All important!!!

The Working Capital Requirement (WCR) represents the amount of short-term funding a company needs to finance its day-to-day operations, specifically the difference between its current assets (used in operations) and its current liabilities (used to finance those operations). In essence, it reflects the net resources required to cover the gap between cash inflows and outflows related to operational activities.

Current Assets:

1. Accounts Receivable:

   • Represents money owed to the company by customers for sales made on credit.

2. Inventory:

   • Includes raw materials, work-in-progress, and finished goods.

3. Cash and Cash Equivalents:

   • Represents readily available liquidity.

Current Liabilities:

1. Accounts Payable:

   • Represents money the company owes to suppliers for goods or services.

2. Other Current Liabilities (Operational):

   • Includes accrued expenses (e.g., wages, utilities) that are operational in nature.

1. Quitting activity

2. carry out restructuring investments

3. alienate the business area to other investors or companies, for whom the business has a higher value

4. Wait a little longer, to observe the development of the business, and make a more informed decision later

Basic Rule of Disinvestment:

• VRL (Net Recoverable Value):

  • This is the net amount the company expects to recover from the sale or divestment of the asset or business unit. It could include the sale price, adjusted for costs of disposal.

• VACFE (Value of Lost Future Cash Flows):

  • The present value of all future cash flows the company will forgo if it divests the asset.

[Das bedeutet verkaufen, wenn der Verkauf mehr Geld einbringt als der Erhalt des Projekts verlieren würde)

For debtors [Schuldner]: Inflation benefits them, as the real value of the installments to be paid decreases over time, especially if the interest rate is fixed. —> Schuldner profitieren

For creditors [Kreditgeber/Gläubiger]: Inflation reduces the real value of payments received, which can lead creditors to demand higher interest rates to compensate for this loss of purchasing power. —> Kreditgeber verlieren über die Jahre Geldwert

Inflation also influences credit decisions, making it more attractive to borrow in inflationary environments if interest rates do not keep pace with rising prices.

—> Es macht Sinn bei hohen Inflationen Kredite aufzunehmen, wenn die Kreditzinsen nicht der Inflation entsprechend hoch sind

Uncertainty = Unknown and non-measurable results

Risks = unknown results, but probabilities can be attributed [zugewiesen]

Methods:

1) Empirical Methods

2) Simulation Methods

3) Methods of decision theory

4) Probabilistic Methods [probabilistisch = der Wahrscheinlichkeit nach]

1. Empirical Methods

   • A) Reduction of Investment Recovery Period: Focus on shorter investment durations, especially for fast technological innovations with low capital intensity.

   • B) Adjustment of Assessment Rate: Increase the discount rate to reflect higher risks (e.g., WACC + risk premium).

   • C) Right Equivalent Method: Use a coefficient (0 < α < 1) to convert uncertain cash flows into certain cash flows. Lower coefficients reflect higher risks and uncertainty, especially for long-term cash flows.

1. Simulation Methods

   • A) Sensitivity Analysis: Test project profitability by adjusting key assumptions (e.g., hydrogen fleet pricing). Focus on critical assumptions for viability.

   • B) Scenario Analysis: Create optimistic, moderate, and pessimistic scenarios based on external factors. Assign probabilities to each scenario to assess outcomes.

     
     

2. Methods of Decision Theory

• Focuses on situations of absolute uncertainty where future events (states of nature) are unpredictable.

• Key Components:

  • Actions/Strategies: Decision options available.

  • Situations/Events: Uncontrollable external events impacting decisions.

  • Results/Consequences: Analyze actions for each situation to identify the optimal decision.

    
    

1. Probabilistic Methods

   • A) Maximax Criterion: Optimistic approach; choose the best possible outcome assuming all situations have equal probability.

   • B) Maximin Criterion: Pessimistic approach; choose the option with the least potential loss.

   • C) Minimax Regret Criterion: Minimize the maximum regret or loss. Ideal under high uncertainty without scenario probabilities.

   • D) Laplace Criterion: Assume all states of nature are equally likely; calculate average payoff for each scenario and choose the best one.

