2. What will we learn?
Week 1: Introduction to corporate
finance
- What is the finance, corporate
finance?
-Brief history of managerial finance
-The financial manager’s responsibility
-The goals of the corporation
3. What will we learn?
Week 2: An overview of managerial finance
Week 3: Financial forecasting (Demand and
sales forecast)
• Questionnaire method
• Forecast by using economic indicators
relation
• International comparison
4. What will we learn
Week 4: Financial forecasting (Demand and
sales forecast) continuation…
• Income elasticity of demand method
• Graphic method
• Least squares method
• Correlation and regression methods (Please check on
your statistics notes)
Week 5: Market share calculation
Week 6: Profit planning
• Break Even Analysis
• Operating Leverage
• Financial Leverage
5. What will we learn
Week 7: Profit planning (Continuation)
• Break Even Analysis
• Operating Leverage
• Financial Leverage
Week 8: Working capital management
Week 9: Capital budgeting
• Payback Period
• Net Present Value
• Internal Rate of Return
• Sensitivity Analysis
Week 10:Capital budgeting (Continuation)
6. What will we learn
• Week 11: Student presentations
• Week 12: Student presentations
7. What are we going to acquire?
• Learning forecasting of sales (demand).
• If you know your future sales, you can make
profit planning and know how much fund do
you need for working and fixed capital.
• Learning how to evaluate and choose the
best investment opportunity by applying
some methods.
8. What kind of resources can we use
when we doing research?
1. All finance books
2. All articles about finance
3. www.ssrn.com
4. J. Fred Weston and Eugene Brigham,Essentials
of Managerial Finance, Harcourt Brace&Company
International Edition, 1992
5. Kuhlman Bruce, David W. Wiley and H. Kent Baker,
Business Fundamentals, Schweser Institute
certificate Program, Publisher: Dearborn Trade, A
Kaplan Professional Company, ISBN: 9781419528965
(Electronic book), 2005.
9. What kind of resources can we use
when we doing research?
6. http://en.wikipedia.org/wiki/Demand_foreca
sting
7. http://www.angelfire.com/mn3/apse/entles
3.htm
8. Brealey Richard A., Stewart C. Myers and
Franklin Allen, Principles of Corporate
Finance, The McGraw Hill Companies
International edition 2008, ISBN: 978-007-
126327-6
10. What kind of resources can we
use when we doing research?
9. http://etufan.wordpress.com
10.http://en.wikipedia.org/wiki/Demand_foreca
sting
11.http://en.wikipedia.org/wiki/Questionnaire_
construction
11. What is the finance?
• Money
• Stock exchange
• Banks
• What else?
• How about the companies?
• Balance sheet
12. What is the finance?
• To achieve the goals of company;
1. Finding funds from the most suitable
sources
2. Using them effectively and
3. Control the results…
13. An Overview of Managerial Finance
• A Short History of Managerial Finance
• 1930s: Liabilities and equity
• 1940 and 1950s: Assets, quantitative methods,
discounted cash flow methods
• 1960 and 1970s: Optimization of assets and
liabilities and equity, statistical methods
• 1980s: Globalization, interest rate and exchange
risk
• 1990-2000s to today: More risk, more computer,
new financial instruments and methods
15. An Overview of Managerial
Finance
• The Financial Manager’s Responsibility
• Forecasting and planning
• Major investment and control
• Coordination and control
• Dealing with the financial markets
16. An Overview of Managerial Finance
• The goals of the corporation
• Managerial incentives to maximize
shareholder wealth
• Social responsibility
• Stock price maximization and social
welfare
17. Managerial incentives to maximize
shareholder wealth
•Stockholders •Managers
•Make the highest •Having autonomy
money from the •Protect themselves from
company a hostile takeover or a
•Do not want to proxy fightHostile
share theirs company takeover.doc Example
with others. •Try to maximize stock
prices in reasonable level
18. Social responsibility
• Ethical responsibility to provide a safe working
environment
• To avoid polluting water and air
• Produce safe products
• But social responsibility has a cost
• If the other firms in its industry do not follow
suit, their prices and costs will be lower
• Most investors do not like to buy socially
oriented companies shares.
