Financial management and Markets

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Full Capacity Sales Definition
The amount of sales when machines are 100% utilized
If S1>Full Capacity Sales
you need to buy a new machine –> calculate AFN
If S1
you don’t need to do anything
If NPV>0
invest in a new machine
Crossover Point Definition
The point at which the IRR oaf two investments have the same NPV and WACC
How to Calculate Crossover Point
calculate IRR in calculator using the differences of PV and cash flows
5 Problems with IRR
1) uneven weigh of cash flows
2) uneven initial investments
3) uneven length of investments
4) multiple solutions
5) reinvestment at IRR instead of WACC
3 Problems with Modified IRR
1) uneven weigh of cash flows
2) uneven initial investments
3) uneven length of investments
Present Value Calculation
PV = C1/(1+r)^n + C2/(1+r)^2 + . . .
Modified IRR Steps
1) Calculate the FV, using WACC, for each cash flow besides the initial investment (T0) and the last one
2) Add up step 1 and combine with the last cash flow
3) Calculate MIRR using the initial investment (T0) as PV and find i/y
Additional Funds Needed Definition
funds that a firm must raise externally tom non-spontaneous sources like borrowing or selling stock
If AFN
retained earnings>working capital
If AFN>Purchase Price
retained earnings
AFN Equation
AFN = (A*/S0) x ΔS – (L*/S0) x ΔS – PM x S1 x (1-payout)

where: PM x S1 x (1-payout) = the increase in retained earnings

AFN Equation Variable Definitions
A*= assest that grow spontaneously with sales (accounts receive and inventory)
S0= current sales
ΔS= sales growth
L*= liabilities that grow spontaneously with sales (accounts payable and accruals)
PM= profit margin
(1-payout)= 1-dividend payout
Profit Margin Equation
PM = net income / sales
Assumptions of AFN
– assumes accounts payable and accruals are tied directly to sales
– a sharp increase in forecasted sales will lead to an increase in AFN
– an increase in dividend payout will increase AFN
Definition of Spontaneously Generated Funds
funds that arise out of normal business operations from its suppliers, employees, and the government, and they include a spontaneous increase in accounts payable and accruals.
Difference of NPV and IRR
NPV is a better measure of the quality of an investment because it takes WACC into account. IRR assumes that the WACC is high, however if this is not the case then the IRR becomes a poor decision maker. IRR is easier but NPV is a better measure.
When IRR = Discount Rate
NPV = 0
Full Capacity Sales Formula
FCS = actual sales (S0) / % at which machines operate
Categories: Sales