—> The level of activity of a product means its production rate

Components of Costs:

1. Fixed Costs:

   —> Do not vary with the level of activity (e.g. rents, fixed salaries).

2. Variable Costs:

   —> Vary in proportion to the level of production or sales (e.g. raw materials)

3. Total Costs:

   —> Sum of fixed and variable costs

Description of the Break-Even Point:

The break-even point (BEP) is the level of sales at which total revenues equal total costs, meaning the business neither makes a profit nor incurs a loss.

The concept of “Economic Value Added (EVA)” means the additional value generated by a capital invested in the company, in confrontation with the income that would produce in a financial application in the capital market.

1. EVA > 0: The company is creating value because the returns exceed the required cost of capital.

2. EVA = 0: The company is breaking even, covering the cost of capital but not generating additional value.

3. EVA < 0: The company is destroying value because returns are insufficient to cover the cost of capital.

Balance Sheet:

Balance Sheet sometimes also called Statement of Financial Position [Vermögensübersicht]

—> Gives a Snapshot [Momentaufnahme] of the financial status of a company to a specific moment

—> typically it is created at the end of reporting period (month, quarter or year)

It contains details of:

1. Assets: —> In a balance sheet, assets are listed in categories according to how quickly they are expected to be monetized, sold or consumed

2. Liabilities: —> liabilities are categorized based on their due date, or the timeframe within which you expect to pay them

3. Equity

   
   

Profit & Loss Statement?

The Profit and Loss Statement (P&L), also called the Income Statement, summarizes a company’s revenues, expenses, and profits over a specific period (e.g., monthly, quarterly, annually). It shows how much income a business generates, the costs incurred to generate that income, and the resulting net profit or loss.

Key components include:

1. Revenue [Einnahmen]: Total income from sales or services.

2. Expenses [Ausgaben]: Costs like production (COGS), operating expenses, interest, and taxes.

3. Net Profit/Loss: The final result after subtracting expenses from revenue.

The P&L provides insight into a company’s profitability, cost structure, and financial health.

—> Profit is the surplus that remains after all income exceeds expenses (including operating costs, taxes and depreciation [Abschreibungen])

—> Cash flow measures the actual cash flow into and out of the company (cash receipts and payments). It shows how much cash the company has available to pay bills or make investments.

Profit bewertet mehr die Rentabilität. Es handelt sich mehr um einen buchhalterischen Erfolg oder Verlust

Bei den Cashflows wird genaustens betrachtet ob zu jedem Zeitpunkt genug Cash vorhanden ist, um die nötigen Kosten zu decken.

—> Ein Unternehmen kann über einen Zeitraum zwar Gewinn machen aber nicht genügend Liquidität besitzen, um die Ausgaben zu stemmen

A) Assets:

—> Assets are the things your comapny owns that have monetary value

It includes:

-> concrete items (cash, invetory, property [Immobilien] and equipment)

-> marketable securities [marktgängige Wertpapiere]

-> prepaid expanses [vorausbezahlte Ausgaben]

-> receivables from payers

-> intangible assets (like patents) [immaterielle Werte]

B) Liabilities [Verbindlichkeiten]

—> Liabilities reflect all the money your company owes to others

It includes:

-> Loans [Darlehen]

-> Accounts payable [Verbindlichkeiten aus Lieferungen und Leistungen]

-> Wages [Löhne]

-> Taxes and other debts

C) Owners Equity [Eigenkapital]

—> sometimes called net assets or net worth

—> represents the assets that remain after deducting what you owe [schulden]

—> Owners Equity may be your own, collective ownership rights (partnership) or stockholder ownership (corporation = Kapitalgesellschaft)

The SWOT Analysis is a strategic planning tool used to evaluate a company's Strengths, Weaknesses, Opportunities, and Threats. It helps organizations understand internal and external factors that impact their performance and guide decision-making.

Components of SWOT Analysis:

1. Strengths (Internal): What the company does well, such as unique resources, strong brand reputation, skilled workforce, or efficient processes. Example: Strong customer loyalty.

2. Weaknesses (Internal): Areas where the company is lacking or could improve, like high costs, poor customer service, or outdated technology. Example: Dependence on a single supplier.

