PPT Introduction to Capital Budgeting and Financing of Capital Projects PowerPoint presentation

Post on: 10 Апрель, 2015 No Comment

PPT Introduction to Capital Budgeting and Financing of Capital Projects PowerPoint presentation

Loading.

PPT Introduction to Capital Budgeting and Financing of Capital Projects PowerPoint presentation | free to download

Introduction to Capital Budgeting and Financing of Capital Projects

Case study and small group exercise on cost identification. Modify existing equipment, processes, and management & information systems to. PowerPoint PPT presentation

Tellus Institute

Introduction

Course Background

  • 15 min

Development of the training materials

  • Content has been developed by
  • Tellus Institute
  • Gloucestershire Business School, UK
  • The Illinois EPA
  • The Philippine Institute of CPAs
  • The Asian Institute of Management
  • UNEP CP financing National Project Coordinators

in Zimbabwe and Guatemala

  • UNEP Cleaner Production financing project team
  • UNEP Financing Cleaner Production Support

    • Division of Technology, Industry, and Economics
    • This course results from the project
    • Strategies and Mechanisms For Promoting Cleaner

    Introduction of Instructors

    • 15 min

    Cleaner Production is.

    • The continuous application of an integrated

    preventive environmental strategy applied to

    overall efficiency and reduce risks to humans and

    the environment.

  • UNEP
  • Cleaner Production is different

    • Much of current environmental protection focuses

    on what to do with wastes and emissions after

    they have been created, otherwise known as

    end-of-pipe disposal treatment

  • The goal of Cleaner Production is to avoid

    generating pollution in the first place

  • Environmental Management hierarchy

    • CLEANER PRODUCTION
    • Pollution Prevention
    • On-site Recycling/Reuse

    Cleaner Production

    • Production processes conserving raw materials

    energy, eliminating toxic raw materials, and

    Cleaner Production benefits

    • Reduces costs (of raw materials, energy, waste,

    emissions)

  • Reduces risk (to employees, human health, and

    environment)

  • Identifies new opportunities for more efficient

    operations

  • Welcome bySenior Official

    • 15 min

    Participant Introductions

    • 30 min

    Who is here today?

    • What type of organization do you work for?
    • e.g. industry, government, other
    • If from industry, which sector and what size
    • What are your job responsibilities and areas of

    expertise?

  • e.g. management, accounting, finance,

    engineering, production, environmental

  • What is your investment perspective?
  • e.g. developer of investment proposals, funder

    of investment proposals

  • Why are you here?

    • What work issues or concerns motivated you to

    come?

  • What are your learning goals for this course?
  • What are your expectations of this course?
  • Course Overview

    • 15 min

    Todays focus

    • Capital Budgeting
    • Project Financing
    • Also to incorporate your experiences, questions,

    and goals into todays presentation,exercises,

    discussions

    In the context of Cleaner Production

    Investment projects

    • Investment projects and company value
    • Discussion of course participant experiences with

    investment projects

  • Summary — typical project types goals
  • Capital budgetingIntroduction

    • Capital budgeting definition and main

    implementation steps

  • Case study and small group exercise on cost

    identification

  • Discussion of small group exercise findings
  • Capital budgetingProfitability Assessment

    • Estimating project profitability with Net Present

    Value (NPV)

  • Time value of money discounting
  • Alternative profitability indicators
  • NPV, IRR, Payback
  • Project financing

    • Project financing sources
    • Discussion of course participant experiences with

    project financing

  • Types of investment and financing decisions
  • Different types of funding sources
  • Bank information requirements
  • How to demonstrate credit-worthiness
  • Case study and small group exercise on bank
  • information requirements

    Conclusion

    • Other issues?
    • Where to go for more information
    • Brief review of what we learned today
    • Course evaluation

    Time for a break! 15 min

    INVESTMENT PROJECTS

    Investment Projects and Company Value

    • 15 min

    Companies Projects

    • Think of a company as a collection of projects

    that fit together

  • A project could be
  • A production process or equipment
  • A product
  • An information or management system
  • etc.
  • Projects should be evaluated on how they help the

    company as a whole

  • So — what are the companys goals?
  • Company goals

    • The basic goal of any organization
    • Survive and prosper!
    • Economic survival depends on
    • Generating income (profits, cash flows)
    • Raising capital from investors lenders that

    supports generation of income

  • The key question- do investors lenders view

    the companys income as an adequate return on

    their capital investment.

