Controlling in the Wood Products Industry

Transcription

1 Controlling in the Wood Products Industry SS 2015 Albert Sickl

2 Take-aways from Module 3 Reporting, Forecasting, Budgeting Looking back: Reporting of past events Looking ahead: Short-term forecasting & Budgeting Long-term plans and scenarios as tools for the strategist to steer a course between a single forecast and confusion. 2

3 An investment is a long-term usage of financial funds in tangible and intangible objects with the intention to use these objects in achieving company targets. Strategy An investment is characterized through cash flows that start with an outflow of cash and continue with expected cash in- and outflows at later points of time. Investment Financial Investment Real Investment Speculative Long-Term Tangible Intangible Götze U.; Investitionsrechnung; 2008; Berlin: Springer Verlag 3

4 Real Investment Construction / installation investment Running investments Extension / completion investment Alternative investments Repair- and maintenance investments Construction investment: Initial investment when founding a company. Running investments: Substitution of an object with an identical one or a bigger maintenance activity. Extensions: Similar to alternative investments by enlarging, changing or securing existing capacities. Götze U.; Investitionsrechnung; 2008; Berlin: Springer Verlag 4

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6 INVESTMENT CARD Reg No CPG-SOL-08-2 Investment Order No.: Int. Order / Cost Center: REPLACEMENT DEVELOPMENT X STRATEGIC Mill Funds X Divisional Funds X Strategic Funds NAME Animal bedding mill DIVISION Production Group Stora Enso Timber Central Europe MAJOR MACHINERY screen and press, conveyors, building adaptions, installation Subsidiary Mill Department Stora Enso Timber AG Sollenau Sawmill DESCRIPTION OF THE PROJECT AND ITS OBJECTIVES INVESTMENT PROFITABILITY (based on line 14) In Sollenau Sawmill we produce a high share of pine shavings from our planing operations. Contrary to spruce shavings these are more difficult to market for a resonable price - as a raw material for pellets they are not as suitable as spruce shavings. The aim of this project is to find a different purpose for these shavings that can add more value to it - animal bedding (i.e. litter for horses) is a growing and well paying market that would accept our pine shavings. The most important feature for animal bedding is that the material must be dust-free, so we would invest mainly into equipment which can efficiently sort out the smaller fractions from the "good" shavings. Our concept for marketing and sales is that the Austrian company PABST is responsible for the distribution - we would make a long term contract with them, which would guarantee the sales of the first 5 years production (with a pre-defined price). Discount rate 10,2 % Construction period 0,35 a Operational period 9,98 a =Calculation period 10,3 a Change in net sales 953 keur/a Return (average) 171 keur/a Payback period 2,5 a Internal rate of return 77,9 % Net present value 826 keur ACCOUNTING PROFITABILITY (based on line 17) ROCE 60,5 % INDICATORS Change in annual full production m³/a Change in demand for raw materials m³/a SCHEDULE Change in energy supply (electricity) 0,3 GWh/a 1.Start of the project Start-up Installations begin Completion New premises 0 m² EXPERTISE INSPECTIONS Function / Date / Inspection Change in labour force 2 pers. Hubert Hortschitz (Technical Manager Sollenau), Herbert Jöbstl (VP Production Central Europe), Franz Kraus (Technical Manager CE) Research and development 0,0 % Environmental protection 0,0 % SUMMARY OF EXPENDITURE [keur] Date RETURN Description of the returns: Fixed assets at current rates 1. Special expenses 0,0 8 The main financial effect from this investment would be that we get an 2. Field and ground construction 0,0 10 additional sales opportunity for pine (and spruce) shavings. 3. Buildings 45, Machinery and equipment 282, Electrical installations 1, Automation 0, Replacement and special spare parts 0, Provision for unexpected costs 5,0% 16, Fixed assets (1 8) 346,6 Net Working Capital 10. Accounts receivables Inventories (incl. spare-parts etc.) 76 6

7 Investmentcalculation Methods Static Methods Dynamic Methods 1) Cost comparison 1) Net present value 2) Profit comparison 2) Dynamic payback period 3) Comparison of profitability 3) Internal rate of return 4) Static payback period 7

8 Example 1: Kostenvergleichsrechnung / Cost comparison calculation Available own funds: EUR Cost of capital: Equity: 5% p.a. Debt: 9% p.a. Alternative A Alternative B Acquisition value Income from asset disposal Useful life (years) 4 5 Production pieces pieces Insurance / year Personnel costs / piece 6 5 Material costs / piece 3 3 8

