Topic Included:
1. Financial Analysis Fundamental
2. Simple Financial Model Building
3. Project Decision Analysis
4. Share Key Ideas from Seminar
Nuttakul Somakettarin
Special Project Team
21 May 2015
1. Financial Analysis Fundamental
WHAT IS CAPITAL BUDGETING?
I. CAPITAL IS A LIMITED RESOURCE
 Capital Budgeting is the process of
determining which real investment
projects should be accepted and
given an allocation of funds from
the firm.
 Capital Budgeting คือ กระบวนการ
คัดสรรการลงทุนในโครงการ จากการ
วิเคราะห์ผลตอบแทนทีเ่ หมาะสม
1. Financial Analysis Fundamental
II. Basic Steps of Capital Budgeting
1. Estimate the cash flows
2. Assess the riskiness of the cash flows.
3. Determine the appropriate discount rate.
4. Find the PV of the expected cash flows.
5. Accept the project if
- PV of inflows > costs.
- IRR > Hurdle Rate
- and/or payback < policy
1. Financial Analysis Fundamental
Tools and Concepts behind
the Capital Budgeting
Time Value
of
Money
DCF
(Discounted
Cash Flows)
Measurements:
NPV
IRR
Payback
Etc.
1. Financial Analysis Fundamental
III. Evaluation Techniques
A. Payback period
B. Net present value (NPV)
C. Internal rate of return (IRR)
D. Modified internal rate of return (MIRR)
E. Profitability index
1. Financial Analysis Fundamental
A. PAYBACK PERIOD : Payback period = Expected number
of years required to recover a project’s cost.
Payback L = 2 + $30/$80 years
= 2.4 years.
Payback S = 1.6 years.
Weaknesses of Payback:
1. Ignores the time value of money.
This weakness is eliminated with
the discounted payback method.
2. Ignores cash flows occurring
after the payback period.
1. Financial Analysis Fundamental
B. NET PRESENT VALUE
10%=K
Discount Factor Discounted CF
1.00
-100
1.10
9.09
1.21
49.59
1.33
60.11
NPV =
18.79
NPVS = $19.98
If the projects are independent, accept both.
If the projects are mutually exclusive, accept Project S since NPVS > NPVL.
1. Financial Analysis Fundamental
C. INTERNAL RATE OF RETURN
IRRL = 18.1%
IRRS = 23.6%
If the projects are independent, accept both because IRR > k (@ 10%)
If the projects are mutually exclusive, accept Project S since IRRS >
IRRL.
1. Financial Analysis Fundamental
WACC calculation
KE หรือ Cost of Equity สามารถคานวนหาได ้จาก CAPM
(Capital Asset Pricing Model)
1. Financial Analysis Fundamental
WACC calculation
KD หรือ Cost of Debt สามารถหาได ้จากต ้นทุน(ดอกเบีย
้ ,
้
cost of borrowing) เงินกู ้ทีจ
่ ะนามาใชในการ
Financing
โครงการนัน
้ ๆ
1. Financial Analysis Fundamental
WACC calculation
􀁑 Equity
• Cost of Equity = Riskfree rate + Beta * Risk Premium
= 4% + 1.2 (7%) = 12.4%
• Market Value of Equity = 700,000
• Equity/(Debt+Equity) = 70%
􀁑 Debt
• After-tax Cost of debt = (Interest Rate for the Loan) (1-t)
= (6%) (1-.25) = 4.5%
• Market Value of Debt = 300,000
• Debt/(Debt +Equity) = 30%
􀁑 Cost of Capital = 12.4%(.70) + 4.5%(.30) = 10.03%
2. Simple Financial Model Building
2. Simple Financial Model Building
INPUT SHEET: USER ENTERS ALL BOLD NUMBERS
INITIAL INVESTMENT
Initial Investment=
CASHFLOW DETAILS
1,000,000
DISCOUNT RATE
Revenues in year 1=
600,000
Opportunity cost (if any)=
0
Var. Expenses as % of Rev=
Lifetime of the investment
10
Fixed expenses in year 1=
Salvage Value at end of project=
Deprec. method(1:St.line;2:DDB)=
Tax Credit (if any )=
Other invest.(non-depreciable)=
10,000
50%
80,000
Tax rate on net income=
1
0%
Approach(1:Direct;2:CAPM)=
25%
2
1. Discount rate =
10%
2a. Beta
1.2
b. Riskless rate=
4.00%
If you do not have the breakdown of fixed and variable
c. Market risk premium =
7.00%
expenses, input the entire expense as a % of revenues.
d. Debt Ratio =
30.00%
e. Cost of Borrowing =
6.00%
Discount rate used=
10.03%
0
WORKING CAPITAL
Initial Investment in Work. Cap=
10000
Working Capital as % of Rev=
25%
Salvageable fraction at end=
100%
GROWTH RATES
1
2
3
4
5
6
7
8
9
10
Revenues
Do not enter
10.00%
10.00%
10.00%
10.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Fixed Expenses
Do not enter
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
Default: The fixed expense growth rate is set equal to the growth rate in revenues by default.
2. Simple Financial Model Building
Year
INITIAL INVESTMENT
Investment
- Tax Credit
Net Investment
+ Working Cap
+ Other invest.
