Weekly Questions
From a financial perspective, what metric(s) should be calculated and why?
The main purpose of taking on a project is to generate profit for the firm. Therefore the core concern should be if this project will return a profit and when. The clearest way to identify the profit potential is to calculate the breakeven point; this is the point when the firm can expect to start earning a profit. Also in deciding to do this project calculating the various types of cash flow will be helpful in understanding how the project will progress. The Breakeven is usually the single most important deciding factor in determining to implement a project.
Shane is worried about product demand and is wondering about the minimum threshold for sales. What financial concept/approach/metric would assist Shane? If there are alternatives, compare them and identify the best among them.
Calculating the minimum threshold for sales is the same as finding the breakeven point. In this example there is enough information to find the breakeven point in three different ways; the Net Income (NI) method, the Net Present Value method (NPV), and setting up a spread sheet. Each will deliver a different answer; the Net Income is the least conservative option, meaning that it that it will deliver a lower breakeven point. While setting up a spreadsheet and using the goal seek function in Excel will produce a more accurate breakeven point, but will also result in a higher point which produces in a more conservative approach to choosing the project. In the middle is the NPV method, this process is similar to the NI method but it factors in the Equivalent Annual Cost (EAC) which is the annual cost of owning the machinery. In this scenario setting up a spreadsheet and using the goal seek function in Excel is the best method. The spreadsheet is more accurate, all of the data is displayed and the project manager can foresee where problems may arise.
For the approach you identified as the best, what are
The main purpose of taking on a project is to generate profit for the firm. Therefore the core concern should be if this project will return a profit and when. The clearest way to identify the profit potential is to calculate the breakeven point; this is the point when the firm can expect to start earning a profit. Also in deciding to do this project calculating the various types of cash flow will be helpful in understanding how the project will progress. The Breakeven is usually the single most important deciding factor in determining to implement a project.
Shane is worried about product demand and is wondering about the minimum threshold for sales. What financial concept/approach/metric would assist Shane? If there are alternatives, compare them and identify the best among them.
Calculating the minimum threshold for sales is the same as finding the breakeven point. In this example there is enough information to find the breakeven point in three different ways; the Net Income (NI) method, the Net Present Value method (NPV), and setting up a spread sheet. Each will deliver a different answer; the Net Income is the least conservative option, meaning that it that it will deliver a lower breakeven point. While setting up a spreadsheet and using the goal seek function in Excel will produce a more accurate breakeven point, but will also result in a higher point which produces in a more conservative approach to choosing the project. In the middle is the NPV method, this process is similar to the NI method but it factors in the Equivalent Annual Cost (EAC) which is the annual cost of owning the machinery. In this scenario setting up a spreadsheet and using the goal seek function in Excel is the best method. The spreadsheet is more accurate, all of the data is displayed and the project manager can foresee where problems may arise.
For the approach you identified as the best, what are