19. Stock price maximization
and social welfare
What requires stock price maximization?
1. Efficient, low-cost plants that produce high-
quality goods and services at the lowest
possible cost
2. Development of products that consumers want
and need, so the profit motive leads to new
technology, to new products, and to new jobs
Example Example 2
20. An Overview of Managerial
Finance
• The Financial Manager’s Responsibility
• Forecasting and planning
• Major investment and control
• Coordination and control
• Dealing with the financial markets
22. Some Financial Forecasting Methods
• Questionnaire method
• Forecast by using economic indicators
relation
• International comparison
• Income elasticity of demand method
• Graphic method
• Least squares method
23. Financial forecasting:
Questionnaire
Simple things:
• Quantitative marketing researches and social
sciences
• Especially, if it is known specific target
consumer
• By phone, by email, web, go to houses and
malls…
24. Take into consider for
questionnaire
1. Determining research aims, example size,
duration, human resources, permissions, and
privacy before applying questionnaire,
2. Determining natural answers,
3. Questionnaires should be directly related
with research’s aims,
4. Applying questionnaire to right participants is
very important,
5. Determining questionnaire’s type…
25. Take into consider for questionnaire
• Questions and answers should be neutral,
• Ranking and grouping of questions’ should be
right,
• Questions’ should be basic and non-technical,
• No double meaning and negative sentences,
• Every question should ask just one subject,
• Put “other” option,
• Questions’ should be daily communication
sentences,
26. Take into consider for questionnaire
• Do not ask private questions,
• Carefully use colours, graphics or pictures,
• Give numbers to your questions.
27. An example
(This example has been derived from Güvemli Oktay, Yatırım Projelerinin Düzenlenmesi,
Değerlendirilmesi ve İzlenmesi, Atlas Kitabevi Yayınları, İstanbul:2008, pp.89-90, ISBN
9789756574065)
We would like to search demand of honey
consumption of Karvina. We chose an area as
example which represents whole Karvina. In
this area, there are 200 houses. So we
prepared a basic questionnaire and asked
questions’ below:
1.Does your family consume honey?
2.If so, how much do you consume per month?
3.How many people live in your family?
28. An example (Continuation…)
Answers:
1.Yes we consume (150 family), No (50 family)
2.500 gram per month
3.4 people
If we assume that Karvina’s population is
70.000, the demand could be calculated as:
29. An example (Continuation…)
Family count in Karvina: 70.000/4=17.500 Family
Percentage of families who are bought honey=
(150 family/200 Family)x100=75%
Count of families who are bought honey=
17.500 Family x 75%= 13.125 Family
Yearly consumption per family: 500 Gramx12
month=6.000 Gram=6 kg
Yearly consumption= 13.125 family x 6 Kg
=78.750 Kg.
30. An example (Continuation…)
If Karvina’s population growth rate is +0.41%;
We can predict honey consumption:
Year Family count Honey buy Yearly consumption
family count
2011 17.571 13.178* 79.068**
2012 17.643 13.232 79.392
2013 17.715 13.286 79.716
2014 17.787 13.340 80.040
*(17.571x75%), **(13.178x6kg)
31. Financial forecasting: Economic
indicators relation
Finding data which correlated each other for
searched sector/subject.
Examp: Weather Wheat Bread price
Demand estimation using correlated data.
32. Plasterboard Demand Example
(Source: Güvemli Oktay, Yatırım Projelerinin Düzenlenmesi, Değerlendirilmesi ve İzlenmesi, Atlas Kitabevi Yayınları,
İstanbul:2008, pp.90, ISBN 9789756574065)
33. Example (Continuation…)
Plasterboard or also called gypsum board are
panels made of gypsum plaster pressed
between two thick sheets of paper, the panels
are used to make interior walls and ceilings.
