Download Investment Management

Investment Management
Impact on performance
managers
Presenter: Mark Heath B.Bus CPA MAIPM
Office: 02 9570 3160
Mobile: 0402 285 967
Email: [email protected]
Strategic value
How much is it worth?
Strategic
value
=
Future
Options
=
Option
Pricing
Management options
Hold?
Maintain current project /
business
Sell?
Abandon project / business
Buy?
Invest in project / business
Valuation methods
NPV
Good for non-strategic
decisions
Payback
Complete waste of time
Option
Pricing
Only method that values all 3
options
Financial options
Hold?
In the money call option
Sell?
Put option
Buy?
Call option (American with
dividends)
Implementing option pricing
Stage gate
financing
Value 3
options
Track 3
options
Increasing probability of success
Stage Gate Finance
PLAN
ACCOMPLISH
SOFT
HARD
PHASE 1
PHASE 2
PHASE 3
PHASE 4
CONCEPT
DEVELOPMENT
IMPLEMENTATION
TERMINATION
Change
Control
Scope of
Work
Positional
Paper
Business
Case
TIME
Benefits
Realisation
Information required
Asset price or share price
Exercise price
Standard deviation of forecast
Amount of time till next stage gate
Risk free rate of return
Net present value analysis
Define value / cost drivers
Estimate discount rate
Estimate project costs
Utilise NPV analysis
Carry out sensitivity analysis
Track value / cost drivers
Track project costs
Sensitivity Analysis
Best and worst case
Probabilities of each case
Monte Carlo simulation
Monte Carlo Simulation
Mean NPV
Std. Dev.
Upper and
lower limits
Option pricing – information at hand
PV of cash flows = Asset value or
share price
Initial Investment = Exercise Price
Monte Carlo Simulation = Standard
deviation
Time till next stage gate = time till
exercise of option
90 bank bill rate = Risk free rate
Option pricing methods
Black Scholes
Binomial
method
•
•
•
•
Easy to use
More accurate
Won’t value America put options
Won’t value American call with
dividends
• Not as accurate unless using weekly
periods
• Can be used for all option types
• Uses decision tree analysis
• Sets up benefits tracking model
Binomial Method
Needed for abandon and hold options
because of dividends and early exercise
Decision tree analysis with option
pricing theory
Start at end of project’s life and work
backwards
Binomial method
Now
A
Year 1
Year 2
B
E
C
F
G
H
Ex = Cost of investment in project
A = base case NPV
d = % change in NPV of downside event
u = % change in NPV of upside event
B = A x d , C = A x u, E = B x d, F = B x u, G = C x d, H = C x u
Option value at E – H (opt 2yr) = Letter – Ex
Probability of upside event (P) = (rf – d)/ (u-d)
Option value at C = (P x H + (1-P) x G)/ (1+rf)t
British Telecom – 3G investment
Exercise Price = 1bn
10bn initial investment to get option
PV of future cash flows = 6bn
NPV = -5bn
Standard deviation = 150%
Risk free rate = .04
Time to exercise = 5 years
Value of option = 5.2bn
Tangible v intangible assets
Intangible
Tangible
NAB investment in Homeside
$A 2.2bn Investment
Income stream of avg $A170m / year
PV of income stream $A2.2bn
Value of options into US allows for
positive NPV
Revaluation of MSR’s through
derivatives trading causes losses
A$bn
Revaluation of MSR’s
9
8
7
6
5
4
3
2
1
0
1998
1999
2000
MSR Valuation
2001
2002
HIH investment in FAI
Cost of Investment = $320m
Base case NPV = -$16m
NPV range = -$85m and $18m
Call option value = $13m
Put option value = $30m
First decision tree point puts NPV @
-$105m
Implications for the performance
manager
Benefits management is as important
as other job functions
Binomial method and decision tree
analysis provides framework
Should be embedded in weekly
reporting