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Building block 4: Planning and control in .NET Receive ECC200 in .NET Building block 4: Planning and control

Building block 4: Planning and control use .net vs 2010 datamatrix 2d barcode implement tomake datamatrix in .net code 3 of 9 The methodolo Visual Studio .NET 2d Data Matrix barcode gy is such that the initial year s investment is maintained. If growth is, say, 5% then the previous year the project that was started must have been 5% smaller and so on.

So a company that is growing at a steady rate and that implements a project of a given size this year will be smaller overall than a company that implements the same size project but is not growing. Each project that the growing company has invested in will offer the same relative return but they will all have been smaller. The impact of growth has two important effects.

First, ROACE falls a little. In this case it falls to 15.0%.

24 Second, the funds flow is no longer equal to profit. It is now substantially less than profit. This is because growth needs to be funded.

So now we have two more ways to aid our words and music understanding of company performance. A company that is growing will have a small reduction in ROACE and a much larger decrease in the extent to which it can afford to pay out its profit as a dividend. Here then is a further big advantage of adopting the AFS approach to project evaluation.

We can easily see the implications for the accounting performance of the company of implementing projects that are like a particular project that is under consideration. Furthermore, we can see what the impact of growth will be. All that we need to do is add up the lines in our project spreadsheet.

I call this approach the company as projects in recognition of the operator from mathematics.25 Overheads and sunk costs The above approach, which treats a company as a series of projects, has, I believe, intuitive appeal but it is missing two features which serve to distort the way that we look at projects. These concern the impact of fixed overheads and sunk costs.

When a project is presented for approval its economic indicators should be calculated by comparing a with project world with a without project world. The NPV is based on incremental cash flows. This means that any overheads which are unaffected by the project will not be included in the cash flow.

I should stre ss again that ROACE is the only number in this table which is not simply calculated by adding up the lines in the project spreadsheet. ROACE is specifically calculated given the accounting data and in particular includes back-calculating what the opening capital employed will be given the change in capital employed inferred by the capital investment, the amortisation and the working capital change. For the non-mathematical, the Greek letter (pronounced sigma) means the sum of .

. The five financial building blocks projections. This will include, for example, the cost of the chief executive who will, presumably, be running the company irrespective of the particular project. Also excluded from the project NPV calculation will be any sunk costs.

Sunk costs are money that has already been spent on the project, for example on the initial design work that was necessary in order to prepare the financial estimates. So it is unlikely that a company will look as favourable as would be implied by the simple extrapolation from a single project. A better model would treat the company as a series of projects plus overheads and sunk costs.

The overheads number would be the sum of all of the costs in a company that were not project costs. The sunk costs would be the project costs incurred on a project prior to its approval. Suppose that in our scaffolding example with 5% growth there were corporate overheads of $300,000 per annum.

This covered the cost of the board of directors, the finance department, etc. Suppose also that the pre-sanction costs on a typical project were $100,000. This covered the cost of the project development team and the specific pre-sanction analysis.

Overall then, $400,000 of costs would be excluded in the simple company as the sum of its projects model. A full company model would allow for these. In principle one would allow for all consequent effects including not only the tax relief associated with costs but also working capital impacts.

In practice one might simply model the costs and their associated tax relief but not any working capital effects. The effect of including these assumptions is shown here:.
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