(http://en.wikipedia.org/wiki/Drywall).
As Sweet Home Company, we would like to
produce and enter plasterboard market in
Karvina. Lets calculate demand with using
house counts and floor space!
34. Example (Continuation…)
• Internal walls two faces are averagely equal
250 m2 for 100 m2 house while external walls
faces are averagely equal 130 m2. There are
20% gaps these walls for windows and doors.
• Lets calculate how much wall surface for
plasterboard do we have for a 100 m2 houses?
35. Example (Continuation…)
• Internal walls two face surface is equal (250 m2
x 80%) = 200 m2
• External walls two face surface is equal (130 m2
x 80%) = 104 m2
• Whole surface which it can be applied
plasterboard is equal (200 + 104 ) 304 m2.
We assume that demand for buildings could be
5% for first year and later 7%, 10%, 12%
respectively.
36. Example (Continuation…)
It is being predicted new buildings counts which
will be built in four years and theirs’ surface is:
Years Buildings Surface (m2)
1 160.000 16.000.000
2 175.000 17.500.000
3 190.000 19.000.000
4 210.000 21.000.000
37. Example (Continuation…)
Plasterboard demand:
Years Building Estimated plasterboard Plasterboard
Counts demanded buildings demand
1 160.000 x (5%) 8.000 *2.432.000
2 175.000 x (7%) 12.250 3.724.000
3 190.000 x (10%) 19.000 5.776.000
4 210.000 x(12%) 25.200 7.660.800
* 1. year demand = 8.000 x 304 m2 = 2.432.000 m2
38. International comparison
This method based on comparing two countries Gross
Domestic Product (GDP) per capita and demands
which one of them is developed while another
developing and assumed that developing country’s
demand is going to reach to developed country’s
demand in the future .
Step 1: Determining developed country’s demand for
a specific good and GDP per capita
Step 2: Assuming that developing country’s demand
will be equall developed country’s demand in the
future.
39. International comparison (Example)
Resource: This example has been derived from Güvemli, pp.92.
In France, GDP per capita is 30.000€ and orange
juice consumption is 15 liter. In Czech
Republic GDP per capita is 10.000 € and
orange juice consumption is 3 liter. The
population is 11.000.000.
40. Example (Continuation…)
Years GDP per capita in Czech Consumption per capita
1 10.000 3
2 15.000 4,5
3 17.000 7,5
4 18.000 9,3
5 22.000 11,2
6 28.000 13,1
7 30.000 15,0
* 7th year data is equal to France current data.
41. Example (Continuation…)
Years Population of Czech (000) Tot. Juice
consumption
0 11.000 x 3 liter = 33.000 (Current)
1 11.500 x 3,6 = 41.400
2 11.800 x 4,5 = 53.100
3 12.000 x 7,5 = 90.000
4 12.400 x 9,3 = 115.320
5 12.900 x 11,2 = 144.480
6 13.000 x 13,1 = 170.300
7 13.000 x 15,0 = 195.000
42. Income elasticity of demand
Example: (Güvemli pp.95)
Rate of increment of GDP per capita = 3,5%
Coefficient of income elasticity of product = 2
Rate of increment of product’s yearly per capita
demand = 7% (3,5% x 2)
Note: Income elasticity is calculated by dividing rate of
increment of demand to rate of increment income.
43. Income elasticity of demand
Example 1:
Past periods 2007 2008 2009
Sale of product “A” (Unit) 150.000 180.000 220.000
Yearly rate of increment 20% 22%
Average rate of increment ((0,20+0,22)/2) = 21%
GDP rate of increment 3,5% 4% 3,6%
GDP average rate of increment = (0,035 + 0,04 +
0,036) / 3 = 3,7%
Coefficient of income elasticity (21%/3,7%) = 5,6
44. Income elasticity of demand
Demand of product “A”?
Next periods 2010 2011 2012 Averg.
