- •Abstract
- •1. Introduction
- •1.1. Background
- •1.2. Problem and research questions
- •1.3. Aim and Limitation
- •1.4. Outline of thesis
- •1.5. Abbreviation and definition
- •Irr Internal Rate of Return
- •2. Method
- •2.1. Approach
- •2.2. Data collection method
- •2.3. Primary data
- •2.4. Secondary data
- •2.5. Data processing
- •2.6. Validity, reliability and generalization
- •3. Theories
- •3.1. Principal-Agent Problems
- •3.2. Wacc and opportunity cost of capital
- •3.3. Capm and apt
- •3.4. Estimating β
- •3.4.1. Operating leverage and β
- •3.5. The risk and discount rates for international projects
- •3.6. Purposes of performance measurement
- •3.6.1. Eva, Book roi, and ep
- •3.7. Working capital, depreciation and tax
- •4. Own research
- •4.1. Review of pharmaceutical market in Russia
- •3.1.1. Russian companies and them place in market
- •3.1.2. Pharmaceutical company “Zdorovie Ludi”
- •3.2. Research strategy (Roadmap of decision)
- •3.3. International and European contracts
- •3.4. National contracting in a global economy
- •3.5. National contract low and human rights
- •3.6. (Step 1) Juristic analyses and common mistakes of the contract
- •3.6.1. The formation and scope of a contract:
- •3.6.2. The content of a contract:
- •3.6.3. Policing a contract:
- •3.6.4. Performance, discharge and breach of the contract:
- •3.7. (Step 2) Controlling of strategy and consideration the contract as investment project
- •3.8. Transformation the contract to the invest project
- •Risk of delivery (for buyer)
- •Techniques of payment (risk for buyer)
- •3.9. (Step3) Forecast of outflow and inflow
- •3.10. (Step 4) Determination the risk and discount rate
- •3.10.1. Country risk analysis
- •3.11. Commercial counterparty risk analysis
- •3.12. (Step 5) Procedure of estimation and comparison of the contract
- •3.13. Book Rate of Return (Advantages and disadvantages)
- •3.14. Payback Period and Discounted-Payback Period (Advantages and disadvantages)
- •3.15. Internal (or discounted-cash-flow) rate of return (irr) and mirr (Advantages and disadvantages)
- •3.15.1. Lending or borrowing position
- •3.15.2. Multiple rates of returns
- •3.15.3. Mutually exclusive projects
- •3.16. The cost of capital for near-term and distant cash flows
- •3.17. Profitability Index (pi, advantages and disadvantages)
- •3.18. Net Present Value (npv, advantages and disadvantages)
- •3.18.1 Calculate npv with glance of inflation
- •3.18.2 Calculating npv in other countries and currencies
- •3.19. (Step 6) Performance and agency problems
- •4. Results
- •4.1. Simulation model analysis and calculation
- •4.2.1. Wacc as discount rate
- •4.2.2. Manager’s working capital use penalty points
- •4.2.3. Risk-Adjusted Discount Rate (radr) and ceq
- •4.3. Summary of Simulation model analysis
- •4.4. Scenario analysis and calculation
- •4.4.1. Discount rates that based on wacc
- •4.4.2. Discount rates that based on radr
- •4.5. Summary of scenario analysis
- •4.6. Final analysis and Decision Card (Step 7)
- •Decision Card
- •4.7. What could be improved and suggestion for future research.
