Capital Budgeting - Process, Concepts and Techniques

6 Novembro 2019, 10:00 • JOÃO CARLOS CARVALHO DAS NEVES

Important concepts in investment analysis: Sunk costs; Opportunity cost of the resources; Incremental cash flow; Externalities; Cannibalization; Conventional cash flow

Investment criteria Advantages and Disadvantages: Average accounting rate of return; Pay-back period; Discounted pay-back period; Net present value (NPV); Internal rate of return (IRR); Modified internal rate of return; Profitability index; Equivalent annual cost and Equivalent annual value

Why NPV is the best financial criteria in general: NPV depends on cash flow not on accounting rules; 

Time value of money is the most accurate measure for the timing of the cash flows; Risk; Additivity property

Pifalls of IRR

The annual Equivalent value for unequal life spans

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Capital Budgeting

4 Novembro 2019, 10:00 • JOÃO CARLOS CARVALHO DAS NEVES

Important concepts in investment analysis: Sunk costs; Opportunity cost of the resources; Incremental cash flow; Externalities; Cannibalization; Conventional cash flow

Investment criteria Advantages and Disadvantages: Average accounting rate of return; Pay-back period; Discounted pay-back period; Net present value (NPV); Internal rate of return (IRR); Modified internal rate of return; Profitability index; Equivalent annual cost and Equivalent annual value

Why NPV is the best financial criteria in general: NPV depends on cash flow not on accounting rules; 

Time value of money is the most accurate measure for the timing of the cash flows; Risk; Additivity property

Pifalls of IRR

The annual Equivalent value for unequal life spans

Why IRR is lisleading in comparison to NPV

The modified internal rate of rate as an alternative to IRR

Capital rationing: The PI and the use of linear programming to optimize the use of capital in value creation

 

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Part II - Investment appraisal

30 Outubro 2019, 10:00 • JOÃO CARLOS CARVALHO DAS NEVES

Part II - Investment Appraisal

Cost of capital

Models to calculate the cost of equity

CAPM, Gordon model, M&M

The CAPM parameters, how to find them: risk free rate, beta, equity market risk and country risk premium

Beta levered and unlevered

Cost of equity levered and unlevered cost of capital

WACC

What do CFOs do? 

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Cost of capital and Capital budgeting techniques

28 Outubro 2019, 10:00 • JOÃO CARLOS CARVALHO DAS NEVES

Beta levered and unlevered

Cost of equity levered and unlevered cost of capital

WACC

What do CFOs do? 

Capital Budgeting tecniques

 

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Cash Flow Statement and Sustainable Growth Rate Analysis

23 Outubro 2019, 10:00 • JOÃO CARLOS CARVALHO DAS NEVES

Cash Flow Statement Analysis:

- Cash Flow statement - the accounting structure

- The direct approach (the only accepted by IFRS now) and the indirect approach

- IFRS approach versus GAAP approach - discussion of these accounting approaches in contrast to a financial approach of the investing cycle, the operational cycle and the financing cycle (both LT and ST)

- The managerial cash flow statement

- The indirect approach to cash flow - an example

- The comparison to the FCFF (Free cash Flow to the firm)

- How the indirect approach can be used for financial planning 

Sustainable growth rate:

- The Higgins formula

- Main assumptions of the sustainable growth rate - Operating assets (fixed assets and WCR) are proportional to sales, D/E remains stable, return on equity and pay-out ratio. Any change in these ratios may change sustainability

- The matrix of growth and expected impact on the liquidity of the firm 

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