Predicted GDP
rate of increment ((4% + 4,2% + 4,4%)/3)= 4,2%
Coefficient of income elasticity = 5,6
Yearly rate of increment= (4,2% x 5,6) = 23,5%
Demand of product “A”
(2010 period) = 220.000 x 123,5% = 271.700
(2011 period) = 271.700 x 123,5% = 335.550
(2012 period) = 335.550 x 123,5% = 414.404
45. It is your turn!
Question:
Dogtas Company is a Turkish company which produces
home inner products such as furniture. Dogtas
company sold 80.000 furniture in 2007, while 125.000
in 2008 and 100.000 in 2009 respectively. In same
period GDP rate of increment was 7%, 9% and 5%
respectively. Because World economic crisis, it is
being expected GDP rate of increment will be -2% in
2010 while 3% in 2011 and 5% in 2012. So, please
calculate Dogtas Company’s furniture demands in
2010, 2011 and 2012.
46. Graphic method
In this method, demand of product and dates are
being located on a graphic. Then taking account
the numbers density and draw a line.
This method is very basic but not reliable.
47. Graphic method (Example)
Date (2009) Demand
January 2500
February 2800
March 3050
April 3476
May 3899
June 1257
July 1289
August 3456
September 4900
October 5600
November 7988
December 3678
January 8899
February 7654
March 7889
April 9900
May 6754
June 5678
July 6754
August 7654
September 9876
October 7654
November 7865
December 8888
48. Least squares method
We can use Excel to estimate the demand of our
product(s) with applying least squares
method.
49. Least squares method
Years Demand Step 1: Open an Excel page and click
1 1250 fx (functions) and chose “Statistics”
2 1578 Step 2: Chose “forecast”. Then you
3 3234 will see three spaces.
4 7500
5 3456
Step 3: For first space chose estimated
year (In our examp. 10), for second
6 2200
space chose demand numbers and for
7 4578
third space chose years (In our
8 6543 example from 1 to 9)
9 2134
Step 4: Click to Enter and get the
10 4926 result. Example
50. How to calculate market share?
There are two ways to calculate market share:
I. Percentage of sale units: Company’s sale
units/Total sale units in the market
II. Percentage of income: Total income of the
company / Total income of the sector which
the company belongs
51. How to calculate market share?
Example: Our company produces cheese in
Çanakkale. In 2009 it has produced 70 ton
cheese in the city and sold them at 70.000 Euro.
In same period our company produced 7 ton
cheese and sold it 12.000 Euro. So;
Our market share as a unit is:
(7 Ton / 70 Ton)x100= 10%
Our market share as a sale:
(12.000 Euro/70.000 Euro)x100= 17,14%
54. Financial managers use profit planning for;
• Determine at least how much products should
be produced to get profit with using sale and
cost information,
• Which products should be produced and how
much?
• Determine the price of the product
56. Data
• Unit sale price of the product
• Sale volume of the product
• Sale composition of the products
• Unit variable cost
• Total fixed costs
57. Assumptions of profit planning
• Costs are divided into two such as fixed and
variable but there is one more which is half
variable costs
• There is only one price and stable
• Input prices are fixed
• At the end of the financial term, there is no
inventory
60. We can use Break Even Analysis…
• To decide producing a new product and it’s sale volume
to get profit
• To decide company’s to grow or non-grow situation
• To decide to realise modernisation and automation
investments
• To measure effect of variation of price, fixed and variable
costs on profit
It can be applied both graphic and mathematics methods...
61. Limitations
Resource: http://en.wikipedia.org/wiki/Break-even_(economics)
• Break-even analysis is only a supply side (i.e. costs only) analysis, as it
tells you nothing about what sales are actually likely to be for the
product at these various prices.
• It assumes that fixed costs (FC) are constant. Although this is true in
the short run, an increase in the scale of production is likely to cause
fixed costs to rise.
