1. Financial Analysis Fundamental
Topic Included:
Financial Analysis Fundamental
Simple Financial Model Building
Project Decision Analysis
Share Key Ideas from Seminar
Nuttakul Somakettarin
Special Project Team
21 May 2015

2. Financial Analysis Fundamental
WHAT IS CAPITAL BUDGETING?
I. CAPITAL IS A LIMITED RESOURCE
Capital Budgeting is the process of determining which real investment projects should be accepted and given an allocation of funds from the firm.
Capital Budgeting คือ กระบวนการคัดสรรการลงทุนในโครงการ จากการวิเคราะห์ผลตอบแทนที่เหมาะสม

3. Financial Analysis Fundamental
II. Basic Steps of Capital Budgeting
1. Estimate the cash flows
2. Assess the riskiness of the cash flows.
3. Determine the appropriate discount rate.
4. Find the PV of the expected cash flows.
5. Accept the project if - PV of inflows > costs.
- IRR > Hurdle Rate
- and/or payback < policy

4. Tools and Concepts behind the Capital Budgeting
Financial Analysis Fundamental
Tools and Concepts behind the Capital Budgeting
Time Value of
Money
DCF (Discounted Cash Flows)
Measurements:
NPV
IRR
Payback
Etc.

5. Financial Analysis Fundamental
III. Evaluation Techniques
A. Payback period
B. Net present value (NPV)
C. Internal rate of return (IRR)
D. Modified internal rate of return (MIRR)
E. Profitability index

6. Financial Analysis Fundamental
A. PAYBACK PERIOD : Payback period = Expected number of years required to recover a project’s cost.
Weaknesses of Payback:
Ignores the time value of money. This weakness is eliminated with the discounted payback method.
Ignores cash flows occurring after the payback period.
Payback L = 2 + $30/$80 years
= 2.4 years.
Payback S = 1.6 years.

7. Financial Analysis Fundamental
B. NET PRESENT VALUE
10% =K
Discount Factor
Discounted CF
1.00
-100
1.10
9.09
1.21
49.59
1.33
60.11
NPV =
18.79
NPVS = $19.98
If the projects are independent, accept both.
If the projects are mutually exclusive, accept Project S since NPVS > NPVL.

8. Financial Analysis Fundamental
C. INTERNAL RATE OF RETURN
IRRL = 18.1%
IRRS = 23.6%
If the projects are independent, accept both because IRR > k 10%)
If the projects are mutually exclusive, accept Project S since IRRS > IRRL.

9. Financial Analysis Fundamental
WACC calculation
KE หรือ Cost of Equity สามารถคำนวนหาได้จาก CAPM (Capital Asset Pricing Model)

10. Financial Analysis Fundamental
WACC calculation
KD หรือ Cost of Debt สามารถหาได้จากต้นทุน(ดอกเบี้ย, cost of borrowing) เงินกู้ที่จะนำมาใช้ในการ Financing โครงการนั้นๆ

11. Financial Analysis Fundamental
WACC calculation
􀁑 Equity
• Cost of Equity = Riskfree rate + Beta * Risk Premium
= 4% (7%) = 12.4% • Market Value of Equity = 700,000
• Equity/(Debt+Equity) = 70%
􀁑 Debt
• After-tax Cost of debt = (Interest Rate for the Loan) (1-t)
= (6%) (1-.25) = 4.5%
• Market Value of Debt = 300,000
• Debt/(Debt +Equity) = 30%
􀁑 Cost of Capital = 12.4%(.70) + 4.5%(.30) = 10.03%

12. 2. Simple Financial Model Building

13. 2. Simple Financial Model Building

14. 2. Simple Financial Model Building

15. 3. Project Decision Analysis
A. MAKING GO/NO-GO PROJECT DECISION
Focus on cash flows, not profits.
Focus on incremental cash flows.
Account for time. Time is money.
Account for risk.

16. 3. Project Decision Analysis
B. THE PROCESS OF PROJECT EVALUATION
Carefully estimate expected future cash flows.
Select a discount rate consistent with the risk of those future cash flows.
Compute a “base-case” NPV.

17. 3. Project Decision Analysis
B. THE PROCESS OF PROJECT EVALUATION
Identify risks and uncertainties. Run a sensitivity analysis. - Identify “key value drivers”. - Identify break-even assumptions. - Estimate scenario values. - Bound the range of value.

18. 3. Project Decision Analysis
B. THE PROCESS OF PROJECT EVALUATION
Identify qualitative issues. - Flexibility - Quality - Know-how - Learning
Decide

19. 4. Share Key Info. from Seminar
Topic : Project Investment and Feasibility Studies
9 – 10 February 2015

20. 4. Share Key Info. from Seminar
WACC by Sector (Thai Market)

21. 4. Share Key Info. from Seminar
Project Feasibility from Banking Perspective
Project Financing is all about ‘risks allocation and mitigation’
Step 1 Risk Identification and analysis
Cost analysis
Cash flows
Step 2 Risk Allocation
Allocated by the parties through negotiation of the contractual framework.
Step 3 Risk Management
Involved and monitor project closely
Reporting obligations on the borrower

22. 4. Share Key Info. from Seminar
Project Feasibility from Banking Perspective
Key Financial Evaluation for Project Financing Debt
Tools
Details
Project Feasibility
Project Technical feasibility
Project Financial feasibility
Project IRR (to look whether it makes sense)
Equity IRR
Debt Coverage Ratio
DCSR to understand the level of cushion to lenders
D/E ratio (varied with the nature of the project)
Financial Sensitivity Analysis
To evaluate the Project’s tolerance level to adverse changes in ‘Cash flows Assumption’ such as Project Costs, Delays, Drop in Revenues, & etc.
Normally banks will have 3 main cashflow scenarios (Client case, Bank case, Worse Case)

23. 4. Share Key Info. from Seminar
BCG Approach to Minimizing CapEx needed:
Capex Optimization
Implementation of Cost-focus culture not the Cost-reduction culture.
Organization Set-Up.
Set a Cost oriented structure.
Monitor of Performance.
Set up a dashboard to solve the cost problem (ex. Project delay & Cost overrun)

24. Definition & Investment Criteria
4. Share Key Info. from Seminar
M&A perspectives
Types of Investors
Definition & Investment Criteria
Examples
1. Strategic Investor
Long-term business plan
Enhance existing operations
Willing to pay for readily realizable synergies
2. Financial Investor
Interested in Return
Well-managed company with a history of consistent earning
Private equity funds and Venture capital funds

25. Good Deals but Poor Implementation
4. Share Key Info. from Seminar
Only about 30-40% of the world’s M&As are value accretive.
M&A Bad Deals
M&A Successful Deals
Weak strategic fit
Unrealistic synergies
Price too high
Disciplined transaction process
Clear deal strategy
Excel in post-deal execution with adequate resources to manage the Post-Integration
Good Deals but Poor Implementation
Poor integration
Customer losses
Loss of key staff
Source: Mckinsey

26. Thank You https://ptfinance.wordpress.com/
Simple Financial Model & Powerpoint presentation Downloadable From