Project Cash Flows Research Articles

Effects of Cost of Capital on Firm Performance in Kenya

This paper discusses the importance of the cost of capital and its impact on the performance of firms in Kenya. The cost of capital is affected by various factors such as interest rates, inflation, market conditions, and government policies. Financial managers use discounting cash flow techniques to evaluate capital investments, which requires the estimation of the project's cash flows and the discount rate. The article also explores the concept of capital structure and its significance in determining the cost of capital. Managers need to manage the capital structure effectively to optimize shareholder wealth and minimize the company's cost of capital. The article highlights the importance of balancing the mix of financing sources between debt and equity. High costs of capital can limit a firm's access to financing, while low costs of capital can improve a firm's investment and growth opportunities. This article concludes that the cost of capital is an essential factor that affects the performance of firms in Kenya. It impacts investment decisions, financial structure, and competitiveness in the market. Researchers suggest that managers should balance the use of debt and equity financing in an optimum manner to maximize shareholder wealth. However, the research suggests that high costs of capital can discourage firms from investing in new projects, reducing growth and profitability. Firms need to evaluate their cost of capital and consider strategies to lower it, such as improving creditworthiness or exploring alternative financing options.

РЕАЛЬНІ ОПЦІОНИ ЯК ФІНАНСОВІ ІНСТРУМЕНТИ СПРИЯННЯ ВІДБУДОВІ ПІСЛЯВОЄННОЇ ЕКОНОМІКИ УКРАЇНИ

Using the example of the Ukrelektromash plant, the application of various types of real options is considered depending on the development of the project scenario for the production and sale of rotary hybrid engines. The conditions and criteria for the application of option mechanisms are defined, taking into account the impact of risks, which is reflected in the assessment of the probabilities of the development of one or another type of scenario. The effectiveness of using abandonment and switching real options to a related type of activity in the event of a pessimistic development of cash flow and options to expand and replicating experience real option in the event of an optimistic scenario has been proven. At the same time, the degree of effectiveness of the manager's actions is shown, depending on the results of the project's cash flows after the first year of implementation. It has been established that real options are able to generally increase the strategic value of international investment projects, creating conditions for the post-war reconstruction of Ukraine's industry and encouraging the cooperation of foreign investors. In this way, the use of real options enables the manager to take effective measures to manage risks and cash flows, improving the degree of attractiveness of investment projects, and thereby opening new opportunities for cooperation with foreign partners. The implementation of programs with the use of real options becomes necessary when the investor is wary of investing in the development of the country after the end of the war, and at the same time sees great potential for the development of various sectors of the economy. Reducing the degree of riskiness of projects with the help of real options contributes to the gradual restoration of industrial capacities, the acceleration of money circulation, and the improvement of trade and financial operations on international markets.

Technical and financial feasibility assessment of producing an impeller sand mould by three-dimensional printing using a Voxeljet VX 1000 machine

Impeller castings are some of the most critical components used in engineering applications with complex designs. The high-quality production of their sand mould is essential to ensure optimal casting properties. Three-dimensional printing is an appropriate modern technology that can manufacture such moulds at a shorter production lead time than traditional methods. This paper assesses the technical and economic feasibility of producing the impeller sand mould for casting a mining impeller pump using a Voxeljet VX1000 printer available locally. The methodology includes the use of casting simulation and the application of the financial payback period method. This paper provides a practical case study of the theoretical assessment of rapid sand casting projects. The payback period showed the rapid sand casting process for printing impeller sand mould using the VX1000 printer is feasible for adoption by the local foundry industry as the initial investment is recovered within the 5 years of the projected cash flows.

Career Concerns, Investment, and Management Forecasts

ABSTRACTA firm manager is concerned about both the firm value and the market assessments of his abilities. When investing in a project, he has private knowledge of his project-related ability that interacts with the project investment, and his general ability that produces a cash flow independent of the project cash flow. The concerns about the general (project-related) ability assessment create a signaling incentive to decrease (increase) investment. In the presence of underinvestment (overinvestment), higher-quality earnings information reduces (improves) equilibrium efficiency. When the manager issues an earnings forecast as an additional signaling device, the forecast is upwardly biased, and the equilibrium investment is smaller than that without a forecast. The latter is because the signaling incentive to decrease investment is strengthened. When the manager’s concerns about the general ability assessment are relatively large, he is better off by committing to no forecast. Novel empirical predictions about investment and earnings forecast emerge.JEL Classifications: D61; G14; M41.

