3rd Bac - Defining the investment needed

 Defining the investment needed

 

After the studies related with the market, the productive process and the resources needed to generate the good or service are done, the entrepreneur must transform this data and information into monetary terms. Among the fundamental elements, that take part of the total investment are the investment of working capital and the investment of fixed capital.

 

The Physical and Material Resources to start an Entrepreneurship

With the information about the estimate of physical and material resources, the entrepreneur is in the capacity to express them in monetary terms. This way we can know if the financial resources available are enough to finance the business that you want to begin. 

 

The estimate of the investment needed is an activity that helps to evaluate, at first the feasibility of what the entrepreneur wants to make, because it will be difficult to get funds for projects too ambitious in terms of investment. Also, the amount of the investment will focus in the increase of the risk that the entrepreneur will take. Specially if the entrepreneurship is financed through some type of financial loan.

 

In accounting terms, the investment is set under assets. This can be current or fixed, in the language of designing and evaluating of projects, they are known as working capital (current assets) and fixed capital (fixed assets).


Formula

Initial investment equals the amount needed for capital expenditures, such as machinery, tools, shipment and installation, etc.; plus any increase in working capital, minus any after tax cash flows from disposal of any old assets. Sunk costs are ignored because they are irrelevant.

Initial Investment = CapEx + ΔWC + D


Where,

CapEx is capital expenditure,

∆WC is the change in working capital and

D is the net cash flow from disposed asset.


Example

Saindak Copper Company Ltd (SCCL) started a copper and gold exploration and extraction project in Baluchistan in 20X5. In 20X6-20X7, it incurred expenditure of $200 million on seismic studies of the area and $500 million on equipment, etc. In 20X8, the company abandoned the project due to disagreement with the government. Recently, a new business friendly government is sworn in. SCCL managing director believes the project needs reconsideration. The company's financial analyst and chief engineer estimate that $1,500 million worth of new equipment is needed to restart the project. Shipment and installation expenditures would amount to $200 million. Current assets must increase by $200 million and current liabilities by $90 million. The equipment purchased in 20X6-20X7 is no longer useful and is to be disposed of for after tax proceeds of $120 million. Find the initial investment outlay.

Solution

Initial investment

= equipment purchase price + shipment and installation + increase in working capital − disposal inflows

= $1,500 million + $200 million + ($200 million − $90 million) − $120 million

= $1,690 million.


SCCL needs $1,690 million to restart the project. It needs to estimate future cash flows from the project, and calculate net present value and/or internal rate of return in order to decide whether to go ahead with the restart or not.


$200 million expenditure on the seismic studies is not part of the initial investment because it is a sunk cost.

 

ACTIVITY:

Choose an entrepreneurship and you will calculate the investment needed.

Working capital (for three months, think about the monthly payments you will need to make, like: rent, salaries, providers) and fixed capital (any machines or equipment you may need).

Comments

Post a Comment

Popular posts from this blog

1st Bac - The Entrepreneurship Ecosystem

Image
  https://youtu.be/mW6dGqp4YYQ The entrepreneurship ecosystem 1. What is an entrepreneurship ecosystem? 2. Stability 3. Activity  4. Entrepreneurs 1. What is an entrepreneurship ecosystem? An entrepreneurship ecosystem is an economic, social, and cultural environment comprising multiple stakeholders involved in or benefitting from concentrated activities related to entrepreneurship. These stakeholders are individuals, organizations and institutions across the private and the public sector such as entrepreneurs, investors, government, military, aid agencies, universities, research centres, professional services firms, local communities, and many more. The activities carried out by the stakeholders are largely geared towards facilitating entrepreneurship in a wider sense. Although these activities are not following a concerted approach they are interrelated. Entrepreneurs and investors represent the nucleus of an entrepreneurship ecosystem around which everything revolves. 2. St...
Read more

1st Bac - Ecuadorian Institute of Social Security

Image
  Benefits of being affiliated to IESS When a worker is affiliated with the IESS, immediately, he begins to have the right to a series of benefits, especially related to the field of health protection that, in several cases, can be affected by the exercise of labor activity you have been hired for. Among the main obligations that must begin to be fulfilled, in a timely manner, from the moment a worker joins the IESS are: payment of personal contributions, payment of employer contributions and payment of reserve funds. Employer contributions It is the additional payment to the worker's compensation that the employer must make on a monthly basis. In the case of private sector workers, who are in a dependency relationship, the contribution is equal to 11.15% that must be paid to the IESS during the first 15 days of each month. Hence, this item must be part of the monthly budget of costs and expenses required by the operation of the business that has been created by the entrepreneur. P...
Read more

3rd Bac - Cost-Benefit Analysis

Image
  https://www.youtube.com/watch?v=7tdKkeNClPE&ab_channel=ConservationStrategyFund What Is a Cost-Benefit Analysis (CBA)? A cost-benefit analysis is a systematic process that businesses use to analyze which decisions to make and which to forgo. The cost-benefit analyst sums the potential rewards expected from a situation or action and then subtracts the total costs associated with taking that action. Some consultants or analysts also build models to assign a dollar value to intangible items, such as the benefits and costs associated with living in a certain town. What is the formula for CBA? The output of cost benefit analysis will show the net benefit (benefits minus cost) of a project decision.  For example: Project A:  Build a new product will cost 100,000 with expected sales of 100,000 per unit (unit price = 2). The sales of benefits therefore are 200,000.  The simple calculation for CBA for this project is 200,000 monetary benefit minus 100,000 cost equals a ...
Read more