business modeling for investment appraisal - part 3- 3 nov 2013

8/13/2019 Business Modeling for Investment Appraisal - Part 3- 3 Nov 2013

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Part 3 ProjectFunding andInvestmentAppraisal

BUSINESS MODELING

FOR INVESTMENTAPPRAISAL


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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


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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


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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


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Dividend

Give the companymoney and get shares


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


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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


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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


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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.


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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


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ASSIGNMENT


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]


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NEXT WEEK CLASS EVALUATION


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


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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


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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!

business modeling for investment appraisal - part 3- 3 nov 2013

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