3. Opportunities (External): External factors that the company can leverage to grow, like emerging markets, technological advances, or changing consumer trends. Example: Increasing demand for eco-friendly products.

4. Threats (External): External challenges that could negatively impact the company, such as competition, economic downturns, or regulatory changes. Example: Rising raw material costs.

The Porter's Five Forces Analysis, developed by Michael E. Porter, is a framework used to analyze the competitive forces shaping an industry. It helps businesses understand the structure of their market and assess profitability and strategic positioning

The Five Forces:

1. Threat of New Entrants:

   • How easily new competitors can enter the market and disrupt established players.

   • High threat: Low barriers to entry (e.g., minimal capital requirements or weak regulations).

   • Low threat: High barriers to entry (e.g., strong brand loyalty, patents, or economies of scale).

2. Bargaining Power of Suppliers:

   • The ability of suppliers to influence prices, quality, or availability of inputs.

   • High power: Few suppliers, unique materials, or essential resources.

   • Low power: Many suppliers or standardized inputs.

3. Bargaining Power of Buyers:

   • The influence customers have on pricing and terms.

   • High power: Few buyers, easily available substitutes, or price-sensitive customers.

   • Low power: Many buyers or differentiated products.

4. Threat of Substitutes:

   • The risk that alternative products or services can replace the company’s offerings.

   • High threat: Many substitutes available, often cheaper or more convenient.

   • Low threat: Few or no viable substitutes.

5. Industry Rivalry:

   • The intensity of competition among existing players.

   • High rivalry: Many competitors, slow industry growth, or low product differentiation.

   • Low rivalry: Few competitors or a highly differentiated market.

Direct Costs:

Costs that can be immediately affected, without intermediate calculations, to a particular segment or to the products or services considered

Indirect Costs:

Because they relate to several [mehrere] products or services or to various segments of the company, their costs need to be split in order to be able to be charged on only one specific product.

A) Revenue [Einnahmen]:

—> it is the money you receive in payment for your products or services

B) Operating Expanses [Expanses = Kosten]

—> Expanses that rise or fall based on your sales volume

C) Gross profit margin [Bruttogewinnspanne]

—> it is the amount that is left when you subtract operating expanses from Revenues

D) Overhead or fixed expenses:

—> stay each month almost the same, independent on the sales

—> includes salary of office staff, rent or insurance

E) Operating income:

—> it is the income after deducting the operating expanses and overhead expanses [Gemeinkosten]

F) Pre-Tax income

—> Income before federal and state governments take their share

G) Income Taxes

—> How income tax is shown on the P&L varies based on the type of legal entity [juristischen Person]

H) Net income [Nettogewinn]:

—> it is the final amount on most profit-and-loss statements

—> It represents the net total profit earned by the business during the period, above and beyond all related costs and expenses

1. Simple Interest: Interest is calculated only on the initial principal and does not grow over time.

2. Compound Interest [Zinseszins]: Interest is calculated on the principal and on previously earned interest, leading to exponential growth.

The time value of money states that a sum of money today is worth more than the same sum in the future due to its earning potential. This concept underpins interest and discounting [Diskontierung = Abzinsung].

Discounting [Abzinsung] is used to calculate the present value of a future cash flow. It reflects the reduction in value over time due to the opportunity cost of capital.

Nominal interest rate [Nominalzins]

—> interest rate without inflation

Real interest Rate [Realzins]

—> Actual increase in the value of the capital, taking into account the change in purchasing power (inflation)

1. APR (Annual Percentage Rate) [Nominale Jahreszins]: Nominal interest rate that does not account for compounding [Zinseszins]. It is a simple interest rate that is often used for transparency in loan agreements [Kreditverträgen].

2. EAR (Effective Annual Rate) [Effektive Jahreszins]: Actual interest rate considering compounding. It shows the effective annual interest rate if interest accrues several times a year (e.g. monthly or quarterly).

