Formulae

Question 1

Value for money - 3 E’s

Answer 1

Efficient - Outputs per input
Effectiveness - Measure of outputs
Economy - effective and efficient at lowest cost

Question 2

ROCE

Answer 2

PBIT / Capital

If difference profit or capital during year use an average (starting plus ending / 2)

Appraisal technique based on accounting profits

Question 3

Dealing with tax in NPV

Answer 3

Tax is charges on operating cashflows and writing down allowances allowed for an expense against profit instead of depreciation

Question 4

Discounted cashflows techniques

Annuity
Perpetuity

Answer 4

Present value of Annuity = Annuity x PV from table

Perpetuity = Cashflows/r
r=interest rate

Question 5

IRR

on excel
if given two NPVs

Answer 5

on excel =irr(cashflows) needs to include the inital negative cashflow of cost

low NPV% + (low NPV/(NPV low-high) to the power of (high%-low%)

This is the break even point of cost of capital

Question 6

Real or money cost of capital

Answer 6

(I + i) = (l + r) (l +h)

I = nominal inflation 
R = real cost of capital 
H = general inflation

Question 7

Probability analysis

Answer 7

Expected values: probability x outcome

Question 8

Sensitivity analysis

Answer 8

(NPV/PV of variable) * 100

Question 9

Equivalent annual cost

Answer 9

PV of cost/Annuity factor

Asset investment decision

Question 10

Profitability index

Answer 10

NPV/Investment needed

Question 11

When capital rationing mutually exclusive projects consider if:

Dividable
Indivisible

Answer 11

Divisible: calculate PI, rank in order of highest first, allocate funds in order

Indivisible: trial and error to maximise NPV

Question 12

Cash operating cycle

Answer 12

Receivables days + Inventories days - payables days

This is the average time between purchase of inventory and receiving cash from the sale of inventory

Question 13

Receivables days

Receivables amount $

Answer 13

(Receivables/sales)*365

The average number of days taken to get cash from debtors

(Receivables days/365)*sales

Question 14

Payables days

Payables amount $

Answer 14

(Payables/purchases or cost of sales) *365

The average number of days to pay creditors

(Payables days/365) *purchases or cost of sales

Question 15

Inventory days

Inventories amount $

Answer 15

(Inventories/cost of sales)*365

How many days it takes to sell stock

(Inventory days/365)*cost of sales

Question 16

Total cost of stock

Answer 16

Cost of holding + ordering + purchasing

(Co* (D/Q))+(Ch* (Q/2))+(P*D)

Co = Cost of ordering 
D = Demand per year 
Q = EOQ 
P = price 

If working out a discount offered by supplier change P and Q to information given in question.

Question 17

Economic Order Quantity - EOQ

Answer 17

Square root(2CoD/Ch)

Co = Cost of ordering
D = Annual demand 
Ch = Cost of holdings 1 unit for 1 year 

This is to minimise cost of ordering and holding by ordering a specific number of units per time.

If you have buffer stock add buffer stock x cost of holding

Question 18

Annual cost of discount

Answer 18

(1+(Discount/amount left to pay))^n-1

N = number of periods = 12/number of months earlier
Can be done as days or weeks as well 365 or 52/X

Question 19

Baumol model

Answer 19

EOQ for cash

Square root(2CoD/Ch)

Co = Transaction costs
D = Demand 
Ch = cost of holdings (opportunity cost, what interest % you would have gotten)

Question 20

Foreign exchange risk

Answer 20

Transactional = risk of exchange rates changing between transaction date and payment date
Economic
Translation