Modelling the Implications of Delayed Payments on Contractors’ Cashflows on Infrastructure Projects

The consideration of payments to contractors is not only a legal obligation but a necessity for assuring the continuity and completion of a construction project. However, consistent payments to facilitate project cash flows are uncommon in the construction industry. Within the context of a small island developing state, this paper aims to uncover leading risks factors the contributing to implications of delayed payments, on contractors’ cash flows and uncover any causalities and effects on relationships among these factors. A two-tiered quantitative approach was adopted. Firstly, a compiled list of delay factors was collated from the literature review. Semi-structured interviews were conducted with experienced construction professionals to determine the factors’ relevance and applicability in Trinidad and Tobago. A closed-ended survey questionnaire was subsequently developed and administered to primary construction stakeholders. Secondly, the responses obtained were collated, validated, and ranked using the relative importance index. A confirmatory factor analysis (CFA) was carried out using SPSS, and thereafter, SPSS Amos was used to determine the best-fit Structural Equation Model (SEM). The results strongly indicate that the issue of delayed payments is very prevalent within public sector projects. Unstable political climates and the delay in employers’ issuance of variation orders were found to be the main causes of delayed payments within the industry. Delays in sub-contractor and supplier payments as well as an increase in the contractor’s debt are the leading effects of delayed payments on the contractor’s cash flows. Based on these findings, a risk response framework was outlined to assist small to medium-contracting enterprises cope with payment delays, both locally and internationally. This research contributes to the advancement of construction management knowledge by informing construction professionals and policy makers of the implications of delaying approved payments, the consequential causes and effects, and a risk response technique to mitigate the negative effects on contractors’ cash flows. Doi: 10.28991/CEJ-2023-09-01-05 Full Text: PDF

FİRMA DEĞERİNİ MAKSİMİZE EDECEK NAKİT AKIŞLARIN SİSTEM DİNAMİĞİ YAKLAŞIMIYLA ANALİZİ

In this study, it was practiced to adopt free cash flows to firm which is frequently used in calculating the firm value through the system dynamics model. For the study, a firm traded at Borsa Istanbul 100 Index (BIST-100) was chosen and the firm’s cash flow projection was created by analyzing its financial data. Future cash flows of the firm were exercised under certain scenarios via system dynamics model. The results exhibit that the future cash flows of the firm can be predicted successfully through the system dynamics model. It is considered that the system dynamics can be used as an efficient strategic management accounting technique and that it can provide the data which the business executives will require when making the optimal decisions maximizing the firm value.

CONSTRUCTION COST CONTROL FOR ROAD PROJECTS IN THE CONTEXT OF MALAYSIAN CONTRACTORS

Cost overrun is a common problem in the construction industry. Cost overrun occurs when the actual cost exceeds the budgeted, estimated, original, or target cost. Implementing cost control is complicated since it must evaluate many things, such as budget, project cash flow, cost performance, and others. In road construction projects, cost overrun is typical even though cost control has been practised. Road construction in Malaysia can be observed to have cost problems, and cost control practised in the industry needs to be improved. This research aims to analyse the present methods of cost control utilised by contractors in road projects and propose possible strategies to improve cost control in enhancing project cost performance. The objectives of this research are to investigate the practices of cost control in road projects by the contractors, to assess the problems encountered, and to suggest possible strategies to overcome the problems. This research employs a quantitative method by conducting a survey questionnaire as an approach to data collection. A total of 160 questionnaires were distributed to G5, G6, and G7 contractors, while only 32 questionnaires were received. However, only 27 respondents were involved in a road project. The data obtained were analysed by using Microsoft Excel. Based on the results, cost control practices in road projects include record keeping, financial reports, valuation of work in progress, work programmes, approximate quantities method, cost control at the site, and daily labour controlling. Next, the problems encountered include obtaining standard data, change of works from variation order, changes of design, instability of material prices, and inaccurate quantity take-off. Lastly, the strategies to overcome the problems include practising effective strategic planning, practising effective site management, providing detailed descriptions of Bill of Quantities (BQ), utilising cost value comparison, and ensuring the cost budget is realistic.

Feasibility study of the Kerinci 350 MW hydro power plant

The demand for electricity is currently growing rapidly. In accordance with the government's policy to optimize the use of renewable energy sources, including water, by constructing a hydroelectric power plant. The study of the potential utilization of the Batang river flow is aimed at how much of the optimum electric power potential there is in the utilization of the Batang Merangin river flow as a hydropower plant. The results of the calculation of the potential for electric power at the Kerinci PLTA show that the optimum electrical power that can be generated is 366.27 MW and the energy produced annually is 1,443.86 GWh. The cash flow of the Kerinci hydropower project consists of technical estimates, revenues, operating and maintenance costs, inflation, taxes, and depreciation. Benefit-cost ratio analysis is calculated according to probable economic conditions during construction and lifetime. The initial investment cost for the Kerinci hydropower plant is around 12,922,000,000,000. The net present value obtained is 423,372,934,373, the internal rate of return is 10.7%, the return on equity is 16.2 years and the benefit-cost ratio is 1.2. The results show that the Kerinci hydropower plant can be built in terms of both technology and money.

