Upload
iynkaran858604
View
226
Download
0
Embed Size (px)
Citation preview
8/13/2019 Business Modeling for Investment Appraisal - Part 3- 3 Nov 2013
1/14
Part 3 ProjectFunding andInvestmentAppraisal
BUSINESS MODELING
FOR INVESTMENTAPPRAISAL
8/13/2019 Business Modeling for Investment Appraisal - Part 3- 3 Nov 2013
2/14
8/13/2019 Business Modeling for Investment Appraisal - Part 3- 3 Nov 2013
3/14
03 Nov 2013 Business modeling for investment appraisal - Part 3 3
YOUR BUSINESS IDEA - RECAP
Youve selected a business for which you believe there is a business case.
We have Analysed the external environment using a PEST analysis Analysed the industry weve selected using a Porters five forces Forecasted the capital expenditure, revenue and operational costs
The next step is to assess the feasibility of the business idea. We will
Look at financing options Assessing the viability of the business
8/13/2019 Business Modeling for Investment Appraisal - Part 3- 3 Nov 2013
4/14
03 Nov 2013 Business modeling for investment appraisal - Part 3 4
BASIC STRUCTURE OF A FINANCIALMODEL
Capital Expenditure Revenue Assumptions Operating Expenditure Other Depreciation, Taxation and Working Capital
Financial Statements Profit & Loss Statement Cash Flow Statement Balance Sheet
Financing Debt & Equity Financing
Project Evaluation using NPV, IRR, Payback Period, ROI
8/13/2019 Business Modeling for Investment Appraisal - Part 3- 3 Nov 2013
5/14
03 Nov 2013 Business modeling for investment appraisal - Part 3 5
FUNDING OPTIONS
Company needs to fundinitial capital expenditure
Debt :
The funds borrowed from abank
Equity :
The funds contributed bythe owners (the
stockholders)
Why should a company go for debt? - Debt is cheaper than Equity. How much debt and equity? A debt to equity ratio is used
8/13/2019 Business Modeling for Investment Appraisal - Part 3- 3 Nov 2013
6/14
Dividend
Give the companymoney and get shares
03 Nov 2013 Business modeling for investment appraisal - Part 3 6
RETURN TO FUNDERS?
What is the dividend rate that should be paid? Dividend Payout Ratio How are capital repayments made? Equal Payments or Cash Flow
Matching What is the interest rate I can borrow at? If Rupee funds AWPLR + 2% / If
USD Funds LIBOR + 5.5%
COMPANYSHAREHOLDERS BANK
Give the company cashthrough a loan
Capital Payments &Interest
8/13/2019 Business Modeling for Investment Appraisal - Part 3- 3 Nov 2013
7/14
03 Nov 2013 Business modeling for investment appraisal - Part 3 7
FREE CASH FLOW TO THE FIRM (FCFF)
The FCFF is the cash flow availableto both the debt and equity holders
The terminal value assumes that the
final year cash flow continues into thefuture
Terminal Value =Final Year Cash Flow*(1+ Growth Rate)
Discount Rate Growth Rate
Free Cash Flow to Equity Holders =FCFF Debt Repayment
Operating CashFlow
Less Changes inworking capital
Less Taxes Paid
Less Capital
Expenditure
Free Cash Flowto the Firm
8/13/2019 Business Modeling for Investment Appraisal - Part 3- 3 Nov 2013
8/14
03 Nov 2013 Business modeling for investment appraisal - Part 3 8
WEIGHTED AVERAGE COST OF CAPITAL
Time Value of Money Principle : Rs.1 today is worth more that Rs. 1tomorrow
Businesses often discount cash flows to determine the Net Present Value(NPV) of a project.
