ACKNOWLEDGEMENT

All praises to Almighty Allah, the most Gracious, the most Beneficent and the most Merciful,
who enabled me to complete this assignment. I feel great pleasure in expressing my since
gratitude to my teacher, for his guidance and support for providing me an opportunity to
complete my Project. I will keep my hopes alive for the success of given task to submit this
report to my honorable teacher whose guidance; support and encouragement enable me to
complete this assignment.

ABSTRACT

This assignment from the course of Corporate Finance. My topic is Capital Investment
Decisions. This ASSIGNMENT is the part of my MBA study. In the specialization MBA,
University sends/asks all the students for prepare these assignments. The program helps the
students to understand the practical conditions of different organization and their cultures, their
values, their policies, marketing and competitive strategies and also their implementation.
My basic purpose for doing this assignment was to analyze the ways and methods of capital
investment criteria with relate to the case study of Bank Alfalah Limited. During this assignment
program I get practical data from official website of Bank Alfalah. It is very important for the
student of MBA to get practical skills from any organization. For completion of this assignment
related to my topic I have collected data from different sources I collect data through discussion
with the teachers and my fellows and recommended books from the university.

CAPITAL INVESTMENT DECISIONS

INTRODUCTION WITH THE ISSUE
Purpose of this assignment is to analyze the different ways and criteria of making capital
investment decisions at different situations and criteria of selection of investment decisions.
Before study the investment criteria one has to understand about the basics of investment that are
given under:
MEANING OF INVESTMENT
In simple terms, Investment refers to purchase of financial assets. While Investment Goods are
those goods, which are used for further production.

Investment implies the production of new capital goods, plants and equipments. John Keynes
refers investment as real investment and not financial investment.
Investment is a conscious act of an individual or any entity that involves deployment of money
(cash) in securities or assets issued by any financial institution with a view to obtain the target
returns over a specified period of time.
Target returns on an investment include:
1. Increase in the value of the securities or asset, and/or
2. Regular income must be available from the securities or asset.
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TYPES OF INVESTMENT
Different types or kinds of investment are discussed in the following points.

AUTONOMOUS INVESTMENT
Investment which does not change with the changes in income level, is called as Autonomous or
Government Investment.
Autonomous Investment remains constant irrespective of income level. Which means even if the
income is low, the autonomous, Investment remains the same. It refers to the investment made
on houses, roads, public buildings and other parts of Infrastructure. The Government normally
makes such a type of investment.

INDUCED INVESTMENT
Investment which changes with the changes in the income level, is called as Induced Investment.
Induced Investment is positively related to the income level. That is, at high levels of income
entrepreneurs are induced to invest more and vice-versa. At a high level of income, Consumption
expenditure increases this leads to an increase in investment of capital goods, in order to produce
more consumer goods.
FINANCIAL INVESTMENT
Investment made in buying financial instruments such as new shares, bonds, securities, etc. is
considered as a Financial Investment.
However, the money used for purchasing existing financial instruments such as old bonds, old
shares, etc., cannot be considered as financial investment. It is a mere transfer of a financial asset
from one individual to another. In financial investment, money invested for buying of new shares
and bonds as well as debentures have a positive impact on employment level, production and
economic growth.
REAL INVESTMENT
Investment made in new plant and equipment, construction of public utilities like schools, roads
and railways, etc., is considered as Real Investment.
Real investment in new machine tools, plant and equipments purchased, factory buildings, etc.
increases employment, production and economic growth of the nation. Thus real investment has
a direct impact on employment generation, economic growth, etc.
PLANNED INVESTMENT
Investment made with a plan in several sectors of the economy with specific objectives is called
as Planned or Intended Investment. Planned Investment can also be called as Intended
Investment because an investor while making investment make a concrete plan of his investment.

