how to evaluate a business
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There are various appraisal methods for a start-up business. it should explore which is the most appropriate method for financial appraisal for a business.
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how to evaluate a business
- 1. Should we invest or not?
- 2. Learning Objectives: The participants will be able to… State time value money Mention factors affecting time value money Describe important indicators for appraising a business investment List methods of investment appraisal Discuss pro & cons of each method of investment appraisal Select the most suitable method of investment appraisal
- 3. Time value of money Present value: 1,000,000 How much? 1,000,000 <1,000,000 >1,000,000 Future value
- 4. Time value of money You have 1,000,000MMK! Save the money in box Save money at Bank What is the value after 3 year? Factors to be considered:
- 5. Year1 Year2 Year3 1,000,000 value after inflation value after interest value after inflation value after interest value after inflation value after interest value of 1M after 3 years save in a box 930,000 - 864,900 - 804,357 - 804,357 save at a bank 930,000 1,100,000 1,023,000 1,210,000 1,125,300 1,331,000 1,205,700 Assumption: Inflation yearly 7% Interest yearly 10% Time value of money
- 6. Business Investment Profit A 100,000 10,000 B 120,000 12,000 C 6,000 6,00 Business Investment Profit % profit A 100,000 10000 10% = (profit/investment)x100 B 120,000 12,000 10% C 6,000 600 10% Which project will you choose? Why? Appraisal for capital investment
- 7. Your clinic….. 5,000,000 ? ? ? 500,000 3000 5,000 6,000 6,500 7,000 Investment Clients over year 1 to year 5 Profit Income/client: 1500MMK/ Total cost per client: 1000MMK Appraisal for capital investment 1,500,000 2,500,000 3,000,000 3,250,000 3,500,000
- 8. Year Investment Depreciation Investment after depreciation Client load income/client cost/client total income total cost Profit Return% A B C D E F G H I J K Bx10%=C B-C=D ExF=H ExG=I H-I=J J/Dx100 0 5,000,000 500,000 4,500,000 3,000 1,500 1,000 4,500,000 3,000,000 1,500,000 30% 1 4,500,000 450,000 4,050,000 5,000 1,500 1,000 7,500,000 5,000,000 2,500,000 56% 2 4,050,000 405,000 3,645,000 6,000 1,500 1,000 9,000,000 6,000,000 3,000,000 74% 3 3,645,000 364,500 3,280,500 6,500 1,500 1,000 9,750,000 6,500,000 3,250,000 89% 4 3,280,500 328,050 2,952,450 7,000 1,500 1,000 10,500,000 7,000,000 3,500,000 107% Appraisal of Business: Rate of Return Average rate of return: 71%RR ≠ Time value money RR ≠ Cash-flow
- 9. Investment (1,500,000) 0 1 2 3 2,500,000 3,000,000 3,250,000Cash-Flow Year 0: 1.5M Year 1: 2.5M Year 2: 3.0M Year 1 Year 2 Year 3 Payback period: 2.35 yr 4 3,500,000 Year 4 1,500,000 Appraisal of Business: Pay-Back PB ≠ Time value money PB ≠ rate of return
- 10. Present value Future value 1 Future value 2 Net Present Value Difference between present and future values = NPV NPV → Time value money NPV → Cash-flow NPV → Return rate 100 100+(100*10%*) 110 110+(110*10%*) 121 *bank interest rate *bank interest rate
Editor's Notes
- Net Present Value (NPV): NPV should be calculated for every project so that all proposed projects in the project portfolio management system can be compared. When using NPV as one of the project selection criteria, generally only projects with positive NPV are considered for funding with the higher NPV being favored over the lower. When a project has a zero NPV other factors such as intangibles within the business case might warrant the project being funded. Projects with negative NPV are usually not funded.