Initial Investment
0
1
2
3
4
5
6
7
8
9
10
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
10,000
219,615
1
2
3
4
5
6
7
8
9
10
600,000
300,000
80,000
220,000
99,000
121,000
30,250
90,750
99,000
140,000
49,750
49,750
1.100
45,215
660,000
330,000
84,000
246,000
99,000
147,000
36,750
110,250
99,000
155,000
54,250
54,250
1.211
44,810
726,000
363,000
88,200
274,800
99,000
175,800
43,950
131,850
99,000
(123,500)
354,350
354,350
1.332
266,011
798,600
399,300
92,610
306,690
99,000
207,690
51,923
155,768
99,000
18,150
236,618
236,618
1.466
161,437
878,460
439,230
97,241
341,990
99,000
242,990
60,747
182,242
99,000
19,965
261,277
261,277
1.613
162,011
878,460
439,230
102,103
337,127
99,000
238,127
59,532
178,596
99,000
0
277,596
277,596
1.774
156,439
878,460
439,230
107,208
332,022
99,000
233,022
58,256
174,767
99,000
0
273,767
273,767
1.952
140,218
878,460
439,230
112,568
326,662
99,000
227,662
56,915
170,746
99,000
0
269,746
269,746
2.148
125,565
878,460
439,230
118,196
321,034
99,000
222,034
55,508
166,525
99,000
0
265,525
265,525
2.364
112,333
878,460
439,230
124,106
315,124
99,000
216,124
54,031
162,093
99,000
0
261,093
490,708
2.601
188,674
1,000,000
0
1,000,000
10,000
0
1,010,000
SALVAGE VALUE
Equipment
Working Capital
Year
0
OPERATING CASHFLOWS
Revenues
-Var. Expenses
- Fixed Expenses
EBITDA
- Depreciation
EBIT
-Tax
EBIT(1-t)
+ Depreciation
- ∂ Work. Cap
NATCF
(1,010,000)
NATCF(with Salv.)
(1,010,000)
Discount Factor
1
Discounted CF
(1,010,000)
Investment Measures
NPV =
392,712
IRR =
16.61%
3. Project Decision Analysis
A. MAKING GO/NO-GO PROJECT DECISION
1. Focus on cash flows, not profits.
2. Focus on incremental cash flows.
3. Account for time. Time is money.
4. Account for risk.
3. Project Decision Analysis
B. THE PROCESS OF PROJECT EVALUATION
1. Carefully estimate expected future
cash flows.
2. Select a discount rate consistent
with the risk of those future cash
flows.
3. Compute a “base-case” NPV.
3. Project Decision Analysis
B. THE PROCESS OF PROJECT EVALUATION
4. Identify risks and uncertainties. Run
a sensitivity analysis.
- Identify “key value drivers”.
- Identify break-even assumptions.
- Estimate scenario values.
- Bound the range of value.
3. Project Decision Analysis
B. THE PROCESS OF PROJECT EVALUATION
5. Identify qualitative issues.
- Flexibility
- Quality
- Know-how
- Learning
6. Decide
4. Share Key Info. from Seminar
Topic : Project Investment and Feasibility Studies
9 – 10 February 2015
4. Share Key Info. from Seminar
WACC by Sector (Thai Market)
4. Share Key Info. from Seminar
Project Feasibility from Banking Perspective
Project Financing is all about ‘risks allocation and mitigation’
Step 1 Risk Identification and analysis
• Cost analysis
• Cash flows
Step 2 Risk Allocation
• Allocated by the parties through negotiation of the
contractual framework.
Step 3 Risk Management
• Involved and monitor project closely
• Reporting obligations on the borrower
4. Share Key Info. from Seminar
Project Feasibility from Banking Perspective
Key Financial Evaluation for Project Financing Debt
Tools
Details
Project Feasibility
•
•
•
•
Project Technical feasibility
Project Financial feasibility
Project IRR (to look whether it makes sense)
Equity IRR
Debt Coverage Ratio
• DCSR to understand the level of cushion to
lenders
• D/E ratio (varied with the nature of the project)
Financial Sensitivity
Analysis
• To evaluate the Project’s tolerance level to
adverse changes in ‘Cash flows Assumption’
such as Project Costs, Delays, Drop in
Revenues, & etc.
• Normally banks will have 3 main cashflow
scenarios (Client case, Bank case, Worse Case)
4. Share Key Info. from Seminar
BCG Approach to Minimizing CapEx needed:
1. Capex Optimization
o Implementation of Cost-focus culture not the Cost-reduction
culture.
2. Organization Set-Up.
o Set a Cost oriented structure.
3. Monitor of Performance.
o Set up a dashboard to solve the cost problem (ex. Project delay
& Cost overrun)
4. Share Key Info. from Seminar
M&A perspectives
Types of Investors
1. Strategic
Investor
2. Financial
Investor
Definition &
Investment Criteria
• Long-term business plan
• Enhance existing operations
• Willing to pay for readily
realizable synergies
• Interested in Return
• Well-managed company with
a history of consistent
earning
• Private equity funds and
Venture capital funds
Examples
4. Share Key Info. from Seminar
Only about 30-40% of the world’s M&As
are value accretive.
M&A Bad Deals
 Weak strategic fit
 Unrealistic synergies
 Price too high
Good Deals but
Poor
Implementation
 Poor integration
 Customer losses
 Loss of key staff
M&A Successful
Deals
 Disciplined transaction
process
 Clear deal strategy
 Excel in post-deal execution
with adequate resources to
manage the Post-Integration
Source: Mckinsey
Thank You
Simple Financial Model & Powerpoint presentation
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