• It assumes average variable costs are constant per unit of output, at
least in the range of likely quantities of sales. (i.e. linearity)
• It assumes that the quantity of goods produced is equal to the
quantity of goods sold (i.e., there is no change in the quantity of
goods held in inventory at the beginning of the period and the
quantity of goods held in inventory at the end of the period).
• In multi-product companies, it assumes that the relative proportions
of each product sold and produced are constant (i.e., the sales mix is
constant).
62. Graphic Method
Total Income
Income - cost
Break even point Profit
Total costs
loss
Amount of production
63. Continuation...
Total costs
Break Even Point
Loss
Income -Cost
Break Even Point Total Income
Profit
Loss
Amount of production
64. Mathematical Method
Production level in Break Even Point: Q=F/P-V
Sale level in Break Even Point: S=F/1-(V/P)
Q: Production level in Break Even Point
F: Fixed costs
P: Unit price
V: Unit variable costs
65. Break Even Point Assignments
Please watch the video and create your own
example and send me by email till next lesson.
1.http://www.youtube.com/watch?
v=7MxlVMzRxa8&feature=related
Break Even Analysis Example Video.xlsx
2.Please done this example by yourself. Print it
out and deliver at next lesson.
Break event point assignment 2012.xlsx
66. Example (1) for Break Even Analysis
Microsoft Company’s sale is 5.000.000 Euro when
production is 20.000 unit, variable costs are 3.000.000
Euro and fixed costs are 1.000.000 Euro. In this case,
what is the production level in break even point?
Unit price: 5.000.000/20.000=250 Euro
Unit variable cost: 3.000.000/20.000=150 Euro
Q=1.000.000/250-150
= 10.000 Unit
67. Example (II)
If it is being used same data with first example
sale level in break even point=?
S=F/1-(V/P)
=1.000.000/1-(150/250)
=2.500.000 Euro
68. Different approach to calculate break
even point: Additive margin
Additive margin = Unit price-Unit variable costs
Amount of production in break even point= Total fixed
costs/Unit additive margin
Additive rate=(Unit price-Unit variable costs) /
Unit price
Amount of sale in break even point= Total fixed costs/Additive
rate
69. Example III
Amount of production in break even point= Total fixed
costs/Unit additive margin
Unit additive margin = 250-150
= 100
Amount of production in break even point =
1.000.000/100
= 10.000 unit
71. Break even point and target profit
Amount of production in break even point which is
being taken consider target profit=
(Fixed costs + EBIT)/(Unit price-Unit variable cost)
The company is targeting 2.000.000 Euro profit. So,
what is the amount of production in break even
point
=(1.000.000+2.000.000)/(250-150) Additive rate
= 30.000 Unit
How about break event point in sale?
72. Example IV
• Dardanel A.Ş. Produce Tuna fish (500 gram) and sell it 50 Euro
per can. Other informations are given below:
• Direct raw materials and consumables cost: 12.5 Euro/can
• Direct labour costs: 8.25 Euro/can
• Variable production overheads: 3.75 Euro/can
• Fixed production overheads : 425.000 Euro
• Fixed marketing costs: 150.000 Euro
a) How many Tuna fish can should be produced to get break even
point?
b) How much sales should be achieved to get break even point?
c) The boss Mr. Niyazi Önen would like to make 400.000 Euro
profit. In this case, how many can should be sold?
73. Continuation…
a) BEPQ= Fixed costs/(Unit sales price-Unit
variable cost)
• Unit varible cost=Direct raw material
cost+Direct labour cost+ Variable production
overheads
• Unit variable cost = 12.5+8.25+3.75
= 24.5
• BEPQ= (425.000+150.000) /(50-24.5)
• BEPQ= 22.549 Unit
75. Multiproduct Break Even Point
Source: Tsorakidis Nikolaos, Sophocles Papadoulos, Christopher Zerres and Michael
Zerres, Break Even Analysis, 2008, www.bookboon.com, ISBN 978-87-7681-290-4
Example: Quick Coffee, a cafeteria that sells
three types of hot drinks: White/Black coffee,
espresso and hot chocolate.