UNPLANNED INVESTMENT
Investment done without any planning is called as an Unplanned or Unintended Investment. In
unplanned type of investment, investors make investment randomly without making any concrete
plans. Hence it can also be called as Unintended Investment. Under this type of investment, the
investor may not consider the specific objectives while making an investment decision.
GROSS INVESTMENT
Gross Investment means the total amount of money spent for creation of new capital assets like
Plant and Machinery, Factory Building, etc.
NET INVESTMENT
Net Investment is Gross Investment less (minus) Capital Consumption (Depreciation) during a
period of time, usually a year.
It must be noted that a part of the investment is meant for depreciation of the capital asset or for
replacing a worn-out capital asset. Hence it must be deducted to arrive at net investment.
CAPITAL INVESTMENT DECISIONS
Capital investment decisions are long-term corporate finance decisions relating to fixed assets
and capital structure. Decisions are based on several inter-related criteria. (1) Corporate
management seeks to maximize the value of the firm by investing in projects which yield a
positive net present value when valued using an appropriate discount rate in consideration of
risk. (2) These projects must also be financed appropriately. (3) If no such opportunities exist,
maximizing shareholder value dictates that management must return excess cash to shareholders
(i.e., distribution via dividends). Capital investment decisions thus comprise an investment
decision, a financing decision, and a dividend decision.

THE INVESTMENT DECISION

Management must allocate limited resources between competing opportunities (projects) in a
process known as capital budgeting. Making this investment, or capital allocation, decision
requires estimating the value of each opportunity or project, which is a function of the size,
timing and predictability of future cash flows.
PROJECT VALUATION
In general, each project's value will be estimated using a discounted cash flow (DCF) valuation,
and the opportunity with the highest value, as measured by the resultant net present value (NPV)
will be selected. This requires estimating the size and timing of all of the incremental cash flows
resulting from the project. Such future cash flows are then discounted to determine their present
value (see Time value of money). These present values are then summed, and this sum net of the
initial investment outlay is the NPV.
The NPV is greatly affected by the discount rate. Thus, identifying the proper discount rate
often termed, the project "hurdle rate" is critical to making an appropriate decision. The hurdle
rate is the minimum acceptable return on an investmenti.e. the project appropriate discount
rate. The hurdle rate should reflect the riskiness of the investment, typically measured by
volatility of cash flows, and must take into account the project-relevant financing mix. Managers
use models such as the CAPM or the APT to estimate a discount rate appropriate for a particular
project, and use the weighted average cost of capital (WACC) to reflect the financing mix
selected. (A common error in choosing a discount rate for a project is to apply a WACC that
applies to the entire firm. Such an approach may not be appropriate where the risk of a particular
project differs markedly from that of the firm's existing portfolio of assets.)
VALUING FLEXIBILITY
In many cases, for example R&D projects, a project may open (or close) various paths of action
to the company, but this reality will not (typically) be captured in a strict NPV approach. Some
analysts account for this uncertainty by adjusting the discount rate (e.g. by increasing the cost of
capital) or the cash flows (using certainty equivalents, or applying (subjective) "haircuts" to the
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forecast numbers). Even when employed, however, these latter methods do not normally
properly account for changes in risk over the project's lifecycle and hence fail to appropriately
adapt the risk adjustment.[10] Management will therefore (sometimes) employ tools which place
an explicit value on these options. So, whereas in a DCF valuation the most likely or average or
scenario specific cash flows are discounted, here the flexible and staged nature of the
investment is modelled, and hence "all" potential payoffs are considered. See further under Real
options valuation. The difference between the two valuations is the "value of flexibility" inherent
in the project.
THE DIVIDEND DECISION
Whether to issue dividends, and what amount, is calculated mainly on the basis of the company's
unappropriated profit and its earning prospects for the coming year. The amount is also often
calculated based on expected free cash flows i.e. cash remaining after all business expenses, and
capital investment needs have been met.
Working capital management
Decisions relating to working capital and short term financing are referred to as working capital
management. These involve managing the relationship between a firm's short-term assets and its
short-term liabilities. In general this is as follows: As above, the goal of Corporate Finance is the
maximization of firm value. In the context of long term, capital investment decisions, firm value
is enhanced through appropriately selecting and funding NPV positive investments. These
investments, in turn, have implications in terms of cash flow and cost of capital. The goal of
Working Capital (i.e. short term) management is therefore to ensure that the firm is able to
operate, and that it has sufficient cash flow to service long term debt, and to satisfy both
maturing short-term debt and upcoming operational expenses. In so doing, firm value is
enhanced when, and if, the return on capital exceeds the cost of capital; See Economic value
added (EVA). Managing short term finance and long term finance is one task of a modern CFO.