- •Conclusion
- •References
- •Appendix 1 – 7 (Simulation Model and Scenario analysis calculation) (Excel) Appendix 1 (Excel)
- •Appendix 2 (Excel)
- •Appendix 3 (Excel)
- •Appendix 4 (Excel)
- •Appendix 5 (Excel)
- •Appendix 6 (Excel)
- •Appendix 7 (Excel)
- •Appendix 8 (Interview questions and structure of survey) part 1
- •A) Survey for managers
- •B) Survey for specialist
- •Part 2 Survey of experts
- •Part 3 Results and Conclusion a) Survey for managers
- •Conclusion
- •B) Survey for specialist
- •Conclusion
- •C) Survey of experts
3.1.2. Pharmaceutical company “Zdorovie Ludi”
The dates are about companies at 2007 year9
Owners |
single shareholders is “Nature product retail” |
Amount of drug-store |
230 |
Location of drug-store |
21 region of Russian federation 8 the biggest city of Russia |
Staff |
2000 |
Average single purchase |
ruble 173 |
Average turnover the drug-store |
$ 265 |
Average area of drug-store |
93.5 square miters |
ROA |
4 percents |
3.2. Research strategy (Roadmap of decision)
In research we consider the cross-border contract as the investment project and I have supposed as if managers are handed unbiased cash flow forecasts and theirs tаsk is to assess risk, choose the right discount rate, and calculate the NPV. In the end, financial manager have to understand what makes the contract (project) acceptable and what might go wrong with it. Even the manager has complied all preparation and calculation for the contract and this preparation have proved the positive result of analysis the project even after that the contract could fail. If the contract is going to has negative NPV, as sooner manger can identify it, the better. The manager have to distinguishes the danger signal and understand which action manager might fulfill. The positive NPV’s analysis assumes that firms hold assets passively and it rejects the contract if it is not successful. Manager has to look for way to capitalize the success contract and to reduce the possibility of failure. Manager’s preparation to pay up for contract should be completed preparation that gives the contract flexibility. There are lots of techniques to predict if the something can go wrong with project, for example, Monte Carlo simulation, Break-even analyses, Decision tree, Sensitive analysis they identify crucial assumptions and to explore the problem the contract (project).
Figure 1.1
In this situation I don’t need so sophisticated techniques, because my aim is complete the simplest techniques such as roadmap of decision about cross-border contract. That is why, I create the 7-step roadmap (see the Figure 1.1). The roadmap is consisted seven steps such are:
1 Step (Juristic analyses of the contract). A step means that is the negotiation phase of preparation the deal is ended and the contract have completed and it time to make decision and the negotiation to improve the options of the contract or reject the contract.
2 Step (Company strategy and transformation the contract to the invest project). A step mean that is juristic part of analysis is complied and we have to camper the strategy of the contract with strategy of company. After that the risks of delivery and payment of the contract are estimated. In the end, the data of the contract transformation to the invest project.
3 Step (Forecast of outflow and inflow). The good invest decision depend both on tools, which was chosen, and forecasted cash flows. The value of project (contract) really complied from negative and positive cash flows. That is why, forecasting cash flows are very important. Managers mistake could be minimized by following rules:
Manager should be careful with accounting data, sometime they masquerading as cash flow data. It is better to concentrate on cash flow after taxes.
Manager has to forecast cash flow on an incremental basis.
When manager discounted nominal cash flow forecast at nominal rates, when real forecast at real rates.
4 Step (Estimation discount rate) The financial theories linking risk and return, financial managers adjusted risk to the discount rates. They understand that risky projects (contract) are less valuable than safer one. Therefore manager consider higher rates of return with higher discount rate, or manager is based decision about risky projects (contract) on conservative forecasts of project cash flows.
5 Step (Procedure of estimation and comparison of the contract). Manager will consider this topic particularly in Part II from 2.1 to 2.3.7.
6 Step (Performance).Financial measures of performance have to be objectivity, particularly and unsophisticated. The management control the performance function requires a mixed of both financial and non-financial performance measures. Within this points, accounting performance measurements should not be understand as universal. Thus, accounting performance measures should be neither dismissed nor privileged camper with forecasted financial measures. I am going to have attempting to show system of performance management those encourager managers to achieve purpose of company.
7 Step (Decision Card). The decision completed as “Decision Card”, where all steps of roadmap are fulfilled and manager can see results of all calculations and analyses. These results are provided more information, which is based on forecasted cash flows. The top manager or owner could use the “Decision Card” and they have possibility to make decision not only the contract, but they might have conclusion about education, skills, future budgeting and financing. The most important thing that senior manager would have real information in real time without accounting misrepresentation.