Module 1 Section H Flashcards
Business Planning
-statement of long-term strategy and revenue, cost, and project objectives usually accompanied by budgets, a projected balance sheet, and a cash flow (soource and application of funds) statement
-usually stated in terms of dollars and grouped by product family
-translated into synchronized tactical functional plans through production planning process (pr sales/ops. planning process)
-stage in strategic planning where goals become projected revenue, against which orgg must allocate its financial resources
pg. 1-244
Capital Budgeting
-actions related to planning and financing of capital outlays for such purposes as purchase of new equipment, introduction of new product line, and modernization of plant facilities
-involves investment of resources (either cash on hand or financed debt) to improve org’s long-term competitiveness
-can be directed at retiring long-term debt
-every capital investment decision involves an opportunity cost
-one fact that should not be included in analyzing potential capital investment is sunk cost
Opportunity Cost
-return on capital that could have resulted had the capital been used for some purpose other than its present use
Sunk Cost
-unrecovered balance of an investment
-it is a cost, already paid, that is not relevant to the decision being made about the future
-capital already invested cannot be retrieved
-concept implies that since a past outlay is the same regardless of alternative selected, it should not influence choice between alternatives
Return on Invesmtent (ROI)
-relative measure of financial performance that provides a means for comparing various investments by calculating the profits returned during specified time period
-ROI above 0 seen as positive
-provides limited picture of profitability –> does not reflect impact of time or costs of borrowing on investment
Residual Income
-net operating income that an investment center earns above minimum required return on its operating assets
-residual income is an improvement over ROI because the investment must not only generate a positive return; it must be a return if a certain magnitude
-also known as economic value added = net operating proift earned above cost of capital for an investment center
Payback
-method of evaluating an investment opportunity that provides a measure of the time required to recover initial amount invested in a project
-investment with shorter payback period is usually preferable since a shorter period of investment is less risky and increases org’s liquidity
-does ot consider the time value of money which can make a difference in a long payback period
Time Value of Money
-cumulative efffect of elapsed time on money value of an event, based on earning power of equivalent invested funds
Discounted Cash Flow
-a method of investment analysis in which future cash flows are converted, or discounted, to their value at the present time
-based on market rates, the risk of investment, and industry factors
Net Present Value (NPV)
-the present (discounted) value of future earnings (for which operating expenses have been deducated from net operating revenues) for a given number of time periods
to calculate:
1. identify anticipated net cash flows from project over project’s lifetime (investment’s future value)
2. adjust future values into the value today or the present value (PV)
3. compare the PV of all future cash inflows in total with the initial investment in the present (difference between the initial investment and the PV is the NPV). A positive NPV indicates the project will return a value that excess the required return on investment
pg 1-249
Internal Rate of Return (IRR)
-the rate of compound interest at which the company’s outstanding investmet is repaid by proceeds from the project
-essentially a way to convert NPV into a project yield rate
-rate of return org. is receiving when project’s present value equals initial investment (or point at which NPV is zero) –> compared to hurdle rate (minimum acceptable rate of return on a project)
-if IRR exceeds hurdle rate, project is acceptable b/c it will create organizational value
-considers the time value of money
Profitability Index
-present value of a projected stream of income from a project (potential investment) divided by the investment in the project
-value greater than 1 is preferable
-generally used to rank investment choices
Total Productive Maintenance (TPM)
-preventative maintenance plsu continuing efforts to adapt, modify and refine equipment to increase flexibility, reduce material handling, and promote continuous flows
-it is operator-oriented maintenance with the involvement of all qualified employees in all maintenance activities
-proactive approach to equipment maintenance that strives for perfect production with no:
1. slow running or small stops
2. breakdowns
3. defects
4. accidents
5. missed shipments
-emphasizes proactive and preventative maintenance with scheduled downtime
Scheduled Downtime
-planned shutdown of equipment or plant to perform maintenance or to adjust to softening demand
-allows org to get full value from its physical assets while maximizing operational efficiency