Economic Feasibility, Benefits and Challenges of On-Farm Artisanal Cheese Making in South Africa

There is limited information regarding artisanal cheese making that can help entrepreneurs evaluate business opportunities and make realistic business decisions. The objective of this study was to assess the economic feasibility, benefits and challenges of on-farm artisanal cheese making. A model was designed to evaluate the economic feasibility of processing hard pecorino-style cheese and soft fresh ricotta on four different smallholder farms. The study assumed a small-scale family-owned business with an average herd size of 10 lactating cows, using 80 L of raw milk a day to make cheese. Projected Cash Flow Statement was used to determine the economic feasibility of cheese making. Sensitivity analysis was conducted using a factor of 10% to determine the changes in net cash flows by varying the milk volume, cheese selling price and both. The positive projected cash flow after the sensitivity analysis for the four farms ranged from $24,073.84 to $33,783.5. The breakeven quantity for the four farms ranged from 325.82 kg to 357.88 kg per year.Overall, the results show that artisanal cheese making is economically viable under the given model assumptions. However, the major challenge noted is that most farmers lack knowledge in terms of the processing techniques, market opportunities and production costs involved in cheese making. Access to this information by small-scale milk producers is vital in considering cheese making as a business.

Accelerability vs. Scalability: R&D Investment Under Financial Constraints and Competition

I develop a continuous-time model to examine how the interaction between competition and financial constraints affects firms’ research and development (R&D) strategies. The model integrates two key characteristics of R&D investment: accelerability (i.e., higher R&D intensity leads to faster discovery) and scalability (i.e., higher R&D intensity leads to higher project payoff). I find that firms react strategically to their rivals’ financial constraints when making investment decisions in a duopoly R&D race. In particular, firms respond positively to the R&D intensity of an unconstrained rival, while they respond in a hump-shaped fashion to the R&D intensity of a constrained rival. As a result, a constrained firm can pre-empt an unconstrained competitor in market equilibrium. Accelerability is necessary for such pre-emption to occur, and scalability generally reduces its likelihood. Comparison with a monopoly benchmark shows that the economic mechanism differs from over-investment induced by financial constraints alone. The model also generates new implications regarding how project characteristics and cash flow risks impact R&D decisions. This paper was accepted by Gustavo Manso, finance. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.4503 .

СУЧАСНІ МЕТОДИКИ ОЦІНКИ ФІНАНСОВОГО ПОТЕНЦІАЛУ ПІДПРИЄМСТВА ІНДУСТРІЇ ТУРИЗМУ ТА СФЕРИ ГОСТИННОСТІ

The study shows the advantages of forming and maximizing the financial potential of enterprises in the tourism industry and the hospitality sector, which shows the maximum importance of this economic stage of the enterprise. Methods for assessing financial potential in the tourism and hospitality industry include a thorough analysis of financial statements, cash flow projections, return on investment calculations and comparisons with industry standards. In addition, market research, customer feedback and risk assessment contribute to a comprehensive assessment of the company's financial condition and development prospects. The study of the method of assessing the financial potential in the economy of the enterprise involves the analysis of financial statements, the assessment of indicators of liquidity, profitability and solvency, as well as the understanding of the dynamics of cash flows. It also includes an assessment of market conditions, industry trends and potential risks. A holistic approach combiningquantitative and qualitative factors provides a comprehensive understanding of the economic viability and growth potential of the enterprise. Key indicators for assessing financial potential in the tourism and hospitality industry include revenue growth, profit margins, return on investment (ROI), average daily rate (ADR), occupancy rates, and customer satisfaction scores. Additionally, monitoring cash flow, debt levels, and keeping an eye on industry-specific metrics like RevPAR (Revenue per Available Room) can provide valuable insights into the financial health and potential of enterprises in this sector. Assessing the financial potential of a tourism enterprise is crucial for sustainable growth. A robust methodology helps to assess profitability, identify cost-effective strategies and adapt to market trends, ensuring long-term success in the dynamic tourism and hospitality sector.