  • Investors and lenders (1)

    • Two main potential sources
    • Investors ( owners, shareholders, equity)
    • Lenders ( debt)
    • (Sometimes called financial stakeholders)
    • Both types will require a reasonable return on

    their capital or may withdraw their support

    Investors and lenders (2)

    • Withdrawal of support by investors lenders

    could mean collapse of company

  • So, for any potential new project, first ask.

    Company value — Acme (1)

    • As an example, lets consider a company called

      Acme

    • A small metal plating firm in a developing

      Company value — Acme (2)

      • What is the value of Acme to its investors

        lenders if they expect

      • - Acme will continue in business indefinitely
      • 20 If investors/lenders consider Acme to be a

        risky company and require 30, then Acmes value

        will be less 12,000 40,000 30

        Discussion of Course Participant Experienceswith

        Investment Projects

        • 30 min

        Questions for discussion

        • Think of examples of capital investment projects

        that have been implemented (or funded) by your

        organization

      • What were the specific goals of the projects?
      • What was the typical investment size?
      • Would you consider any of those projects to be

        Cleaner Production (CP) projects?

      • Investment Projects Summary

        • 15 min

        Investment projects (1)

        • An investment project might focus on
        • A production process
        • Production or other equipment
        • A product
        • An information or management system
        • etc.
        • Investment projects might focus on existing

        equipment, processes, or products or focus on

        brand-new ones

        Investment projects (2)

        • Some investment projects require only a moderate

        investment of time/labour

      • Others require more significant up-front capital
      • (i.e. investment funds) for the purchase of

        physical assets such as equipment

        Investment projects (3)

        • Timing and frequency of investment projects and

        amount of investment capital required may vary

        with

      • Industry sector Company size
      • Company location State of the economy
      • etc.
      • However, for long-term survival, most companies

        periodically need capital for investment projects

      • Typical project types goals (1)

        • Maintenance
        • Maintain existing equipment operations
        • Improvement
        • Modify existing equipment, processes, and

        management information systems to improve

        efficiency, reduce costs, increase capacity,

        improve product quality, etc.

      • Replacement
      • Replace outdated, worn-out, or damaged equipment

        or outdated/inefficient management information

        systems

      • Typical project types goals (2)

        • Expansion
        • e.g. obtain and install new process lines,

        initiate new product lines

      • Safety
      • Make worker safety improvements
      • Environmental
      • e.g. reduce use of toxic materials, increase

        recycling, reduce waste generation, install waste

        product quality also reduces the use and purchase

        cost of toxic chemicals, as well as disposal

        costs

      • So, do not place your project idea into a single

        narrow category think broadly about all the

        possible benefits

      • Project implementation process

        • Capital budgeting
        • Identify company goals strategies identify

        potential projects evaluate projects select

        projects to implement

      • Project financing
      • Identify potential sources of capital raise

        external capital if needed

      • Project implementation assessment
      • Implement project monitor progress control

        review learn for next time!

      • CAPITAL BUDGETINGINTRODUCTION

        Capital Budgeting -Definition and Main

        Implementation Steps

        • 15 min

        Capital budgeting

        • The process by which an organization
        • Decides which investment projects are needed

        possible, with a special focus on projects that

        different projects

      • Decides if additional capital is needed
      • Capital budgeting practices

        • Capital budgeting practices vary widely from

        company to company

      • Larger companies tend to have more formal

        practices than smaller companies

      • Larger companies tend to make more larger

        capital investments than smaller companies

      • Some industry sectors require more capital

        investment than others

      • Capital budgeting practices may also vary from

        country to country

      • Basic capital budgeting steps

        • Identify potential projects
        • talk to employees, industry colleagues, trade

