MARKETING INVESTMENT EVALUATION

Investment means here any outlay on any extraordinary project or effort quite distinct from the normal expenditures connected with ordinary business operations. There are broadly three investment areas in a business from this stand-point. These are a) Capital expenditure, b) New business venture, and (c) New marketing effort. There may be various types of business needs giving rise to an investment proposal. To define an independent project and to recognize all feasible alternatives to it, identification of the specific need is important. Accordingly, need may be classified as follows: 1) Expansion 2) Cost reduction 3) Loss/cost avoidance 4) Replacement 5) Employee welfare 6) Improved manufacturing methods 7) Quality assurance and good manufacturing practice After an investment proposal is made, it has to be thoroughly evaluated, such evaluation requires collection, integration quantification and analysis of all feasible alternative projects relates to the particular course of action.

Capital budgeting
Capital budgeting is vital in marketing decisions. Decisions on investment, which take time to mature, have to be based on the returns which that investment will make. Unless the project is for social reasons only, if the investment is unprofitable in the long run, it is unwise to invest in it now. Often, it would be good to know what the present value of the future investment is, or how long it will take to mature (give returns). It could be much more profitable putting the planned investment money in the bank and earning interest, or investing in an alternative project. Typical investment decisions include the decision to build another grain silo, cotton gin or cold store or invest in a new distribution depot. At a lower level, marketers may wish to evaluate whether to spend more on advertising or increase the sales force, although it is difficult to measure the sales to advertising ratio. Capital budgeting includes: a) The formulation of long-term goals b) The creative search for and identification of new investment opportunities c) Classification of projects and recognition of economically and/or statistically dependent proposals d) The estimation and forecasting of current and future cash flows e) A suitable administrative framework capable of transferring the required information to the decision level f) The controlling of expenditures and careful monitoring of crucial aspects of project execution g) A set of decision rules which can differentiate acceptable from unacceptable alternatives is required.

The economic evaluation of investment proposals

The analysis stipulates a decision rule for: I) accepting or II) rejecting investment projects. The time value of money Recall that the interaction of lenders with borrowers sets an equilibrium rate of interest. Borrowing is only worthwhile if the return on the loan exceeds the cost of the borrowed funds. Lending is only worthwhile if the return is at least equal to that which can be obtained from alternative opportunities in the same risk class. The interest rate received by the lender is made up of: i) The time value of money: the receipt of money is preferred sooner rather than later. Money can be used to earn more money. The earlier the money is received, the greater the potential for increasing wealth. Thus, to forego the use of money, you must get some compensation. ii) The risk of the capital sum not being repaid. This uncertainty requires a premium as a hedge against the risk, hence the return must be commensurate with the risk being undertaken. iii) Inflation: money may lose its purchasing power over time. The lender must be compensated for the declining spending/purchasing power of money. If the lender receives no compensation, he/she will be worse off when the loan is repaid than at the time of lending the money. INVESTMENT EVALUATION TECHNIQUES: NPV IRR PAY BACK PERIOD ROI

NPV (Net Present value): NPV method is one of the discounting cash flow method recognizes the time value of money. It is consider to be one of the best method for evaluating the capital investment projects. The NPV is the difference between the total present value of future cash inflows and total present value of future cash outflows. NPV method is the process of calculating present value of flows (inflows and outflows) of an investment proposal. NPV for keynote corporate services:

IRR (Internal Rate of Return) The internal rate of return (IRR) or economic rate of return (ERR) is a rate of return used in capital budgeting to measure and compare the profitability of investments. IRR is that rate of return at which the sum of the discounted cash inflow equals the sum of the discounted cash outflow. It is a rate at which the NPV is zero. IRR can be calculated by locating the factor in annuity table . Factor= original investment Cash inflow per year IRR= A+ (C-O) X (B-A) (C-D) where A= Discounted factor of low trial B= Discounted factor of High trial C=Present value of cash inflows in low trial. D= present value of cash inflow in high trial. O= initial or original investment.

PAY BACK PERIOD: The pay-back period is defined as the period (number of years and months) at the end of which the net cash flow of a project is zero 0). In other words it is the period during which the original investment (cash outflow) is fully paid back by the returns (cash inflows)

ROI (Return On Investment)

The return on investment method is a popular method of judging acceptability of a project. To calculate the ROI both the statement and the returns are to be worked out with proper perspective. Total investment usually means the net fixed assets (gross fixed is less depreciation) plus net working capital (current assets current liabilities) relatable to a particular project or an alternative. Returns may be either pre-tax or after-tax profit. Sometimes after-tax cash flows are taken to be the returns. This is of course not a healthy practice ROI being basically an accounting concept, profit should be taken as the numerator; whatever be the profit is defined. For example besides PBT or PAT, sometimes it' (Earnings before interest and tax) is taken to be the returns the purpose of ROI calculations. An enterprise should have some minimum expectation in the form ROI percentage. This minimum expectation is called the cut-off of investment. The projects showing ROI below the cut-off rate automatically is excluded from consideration. And obviously, one with the highest ROI rate, will be accepted when there are a number of projects competing for a limited or scarce investible fund.

BREAKEVEN ANALYSIS
Breakeven analysis is used to determine when your business will be able to cover all its expenses and begin to make a profit. It is important to identify your startup costs, which will help you determine your sales revenue needed to pay ongoing business expenses. Break-even analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point. This is the amount that revenues can fall while still staying above the break-even point. Breakeven point = fixed costs/ (unit selling price variable costs)

Solution: Particulars Sales Less:- Variable cost Contribution Less: - Fixed cost Profit Amount (in Rs.) 85,263,564 (25,684,462) 59579102 (4,321,248) 55257854

Profit- Volume Ratio:-

Contribution Sales = 59579102 X 100 85,263,564 69%

Break-even point in sales: - Fixed cost P/V Ratio = 4,321,248 0.69 = Rs. 6262678

Break Even Point (Units)=

Fixed Cost Contribution 4,321,248 59579102 0.07253 units

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