Project Ka Bazigaar

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Project Ka Bazigaar
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• Cost-Benefit Analysis
• By-Rahul Jain

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Cost-Benefit Analysis Project Appraisal

• Market Appraisal (Demand forecasting, Market size
  etc)
• Technical Appraisal ( Location, processes,
  design, technology)
• Financial Appraisal
• Socio Economic Appraisal ( Societal issues)
• Ecological Appraisal

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Cost Benefit Analysis ?

• Analysis of potential projects.
• Long-term decisions involve large expenditures.
• Very important to firms future.

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Financial Projection Various components

• Estimation of cost of Project and its timings
• Estimation of likely revenues during each period
• Cost of capital
• Planning horizon of project
• Risk of the project ( Scenario Analysis)

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Financial Criteria

• ROI
• Gross Margin /Sales Ratio, Net Margin/Sales Ratio
• BreakEven
• Payback period , IRR, NPV
• Other Ratios and Measures

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ROI Return on Investment

• Profit /Investment
• Desirable It should be more than 18

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ROI ( Under all scenarios)- For Business/
Marketing Plan

• Steps
• Forecast Sales Investments
• Forecast Costs Budgets
• Forecast Income statement
• Calculate ROI

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ROI- For Marketing Campaigns

• Steps
• Forecast Sales Investments
• In Investments consider following
• Investment in Marketing campaign Cost of Sales
• Forecast Direct Costs
• Forecast Gross Margin ( Sales-Cost of
  sales-Recurring Marketing Investment)
• Calculate ROI

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Gross Margin /Sales Ratio

• Suitable for Measuring the effectiveness of
  Marketing compaigns
• Suitable for indicating the direct efficiency of
  business

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Net Margin /Sales Ratio

• Suitable for Measuring the effectiveness of
  Marketing compaigns
• Suitable for indicating the overall efficiency of
  business

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Breakeven Sales

• Breakeven Fixed Costs/ Contribution Margin
  Ratio.
• This explain the Sales to be achieved for
  recovering the costs.

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What is the payback period?
The number of years required to recover a
projects cost, or how long does it take to get
the businesss money back?
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Payback for Franchise L(Long Most CFs in out
years)
2.4
0
1
2
3
10
80
60
-100
CFt
100
Cumulative
-100
-90
-30
50
0

PaybackL
2 30/80 2.375 years
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Franchise S (Short CFs come quickly)
1.6
0
1
2
3
70
20
50
-100
CFt
100
Cumulative
-100
-30
20
40
0
PaybackS
1 30/50 1.6 years

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Strengths of Payback
1. Provides an indication of a projects risk and
liquidity. 2. Easy to calculate and understand.
Weaknesses of Payback
1. Ignores the TVM. 2. Ignores CFs occurring
after the payback period.
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NPV Sum of the PVs of inflows and outflows.
Cost often is CF0 and is negative.
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Whats Franchise Ls NPV?
Project L
0
1
2
3
10
10
80
60
-100.00
9.09
49.59
60.11
18.79 NPVL
NPVS 19.98.
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Rationale for the NPV Method
NPV PV inflows - Cost Net gain in
wealth. Accept project if NPV gt 0. Choose
between mutually exclusive projects on basis
of higher NPV. Adds most value.
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Using NPV method, which franchise(s) should be
accepted?

• If Franchise S and L are mutually exclusive,
  accept S because NPVs gt NPVL .
• If S L are independent, accept both NPV gt 0.

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Internal Rate of Return IRR
0
1
2
3
CF0
CF1
CF2
CF3
Cost
Inflows
IRR is the discount rate that forces PV inflows
cost. This is the same as forcing NPV 0.
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NPV Enter r, solve for NPV.
IRR Enter NPV 0, solve for IRR.
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Whats Franchise Ls IRR?
0
1
2
3
IRR ?
10
80
60
-100.00
PV1
PV2
PV3
0 NPV
Enter CFs in CFLO, then press IRR
IRRL 18.13.
IRRS 23.56.
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Rationale for the IRR Method
If IRR gt WACC, then the projects rate of return
is greater than its cost-- some return is left
over to boost stockholders returns. Example WAC
C 10, IRR 15. Profitable.