        association, suppliers/vendors, government

        technical assistance office

      • Evaluate and compare projects
      • technical, organizational, regulatory, and

        financial evaluation

      • Select project(s) to implement
      • may choose one or several projects, depending on

        availability of capital

      • Decision-making factors

        Technical

        Project selection

        Regulatory

        Financial

        Organizational

        Financial analysis steps

        • Estimate cash flows
        • PPT Introduction to Capital Budgeting and Financing of Capital Projects PowerPoint presentation
        • Characterize project risk
        • Select required rate of return on project
        • Calculate project profitability

        We will discuss this now

        We will discuss these after lunch

        Cost identification estimation

        • Initial investment costs
        • e.g. equipment, installation, training
        • Annual operating costs, savings,and revenues
        • Current operations, before the project
        • After project implementation
        • e.g. materials, energy, labour
        • Need to identify, estimate, and allocate all

        Case Study Small Group Exerciseon Cost

        Identification

        • 30 min

        Exercise instructions

        • Break into small groups
        • Review the company description
        • Work with your group to answer question 1
        • Work with your group to answer question 2
        • Discussion of answers as entire class

        Converting cash flowsto their present value

        • You can convert future year cash flows to their

        present value using a discount rate that

        incorporates

      • Desired return on investment
      • Inflation
      • The discount rate calculation is simple

        mathematically, it is the reverse of an interest

        rate calculation

      • Net Present Value

        • Net Present Value (NPV) is the sum of the present

        values of all the projects cash flows

      • Cash inflows are positive numbers
      • Cash outflows are negative numbers
      • If NPV is more than zero, the project is

        profitable since it will increase total company

        value

      • If NPV is less than zero, the project is not

        profitable since it would destroy value

      • Discounting

        • Expressing future amounts in terms of their

        present value is called discounting

      • Exchange rates can be calculated for any

        combination of

      • Required rate of return
      • Period of time into the future
      • These exchange rates are called
      • Discount factors, or
      • Present value factors
      • Question If Acme wants to borrow 18,000 in

        order to finance a new project, what factors are

        likely to influence how much interest it will

        have to be prepared to pay?

        Return, risk, and inflation

        • Basic Rate
        • pure compensation for deferring consumption
        • even if there is no risk or inflation
        • Risk
        • of the particular investment
        • the risk premium
        • Inflation
        • expected fall in the value of money over time

        What Rate of Return?

        • What amount should be set as the required rate

        of return for a project?

      • This rate must cover the costs of raising the

        finance from investors/ lenders (i.e. the

        companys cost of capital)

      • The required rate of return will usually

        incorporate 3 distinct elements

      • a basic return — pure compensation for deferring

        consumption

      • any risk premium for that projects risk
      • any expected fall in the value of money over

        time through inflation

      • Questions(1) What is a typical rate of return

        at your organisation?(2) Do you use this rate

        of return in capital budgeting?

        Summary (1)

        • Money has more value now than it does in the

        future

      • How much more value depends on
      • amount of discount rate
      • how many years into future
      • Required rate of return reflects time value of

        money and risk

      • This is true with or without inflation
      • Note also called discount rate
      • Summary (2)

        • Discount rate level reflects cost to company of

        raising capital

      • Present value (PV) factors can be calculated from

        discount rates

      • PV factors are conversion rates to convert future

        money into its present value (like exchange rates

        with foreign currencies)

      • NPV and Cleaner Production Projects

        • Any special issues in doing NPV analyses on CP

        projects?

      • Estimating future cash flows
      • Predicting project life
      • Identifying appropriate discount rate
      • Influences on Project Appraisal

        • 20 min

        Acmes CP project

        • Potential project
        • initial investment (now) 18,000
        • net cash inflows each year 9,600
        • life of project 3 years
        • discount rate (per year) 20
        • Projected NPV 2,221
        • BUT what could go wrong.

