financial analysis. basic elements estimate whole life costs forecast business benefits and/or...
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Financial AnalysisFinancial Analysis
Basic ElementsBasic Elements
Estimate Whole Life Costs Forecast Business Benefits and/or Revenues Estimate financial return on project investment
Estimates requiredEstimates required
Initial Cost Estimate Option Cost Studies Budget Cost Estimate Milestone / Elemental Cost Plans
Benefit & Revenue ForecastsBenefit & Revenue Forecasts
Realistic Forecasts Costs to achieve Revenues & Benefits Benefits, Revenues & Costs based on
same assumptions
Establishing RevenuesEstablishing Revenues
Place
PeopleWho/How many
Price
People (Staff)
Process
Promotion
DetermineProduct/MarketRevenue Cost of Sales
Estimating BenefitsEstimating Benefits
HeadcountReductions
Other operationalCost Savings
ProductivityImprovement
DetermineCost Savings
Analyse PotentialIndirect Revenues
Translate K.P.I.'s intoCosts Savings
Determinerelevant K.P.I.'s
Established Baseline(Current Performance)
Determine/Describetargeted benefits
Investment AppraisalInvestment Appraisal
What is the financial return for the project? How quickly will we get the money back? Is this a sound investment? Which project or programme gives best return on
investment? What contribution does this customer project make? How does this compare with other investment opportunities?
Discounted Cash FlowDiscounted Cash Flow
Compound GrowthCompound GrowthFuture Value of £100 @ 12% Compound Growth
0
50
100
150
200
250
300
350
0 1 2 3 4 5 6 7 8 9 10Years
Discounted Cash FlowDiscounted Cash Flow
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Years
Project 1 - NPVProject 1 - NPV
Cost RevenueAmount Present Value Amount Present Value
Now 5000 5000End Year 1 2000 1786End Year 2 1000 797End Year 3 500 356 5000 3559End Year 4 7500 4766End Year 5 10000 5674
Totals 8500 7939 22500 13999
Net Present Value (NPV) 13999 – 7939 = 6060
Discount Rate = 12%
Project 2 - NPVProject 2 - NPV
Cost RevenueAmount Present Value Amount Present Value
Now 10000 10000End Year 1 4000 3571End Year 2 2000 1595End Year 3 1000 712 3270 2329End Year 4 13000 8259End Year 5 20000 11350
Totals 17000 15878 36270 21938
Net Present Value (NPV) 21938 – 15878 = 6060
Discount Rate = 12%
Project 1 - IRRProject 1 - IRR
Cost RevenueAmount Present Value Amount Present Value
Now 5000 5000End Year 1 2000 1527End Year 2 1000 583End Year 3 500 222 5000 2224End Year 4 7500 2546End Year 5 10000 2592
Totals 8500 7332 22500 7362
Net Present Value (NPV) = 0 IRR = 31%
Discount Rate = 31%
Payback PeriodPayback Period