77. Continuation…
Quick cafe breaks even when it sells 19,784 hot
drinks in total. To determine how many units
of each product it must sell to break even we
multiply the break-even value with the ratio of
each product’s revenue to total revenues.
Classic coffee: 19.784 x 50% = 9.892 Unit
Espresso: 19.784 x 30% = 5.935 Unit
Hot chocolate: 19.784 x 20% = 3.957 Unit
80. We can use operating leverage…
• To search how much fixed and variable costs
can be accepted by using relationship
between them
• To estimate extra productions effect on profit
when production exceeds a certain level
• To decide if a company based on labour force
or capital
81. Operating Leverage Formulas
Pr ofit variability ( %)
OP =
Sales variability (%)
or
∆EBIT
OP = EBIT
∆SALES
SALES
83. Example
Student Agency Company’s variable costs
are 3.000.000 € at 5.000.000 € sales level.
EBIT is 1.000.000 €. If we assume that
sales can be increased 10%, EBIT will be
1.200.000 €. So,
(1.200.000 − 1.000.000) / 1.000.000
OP = =2
(5.500.000 − 5.000.000) / 5.000.000
This means, profit will increase 2 € if sales
increase 1 € at 5.000.000 € sales level.
84. Example
Sales − Variable Costs
OL =
EBIT
5.000.000 − 3.000.000
OL = =2
1.000.000
86. Example
Source: Tsorakidis Nikolaos, Sophocles Papadoulos, Christopher Zerres and Michael Zerres, Break Even Analysis, 2008,
www.bookboon.com, ISBN 978-87-7681-290-4, pp.14-16.
87. Continuation…
For sales volume from 50.000 to 60.000 OP of
∆EBIT
EBIT
First Company = OP =
∆SALES
SALES
OP = ((90-70)/70)) / ((240-200)/200)
OP = 1,43 (approximately)
90. Continuation…
OP 1= 1.43
OP 2= 1.65
OP 3= 1.67
If sales could be increased 10%, its profit will
increase;
• 14.3% for company 1
• 16.5% for company 2
• 16.7% for company 3
What happens if sales decrease in same level?
91. Continuation…
• Which company reach first its break even point?
Why?
• Please calculate it and make critics!
• Answer: First one reaches at 15.000 Units while
the others 20.000 Units. Because, first company
has the lowest fixed costs, even has the highest
unit variable cost.
• The larger the degree of operating leverage, the
greater the profits volatility.
92. Continuation…
Company Unit sale price (€) Unit variable cost (€) Fixed costs (€)
Company 1 4 2 30.000
Company 2 4 1.5 50.000
Company 3 4 1 60.000
94. Financial Leverage
http://www.investorwords.com/1952/financial_leverage.html
• The degree to which an investor or business is
utilizing borrowed money. Companies that are
highly leveraged may be at risk of bankruptcy if
they are unable to make payments on their debt;
they may also be unable to find new lenders in
the future.
• Financial leverage is not always bad, however; it
can increase the shareholder’s return on
investment and often there are tax advantages
associated with borrowing.
96. We can use financial leverage…
To search a company’s debts effect on
it’s profit.
97. Financial leverage formulas
EBIT
FL =
EBIT − C
C = Inreterest cost
Profit increase per share
FL =
Profit increase
∆profit per share
profit per share
FL =
∆EBIT
EBIT
98. Example
Student Agency Company’s capital is
20.000.000 €, total debts are 10.000.000
€. Debts are 8% interest rate bank loans.
EBIT is 15.000.000 €. The company has a
chance to increase it’s EBIT 20%.
Please calculate financial leverage of the
company and make comments on the
result.
99. Example
Interest cost = 10.000.000 € x 8% = 800.000 €
EBIT 15.000.000
FL = = = 1.05
EBIT − C 15.000.000 − 800.000
C = Inreterest cost
1.05x20%=0.21 If the company can increase it’s EBIT 20%,
earnings per share (EPS) also will increase 21%.