        Acmes CP project

        • 4 main items in the data analysis
        • initial investment (now) 18,000
        • net cash inflows each year 9,600
        • life of project 3 years
        • discount rate (per year) 20
        • If any of these deteriorate too far, NPV may fall

        below zero and the project would not be viable.

      • How far could each deteriorate, before NPV falls

        to zero?

      • Initial investment

        PV of future cash inflows 20,221 Expected

        initial investment 18,000 Net Present

        Value (NPV) 2,221 If cost of initial

        investment were to increase by more than 2,221

        (12.3) then project would not be worthwhile

        Project life (1)

        • The project could have to finish early for any of

        several possible reasons, e.g.

      • The equipment wears out through use
      • Companys lease on the property expires
      • New environmental regulation makes the equipment

        future cash flows

      • Payback (discounted)

        • Payback period can alternatively be calculated

        based on discounted future cashflows

      • This is more correct, since it recognises the

        time value of money (at least partly)

      • If based on discounted cash flows (which is more

        correct), the payback period would be 27.5 months

      • Discount rate

        • The rate at which the Net Present Value is zero

        (27.76, here) is the projects

      • internal rate of return (IRR)
      • The company should implement the project only if

        it can raise the money needed to finance it at a

        lower rate than this.

      • If it has to pay more than 27.76 to raise

        finance, the project will destroy value.

      • Alternative project appraisal methods Summary

        • Net Present Value (NPV)
        • Internal Rate of Return (IRR)
        • Payback (simple or discounted)

        Net Present Value (NPV)

        • net amount of discounted future
        • cashflows less initial investment
        • ? reflects amount (in ) added by
        • project to total company value
        • ? recognizes time value of money
        • ? complex to calculate
        • ? needs prior estimate of cost of
        • raising capital

        Internal Rate of Return (IRR)

        • discount rate at which NPV 0
        • ? basis to compare with costs of
        • different sources of finance
        • ? recognises time value of money
        • ? complex to calculate
        • ? does not directly reflect impact
        • on value

        Payback

        • time needed for net cash inflows to equal the

        initial investment

      • ? simple to calculate and understand
      • ? reflects risk of project life being shorter

        than expected

      • ? ignores all cash flows after payback point
      • ? simple version completely ignores time value

        of money

      • PROJECT FINANCING

        Project Financing Sources

        • 30 min

        What are the different sources of project

        financing available?

        Questions

        • What sources has your company raised capital from

        in order to finance projects?

      • Why were these sources used?
      • In what form was the finance provided (loans,

        grants, other )?

      • Were any possible sources considered but not used?
      • Potential sources of project financing

        • A. Internal funds
        • B. Private sector
        • 1. commercial banks
        • 2. development corporations
        • 3. equipment vendors/ subsidiary
        • finance companies
        • 4. owners capital (equity)
        • C. Governmental sector
        • grants/ earmarked capital from

        governmental programmes

        Investing and financing decisions

        • Distinguish between
        • The investing decision
        • The financing decision
        • Investing decision is the project acceptable?

        (i.e. does it have a positive NPV, at the

        relevant discount rate?)

      • Financing decision what is the best (usually,

        the cheapest) way to fund it?

      • Internal funds and the financing decision

        • Internal funds are generated from past cash flows
        • Internal funds (if available) are usually the

        best source, but

      • They have an opportunity cost — what else could

        be done with these funds? (e.g. finance other

        projects, invest in financial securities, etc.)

      • Soft funds specifically for CP projects may be

        preferable to internal funds

      • The variety of securities for Financing Companies

        • International firms use different kinds of

        securities

      • Stocks and shares
      • Long-term debt (secured or unsecured by mortgages

        on plant and equipment)

      • Short-term debt
      • Lease or rent on long term basis
      • Why are these securities not all relevant to

        small and medium-sized companies?

      • without conditions on how the borrower must use

        those funds)

        Development corporations

        • Development corporations/banks are established to

        contribute to the economic development of a

        particular community or region

      • CP projects which comply with their criteria can

        apply for loans

      • Question what development corporations/banks

        are you aware of?

