Project financial appraisal Skills- Finance for non financial managers course
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This document provides an overview of project financial appraisal techniques that are part of an advanced finance course for non-financial managers. It defines financial evaluation as assessing a project's financial viability and risk profile. Key techniques discussed include payback period, return on investment, net present value, and profit-based measures. An example illustrates a financial plan projection for a combine harvester purchase, applying techniques like payback period, net present value, and discount rates to evaluate the project's financial performance over 8 years.
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Project financial appraisal Skills- Finance for non financial managers course
- 1. P ROJECT F INANCIAL A PPRAISAL T ECHNIQUES - PART OF OUR ADVANCED FINANCE FOR NON FINANCIAL MANAGERS C OURSE PROGRAMME www.businessservicessupport.com
- 2. K EY O BJECTIVES What is financial evaluation Why project financial evaluation techniques Project financial risks assessment Practice illustration of financial plan 2 COPYRIGHT© TO BUSINESS SERVICES SUPPORT LIMITED 2011
- 3. D EFINITION OF FINANCIAL EVALUATION Concern with the assessment of financial viability of projects Assessment of risk profile and financial efficiency 3 COPYRIGHT© TO BUSINESS SERVICES SUPPORT LIMITED 2011
- 4. W HY P ROJECT F INANCIAL E VALUATION Does the project create financial wealth How quickly can we recover project investment How risky is the project vis a viv it returns potentials How much capital do we need to invest 4 COPYRIGHT© TO BUSINESS SERVICES SUPPORT LIMITED 2011
- 5. F INANCIAL R ISKS FACING P ROJECTS Demand Risk Competition Risk Financial Risk Operational Risk Interest Rate Risk 5 COPYRIGHT© TO BUSINESS SERVICES SUPPORT LIMITED 2011
- 6. F INANCIAL E VALUATION T ECHNIQUES F OR E FFECTIVE P ROJECT M ANAGEMENT Payback Period Return On Investment Profit Based Measures Net Present Value Method 6 COPYRIGHT© TO BUSINESS SERVICES SUPPORT LIMITED 2011
- 7. PAYBACK P ERIOD T ECHNIQUE Payback Period This is probably the most frequently used technique for assessing the financial viability of projects. It regards projects which repay their capital cost most quickly as being the best. For example, if a cafe purchases a new cooker for £1000 and makes an average of £.50 profit on each meal, the cooker will be paid for after £1000/£0.50=2000 meals. If the cafe sells 40 meals a day, the full price of the cooker is paid back after 2000/40=50days. Attempt this question now: Frank and Mary decided to set up a carpet cleaning business. They purchased carpet cleaning equipment for £800. On average they expect to earn £5 per carpet after expenses and to be able to clean two carpets, five days a week. Calculate their payback period in weeks 7 COPYRIGHT© TO BUSINESS SERVICES SUPPORT LIMITED 2011
- 8. PAYBACK P ERIOD T ECHNIQUE The payback period is ( £800/ £5x2x5) = £800/50=16weeks. You will appreciate as a project manager that the calculations above are rater simplistic. The capital cost of equipment or machinery is fairly easy to work out. It is how much the organisation paid for it together with delivery, installation and other costs incurred to get it up and running. But how is income calculated? And you know that income does not always flow in evenly 8 COPYRIGHT© TO BUSINESS SERVICES SUPPORT LIMITED 2011
- 9. P ROJECT M ANAGEMENT – R EVENUE & C OST P ROJECTIONS Project Management In Practice Hampdene Ltd is a company specialising in arable farming. It is thinking about purchasing a combine harvester for a capital cost of £160,000 to be used from August to early October on its fields. It will also be rented out to a neighboring farm for the remainder of October. Harvest income flow in from October to December and total sales are expected to bring in £60,000 in year 1, £66,000 in year 2 and £70000 for each year from year 3 to year 8 (additional competition in world markets is faced in the later years). Running costs of the combine harvester are estimated at £4000 a year for year 1 and year 2 and £5000 for each year thereafter. Seeds fertilisers and other costs of production are generally 50 percent of sales income. Rental income from hiring out the vehicle is estimated at £2000 per year for the foreseeable future. While not in use, storage, security and maintenance expenses of the combine harvester are estimated at £1000 per year. Your task is to use a separate sheet and put together the projection of revenue and costs including net profit or loss for this project. 9 COPYRIGHT© TO BUSINESS SERVICES SUPPORT LIMITED 2011
- 10. P ROJECT M ANAGEMENT – R EVENUE & C OST P ROJECTIONS - A NSWER Year 1 £ Year 2 £ Year 3 £ Year 4 £ Year 5 £ Year 6 £ Year 7 £ Year 8 £ Income: Crop (sales) 60000 66000 70000 70000 £70000 £70000 £70000 £70000 Rental 2000 2000 2000 2000 2000 2000 2000 2000 62000 68000 72000 72000 72000 72000 72000 72000 Running costs 4000 4000 5000 5000 5000 5000 5000 5000 Storage etc 1000 1000 1000 1000 1000 1000 1000 1000 30000 33000 35000 35000 35000 35000 35000 35000 35000 38000 41000 41000 41000 41000 41000 41000 27000 30000 31000 31000 31000 31000 31000 31000 Outgoings Cost production crop Net Income of of 10 COPYRIGHT© TO BUSINESS SERVICES SUPPORT LIMITED 2011
- 11. P ROJECT M ANAGEMENT – PAY B ACK P ERIOD T ECHNIQUE I N P RACTICE Year Net Income £ Additional Overheads Final net income (ie Net income less additional overheads) Cost of combine harvester less final net income (£160000) Year 1 27000 8000 19000 (141000) Year 2 30000 7000 23000 (118000) Year 3 31000 6000 25000 (93000) Year 4 31000 5000 26000 (67000) Year 5 31000 5000 26000 (41000) Year 6 31000 5000 26000 (15000) Year 7 31000 5000 26000 11000 Year 8 31000 5000 26000 37000 11 COPYRIGHT© TO BUSINESS SERVICES SUPPORT LIMITED 2011
- 12. P ROJECT M ANAGEMENT –N ET P RESENT VALUE T ECHNIQUE V T IME Initial Investment £ 10% Yearly Interest £ Total Money Available £ 100 10 110 110 11 121 121 12 133 133 13 146 146 14 161 161 16 177 12 COPYRIGHT© TO BUSINESS SERVICES SUPPORT LIMITED 2011
- 13. P ROJECT M ANAGEMENT –N ET P RESENT VALUE T ECHNIQUE V T IME Year Net Income £ Additional Overheads £ Final net income (ie Net income less additional overheads) £ Discounting Factor for 10% Present Value of projected net income £ Year 1 27000 8000 19000 .909 17272.73 Year 2 30000 7000 23000 .826 19008.26 Year 3 31000 6000 25000 .752 18796.99 Year 4 31000 5000 26000 .685 17808.22 Year 5 31000 5000 26000 .621 16149.07 Year 6 31000 5000 26000 .565 14689.27 Year 7 31000 5000 26000 .513 13333.33 Year 8 31000 5000 26000 .467 12149.53 Total Present Value of all future net income Present value of capital to be invested Net Present Value difference between Present Value of future net income and capital to be invested 129207.4 (160000) -30792.6 13 COPYRIGHT© TO BUSINESS SERVICES SUPPORT LIMITED 2011
- 14. C ONCLUSION – T HE E ND For more information about our courses visit: http://www.businessservicessupport.com 14 COPYRIGHT© TO BUSINESS SERVICES SUPPORT LIMITED 2011