Decision criteria
Working capital is the amount of capital which is readily available to an organization. That is,
working capital is the difference between resources in cash or readily convertible into cash
(Current Assets), and cash requirements (Current Liabilities). As a result, the decisions relating
to working capital are always current, i.e. short term, decisions. In addition to time horizon,
working capital decisions differ from capital investment decisions in terms of discounting and
profitability considerations; they are also "reversible" to some extent. (Considerations as to Risk
appetite and return targets remain identical, although some constraints such as those imposed
by loan covenants may be more relevant here).
Working capital management decisions are therefore not taken on the same basis as long term
decisions, and working capital management applies different criteria in decision making: the
main considerations are (1) cash flow / liquidity and (2) profitability / return on capital (of which
cash flow is probably the most important).

The most widely used measure of cash flow is the net operating cycle, or cash conversion
cycle. This represents the time difference between cash payment for raw materials and
cash collection for sales. The cash conversion cycle indicates the firm's ability to convert
its resources into cash. Because this number effectively corresponds to the time that the
firm's cash is tied up in operations and unavailable for other activities, management
generally aims at a low net count. (Another measure is gross operating cycle which is the
same as net operating cycle except that it does not take into account the creditors deferral
period.)

In this context, the most useful measure of profitability is Return on capital (ROC). The
result is shown as a percentage, determined by dividing relevant income for the 12
months by capital employed; Return on equity (ROE) shows this result for the firm's
shareholders. As above, firm value is enhanced when, and if, the return on capital,
exceeds the cost of capital. ROC measures are therefore useful as a management tool, in
that they link short-term policy with long-term decision making.

Management of working capital

Guided by the above criteria, management will use a combination of policies and techniques for
the management of working capital. These policies aim at managing the current assets (generally
cash and cash equivalents, inventories and debtors) and the short term financing, such that cash
flows and returns are acceptable.

Cash management. Identify the cash balance which allows for the business to meet day
to day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows for uninterrupted
production but reduces the investment in raw materials and minimizes reordering costs
and hence increases cash flow. Note that "inventory" is usually the realm of operations
management: given the potential impact on cash flow, and on the balance sheet in
general, finance typically "gets involved in an oversight or policing way".[25]:714 See
Supply chain management; Just In Time (JIT); Economic order quantity (EOQ);
Dynamic lot size model; Economic production quantity (EPQ); Economic Lot Scheduling
Problem; Inventory control problem; Safety stock.

Debtors management. There are two inter-related roles here: Identify the appropriate
credit policy, i.e. credit terms which will attract customers, such that any impact on cash
flows and the cash conversion cycle will be offset by increased revenue and hence Return
on Capital (or vice versa); see Discounts and allowances. Implement appropriate Credit
scoring policies and techniques such that the risk of default on any new business is
acceptable given these criteria.

Short term financing. Identify the appropriate source of financing, given the cash
conversion cycle: the inventory is ideally financed by credit granted by the supplier;
however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors
to cash" through "factoring".

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Relationship with other areas in finance

Investment banking
Use of the term corporate finance varies considerably across the world. In the United States it
is used, as above, to describe activities, decisions and techniques that deal with many aspects of a
companys finances and capital. In the Pakistan and Commonwealth countries, the terms
corporate finance and corporate financier tend to be associated with investment banking
i.e. with transactions in which capital is raised for the corporation. These may include

Raising seed, start-up, development or expansion capital

Mergers, demergers, acquisitions or the sale of private companies

Mergers, demergers and takeovers of public companies, including public-to-private deals

Management buy-out, buy-in or similar of companies, divisions or subsidiaries

typically backed by private equity

Equity issues by companies, including the flotation of companies on a recognised stock

exchange in order to raise capital for development and/or to restructure ownership

Raising capital via the issue of other forms of equity, debt and related securities for the
refinancing and restructuring of businesses

Financing joint ventures, project finance, infrastructure finance, public-private

partnerships and privatizations.

Secondary equity issues, whether by means of private placing or further issues on a stock
market, especially where linked to one of the transactions listed above.

