology.
INVESTMENT APPRAISEMENT.
Investment appraisement is a method mainly used by companies and venture capitalists to judge the profitability
of investments. 
There are two main methods of investment appraisal techniques that include:
• Discounted cash flow methods this includes Net Present Value, Internal Rate of Return, Profitability Index and
Discounted Payback Period
• Non-discounted cash flow method this includes Payback period and Accounting Rate of Return.
PAYBACK PERIOD.
The time it taken for a project to recover the cost of a venture is referred to as the payback period. It is a forecast
of when an investment will become profitable. As long as the project generates revenue equivalent to the invested
cash, there is no winning or losing point.
Investors frequently prefer a quicker payback period. This shows a quicker inflow of capital, sustainability, and
increases the allure of investing.
The formula is: Payback period=
DISCOUNTED CASH FLOW (DCF).
The term discounted cash flow (DCF) refers to a valuation technique that calculates the value of an asset based on expected future cash flows.
DCF analysis aims to estimate the present value of an investment by predicting how much money the investment will bring in the future. 
It aids venture investors in deciding whether to buy a company or buy securities. Owners and managers of businesses can also use discounted cash flow
analysis to estimate operating and capital expenditure budgets.
The formula is: DFC=
A positive DFC indicates that a project can generate a higher return while a negative NVP indicates that the project expenditure will be more than the returns
thus not worth making an investment.
INTERNAL RATE OF RETURN (IRR).
A metric used in financial analysis to determine the potential return on capital is the internal rate of return (IRR). In discounted cash flow analysis, the IRR is
the discount rate at which the net present value (NPV) of all cash flows is zero.
IRR is calculated using the same formula as NPV. Note that IRR does not represent the true financial value of a project. The annual return will drive the NPV to
zero. In general, the better the investment, the higher the internal rate of return. IRR is constant across different investment types, so it can be used to rank a
large number of potential investments or projects fairly evenly. 
Investments with the highest returns are preferred when contrasting those with similar properties.
The formula is: NVP =
where: Ct​=Net cash inflow during the period t
C0​=Total initial investment costs
IRR=The internal rate of return
t=The number of time periods​
REFERENCES.
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Jason Fernando (30 March 2023) Internal Rate of Return (IRR) Rule: Definition and Example [Online]: https://www.investopedia.com/terms/i/irr.asp