Financial Analysis
Financial Analysis
Financial Analysis
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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The Purpose of this Guide
• The purpose of this guide is to provide assistance in
completing the financial components of the business
case, namely the costs and benefits and in using the
financial calculator to obtain a financial assessment of
a project.
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Financial Analysis Defined:
Comparing the costs and benefits over time to
determine whether a project is profitable or not.
To achieve this the following financial indicators
are used:
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Steps in conducting a Financial
Analysis:
1. Identify the costs
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Defining Costs
There are different ways of defining costs:
By type: By function:
Capital costs Development costs
Operating costs Operational costs
Maintenance costs
By behaviour: By time:
Fixed costs Recurring costs
Variable 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
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Enter the costs and benefits into the
Financial Calculator
For each year enter the anticipated capital and operating
expenses into the financial calculator spreadsheet.
For each year enter the anticipated benefits into the
spreadsheet.
Adjust the discount rate if appropriate.
Enter sensitivity values (% cost increase and % revenue
decrease values)
The spreadsheet will automatically calculate the financial
indicators
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Assess the Financial Indicators
Financial indicators used in the spreadsheet are:
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The value of Money
• The value of money changes over time.
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Investment Analysis
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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Internal Rate of Return
Is defined as the discount rate at which an investment has a
zero net present value.
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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:
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