Raising debt and restructuring debt, especially when linked to the types of transactions
listed above

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PRACTICAL STUDY OF THE ORGANISATION

BANK ALFALAH LIMITED
INTRODUCTION
Bank Alfalah Limited was incorporated on June 21st, 1997 as a public limited company under
the Companies Ordinance 1984. Its banking operations commenced from November 1st ,1997.
The bank is engaged in commercial banking and related services as defined in the Banking
companies ordinance, 1962. The Bank is currently operating through 195 branches in 74 cities,
with the registered office at B.A.Building, I.I.Chundrigar, Karachi.
Since its inception, as the new identity of H.C.E.B after the privatization in 1997, the
management of the bank has implemented strategies and policies to carve a distinct position for
the bank in the market place.
Strengthened with the banking of the Abu Dhabi Group and driven by the strategic goals set out
by its board of management, the Bank has invested in revolutionary technology to have an
extensive range of products and services.
This facilitates our commitment to a culture of innovation and seeks out synergies with clients
and service providers to ensure uninterrupted services to its customers. We perceive the
requirements of our customers and match them with quality products and service solutions.
During the past five years, we have emerged as one of the foremost financial institution in the
region endeavoring to meet the needs of tomorrow today.
Vision
To be the premier organization operating locally & internationality that provides the complete
range of financial services to all segments under one roof.

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Mission
To develop & deliver the most innovative products, manage customer experience, deliver quality
services that contributes to brand strength, establishes a competitive advantage and enhances
profitability, thus providing value to the stakeholders of the bank.
CURRENT ACCOUNT:

Non interest bearing checking account.

Minimum account opening requirement of Rs. 10,000 only.

Free debit card can be used to withdraw cash and make purchases at thousands of outlets
across Pakistan which provides access to funds 24 hours a day.

No restriction on number of withdrawals and on number of deposits

PLS SAVINGS ACCOUNT:

Profit & Loss Sharing Saving Bank Account.

Minimum account opening requirement of Rs. 5,000 only.

No restriction on number of withdrawals and number of deposits.

Profit on saving accounts is credited to the customer account on half-yearly basis.

Free debit card can be used to withdraw cash and make purchases at thousands of outlets
across Pakistan which provides access to funds 24 hours a day.

ROYAL PROFIT:

Minimum Deposit requirement of Rs. 50,000 only.

Higher returns on higher balances.

No restriction on number of withdrawals and on number of deposits.

Free debit card can be used to withdraw cash and make purchases at thousands of outlets
across Pakistan which provides access to funds 24 hours a day.

Profit is credited to the customer account on monthly basis.

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Alfalah Mahana Amdan

Alfalah Mahana Amdan is a 3 year TDR with expected rate of profit of 10% p.a. This term
deposit will provide an opportunity to individual/joint customers to enjoy higher returns that will
automatically be credited to his/her current/PLS/RP/BBA account on 1st working day of each
month.
Investment Criteria
The firm invests and advises by reference to criteria that have been developed by Charles Breese
since the 1980s, latterly in conjunction with LGB. They comprise both positive measures and
Red Flags, which are negative factors that must be addressed before an investment is made.
The firm's criteria continue to evolve in the light of its everyday involvement in analysing and
investing in early-stage growth companies. They are thus not set in stone. However, there are
some core features that are unlikely to change. These are:
Positive
Experienced Management

A properly structured board that acknowledges its responsibilities to all stakeholders.

A management team that includes industry relevant senior executives and makes business
decisions on the basis of verified financial and operational data.

Strong Value Proposition

Robust intellectual property or know-how.

Opportunities to exploit this intellectual property or know-how through multiple

commercial applications.

A significant portion of recurring revenues.

A business that satisfies the unmet needs of its customers in economically quantifiable
terms - as demonstrated by credibly targeting high gross and operating margins.

A business model that can achieve breakeven fairly rapidly.

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Corporate Development and Exit

The potential for scalability in global markets.

The prospect of corporate development via bolt on acquisitions and/or corporate

venturing.

A business strategy that will be attractive to trade buyers and/or investors in the public
equity markets.

Investment Criteria for Corporate Treasury Money Market

Every corporation accumulates excess cash that must be managed to provide for seasonal
expenses such as product production or long-term goals such as expansion of facilities. The
treasurer or chief financial officer of a company is responsible for the management of corporate
cash that has been accumulated in the corporate treasury account.

Quality Risk

Managing quality risk involves researching the financial strength of the institutions
backing the investment products that you purchase. Corporate treasury cash must be
invested in the highest quality investments, because the corporate treasury operates as the
savings account for the corporation. Traditional investments are U.S. Treasury bills and
short-term notes out to 2 years until maturity, certificates of deposit at FDIC-insured
banks and bankers acceptances at the highest quality banks. If you manage a relatively
small cash portfolio of $10 million or less, you should consider investing in money
market mutual funds managed by the largest and highest rated mutual fund managers.