TECHNICAL AND ECONOMIC ANALYSIS OF PRODUCING 250 KW POWER USING THE GASIFICATION SYSTEM AT THE VARIETY WOODS AND GREENHEART LIMITED SAWMILL IN GUYANA.

A technical and economic analysis was conducted on the viability of operating a 250 kW wood biomass gasification power plant to produce electricity for the sawmill at Variety Woods and Greenheart Ltd. in Guyana. The major economic cost factors considered in the gasification plant’s 20-year life comprised a wood chipper, pellet machine, gasification system and operation and maintenance cost. The researchers did a cash flow projection using a spreadsheet program to determine the net present value (NPV), internal rate of return (IRR), the payback period and the return on investment (ROI). The main cash inflow in the analysis is savings from diesel fuel import to power the current diesel power plant at the sawmill. The implementation of the wood biomass gasification plant will save the company US$ 99,600 annually. In the economic analysis, a sensitivity analysis was conducted by the researchers on the capital cost, which was the major factor affecting the economic assessment. In both scenarios, the economic analysis of the proposed gasification plant shows a positive NPV, which suggests an attractive investment financially. The IRR for case one was found to be 4.70% and for case 2 was 6%. For case 1, the gasification plant's return on investment is 13.3% and for case 2, it is 36.56%. The payback period for the wood biomass gasification system was 20 years 5 months for case 1 and for case 2 was observed to be 10 years 1 month.

Mineral Economics and the Business of Mineral Supply

Editor’s note: The aim of the Geology and Mining series is to introduce early career professionals and students to various aspects of mineral exploration, development, and mining in order to share the experiences and insight of each author on the myriad of topics involved with the mineral industry and the ways in which geoscientists contribute to each. Abstract The business of mineral supply comprises the costs, risks, and returns of converting natural capital to financial capital. As such, it represents the interface between economic geology and mineral economics. The traditional approach to studying mineral supply, however, is less an interface than a series of silos covering geologic, engineering, business, and social aspects of the conversion process. The challenges of meeting the ever-increasing demand for minerals and metals will require better communication and understanding across disciplines and stakeholder groups in order to mitigate discovery and development risks. For economic geologists, improved communication starts with an understanding of the essential economic tools and metrics that are used to assign value to projects and make decisions about their advancement toward production. Furthermore, economic geologists should recognize and build on the interface between the economic characteristics of valuations and the underlying geologic characteristics of deposits. The sizes and distribution of project cash flows are intimately linked to the underlying styles and distribution of mineralization within deposits. Understanding how geologic processes created and altered mineral deposits is incredibly useful in grasping the economics of undoing those processes to recover payable minerals and metals.

Project Investment Plan Valuation Using Discounted Cash Flow Analysis (Case Study of LLP Compression Project Investment Plan at Tango Field, Mehacca Block)

This article performs a valuation analysis of LLP Compression in project investment plan at Tango Field in Mehacca Block. The LLP Compression investment project plan is currently under consideration for a Final Investment Decision (FID). The analysis is conducted by using quantitative methodology approach to evaluate 2 project scenario based on its cash flow. The outcome of financial valuation could assist decision maker in the company, in determining whether the project is economically profitable, whether it should be executed, what scenario can generate maximum economic profit for the company, and also what financial factor affecting LLP Compression Project cash flow that should be managed to avoid negative financial results and to forecast project likelihood of success. For DCF analysis, with company discount rate at 10.2%, the Net Present Value (NPV) result is 1.12 Million USD for Scenario 1 and 0.91 Million USD for Scenario 2. Internal Rate of Return (IRR) for both scenarios are higher than company’s discount rate. Payback Period for both scenarios are also the same in year 2026, or 2 years after production. Profitability Index (PI) for Scenario 1 is slightly higher than Scenario 1 amounting at 1.07, while PI for scenario 2 is 1.03. All of the parameters from DCF gives positive result more than expected return, with scenario 1 that provide better value than scenario 2. Monte Carlo simulation is also used to provide a likelihood of having a negative NPV. The result is that both scenarios have probability negative NPV amounting 28% for scenario 1 and 30% for scenario 2. Based on Monte Carlo Simulation result, scenario 1 has slightly lower probability of generating negative NPV than Scenario 2. Sensitivity analysis is also being used to look how large NPV project varies if the parameter inputs are changed. Four parameters tested with assumption change at ± 25% from original condition. Based on sensitivity analysis, it is observed that Gas Production, Gas Price are the most sensitive parameter for both scenarios of LLP Compression project. In summary, the LLP Compression Project investment plan is feasible to be executed for both scenarios, with scenario 1 provides higher economic profit than scenario 2, and it also generates slightly lower probability negative NPV than scenario 2. Since LLP Compression Project has probability of gaining negative NPV based on Monte Carlo Simulation Result, hence several strategies to minimize project risk exposure are required to be determined before project execution.

