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GROUP MEMBERS: MONIKA KAR (20) MILIND SAWANT (41) SATISH MORE (31) BABLI MISHRA (28) NADEEM USMANI (54) SONALI SAMAL (38)
Presented to : Prof. Shyam Patil
What is financial analysis?
y Financial analysis refers to an assessment of the
viability, stability and profitability of a business, sub-business or project.
y Looks at capital cost, operating cost and operating
y Comparing the costs and benefits over time to
determine whether a project is profitable or not.
.Significance of financial analysis y FA primarily deals with interpretation of data incorporated in financial statement of a project. y To check whether the project will be able to generate enough economic value. y To find the attractiveness of project to secure funds.
Project Apprais al Pitfall Index Financial Analysis Enterpri se Health Perform ance Index .
Steps in conducting a Financial Analysis y Identify the costs y Identify the benefits y Performing financial analysis (Cost vs Benefit) y Assess the financial indicators to determine if the project is financially favorable .
Defining Cost y There are different ways of defining costs: By type Capital Cost Operating Cost By function Development Cost Operational Cost Maintenance Cost By time Recurring Cost Non recurring cost By behavior Variable Cost Fixed Cost .
and the value that can be assigned to each benefit. y Tangible Benefits y Intangible Benefits .Identifying the Benefits y Identify the benefits that the project will provide.
Performing a Financial Analysis (Cost vs. Benefit Analysis) y Step 1: Identify the Sources of Cash Flows (Inflows and Outflows). y Step 2: Estimate the Magnitude of Specific Cash Flows y Step 3: Chart the Cash Flows y Step 4: Calculate the Net Cash Flow Using an Agreed-upon Discount Rate .
Step 1: Identify the Sources of Cash Flows y Project execution y Cash inflows ?? y Eg. Increase in revenue. y Cash outflow ?? y Eg. Cost of project itself or increase in operating cost due to project . reduction in production cost Cash outflows as well as inflows etc.
Step 2: Estimate the Magnitude of Specific Cash Flows y Estimating cost is not always straightforward job. y Eg. . Can you give money value to following : Increased output due to enhanced employee satisfaction Improvement in vendor delivery reliability Increase in user comfort or convenience y Rely on historic data or benchmark data for estimating these factors.
. y Allowance for the time value of money.Step 3: Chart the Cash Flows y Prepare a chart of your estimations. y Chart all cash outflows and inflows year by year useful life of the project.
Step 4: Calculate the Net Cash Flow Using an Agreed-upon Discount Rate y Value of a dollar in the future is less than the value of a dollar today. y Formula for discounted cash flow : .
IRR and Payback Period can be calculated.NPV. .
Assess the Financial Indicators y Payback period y Net Present Value (NPV) y Internal Rate of Return (IRR) y Sensitivity Analysis .
revenue) to equal the original cost of investment y Measures the length of time it takes for a project to repay its initial capital cost: y EG: Suppose a project involves a cash outlay of Rs 600000 and generates cash inflow of Rs 100000. y Acts as a proxy for risk: the shorter the payback period.Payback period y The payback period is the length of time taken for the inflows of cash (i. and Rs 200000. Rs 150000. in first . the lower the risk y The weakness of the payback period is that it does not consider the time value of money.its pay back period is 4 years because the sum of cash inflows during the 4 years is equal to the initial outlay. Rs 150000. .second. third and fourth years respectively.e.
initial investment Where . y Calculating the NPV answers the question How much money will this project make (or save)? NPV = Cash flow (1 + r)n . r = Discount Rate (10%) n = Number of Periods .Net present value (NPV) y The NPV of a project is the sum of the present values of all the cash flows² positive as well as negative³that are expected to occur over the life of the project.
01) + 200000/(1. APPROVE Opportunity (Value justifies Capital Outlay) If NPV is NEGATIVE (Present Value of Future Cash Flows LESS than Initial Investment).01)5 . REJECT Opportunity (Value insufficient to justify Capital Outlay) .year 0 1 2 3 4 5 Cash flow 1000000 200000 200000 300000 300000 350000 NPV= 200000/(1.1000000 = -5273 If NPV is POSITIVE (Present Value of Future Cash Flows GREATER than Initial Investment).03) + 350000/(1.01)3 + 300000/(1.01)2 + 300000/(1.
Investment = Cash Flow (1 + r)n Where .Internal rate of return (IRR) The IRR of a project is the discount rate which makes its NPV equal to zero y Calculating the IRR answers the question: How rapidly will the money be returned? y It·s a calculation of the percentage rate at which the project will return wealth. r = internal rate of return n = life of the project .
while in IRR calculation. we set the NPV equal to zero and determine the discount rate that satisfies the condition y Year Cash flow 0 1 (100000 ) 30000 2 30000 3 40000 4 45000 .y In NPV calculation discount rate is known .
y The decision rule for IRR is as follows y Accept: if the IRR is greater than the coc.y The IRR is the value of r which satisfies the following equation: 100000 = 30000 + 30000 + 40000 + 450000 (1 + r)1 (1 + r)2 (1 + r)3 (1 + r)4 We find the value of r by trial and error method. y Reject: if the IRR is less than the coc. .
y Sensitivity analysis provides a means of determining the y By entering an anticipated percentage increase in costs or decrease in revenue the financial impact on the project can be identified by looking at the change to the NPV or IRR measures. financial impact of this type of fluctuation. .Sensitivity Analysis y Projects do not always run to plan. but this profit could be eroded by an increase in costs or a decrease in the value of the benefits (the revenue). Costs and benefits estimated at an early stage of a project may indicate a profitable project.