1. Financing Working Capital: The surplus of permanent capital over non-current assets.

2. Operational Working Capital: The excess of current assets over short-term liabilities.

3. Dynamic Definition: A set of values reused cyclically during operations.

1. Provide funds [Bereitstellung von Mitteln] for operational and strategic needs.

2. Prepare financial and treasury budgets for smooth fund allocation [Mittelzuweisung].

3. Align [Abstimmen] cash flow forecasts with company objectives [Unternehmenszielen].

Boston Consulting Group Matrix

• x axis: market share

• y axis: market growth

• "Stars" - promising investments - company with high market share and growing sector

• “Question Mark” - risky investments - although growing, the company's market share is low

• “Cash Cows” - investments that generate high flows -, but the market is in low growth, long-term care

• “Dead Weights” - zone of weak growth and low market share, to be avoided

  
  

• „Stars“ - vielversprechende Investitionen - Unternehmen mit hohem Marktanteil und wachsendem Sektor

• „Question Mark“ - riskante Investitionen - das Unternehmen wächst zwar, hat aber nur einen geringen Marktanteil

• „Cash Cows“ - Investitionen, die hohe Kapitalflüsse generieren - aber der Markt ist wachstumsschwach, Langzeitpflege

• „Dead Weights“ - Bereich mit schwachem Wachstum und geringem Marktanteil, den es zu meiden gilt

General Electric Matrix

The nine fields of the matrix represent strategic recommendations:

• Upper fields (Invest):

  • Highly attractive markets with a strong competitive position.

  • Strategic recommendation: Invest and expand market share.

• Middle fields (proceed selectively):

  • Moderately attractive markets or medium competitive position.

  • Strategic recommendation: Invest selectively or minimise risks.

• Lower fields (disinvest):

  • Low market attractiveness and/or weak competitive position.

  • Strategic recommendation: Withdraw from the market, reallocate resources.

Compared to the BCG matrix, it offers a more detailed analysis and takes more factors into account.

Market penetration:

• Existing products in existing markets.

• Goal: Increase market share through higher sales or winning customers from competitors.

• Lowest risk.

Market development:

• Existing products in new markets.

• Objective: To tap into new geographical regions or customer groups.

• Medium risk.

Product development:

• New products in existing markets.

• Objective: Customer loyalty and increased sales through innovations or product range expansion.

• Higher risk.

Diversification:

• New products in new markets.

• Goal: Diversify business areas and utilise new opportunities.

• Highest risk.

• Market Research

  • which aims to determine the potential demand for goods or services to produce

• Location Study

  • determine the place or places where it becomes viable and with overall lower cost for project implementation

• Engineering Technicians Studies

  • aims to find the best technical solution for the project

• Dimension studies (capacity)

  • determine the optimal capacity for the project (in technical and economic terms)

• Legal framework studies

  • determine the most appropriate legal regime for the project implementation

• Economic and Financial Profitability studies

  • assess the expected return on capital investment and make comparison with alternative investments

• Financial framework studies

  • find funding solutions for the project

• Environmental Impact Studies,

  • aims to determine the project effect or effects on the environment

The WACC (Weighted Average Cost of Capital) is a financial metric that represents the average cost a company pays for its financing, including both equity (money from investors) and debt (money from loans).

Purpose:

• WACC helps companies decide if an investment is worth pursuing.

• A project must generate a return higher than the WACC to be profitable.

In simple terms, WACC is the "average price" a company pays to raise money for its operations or investments.

The Internal Rate of Return (IRR) is the discount rate at which the Net Present Value (NPV) of an investment project equals zero.

In other words, it is the rate at which the present value of the cash inflows (revenues) equals the present value of the cash outflows (expenses and initial investment).

1. IRR > WACC: The project is profitable and should be undertaken.

2. IRR = WACC: The project just covers the cost of capital; decision depends on other factors.

3. IRR < WACC: The project is not profitable and should be rejected.

NPV (Net Present Value) is used to assess the profitability of an investment by comparing the present value of expected cash inflows to the present value of cash outflows.

1. Positive NPV: The investment is profitable and should be considered.

2. Negative NPV: The investment is not profitable and should be avoided.

The formula compares the present value of cash inflows (revenues) and the present value of cash outflows (expenses and initial investment) to determine the NPV.

The Payback Period (Recovery Period) is the time required for an investor to recover their initial investment through net cash flows from the project.