The Proper Treatment of Cash Holdings in DCF Valuation Theory and Practice

Abstract The discounted cash flow (“DCF”) model is widely used for valuing corporate assets. But valuable assets that do not generate cash flows will be missed by the DCF approach. Because cash interest income is generally not included in the projected net cash flows of operating assets, the value of cash is regarded as a non-operating asset whose value must be added to the DCF enterprise value. Unfortunately, it has become standard practice on Wall Street and for the courts to exclude some amount of cash from non-operating assets on the basis that it will be used to finance the immediate operations of the business. The exclusion of so-called “operating” or “working-capital” cash is widely accepted as necessary and is recommended in virtually all valuation texts and treatises. We disagree and show that all cash should generally be added as a non-operating asset, except in unique circumstances where “wasting cash” is not earning a fair market return. We explain that excluding operating cash is correct only if either the interest income on cash is included in the net cash flows projections used to compute DCF value, or if the specific (near-term) operating expenses that will be covered by operating cash are excluded from the net cash flow projections. In either case, the full economic benefits of owning operating cash are fully reflected in the DCF enterprise value of the company, causing the DCF value to be higher by the exact amount of operating cash that is excluded. We call this the symmetry principle of operating cash. In practice, neither condition is normally met, so that all cash should generally be treated as a non-operating asset.

Optimizing Cash Flow of Construction Projects through Material Procurement Plans

Optimizing Cash Flow of Construction Projects through Material Procurement Plans

A Framework for the Economic Value of Corporate Strategic Moves: Joining Corporate and Competitive Strategies

The economic value of a corporate strategic move is driven by an increase in revenues, a reduction of costs and/or risks, and consists of the net present value of projected cash flows (static value) complemented by dynamic considerations (real options value) and adjusted for competitive interactions with rivals and partners (game- theoretic value). We develop a framework of the economic value of corporate strategic moves that effectively connects corporate and competitive strategies. The framework offers a new synthesis by uncovering mechanisms that influence the profitability of a corporate strategic move across the static, real-options, and game-theoretic perspectives, identifying tensions within a given value driver, and revealing tradeoffs among the three value drivers. In this paper, we apply our framework to the revenue driver of a specific corporate strategic move-corporate diversification—and derive propositions that are new to the strategic management field.

Latour-Marliac, Since 1875

This case follows Charlie Zerzan as he tries to save Latour-Marliac, the cash-strapped but historically important company he owns in the south of France. Rather than devastate the company, the global pandemic of 2020 was a boon, leaving it with a stock of cash just as a handful of unique opportunities for growth arrived. Dumaurier must decide how far to go in pursuing these opportunities. On one hand, the company needs growth to break a decades-long period of stagnation, while on the other it cannot go back to the dangerously precarious cash position it had been in. How much debt is too much? How will revenue trend in the future? In order to seize the moment, Zerzan must project cash flows for the next 4 years, choose a growth strategy, and present his banker with corresponding pro forma income statements.

ОСОБЕННОСТИ ИНВЕСТИЦИОННОГО ПРОЦЕССА В МАЛОМ БИЗНЕСЕ

An economic model for assessing the impact of taxation systems on the value of the net cash flow of an investment project in a small business is proposed

Sample recycling method – a new approach to efficient nested Monte Carlo simulations

Nested stochastic modeling has been on the rise in many fields of the financial industry. Such modeling arises whenever certain components of a stochastic model are stochastically determined by other models. There are at least two main areas of applications including (1) portfolio risk management in the banking sector and (2) principle-based reserving and capital requirements in the insurance sector. As financial instrument values often change with economic fundamentals, the risk management of a portfolio (outer loop) often requires the assessment of financial positions subject to changes in risk factors in the immediate future. The valuation of financial position (inner loop) is based on projections of cashflows and risk factors into the distant future. The nesting of such stochastic modeling can be computationally challenging.Most of the existing techniques to speed up nested simulations are based on curve fitting. The main idea is to establish a functional relationship between the inner loop estimator and the risk factors by running a limited set of economic scenarios, and, instead of running inner loop simulations, inner loop estimations are made by feeding other scenarios into the fitted curve. This paper presents a non-conventional approach based on the concept of sample recycling. Its essence is to run inner loop estimation for a small set of outer loop scenarios and to find inner loop estimates under other outer loop scenarios by recycling those known inner loop paths. This new approach can be much more efficient when traditional techniques are difficult to implement in practice.