What happens if we get 20.000.000 € credit at same cost,
how it effects on EPS and risk?
Answer: 20.000.000 x 8% = 1.600.000
FL= 1.11 So, 1.11x20%= 0.22
100. Financial leverage
If the company use infinite debt does this mean
earnings per share will be also infinite? If not
why?
We are in an economic crises. So, what do you
think our company’s situation if we compare
other one (1.5) in our example?
Answer: If another company’s financial leverage is
1.5 this means our company has less risk but
EPS will increase 30%.
104. The conversion cycle
Real Time Computer Corporation (RTC), which in
early 1992 introduced a new super
minicomputer that can perform 15 million
instructions per second and that will sell for
$250.000. The effects of this new product on
RTC’s working capital position were analyzed in
terms of the following five steps:
105. Resource: J. Fred Weston and Eugene Brigham,Essentials of Managerial Finance,
Harcourt Brace&Company International Edition, 1992.pp.364.
106. Continuation…
1. RTC will order and receive the materials it
needs to produce the 100 computers that are
expected to be sold. Because RTC and most
other firms purchase materials on credit, this
transaction will create an account payable.
However, the purchase will have no
immediate cash flow effect.
107. Continuation…
2. Labor will be used to convert the materials
into finished computers. However, wages will
not be fully paid at the time the work is done,
so accrued wages will build up.
3. The finished computers will be sold but on
credit, so sales will create receivables, not
immediate cash inflows.
108. Continuation…
4. At some point during the cycle, RTC must pay off its
accounts payable and accrued wages. Because these
payments will be made before RTC has collected cash
from its receivables, a net cash outflow will occur, and
this outflow must be financed.
5. The cycle will be completed when RTC’s receivables
have been collected. At that time, the company will be
in a position to pay off the credit that was used to
finance production, and it can then repat the cycle.
109. Cash conversion cycle model
Inventory conversion period (ICP): It is the
average length of time required to convert
materials into finished goods then sell those
goods.
Inventory conversion period= Inventory / Sales per day
For example: If average inventories are $2
million and sales are $10 million;
ICP=$2.000.000/($10.000.000/360) = 72 days
110. Continuation…
Receivables collection period (RCP): It is the
average length of time required to convert the
firm’s receivables into cash, that is, to collect
cash following a sale.
RCP= Receivables / (sales/360)
If receivables are $666,667 and sales $10 million,
RCP= $666,667 / ($10,000,000/360)= 24 Days
111. Continuation…
Payables deferral period (PDP): It is the average
length of the time between the purchase of
materials and labour and the payment of cash for
them.
PDP= Payables/ Credit purchases per day
= Payables/ (cost of goods sold /360)
If the firm on average has 30 days to pay for labour
and materials, if its cost of goods sold are $8
million per year, and if accounts payable average
$666,667;
PDP= $666,667 / ($8,000,000/360) = 30 days
112. Continuation…
Cash conversion cycle (CCC): It nets out the periods
just defined and which therefore equals the length
of time between the firm’s actual cash
expenditures to pay for productive resources
(labour and materials) and its own cash receipts
from the sale of products.
CCP= Inventory conversion period + receivables
collection period - payables deferral period
114. Result
With calculating and finding 66 days, RTC knows
when it starts producing a computer that it will
have to finance the manufacturing costs for a
66 day period. The firm’s goal should be to
shorten its cash conversion cycle as much as
possible without hurting operations.
115. It is your turn!
Dardanel A.Ş. Produces frozen and canned food such
as sea fishes, octopus and mussel. The company will
produce new product namely blue fish which lives
only in Istanbul Bosporus and Canada. So the
product is very valuable and expensive.
It has also market in Europe. A canned food be
produced in 20 minutes and work hours are 8 hours
per day. Marketing department says 90% of the
production will be sold .The price will be 10 Euros
per canned food. Average inventories are 8.000
Euro. (330 working days assumed but year 360 days.