The formula calculates the cumulative net cash flow over time, discounted at the given interest rate, until it equals the invested capital.

The Critical Sales Point refers to the minimum level of sales (in units or revenue) that an investment project must achieve to avoid losses.

Contribution to the analysis of an investment project:

1. Feasibility [Machbarkeit]: Indicates whether the required sales volume is achievable under realistic market conditions.

2. Risk Assessment: Helps evaluate the project's risk based on dependency on sales.

3. Profitability: Identifies when the project starts generating profit.

4. Cost Control: Highlights the importance of reducing costs to lower the break-even point.

5. Strategic Decisions: Aids in pricing, cost reduction, and sales strategies.

6. Scenario Analysis: Shows the impact of changes in costs, prices, or demand on profitability.

Root investment:

1. A root investment refers to the total investment required to establish a completely new project, system, or venture from scratch.

2. It includes all initial capital expenditures, such as infrastructure, equipment, technology, and setup costs.

3. It is independent of any existing projects or operations and does not rely on previously incurred costs.

Incremental Investment:

1. An incremental investment refers to the additional investment required to expand, upgrade, or improve an existing project or system.

2. It focuses only on the added costs needed for the new component or improvement, without considering the initial costs of the existing infrastructure.

1. Global Cash Flow:

   • Definition: Represents the total cash inflows and outflows of a project or business, including all components (initial investments, revenues, operating expenses, etc.).

   • Relevance: Root investments are primarily analyzed using global cash flow since they involve evaluating the total project cash flows from scratch.

2. Incremental Cash Flow:

   • Definition: Refers to the additional cash inflows and outflows directly attributable to a specific change or investment (e.g., an expansion or upgrade).

   • Relevance: Incremental investments are evaluated using incremental cash flow, as only the additional financial impact of the new investment is relevant.

Summary:

—> Root investments are analyzed based on global cash flow because they involve evaluating the entire project as a whole.

—> Incremental investments are analyzed based on incremental cash flow, isolating the financial impact of the new component without considering the already existing project

NPV (Net Present Value):

1. Definition: NPV is the difference between the present value of the cash inflows (revenues or savings) and the present value of the cash outflows (investment costs), discounted at the project’s cost of capital.

2. Time Value of Money: NPV takes into account the time value of money, meaning that it discounts future cash flows to reflect their present value.

Payback Period:

• Definition: The payback period is the time it takes for an investment to recover its initial cost through cumulative cash inflows.

Comparison:

Time Value of Money:

• NPV incorporates the time value of money by discounting future cash flows, making it a more comprehensive measure of profitability.

• PRC, on the other hand, does not consider the time value of money, which can lead to misleading conclusions if the project generates significant cash flows far in the future.

Focus:

• NPV evaluates the total value generated by the project over its lifetime.

• PRC only focuses on how quickly the initial investment is recovered, ignoring any cash flows that occur after the payback period is reached, and it also doesn't reflect profitability after the payback.

Risk and Uncertainty:

• NPV provides a fuller picture of an investment's risk by considering all cash flows, including those far in the future.

• PRC is less effective in capturing risk because it ignores the timing of cash flows beyond the payback period and does not account for the project’s profitability after recovery of the initial investment.

Conclusion:

While both NPV and PRC are valuable tools for evaluating an investment project, they focus on different aspects: NPV assesses the overall profitability and value creation over time, while PRC focuses on the risk of the initial investment recovery. There is no direct correlation between the two; however, they can complement each other in providing a fuller picture of a project’s economic results.

Key Factors to Consider:

1. Remuneration Required by Promoters:

   • The remuneration refers to the return or profit that the promoters expect to earn for taking on the risk of the project. If the required remuneration is low, it suggests that the promoters are willing to accept a relatively lower return for their investment and involvement.

   • A low remuneration usually implies that the project is perceived as less risky from the promoters' perspective, as they do not demand a high premium for taking on the risk.

2. Market Risk Premium:

   • The market risk premium is the additional return over the risk-free rate that investors require to compensate for the risks associated with investing in the market as a whole.