9 Example 1: Kostenvergleichsrechnung / Cost comparison calculation An investment is absolutely advantageous if its costs are lower than the non-investment alternative. An investment is relatively advantageous if its cost are lower than other investment alternatives. Relatively easy to perform Reliability for estimates in the future in reality not fully given Differences in costs over time are not taken into account (averages used) Only total costs taken for decisions. Capacity utilization of investment alternatives and differentiation between fixed and variable costs not included in the calculation Income has to be identical 9

10 Example 2: Gewinnvergleichsrechnung / Profit comparison calculation Alternative A Alternative B Sales / piece 13,0 13,5 Acquisition value Income from asset disposal Useful life (years) 4 5 Production Insurance / year Personnel costs / piece 6 5 Material costs / piece

11 Example 2: Gewinnvergleichsrechnung / Profit comparison calculation An investment is absolutely advantageous if its profit is bigger than zero. An investment is relatively advantageous if its profit is bigger than all other investment alternatives. Different income of the alternatives taken into account Problem if no income is attributed to an investment object Otherwise similar to cost comparison calculation 11

12 Example 3: Rentabilitätsrechnung / Profitability calculation Alternative A Alternative B Sales / piece 13,0 13,5 Acquisition value Income from asset disposal Useful life (years) 4 5 Production Insurance / year Personnel costs / piece 6 5 Material costs / piece

13 Example 3: Rentabilitätsrechnung / Profitability calculation An investment is absolutely advantageous if its profitability is higher than a defined minimum profitability. An investment is relatively advantageous if its profitability is higher than all other investment alternatives. Income of the alternatives taken into account Profitability = Profit in relation to capital employed Problem if investments have different capital needs comparison difficult (similar additional investments needed for comparison). 13

14 Example 4: Statische Amortisationsrechnung / Static payback period calculation Durchschnittsmethode / Average method Kumulationsmethode / Accumulation method Sales [pieces] Alternative A Alternative B Year Year Year Year Year

15 Example 4: Statische Amortisationsrechnung / Static payback period calculation An investment is absolutely advantageous if its payback period is shorter than a defined milestone. An investment is relatively advantageous if its payback period is shorter than all other investment alternatives. Payback period of an investment is the amount of time in which the capital used will be earned through average income Does not show effects after the end of the payback period Indicates in addition to other models the risk of the other alternatives 15

16 Example 5: Kapitalwertmethode / Net present value A dollar today is more than a dollar tomorrow (because the dollar today can be invested to start earning interest immediately) Discount factor = 1/(1+r) Present value (PV) = C1* 1/(1+r) Net present value (NPV) = C0 + C1/(1+r) A safe dollar is worth more than a risky one Net present value rule: Accept investments that have positive net present values (difference between the discounted value of the future income and the amount of the initial investment)! Rate of return rule: Accept investments that offer rates of return in excess of their opportunity costs of capital! 16

17 Example 5: Kapitalwertmethode / Net present value Value cash flows in several periods: PV = C1/(1+r1)+C2/(1+r2)^2+ NPV = C0 + PV A dollar tomorrow cannot be worth less than a dollar the day after tomorrow! 17

18 Example 5: Kapitalwertmethode / Net present value Alternative A Alternative B Year Year Year Year Year

19 Example 6: Dynamische Amortisationsrechnung / Dynamic payback period calculation An investment is absolutely advantageous if its payback period is shorter than a defined milestone. An investment is relatively advantageous if its payback period is shorter than all other investment alternatives. Payback period of an investment is the amount of time in which the capital used will be earned through average income Does not show effects after the end of the payback period Indicates in addition to other models the risk of the other alternatives Indicates a benchmark for the lifetime of the investment Amortization = t* + PV(t*) / ( PV(t*) PV(t*+1) ) t*.. Year with last accumulated negative present value 19

20 Example 6: Dynamische Amortisationsrechnung / Dynamic payback period calculation Alternative A Alternative B Year Year Year Year Year Year

21 Example 7: Interne Zinssatzmethode / Internal Rate of Return The internal rate of return is defined as the rate of discount which makes NPV = 0. Internal rate of return rule is to accept an investment project if the opportunity cost of capital is less than the internal rate of return! The investment is absolutely advantageous if the IRR is bigger than all other investment alternatives. IRR = i(+) + [ NPV(+) * ( i(-) i(+) )] / ( NPV(+) NPV(-) ) 21

22 Example 7: Interne Zinssatzmethode / Internal Rate of Return Alternative A Alternative B Year Year Year Year Year Year

