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Pôle Endance , Audit, contrôle et systèmes d’information

Pôle Endance , Audit, contrôle et systèmes d’information. Fin ancial decisions & strategies. Case study Correction. Part I : investment choices. Question 1 - Calculate cash-flows NPV and IRR for both projects.

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Pôle Endance , Audit, contrôle et systèmes d’information

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  1. Pôle Endance, Audit, contrôle et systèmes d’information Financial decisions & strategies Case study Correction

  2. Part I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects Methodbased on FCF (Cash Flowfrom operating activities + Cash flowfrominvestingactivities) FCF = cash flowavailable (free) for the providers of funds of the company(lenders + shareholders)  Discounting the futur FCF Année universitaire 2012 - 2013

  3. Part I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project A First step the change in WC calculation: Watch out: in the FCF calculation, youwilldeduct the change in WC Increase in WC = use of cash or less cash Decrease in WC = resource of cash or more cash Année universitaire 2012 - 2013

  4. Part I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project A Step 2 - EBIT (= EBITDA – D&A) : Année universitaire 2012 - 2013

  5. Part I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project A Startingherefrom EBIT, youneed to calculate the Cash Flowfrom operating activities  CorporateIncomeTax  reincorporation of Depreciation (non cash expense) : Année universitaire 2012 - 2013

  6. Part I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project A Nowfrom Gross Cash Flow to Free Cash Flow: Année universitaire 2012 - 2013

  7. Part I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project A Based on FCF NPV (in K€) & IRR (in %): NPV = 363,22 K€ Année universitaire 2012 - 2013

  8. Part I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project A Based on FCF NPV (in K€) & IRR (in %): = 0,56 = - 12,40 Linear interpolation: t = 31 % + 0,04 = 31,04 % Année universitaire 2012 - 2013

  9. Part I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project B (1st possibility) Same as before:Step 1 WC , Step 2 EBIT, Step 3 Net IncomeStep 4 Gross CF Step 5 FCF. Année universitaire 2012 - 2013

  10. Part I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project B (1st possibility) Année universitaire 2012 - 2013

  11. Part I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project B (1st possibility) Année universitaire 2012 - 2013

  12. Part I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project B (1st possibility) Année universitaire 2012 - 2013

  13. Part I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project B (1st possibility) Based on FCF  NPV & IRR: NPV= 711,79 K€ Année universitaire 2012 - 2013

  14. Part I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project B (1st possibility) Based on FCF NPV & IRR: = 10,17 = - 4,24 Par interpolation linéaire : t = 40 % + 0,70 = 40,70 % Année universitaire 2012 - 2013

  15. Part I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project B (2ndpossibility) Sameprocess. Année universitaire 2012 - 2013

  16. Partie I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project B (2nd possibility) Année universitaire 2012 - 2013

  17. Partie I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project B (2nd possibility) Année universitaire 2012 - 2013

  18. Partie I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project B (2nd possibility) Année universitaire 2012 - 2013

  19. Partie I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project B (2nd possibility) Based on FCF NPV (in K€) & IRR (in %): NPV = 460,38 K€ Année universitaire 2012 - 2013

  20. Partie I : investmentchoices • Question 1 - Calculate cash-flows NPV and IRR for bothprojects • Project B (2nd possibility) Based on FCF NPV (in K€) & IRR (in %): = 7,06 = - 9,53 Par interpolation linéaire : t = 31 % + 0,42 = 31,42 % Année universitaire 2012 - 2013

  21. Partie I : investmentchoices • Question 2 – Based on the results, whichis the best project? • B1 • Additionnallyevenif the duration of the B1 projectis the longest, itspaybackperiodis the shortest (justabove 3 years) Année universitaire 2012 - 2013

  22. Partie II : Costing • Question 1 – Present a P&L in full costing Some data of the simplified P&L must berestated.  Only the elementimpacting the business as usual(operating + financingactivities) in order to obtain a Profit beforeTax and non-recurring items. Exceptionnal items are therforeleftapart! Additonnallyeach item must be split according to their nature: variables, fixed directs or fixed indirects. Année universitaire 2012 - 2013

  23. Partie II : Costing • Question 1 - Present a P&L in full costing(in €) COGS and otheropexonly are variable : 40 % of the otheropex are Variable costs, thereforedirectlylinked to the retailer (115 000 × 0,40 = 46 000)  Sales: 1 150 000 COGS: - 460 000 Other OPEX: - 46 000 Contribution Margin 644 000 Personnel expenses, fixedcosts, are direct for 80 % only (the restisfixed indirect) (437 000 × 0,80 = 349 600 Personnel expenses: - 349 600 D&A: - 75 000 Financial costs: - 8 000 Financial expenses are fixed directs, becauselinked to the operations Margin on direct costs 211 400 Herethisis the indirect part of the Otheropex (115 000 × 0,60 = 69 000) and of the personnel costs (437 000 × 0,20 = 87 400). Indirect Fixedcosts : -156 400 PBT (and non-recurring items) 55 000 Année universitaire 2012 - 2013

  24. Partie II : Costing • Question 2 – Is closing the South retailer a releventdecisionfrom a profitabilitystandpoint? Such a decisionisbased on the profitabilityinherent to the retailer. Additionnally the best costingmethodishere the full costing (question 1), which gave us a margin on direct costs of €211 400, or 19 % of sales. Based on thisresult the retailershould not beterminated. Otherelementscanbetakenintoaccount:: - Exceptionnalresult, and costs of closing the retailer; - The additionalfinancingcapacity; - No transfer of the know how to the new retailer, sinceitwillbe a new activity (assuming the employeesbeeingre-allocated). Année universitaire 2012 - 2013

  25. Partie II : Costing • Question 3 – Minimum level of sales in2009 to have a PBT equallingthe one of the South retailerin 2008? This is the breakeven point concept, with a minimum level to reach instead of 0 wecompute €55000 in the formula (net result of the South retailerin 2008). Therefore minimum sales equals : SALES – VC – FC = 55 000 Thusweneed to find out the split VC FC in the sales. Année universitaire 2012 - 2013

  26. Partie II : Costing • Question 3 - Minimum level of sales in 2009 to have a PBT equallingthe one of the South retailerin 2008? Based on exhibit 6 wesee the expensesthat are proportional to the sales on se rend compte que celles qui augmentent de façon proportionnelle au CA sont (avec leur montant en € pour 2009) : - COGS: 648 000 - Other OPEX: 162 000 810 000, or 50 % of sales Année universitaire 2012 - 2013

  27. Partie II : Costing • Question 3 - Minimum level of sales in 2009 to have a PBT equallingthe one of the South retailerin 2008? Fixedcosts are : - personnel costs: 486 000 - rents: 24 000 - D&A 130 000 - Financial costs 8 000 - Otheropex: 120 500 768 500 Année universitaire 2012 - 2013

  28. Partie II : Costing • Question 3 - Minimum level of sales in 2009 to have a PBT equallingthe one of the South retailerin 2008? Thuswefind: Sales – VC – FC = 55 000 Sales – 0,5 Sales – 768 500 = 55 000 Sales (1 – 0,5) = 55 000 + 768 500 Sales = 1 647 000 Minimum level of sales in 2009 in order to obtaina PBTa least equivalent to the one of the South retailerin 2008 = €1 647 000 € en 2009. Année universitaire 2012 - 2013

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