116. Continuation…
Other things related with sales:
• Labour get salary 30 days after the work
• Payments for raw material are done 45 days
later
• 80% of sales are done cash while 20% of sales
are credit.
• Cost of goods are sold is 28.800 Euro
• Accounts payable is 12.200 Euro
Please calculate effects of this new product on
Dardanel Company’s working capital position.
118. Capital budgeting
(Strategic Long-Term Investment Decisions)
• Generating ideas for capital projects
• Who creates the capital budgeting projects?
• Do we need to be an entrepreneur?
• Two questions for testing being entrepreneur
(CV and address book)
119. Strategic Long-Term Investment
Decisions
• Project classifications
1. Replacement: Maintenance of business
2. Replacement: Cost reduction
3. Expansion of existing products or markets
4. Expansion into new products or markets
5. Safety and/or environmental projects
6. Other
120. Project classifications
• Replacement: Maintenance of business
• One category consists of expenditures to
replace worn-out or damaged equipment
used in the production of profitable
products.
• Should we continue to produce these products
or services?
• Should we continue to use our existing
production processes?
121. Project classifications
• Replacement: Cost reduction
• This category includes expenditures to
replace serviceable but obsolete
equipment.
• The purpose here is to lower the costs of
labour, materials, or other inputs such as
electricity.
122. Project classifications
• Expansion of existing products or markets
• Expenditures to increase output of
existing products, or to expand outlets or
distribution facilities in markets now
being served are included here.
123. Project classifications
• Expansion into new products or markets
• These are expenditures necessary to
produce a new product or to expand into
a geographic area not currently being
served.
124. Project classifications
• Safety and/or environmental projects
• Expenditures necessary to comply with
government orders, labour agreements,
or insurance policy terms fall into this
category.
125. Project classifications
• Other project investments
• This catch all includes office
buildings, parking lots, executive
aircraft, and so on.
126. Strategic Long-Term Investment
Decisions
• Similarities between capital
budgeting evaluation techniques
1. Project cost
2. Expected cash flows estimation
3. Estimation of project riskiness
4. Cost of capital decision
5. Measurement of present value of cash inflows
6. Present value of the expected cash inflows
and required outlay
127. Capital Budgeting Evaluation
Techniques
1. Payback Period
2. Net Present Value (NPV)
3. Internal Rate of Return (IRR)
4. Sensitivity Analysis
129. Payback period
• Project (S)
Uncovered cost at start of year
Payback=Year before full recovery +
Cash flow during year
100
Payback Period (S)= 2 + = 2,333 Years
300
132. Net Present Value (NPV)
• To implement this method, it should be
proceeded as follows:
• Find the present value of investment and its
future cash flows with discounting at the
project’s cost of capital
• Sum discounted investment and cash flows
• If the NPV is positive then we accept the
project. If we have to choose a project among
the alternate projects, we should take into
consider the highest NPV
133. Net Present Value (NPV)
CF1 CF2 CFn
NPV = CF0 + 1
+ 2
+ ..............+ n
(1+ k ) (1+ k ) (1+ k )
n
CFt
=∑
t =0 (1 + k )
t
134. Capital Budgeting Evaluation
Techniques
• Internal rate of return (IRR)
• The IRR is defined as that discount rate
which equates the present value of a
project’s expected cash inflows to the
present value of its expected costs.
135. Internal rate of return (IRR)
CF1 CF2 CFn
CF0 + 1
+ 2
+ ..............+ n
=0
(1+ IRR ) (1+ IRR ) (1+ IRR )
n
CFt
=∑ =0
t =0 (1 + IRR )
t
136. Example of NPV, IRR and Sensitivity
• Small Scale Flower Cultivation Project in
India
• This project has written by Weitz Center (Israel)
experts for an area in India.
• The project covers an area about one acre. The
aim is producing and selling flowers. Project’s
cost will be covered by a bank loan. All costs
and sale data have been collected and realised
that target sales could be achieved. Cost benefit
analysis Flower.xls
