Cf Value Creation 10  1
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Cf Value Creation 10 1

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FINANCE,CFM

FINANCE,CFM

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Cf Value Creation 10  1 Cf Value Creation 10 1 Presentation Transcript

  • Ravi’s Hardware Stores
    • Evaluating performance
    • Return on invested capital
    • Net operating profits after tax (NOPAT) divided by capital invested
    • Opportunity cost of capital
    • ROIC = 18%. RROR = 10%
  • Economic Profit
    • One store earned only 14%
    • Maximise average ROIC vs increase economic profit
    • Economic profit equals ROIC less COC multiplied by invested capital
  •  
  • Comparison with Rita
    • Sister Rita growing aggressively – Increase in sales and operating profit
    • Comparison with economic profit – Higher growth based on higher investment
    • Low ROIC and declining economic profit
  • Discounted Cashflow
    • Investment in new hardware store
    • Initial decline followed by greater economic profits later
    • DCF value equals initial investment plus PV of future economic profit
  • Fundamental Principles of Value Creation
    • Value is created by earning a return on invested capital greater than opportunity cost of capital
    • Cost of capital depends on the risk involved in a specific investment
    • The more you can invest at returns above cost of capital, the more value you create
    • Growth on the basis of large investments where returns are lower than cost of capital destroys value
    • Objective should be to maximise the present value of expected cashflows or economic profit
  •