Financial Concepts

February 2010

Business Investment Decision

• Price

• Risk

• Alternatives

• Business Objectives

Principal Concepts

There are five concepts we have to understand in order to valuate a project:

• Cash Flow

• Net Present Value (NPV)

• Internal Rate of Return (IRR)

• Payback

• Interest Rate or Discount Rate

Cash Flow

Cash flow refers to the movement of cash into or out of a business, a project, or a financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be usedto determine a project's rate of return or value. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return, and Net Present value

1 2 3

Revenue 1000 2500 1000

Cost 500 1000 1500

Cash Flow 500 1500 -500

Net Present Value - NPV

• NPV is used in capital budgeting to analyze the profitability of an investment or project.

 

NPV =

CFt

( 1 + k )t

t = 1

n

Net Present Value - NPV

• NPV compares the value of a cash today to the value of that same cash in the future, taking inflation and returns into account.

• If the NPV of a prospective project is positive, it should be accepted.

• NPV > 0

• However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.

• NPV < 0

NPV - Example

• Lets considered we will receive US$ 10.000 in the year 2017. How much it represents today?

2010 2011 2012 2013 2014 2015 2016 2017

NPV = 10.000/ (1+0,2)^7 = US $ 2.790

10K

i=20%

NPV Example

Factors affecting NPV- Example

Internal Rate of Return - IRR

• The IRR of an investment is the interest rate at which the costs of the investment lead to the benefits of the investment. IRR can be used to rank several prospective projects a firm is considering.

• Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.

Internal Rate of Return - IRR

• While the actual rate of return that a given project ends up generating will often differ from its estimated IRR rate, a project with a substantially higher IRR value than other available options would still provide a much better chance of strong growth.

-I0 (1+TIR)2 + A1 (1+TIR) + A2 = 0

Excel:

TIR= (A1:C1)

Payback Period

• Payback period in business and economics refers to the period of time required for the return on an investment to "repay" the sum of the original investment

• It is the moment when accumulative cash flow is positive

0 1 2 3

Saving 2000 2000 2000

Investment -5000

Cash Flow -5000 2000

Cash Flow Acc -5000 -3000 -1000 1000

Interest Rate

• One of the most common mistakes made in when calculating DCF is forgetting to properly adjust an annual percentage rate for the period in question.

• Example if Interest rate is 12% annual basis and you are evaluating that last only a quarter. What is the discount rate will you use?

Interest Rate - Example

• Example: if Interest rate is 12% annual basis and you are evaluating that last only a quarter. What is the discount rate will you use?

(1+i)^n = (1+i) ^n

(1+0,12)^1= (1 + iq)^4

(1,12)^1/4 – 1 = iq

0,0287= iq

2,87%= iq

Discount Rate or Interest Rate

• Discount rate is the percentage by which the value of a cash flow in a discounted cash flow (DCF)valuation is reduced for each time period by which it is removed from the present.

• The estimation of a suitable discount rate is often the most difficult and uncertain part of a DCF. This is only worsened by the fact that the final result is very sensitive to the choice of discount rate — a small change in the discount rate causes a large change in the value.

Interest Rate 10% annual

0 1 2 3

Saving 500 500 500

Investment -1.000

Cash Flow -1.000 500 500 500

Cash Flow Discounted -1.000 455 413 376

Cash Flow Accum -1.000 -545 -132 243

NPV 243

Payback 3 AÑOS

Cash Flow, VPN and Discount Rate

CFt

( 1 + k )t

t = 1

n

NPV =

SOP Guide

SOP Guide

R$ (x1000) Condições de OperaçãoMotorizado

TZ-82P AA290AGNº de bicos 2 4Haste e flange de fixação não incluído incluídoPressão de água (BAR) 10 10Vazão ar (Nl/min) não utiliza 87,7Tempo do ciclo de lavagem (min) 18 4Consumo de água por ciclo (m³) 7,5 2,88Frequência de uso (vezes/dia) 3 3Quantidade de Tanques 8 8Duração da Safra (dias/ano) 200 200

Custo do EquipamentoEnquanto o rotativo hidráulico exigirá alguns componentes para instalação, além da mão de obra, o motorizado já é fornecidocom haste e flange de fixação.

Lavador 14.000,00 24.000,00Haste e flange de fixação 1.130,00 incluídoTotal 15.130,00 24.000,00 8.870,00 (+)

Custo de instalaçãoCom o sistema motorizado, não há a preocupação de uma rede hidráulica com filtros de malha muito fechada para evitar o travamento do cabeçote rotativo hidráulico

Tubulação hidráulica 3.000,00 3.000,00Tubulação pneumática 0,00 700,00Total 3.000,00 3.700,00 700,00 (+)

Custos OperacionaisO tempo para limpeza do rotativo hidráulico é quase o equivalente a uma fermentação de 8 horas de 1 tanque, consome cerca de2,5 vezes a mais de fluído de limpeza e utiliza cerca de 30% da potência para rotacionar o cabeçote enquanto o motorizado, movidoa ar, dedica toda a energia do bombeamento para a lavagem, com maior impacto, resultando maior eficiência e em menos tempo.