   • A medium market risk premium suggests that the general market sees a moderate level of risk. It is neither overly optimistic (low risk) nor overly pessimistic (high risk), indicating that the project is subject to a normal amount of market risk.

Conclusion:

Given that the remuneration required by promoters is low (implying lower perceived risk by those directly involved in the project) and the market risk premium is medium (implying a typical level of market risk), the overall project risk would be considered medium.

Justification:

• The low remuneration suggests that the promoters feel the project is relatively safe, but because the market risk premium is medium, the project is still exposed to typical market risks. Thus, the risk level is medium, balancing between the low promoter return expectation and the typical market risk conditions.

he Capital Opportunity Cost based on the Capital Asset Pricing Model (CAPM) represents the expected return on an investment, considering its risk relative to the market. It indicates the minimum return investors require for taking on the additional risk of an investment compared to a risk-free alternative.

1. CAPM helps assess whether an investment is worth its risk.

2. It provides the cost of equity, used in financial decisions like project evaluation or portfolio management.

3. It shows how market risk (systematic risk) impacts expected returns.

1. E(R_i): Expected return of the investment/project.

2. R_f: Risk-free rate (e.g., return on government bonds).

3. β (Beta): Sensitivity of the investment's returns compared to market returns.

   • β > 1: Higher volatility than the market.

   • β < 1: Lower volatility than the market.

4. E(R_m): Expected return of the market (average market return).

5. E(R_m) − R_f: Market risk premium (extra return for taking market risk).

The price elasticity of demand shows how sensitively the quantity demanded reacts to price changes.

Example: If the price rises by 1%, how much does the quantity demanded fall?

The elasticity of demand of the price shows how much the price changes when the quantity demanded changes: If the quantity demanded falls by 1%, what percentage must the price rise?

Effects of Changes in Sales or Credit Policy on Working Capital Requirement (WCR)

1. Sales Volume: An increase in sales typically increases a company’s accounts receivable and inventory levels, leading to a higher WCR, as more resources are tied up in day-to-day operations. Conversely, a decline in sales reduces WCR since less working capital is needed to support operations.

2. Credit Policy:

   • Looser Credit Policy: Extending longer payment terms to customers increases accounts receivable, raising WCR because cash is tied up for a longer period.

   • Stricter Credit Policy: Shorter payment terms reduce accounts receivable, lowering WCR as cash is collected more quickly.

Adjusting WCR Management to Operational Changes

1. Inventory Management: Implementing just-in-time (JIT) practices or better forecasting can reduce excess inventory and lower WCR.

2. Receivables Management: Adjusting credit terms or offering early payment discounts can accelerate [beschleunigen] cash inflows and reduce WCR.

3. Cash Flow Monitoring: Regularly forecasting cash flow and monitoring key working capital metrics helps ensure adjustment between operations and WCR needs.

For debtors [Schuldner]: Inflation benefits them, as the real value of the installments to be paid decreases over time, especially if the interest rate is fixed. —> Schuldner profitieren

For creditors [Kreditgeber/Gläubiger]: Inflation reduces the real value of payments received, which can lead creditors to demand higher interest rates to compensate for this loss of purchasing power. —> Kreditgeber verlieren über die Jahre Geldwert

Inflation also influences credit decisions, making it more attractive to borrow in inflationary environments if interest rates do not keep pace with rising prices.

—> Es macht Sinn bei hohen Inflationen Kredite aufzunehmen, wenn die Kreditzinsen nicht der Inflation entsprechend hoch sind

The Internal Rate of Return (IRR) represents the discount rate at which the net present value (NPV) of an investment project equals zero. In other words, it is the rate of return at which the present value of cash inflows from a project equals the present value of its cash outflows (or initial investment).

IRR in Relation to the Discount Rate:

1. If IRR > Discount Rate: The project generates a positive NPV —> profitable

2. If IRR = Discount Rate: The project's NPV is zero —> indifferent

3. If IRR < Discount Rate: The project generates a negative NPV —> not profitable

Why IRR is Used as a Measure of Profitability

The IRR is widely used as a measure of profitability because it offers a clear metric that is independent of assumptions such as the value of the initial capital or the duration of the project.