      • Equipment vendors and Subsidiary finance companies

        • Leasing has become a major source of financing

        that is provided by some equipment vendors and

        subsidiary finance companies (lease-providers).

      • With financial leases (or capital leases)
      • Title to the equipment is held by the firm which

        operates it (the lease-holder)

      • The lease-provider retains a first security

        interest in the equipment

      • The lease-holder faces the risks and receives

        the rewards of ownership

      • Owners capital (equity)

        • Represented by ordinary shares in a company (or

        stock)

      • Can be raised from either/both
      • Present owners (shareholders)
      • New shareholders
      • But
      • Present owners may not have spare capital

        available

      • Bringing in new shareholders may dilute the

        shareholdings of present shareholders

      • Issues of new shares in a company can be by
      • A public issue
      • A private placement of stock
      • Share issues

        • Public issues of stock
        • For larger companies
        • Requires a stock market listing
        • Substantial administrative costs
        • Not usually suitable for single projects
        • Private placements of stock
        • Stock is bought by private persons but not on a

        public market

      • Still significant administrative costs
      • Financing projectsSummary (1)

        • Keep the financing decision distinct from the

        capital budgeting decision

      • Identify the pool of funds available to your

        company

      • Map the rates and terms of payment of different

        possible sources (differences may be huge!)

      • Try to establish long-term relationships with

        potential sources of finance

      • Financing projectsSummary (2)

        • The main factors are
        • How much capital is available in the country
        • The characteristics of CP-projects
        • Important characteristics of each application

        include

      • The level of uncertainty of future cash flows
      • The duration of the project (long or short term)
      • Financing projectsSummary (3)

        • Each source of capital has its own mechanisms

        which the company has to manage

      • The application process
      • The criteria of the fund provider
      • The terms of repayment
      • Any other restrictions put on the company (e.g. a

        maximum ratio of debt to equity, to limit risk)

      • Time for a break! 20 min

        Bank Information Requirements

        • 55 min

        from you?

      • Is there any further information that you could

        provide to support your application?

      • Typical information to evidence a companys

        credit-worthiness (1)

        • Historical financial statements for the past

        three years (balance sheet, income statement)

      • Projected financial statements for the next 1-3

        years (balance sheet, income statement, cash flow

        forecast)

      • Acmes Balance Sheet (in 000)

        • Capital liabilities
        • Share capital 60
        • Retained 42
        • profits
        • Accounts 23
        • payable ____
        • 125
        • Assets
        • Equipment 73
        • Inventory 21
        • Accounts 29
        • receivable
        • Cash 2
        • ___
        • 125

        Acmes Income Statement (in 000)

        • Sales revenue 203
        • less Cost of goods sold — 156
        • GROSS PROFIT 47
        • less Overhead (indirect) costs — 35
        • e.g. staff costs, rent, etc.
        • NET PROFIT 12

        Typical information to evidence a companys

        credit-worthiness (2)

        • For sole traders and partnerships personal

        financial statements and/or tax returns of the

        owner(s)

      • Bank and credit references payment histories on

        other loans or leases

      • Additional background information on the business
      • Presenting a fund application

        • Acme wants to implement its 3-stage rinse CP

        project. The project requires an initial

        investment of 18,000 but Acme has only 2,000

        in cash, which it needs for day-to-day

        finance. Three potential sources have been

        identified

      • a commercial bank
      • a development bank
      • environmental programme to stimulate CP
      • Presenting a fund applicationCommercial bank

        • An application to a commercial bank should focus

        on

      • The increase in efficiency achievable by the

        investment

      • The firms increased flexibility to respond

        swiftly to future changes in environmental

        regulation

      • Ensuring the firms competitiveness
      • Return on investment
      • Presenting a fund application Development bank

        • An application to a development bank should focus

        matching grant, e.g.from a government programme

      • Potential growth of the company due to increased

        cash flows from the investment

      • The firms fiscal stability and ability to repay

      • Categories
        Cash  
        Tags
        Here your chance to leave a comment!