Impacto teórico por bico (kgf/cm²) 10,6 13,7Tempo gasto com limpeza (hr/dia) 7,2 1,6Consumo de água para limpeza (m³/dia) 180 69,12Custo anual com bombeamento 2570,16 690,86 -1875,21 (-)Custo anual com ar comprimido não há 4,09Total para 10 anos 25.701,59 6.949,49 -18.752,09 (-)

Custos de ManutençãoO sistema motorizado não necessita de manutenções a curto e médio prazo e caso seja necessário, ela é feita pelo próprio cliente. Além de rápida execução, os componentes a serem substituídos custam certa de 40% menos do que os componentes dos rotativos hidráulicos

Tempo para reparo 1,5 semanas 2 horasQuem efetua o reparo Fornecedor ClienteCusto médio de manutenção 6.528,71 2.838,51Nº de manutenções anuais 1 0Nº de manutenções em 10 anos 10 1Total para 10 anos 65.287,10 2.838,51 -62.448,59 (-)

Resumo

Custo do equipamento 9.570,00 (+)

Custo operacional anual -1.875,21 (-)

Custo de manutenção anual -6.528,71 (-)

Economia total no ciclo de vida -71.630,68 (-)

Valor Líquido Presente (com TIR de) 10% -43.170,34

Payback Imediato

ModeloRotativo Hidráulico

Custos (R$)

SPRAYING SYSTEMS COMPANYTYPICAL LIFE CYCLE COST COMPARISON* NEW INSTALLATION - 10 YEAR LIFE

FLUID DRIVEN TANK WASHER / AA 290 MOTOR DRIVEN TANK WASHER

15,13

24,00

3,00

3,70

25,70 6,95

65,29

2,84

0

20

40

60

80

100

120

TZ

-82P

AA

290A

G

Demonstrating the Financial Sale

Value Analysis: TYPICAL LIFE CYCLE COST COMPARISON

Exercise

Dorsay Co., a Food Company, has a problem in it’s industrial process, They want to reduce water and energy spending.

Right now Dorsay’s is spending COL $ 200.000 in Water and COL $ 500.000 in Energy monthly. They have a production of 1.000.000 chocolate bars every month with a price of COL$ 2 each bar

The solution proposed to the company is COL$ 10.000.000 and the financial policy of the company use 10% annual rate for project valuation.

Exercise

The solution will reduce 20% in water consumption and 30% in Energy monthly.

Also, according to our tests the production will increase 15% monthly

Questions:

1. What is the NPV in 12 months analysis

2. In what month Dorsay recover the investment

3. IRR

Ejercicio

Dorsay Co., una compañía del sector Alimenticio tiene un problema en sus procesos industriales. Ellos buscan reducir el consumo de agua y de energía

En la actualidad Dorsay gasta COL $ 200.000 en consumo de agua y COL $ 500.000 en energía mensualmente.

Dorsay Co produce 1.000.000 de barras de chocolates mensualmente y las vende en el mercado a COL $ 2,00 cada una.

ESPAÑOL

Ejercicio

Nuestra compañía le propone una solución con una inversión de COL$ 4.000.000 . Pudimos investigar internamente en Dorsay que ellos valoran sus proyectos a una tasa de 12% anual.

La solución planteada busca reducir 20% en consumo de agua y 30% en energía mensualmente

Igualmente nuestra consultaría y pruebas realizadas han determinado que al implementar nuestra solución la producción mensual aumentaría en 15%.

Preguntas:

1. El proyecto es rentable para el cliente?

2. En cuantos meses el cliente recupera la inversión

ESPAÑOL

Ejercicio- Variable

Dorsay Company

Actual SituationWater 200.000 monthlyEnergy 500.000 monthlyProduction 1.000.000 monthlyPrice 2,00 each bar

SolutionWater 20% ReductionEnergy 30% ReductionProduction 15% IncreaseInvestment 4.000.000

Discount Rate 12% annually

ES

PA

ÑO

LESPAÑOL

Ejercicio- Resultados

Preguntas:

1. El proyecto es rentable para el cliente?

VPN y Tasa Interna de Retorno

2. En cuantos meses el cliente recupera la inversión

Payback Period

ES

PA

ÑO

LESPAÑOL

Ejercicio- Resultados

Preguntas:

1. El proyecto es rentable para el cliente?

Si es Rentable VPN >0 y IRR > tasa de descuento

2. En cuantos meses el cliente recupera la inversión

Payback Period de 9 meses

ESPAÑOL

Ejercicio- Resultados

Resultados

NPV 1.546.478 en 12 meses

Payback discount period

9 months

IRR 113% anual

ES

PA

ÑO

LESPAÑOL