23 Example 8: Why Net Present Value leads to better investment decisions than other criteria: WACC 10% Alternative A Alternative B Alternative C Year Year Year Year Brearly R.; Myers S.; Principles of corporate finance; 6th edition;

24 Example 8: Why Net Present Value leads to better investment decisions than other criteria: NPV versus Discounted payback rule Alternative A Alternative B Alternative C Cash Flow discounted CF accumulated Cash Flow discounted CF accumulated Cash Flow discounted CF accumulated Year Year Year Year Payback (Years) 2,30 1,98 1,66 NPV (10%) The discounted payback rule does not take any cash flows after the cutoff date into account! The static payback rule additionally gives equal weight to all cash flows before the cutoff date! Brearly R.; Myers S.; Principles of corporate finance; 6th edition;

25 Example 9: Why Net Present Value leads to better investment decisions than other criteria: WACC 10% Alternative A Alternative B Year Year Brearly R.; Myers S.; Principles of corporate finance; 6th edition;

26 Example 9: Why Net Present Value leads to better investment decisions than other criteria: NPV versus Internal Rate of Return (1) Alternative A Alternative B Cash Flow discounted CF accumulated Cash Flow discounted CF accumulated Year Year Internal Rate of Return (%) 102,25% 86,14% NPV (10%) The Internal Rate of Return is unreliable in ranking projects of different scale! Brearly R.; Myers S.; Principles of corporate finance; 6th edition;

27 Example 10: Why Net Present Value leads to better investment decisions than other criteria: WACC 10% Alternative A Alternative B Year Year Year Year Year Year Brearly R.; Myers S.; Principles of corporate finance; 6th edition;

28 Example 10: Why Net Present Value leads to better investment decisions than other criteria: Alternative A Alternative B Cash Flow discounted CF accumulated Cash Flow discounted CF accumulated Year Year Year Year Year Year Internal Rate of Return (%) 37,71% 32,27% NPV (10%) The Internal Rate of Return is unreliable in ranking projects which offer different patterns of cash flow over time! The IRR is misleading as the total cash inflow of alternative B is larger but tends to occur later. Brearly R.; Myers S.; Principles of corporate finance; 6th edition;

29 INVESTMENT CARD Reg No CEU-BRA-11-1 Investment Order No.: Int. Order / Cost Center: REPLACEMENT X DEVELOPMENT STRATEGIC Mill Funds X Divisional Funds Strategic Funds NAME New infeed for planer machine DIVISION Production Unit Stora Enso Wood Products Central European Unit MAJOR MACHINERY draw-in roller incl. motors on HO2 Subsidiary Mill Department Stora Enso Wood Products GmbH Brand Sawmill DESCRIPTION OF THE PROJECT AND ITS OBJECTIVES INVESTMENT PROFITABILITY (based on line 14) The wear on the draw-in roller in the planer machine HO2 is very high - a Discount rate 10,2 % change becomes unavoidable (this means in other words that this is a MUST Construction period 0,16 a investment). Operational period 9,57 a =Calculation period 9,7 a Currently we have to reduce the speed in the planer machine down to 135 m/min with big dimensions. With a new draw-in roller we can plane almost all dimensions with 150 m/min - this means improvement in performance due to higher output and better availability due to lower frequency of break-down. Change in net sales 0 keur/a Return (average) 32 keur/a Payback period 1,6 a Internal rate of return 109,5 % Net present value 168 keur ACCOUNTING PROFITABILITY (based on line 17) ROCE 108,8 % INDICATORS Change in annual full production 0 m³/a Change in demand for raw materials 0 m³/a SCHEDULE Change in energy supply (electricity) 0,0 GWh/a 1.Start of the project Start-up Installations begin Completion New premises 0 m² EXPERTISE INSPECTIONS Function / Date / Inspection Change in labour force 0 pers. Franz Kraus (technical Manager) Research and development 0,0 % Environmental protection 0,0 % SUMMARY OF EXPENDITURE [keur] Date RETURN Description of the returns: Fixed assets at current rates 1. Special expenses 0,0 8 The new draw-in roller is designed for planer speeds up to 200 m/min. 2. Field and ground construction 0,0 10 This means if we change the whole planer machine in the future we can 3. Buildings 0,0 25 use the infeed equipment of the current machine. 4. Machinery and equipment 52, Electrical installations 0, Automation 0, Replacement and special spare parts 0, Provision for unexpected costs 5,0% 2, Fixed assets (1 8) 54,6 29

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