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Cf Value Creation 10  1
 

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
    •