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Guide To Financial Analysis
Guide To Financial Analysis
Contents
Purpose of this Guide Financial Analysis defined
Defining Costs
Capital Costs Operating Costs Benefits The Financial Calculator The value of money NPV Payback period Sensitivity Analysis Further assistance
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Defining Costs
There are different ways of defining costs:
By type: Capital costs Operating costs By function: Development costs Operational costs Maintenance costs By behaviour: Fixed costs Variable costs By time: Recurring costs Non-recurring costs
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Capital Costs
Capital costs are the expenses incurred in purchase of items that are recorded as assets; their value is depreciated over time and they are recorded in the Balance Sheet. Identify the capital costs for the project for the following items: Equipment Non-consumable Materials* Infrastructure
*Non-consumable materials are capital costs because these are materials that persist (eg. furniture, bricks)
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Operating Costs
Operating costs are expenses incurred in the execution of the project or in the operation of the business (after the project) They are not depreciated over time and are recorded in the profit and loss statement. Identify the operating costs for the project for the following: Internal business resources Internal IT resources External resources Office accommodation Licenses Support Training System administration Equipment hire Consumable materials* Travel Accommodation
*Consumable materials are operating expenses because they are materials that are used up by the project (eg. stationery, batteries)
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Sensitivity Analysis
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Investment Analysis
Year 1 Year 2 Year 3 Year 4 Year 5
Benefits Less Costs Cash Flow X Discount factor Present Value Net Present Value
If the Net Present Value is less than zero then this indicates the project is not financially worthwhile. Note: The discount factor is based on a discount rate of 13%. Hence at the end of the first year $1 is worth 87c, drops to 75.6c in the second year, 65.8c in the third year etc.
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Sensitivity Analysis
Projects do not always run to plan. Costs and benefits estimated at an early stage of a project may indicate a profitable project, but this profit could be eroded by an increase in costs or a decrease in the value of the benefits (the revenue).
Sensitivity analysis provides a means of determining the financial impact of this type of fluctuation.
By entering an anticipated percentage increase in costs or decrease in revenue the financial impact on the project can be identified by looking at the change to the NPV or IRR measures.
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Further Assistance
For additional supporting guides refer to:
Guide to Benefits Analysis
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