Project Financial Appraisal Techniquespart of our advanced finance for non financial managers Course programme

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Key Objectives

What is financial evaluation

Why project financial evaluation techniques Project financial risks assessment

Practice illustration of financial plan

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Definition of financial evaluation

Concern with the assessment of financial viability of

projects

Assessment of risk profile and financial efficiency

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Why Project Financial Evaluation

Does the project create financial wealth How quickly can we recover project investment How risky is the project vis a viv it returns potentials How much capital do we need to invest

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Financial Risks Facing Projects

Demand Risk
Competition Risk Financial Risk Operational Risk Interest Rate Risk

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Financial Evaluation Techniques For Effective Project Management

Payback Period

Return On Investment Profit Based Measures

Net Present Value Method

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Payback Period Technique

Payback Period This is probably the most frequently used technique for assessing the financial viability of projects. It regards projects which repay their capital cost most quickly as being the best. For example, if a cafe purchases a new cooker for 1000 and makes an average of .50 profit on each meal, the cooker will be paid for after 1000/0.50=2000 meals. If the cafe sells 40 meals a day, the full price of the cooker is paid back after 2000/40=50days.

Attempt this question now: Frank and Mary decided to set up a carpet cleaning business. They purchased carpet cleaning equipment for 800. On average they expect to earn 5 per carpet after expenses and to be able to clean two carpets, five days a week. Calculate their payback period in weeks

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Payback Period Technique

The payback period is ( 800/ 5x2x5) = 800/50=16weeks.

You will appreciate as a project manager that the calculations above are rater simplistic. The capital cost of equipment or machinery is fairly easy to work out. It is how much the organisation paid for it together with delivery, installation and other costs incurred to get it up and running. But how is income calculated? And you know that income does not always flow in evenly

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Project Management Revenue & Cost Projections

Project Management In Practice Hampdene Ltd is a company specialising in arable farming. It is thinking about purchasing a combine harvester for a capital cost of 160,000 to be used from August to early October on its fields. It will also be rented out to a neighboring farm for the remainder of October. Harvest income flow in from October to December and total sales are expected to bring in 60,000 in year 1, 66,000 in year 2 and 70000 for each year from year 3 to year 8 (additional competition in world markets is faced in the later years). Running costs of the combine harvester are estimated at 4000 a year for year 1 and year 2 and 5000 for each year thereafter. Seeds fertilisers and other costs of production are generally 50 percent of sales income. Rental income from hiring out the vehicle is estimated at 2000 per year for the foreseeable future. While not in use, storage, security and maintenance expenses of the combine harvester are estimated at 1000 per year. Your task is to use a separate sheet and put together the projection of revenue and costs including net profit or loss for this project.

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Project Management Revenue & Cost Projections- Answer

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Income: Crop (sales) Rental 60000 2000 62000 66000 2000 68000 70000 2000 72000 70000 2000 72000 70000 2000 72000 70000 2000 72000 70000 2000 72000 70000 2000 72000

Outgoings Running costs 4000 4000 5000 5000 5000 5000 5000 5000

Storage etc
Cost production crop of of

1000
30000

1000
33000

1000
35000

1000
35000

1000
35000

1000
35000

1000
35000

1000
35000

35000 Net Income 27000

38000 30000

41000 31000

41000 31000

41000 31000

41000 31000

41000 31000

41000 31000

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Project Management Pay Back Period Technique In Practice

Year Net Income Additional Overheads Final net income (ie Net income less additional overheads) Cost of combine harvester less final net income (160000)

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

27000 30000 31000 31000 31000 31000 31000 31000

8000 7000 6000 5000 5000 5000 5000 5000

19000 23000 25000 26000 26000 26000 26000 26000

(141000) (118000) (93000) (67000) (41000) (15000) 11000 37000

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Project Management Net Present Value Technique v Time

Initial Investment 10% Yearly Interest Total Money Available

100 110 121 133 146 161

10 11 12 13 14 16

110 121 133 146 161 177

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Project Management Net Present Value Technique v Time

Year Net Income Additional Overheads Final net income (ie Net income less additional overheads) 19000 23000 Discounting Factor for 10% Present Value of projected net income

Year 1 Year 2

27000 30000

8000 7000

.909 .826

17272.73 19008.26

Year 3

31000

6000

25000

.752

18796.99

Year 4

31000

5000

26000

.685

17808.22

Year 5

31000

5000

26000

.621

16149.07

Year 6 Year 7 Year 8

Total Present Value of all future net income Present value of capital to be invested Net Present Value difference between Present Value of future net income and capital to be invested

31000 31000 31000

5000 5000 5000

26000 26000 26000

.565 .513 .467

14689.27 13333.33 12149.53

129207.4 (160000) -30792.6

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Conclusion The End

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