caiib financial management

7/21/2019 CAIIB Financial Management

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Financial Management

CAIIB

MODULE D

Presentation by

Prof. S.D.Bargir

Joint Director,IIBF


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Module D topics

Marginal Costing

Capital Budgeting

Cash Budget

Working Capital


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COSTING

Cost accounting system providesinformation about cost

Aim : best use of resources and

maximization of returns cost = amount of expenditure incurred(

actual+ notional)

Purposes +profit from each job/product,

division,segment+pricingdecision+control+profitplanning +inter firm comparison


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Marginal costing

Marginal costing distinguishesbetween fixed cost and variable cost

Marginal cost is nothing bust variablecost of additional unit

Marginal cost= variable cost

MC= Direct Material + Direct Labour+Direct expenses


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Marginal costing problems

Sales (-) variable cost (=)contribution

Contribution(/ divided by) sales(=) C.S. Ratio

Contribution=Fixed cost (=)Break

even point Fixed Cost (/ divided by)

contribution per unit= break even units


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Basic formulaSales price (-) variable cost= contribution

SP less VC = Contribution

10 6 = 4

9 6 = 38 6 = 2

7 6 = 1

6 6 = 05 6 = (1)

4 6 = (2)


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SP = Rs.10, VC =Rs.6 Fixed CostRs.60000

Find- Break even point (in Rs. & in units)

- C/S ratio

- Sales to get profit of Rs.20000


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Sales Rs.100000

Fixed Cost Rs.20000

B.E.Point Rs.80000 What is profit ?


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Management decisions- assessing profitabilityCONTRIBUTION/SALES=C.S.RATIO

Product

sp vc Contribtion

c/s Ratio % ranking

A 20 10 10 10/20 50% 1

B 30 20 10 10/30

33% 2

C 40 30 10 10/40

25% 3


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DECISION when limiting factors

SP Rs.14 Rs.11

VC 8 7

Contribution

Per unit

6 4

Labour hr. pu 2 1

Contri.per hr 3 4


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DECISIONS

Make or buy decisions

Close department

Accept or reject order Conversion cost pricing


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CAPITAL BUDGETING

It involves current outlay of funds inthe expectation of a stream ofbenefits extending far into the future

Year Cash flow

0 (100000)

1 300002 40000

3 50000

4 50000


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Types of capital investments

New unit

Expansion

Diversification Replacement

Research & Development


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Significance of capital budgeting

Huge outlay

Long term effects

Irreversibility Problems in measuring future cash

flows


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Facets of project analysis

Market analysis

Technical analysis

Financial analysis Economic analysis

Managerial analysis

Ecological analysis


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Financial analysis

Cost of project

Means of finance

Cost of capital Projected profitability

Cash flows of the projects

Project appraisal


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Methods of capital investmentappraisal

DISCOUNTING NON-DISCOUNTING

Net present value(NPV)

Pay back period

Internal rate of return(IRR)

Accounting rate ofreturn

Profitability Index orBenefit cost ratio


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Present value of cash flow stream-(cash outlay Rs.15000)@ 12%

Year Cash flow PV factor@12%

PV

1 1000 0.893 893

2 2000 0.799 15943 2000 0.712 1424

4 3000 0.636 1908

5 3000 0.567 1701

6 4000 0.507 2028

7 4000 0.452 1808

8 5000 0.404 2020

13376


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Present value of cash flow stream-(cash outlay Rs.15000 )@10%

Year Cash flow PV factor@10%

PV

1 2000 0.909 1818

2 2000 0.826 16523 2000 0.751 1502

4 3000 0.683 2049

5 3000 0.621 1863

6 4000 0.564 2256

7 4000 0.513 2052

8 5000 0.466 2330

15522


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CALCULATION NPV/IRR

Outlay PV @10% PV @ 12% NPV

15000 15522 - 522

15000 - 13376 (1624)

Difference - - 2146


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IRR continued

IRR= LR +( NPV by LR/ difference betweenNPV) x (HR-LR)

LR= 10%

NPV by LR= 522

Difference between NPV= 2146

HR less LR= 12 (-) 10 = 2

IRR= 10%+ (522/2146)X2IRR=10%+0.49

IRR=10.49%


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The timing of the cash flows is critical fordetermining the Project's value.

below the line for cash investments or

above the line for returns.

Rs.51 Lakh Rs.51 La kh Rs.61 La kh

Year 1 Year 2 Year 3

Rs.102 lakh

Year 0


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Net Present Value

Year Cash Flow Dis. Factor Present

@10% Value

0 -102 1 -1021 51 0.91 46.36

2 51 0.83 42.15

3 61 0.75 45.83NPV 32.34


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@27% Value

0 -102 1 -102

1 51 0.78740 40

2 51 0.62000 32

3 61 0.48818 30

NPV 0


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The evaluation of any projectdepends on the magnitude of thecash flows, the timing and thediscount rate.

The discount rate is highlysubjective. The higher the rate , theless a rupee in the future would beworth today.

The risk of the project shoulddetermine the discount rate.


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Internal Rate of Return(IRR)IRR is the rate at whichthe discounted cash flowsin the future equal thevalue of the investmenttoday. To find the IRR one

must try different ratesuntil the NPV equals zero.


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PRICING DECISIONS

Full cost pricing

Conversion cost pricing

Marginal cost pricingMarket based pricing


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BUDGET

Quantitative expression ofmanagement objective

Budgets and standards

Budgetary control

Cash budget


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PROFIT PLANNING

Budget & budgetary control

Marginal costing

CVP and break even pointComparative cost analysis

ROCE


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PRICING DECISIONS

Full cost pricing




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Operating leverageFinancial leverage

OL= amount of fixed cost in a coststructure. Relationship between salesand op. profit

FL= effect of financing decisions onreturn to owners. Relationshipbetween operating profit and earning

available to equity holders (owners)


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BUDGET

Quantitative expression ofmanagement objective

Budgets and standards

Budgetary control

Cash budget


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PROFIT PLANNING

Budget & budgetary control

Marginal costing

CVP and break even pointComparative cost analysis

ROCE


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PRICING DECISIONS

Full cost pricing




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Operating leverageFinancial leverage

OL= amount of fixed cost in a coststructure. Relationship between salesand op. profit

FL= effect of financing decisions onreturn to owners. Relationshipbetween operating profit and earning

available to equity holders (owners)


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Working capital

Current assets less current liabilities= net working capital or net currentassets

Permanent working capital vs.variable working capital


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Working capital cycle

cash> Raw material > Work inprogress > finished goods > Sales >Debtors > Cash>

Operating cycle it is a length oftime between outlay on RM /wages/others AND inflow of cash from the

sale of the goods


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Examples from book

P-369

P-375

P-377

P-379

P-380

P-385

P-387

P-393


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Examples from book

P-413

P-414

p-415

P-417


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***

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