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MindMap Gallery Financial Cost Management 2022

Financial Cost Management 2022

D5 investment project capital budget, "Financial Management" requires a large amount of calculations and the test time is tight. It should be a headache for liberal arts students. In fact, as long as the logic of financial management is sorted out and a certain amount of time is spent, it can be easily solved. Master the financial management course well.

Edited at 2022-05-18 11:10:49

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Financial Cost Management 2022

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Outline

D5 Investment Project Capital Budget

Types of investment projects and evaluation procedures

investment type

Mainly new construction or expansion projects & renovation projects

Evaluation procedure

Propose investment plan

Estimated related cash flows

Calculate investment decision indicators

Compare decision indicators to acceptance criteria

Perform sensitivity analysis

Evaluation methods for investment projects

Evaluation methods for independent projects

Basic (the basic indicator is future net cash flow & present value of original investment)

Net present value method, present value index method

Net present value method: npv = present value of future net cash flows - present value of original investment

If it is greater than 0, it means that the return on investment is greater than the capital cost. Adopt~

Present value index method: pi=1 npv=present value of future net cash flow/present value of original investment

Relative number, reflecting efficiency, is greater than 1, and the return on investment is greater than the capital cost, adopted~

Internal rate of return: irr = the discount rate that makes the present value of future cash flows = the present value of the original investment or the discount rate at which the net present value of the investment project is zero

Generally, it is a step-by-step test. First, find the two discount rates with the net present value closest to 0, and find it by interpolation. In special cases, look up the table. IRR>Capital cost to be adopted

Auxiliary

Payback period method - dynamic & static payback period

quiet

The time required for the future net cash flow caused by investment to accumulate to be equal to the original investment amount - the number of years required to recover the investment

The construction period is 0, and the static payback period = original investment/future annual net cash flow

If the original investment is divided into several years, the static payback period = M The uncollected amount in year M / The net cash flow in year M 1

move

Consider the time value of money

The original investment is a one-time investment, and the construction period is 0. (P/A, i, n) = present value of original investment/future annual net cash flow (then use interpolation method)

If not, then the dynamic payback period = M The present value of the uncollected amount in year M / The present value of the net cash flow in year M 1

accounting rate of return ARR

Calculated based on the ratio of the estimated average annual net profit over the life of the project to the estimated capital occupation

Simple

Average annual net profit/original investment*100%

average capital occupation

Average annual net profit/average capital occupation*100%=average annual net profit/(original investment amount net residual value of investment)/2*100%

Prioritization issues for mutually exclusive projects

Projects have the same lifespan - the conclusion of the net present value method takes precedence

Project life spans vary

Technological progress cannot be replicated; replacement costs rise when inflation is severe; competition reduces project returns or even eliminates them

common years method

Assuming that the project can be reset, choose the least common multiple as the common life span

equal annuity method

Calculate the net present value, and then calculate the equal annual amount = net present value of the plan/(P/A, i, n); for perpetual annuity, perpetual net present value = equal annuity/capital cost i

Total distribution when the total amount is limited

There is no limit on the total amount of capital. As long as npv>0 or IRR>capital cost, you can invest.

But if it is limited, it is necessary to find the combination with the largest total net present value as the optimal combination.

Estimation of investment project cash flows

Factors affecting cash flow of investment projects

cash flow - cash inflow & cash outflow & the difference is net cash flow

Distinguish between relevant and non-relevant costs

Must be considered when making specific decisions and analyses: variable cost, marginal cost, opportunity, replacement, cash, avoidable, deferrable, exclusive, differential, etc.

Not relevant

Sunk/inevitable, undelayable/common cost, etc.

Don’t ignore opportunity costs

When adopting new solutions, consider the impact on other projects

need for working capital

Working capital is a stock indicator, and cash flow is a flow indicator. The impact of working capital on cash flow is the increase in working capital. Only when the scale of working capital increases, does it need to increase working capital investment.

Determination of cash flow for new projects

Project life cycle

No income tax considered

Consider income taxes

After-tax cost = cost amount * (1-t)

After-tax income = income finance * (1-t)

Depreciation tax deduction = depreciation *t

after tax cash flow

Cash flow from fixed asset renewal projects

Features - Cash Outflow

average annual cost

Estimation of investment project discount rate

Use the enterprise's current weighted average cost of capital as the capital cost of the investment project

Use the comparable companies method to estimate the capital cost of investment projects

Sensitivity analysis of investment projects

meaning

method

sensitivity method

maxmin method