The discount rate used is the weighted average cost of capital (WACC)
WACC = R e*(E/V) + R d*(1-T)*(D/V)
Where:Re = cost of equity (As per the company or CAPM)Rd = cost of debt (interest rate paid on debt)
E = Value of the firm's equityD = Value of the firm's debtV = E + DE/V = percentage of financing that is equityD/V = percentage of financing that is debtT = corporate tax rate
8/13/2019 Business Modeling for Investment Appraisal - Part 3- 3 Nov 2013
9/14
03 Nov 2013 Business modeling for investment appraisal - Part 3 9
MEASURING RETURNS
Insert a new valuation sheet in your model and compute the following toassess the variability of your investment
Net Present Value
(NPV)
NPV compares the value of a dollar today to the value of that same dollar in the
future, taking inflation and returns into account.The NPV of a prospective project is positive, it should be accepted.
Internal Rate ofReturn (IRR)
The discount rate which makes the NPV of all cash flows from a particularproject equal to zero.Project's IRR should be > companies hurdle rate (Approx 18%).
Payback Period The length of time required to recover the cost of an investment.Should be as less/ as possible
Return onInvestment (ROI)
The benefit of an investment (PBT) is divided by the cost of the investmentThe higher the ROI the better
SensitivityAnalysis
To determine the impact the actual outcome of a particular variable will have if itdiffers from what was previously assumed.
8/13/2019 Business Modeling for Investment Appraisal - Part 3- 3 Nov 2013
10/14
03 Nov 2013 Business modeling for investment appraisal - Part 3 10
SOME FINAL CHECKS
Check the following to complete the model:
Model Check ( Y/N)
There are no excel formula #REF! or #VALUE! errors
The company is making profits at least from the third year onwards
The cash flow at the end of each year should be positive or a minor loss which can befunded through an overdraft
The cash carried forward should not be negative (that is a situation where thecompany has no cash)
The balance sheet balances
You may need to adjust your assumptions if you have answered No forsome of the above model checks
8/13/2019 Business Modeling for Investment Appraisal - Part 3- 3 Nov 2013
11/14
ASSIGNMENT
03 Nov 2013 Business modeling for investment appraisal - Part 3 11
Assignment :Complete the financial model by (1) including funding (2)including financial evaluations such as NPV, IRR, ROI, Payback period andsensitivity analysis
The competed model should be e-mailed to [email protected] on orbefore Wednesday the 6 th of November.
mailto:[email protected]:[email protected]8/13/2019 Business Modeling for Investment Appraisal - Part 3- 3 Nov 2013
12/14
NEXT WEEK CLASS EVALUATION
03 Nov 2013 Business modeling for investment appraisal - Part 3 12
B. 50% from the financial model evaluating the investment (should be emailedon or before the 6 th of November 2013)
A. Final presentation and recommendations 50% (on the 9 th of November2013)
The final presentation will be 10 minutes in duration with 5 minutes ofquestions
Each member in the team should present a part of the presentation SWOT* analysis to be included in the final presentation*Note: A SWOT analysis shows the Strengths & Weaknesses of your company and also the
Opportunity and Threats it faces in the external environment
8/13/2019 Business Modeling for Investment Appraisal - Part 3- 3 Nov 2013
13/14
12 Oct 2013 Business modeling for investment appraisal - Part 1 13
RECAP ON FINAL PRESENTATIONSTRUCTURE
A summary of the business caseExecutive Summary
Provides the background for your business External market analysis through PEST analysis Industry analysis through Porters five forces Business positioning using a SWOT analysis
Strategic analysis
Details about your business venture Strategic Plan Competitive position, brand strategy Marketing plan Market segments, services and distribution Operational details of the business
Business Overview
Your financial outline gives all the relevant financial informationconcerning your business.
Projected Cash Flows and key assumptions Valuation measures such as payback, NPV and IRR Projected profit and loss and balance sheet
Financial Outline
Identify the risks and sensitivities and provide strategies for minimizingrisk
C o m m e r c i a l R i s k sA n a l y s i s
8/13/2019 Business Modeling for Investment Appraisal - Part 3- 3 Nov 2013
14/14
03 Nov 2013 Business modeling for investment appraisal - Part 3 14
FURTHER READING
Further Reading: The Economist Guide to Business Planning (2004) Graham Friendand Stefan Zehle The Economist Guide to Business Modelling (2010) John Tennentand Graham Friend
THANK YOU!