Interest Rate Risk

Corporate treasury cash investments should be as liquid as possible. This requirement

generally protects these investments from interest rate fluctuations, which can lower the
resale or cash-out value of your investments if interest rates rise. Interest rate risk is
something to consider if you invest in short-term U.S. government bond funds, but if you
immunize your portfolio by investing in short-term bonds that mature on dates when you
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need that block of cash, your principal will be protected because bonds pay back their
$1,000 principal value at maturity plus interest. If you pay more than par ($1,000 per
bond) for your bonds, you will still receive only $1,000 per bond at maturity, but your
interest payments will be higher. Consult your tax adviser regarding the utility of
investing in these premium bonds.
Currency Risk

If your company does business overseas, you may be required to maintain a cash account
in a foreign currency. Unless that currency is pegged to the U.S. dollar, you face the risk
that it will decline in value against the U.S. dollar, causing your company to lose money
in its cash account because of the currency translation. The solution is to hedge against
currency risk, which is a complex task. If you are not experienced in managing currency
risk, your bank can assist you with this problem.

Maturity Risk

A lot can happen between the time you make your investment transaction and its maturity
date. Many corporate treasury funds are invested only in overnight investments such as
repurchase agreements fully collateralized by U.S. government securities. Theoretically,
this is the safest type of investment with respect to maturity risk and has the added benefit
of compounding the interest you receive by reinvesting that amount plus principal daily.
The longer the maturity on your investments, the greater the maturity risk.

Investment Policy

Corporations should have a formal investment policy covering the investment of treasury
cash, earmarked cash and pension fund investments if there is an in-house managed
pension fund. The investment policy should address the above risks and dictate the types
of investments that may be made under all circumstances. If your investments are proper
relative to the needs of your corporation and acceptable risk, you should have no need for
a crisis plan. However, a financial crisis involving an issuing institution or the global

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economy can happen at any time, and it is wise to examine the various consequences and
make a policy plan of action.
Socially Responsible Investing

Business world investing activities are coming increasingly under pressure to stop
financial support of environmental polluters, human rights violators and even advocates
of certain political parties or candidates. Interest groups target public companies and even
private companies, so you should scrutinize your investments for any potential problems
that might catapult your company into the nightly news.

Investment selection process

The investment selection process involves a detailed analysis of technology, target market and
accounting, legal and tax aspects of the investment opportunity. It is quite a demanding process,
both for the company and the investor, but is essential in order to obtain mutual knowledge and
often very helpful in leading the company to the next stage of development.
The investment selection process may involve several professionals in different activities in
order to analyse in depth the following items:

Technology and market:

o

Product analysis

Market analysis, vision and competitive positioning assessment

Development roadmap check-up and milestones.

Customer feedback and commercial pipeline:

o

Offers, negotiations and order pipeline

Demonstration of customer interest and feedback.

Companys organization:
o

Commercial partnerships

Management and organization chart.

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CONCLUSION
The banking industry has experienced slower loan growth in recent past due to sluggish demand
in interest-rate sensitive consumer financing as well as a high-base effect. Deposit mobilization
has been faster as banks attract long-term deposits to match long-term project financing needs.

In this situation, larger banks are likely to be the winners because they have a solid deposit base
and the ability to participate in big-ticket project financing deals, analysts say. Banks with
adequate credit quality procedures in the still nascent consumer-financing segment also stand to
benefit, they add. A combination of factors is behind slower loan growth including the tighter
monetary policy adopted by the central bank and higher rates have moderated credit demand,
which is in line with the central banks aim to curb inflationary pressures.
The impact of higher rates has been clearly felt in consumer financing and growth has
temporarily moderated in this segment. Secondly, corporate credit demand has also decreased as
recent industrial expansion cycle stands completed. However, the banks have been able to attract
deposits at a fast pace in the recent past, as banks have made efforts to mobilize long-term fixed
deposits and the proportion of fixed deposits is gradually increasing. The drive for attracting
longer-term deposits comes on the back of zero-rating of deposits of tenure greater than one-year
for CRR purposes. With the industrial expansion cycle kicking off in power and fertilizer
sectors, banks are quietly building up deposit base to gear up themselves for future long-term
lending projects.

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