- •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
3.9. (Step3) Forecast of outflow and inflow
This Step3 (Figure 2.6) is linking with two topic, the first is budgeting (short-term) of company and the second is estimating the project (contract). The budgeting I am going to considered late, but depending on forecasted cash flows balance it is the obvious circumstance that it manager know about estimation the projects. Late I will show that process of forecasting the contract cash flows will help to organize the cash budget of company.
The main problem of finance manager is to forecast future source and uses of cash flow. The forecast provide a budget, against which subsequent performance can be done. The forecast ask the managers to future cash flow needs.
Figure 2.6
Sale became accounts receivable before they become inflow cash. Inflow cash comes from collections on account receivable.
There are outflow cash:
Payment on account payable.
Labor, administrative, and other expenses.
Capital expenditures.
Taxes, interest, and dividends payments.
In the end, manager establishes a minimum cash balance to understand unexpected cash inflow and outflow. The next position which could be developing from this is a short-term financing plan (see the topic 4.3.1).
3.10. (Step 4) Determination the risk and discount rate
In these parts I am going to have a good look the problems of cash flows forecasted and I have a good look situations which is understand as situations that appropriate for methods. It is ad hoc method. In this part I am going to contemplate how the risk is to take into consideration to the contract (invest project). Of course I mean the discount rate which I use when I calculate NPV. The opportunity cost of capital depends on the risk of the project.
Figure 2.7
The most important problem is how risk is defined, what the links are between risk and opportunity cost of capital, and how decision maker can cope with risk in practical situation. Handling all levels of risks is very important in cross-border transactions. There are same risks:
GLOBAL RISKS - World economy - Geopolitics - Financial markets COUNTRY RISKS INCLUDE F/X - Macro and micro BANK SYSTIM RISKS - Individual bank INDUSTRY RISKS - Individual company EXTRAORDINARY RISKS - Terrorism “the unthinkable” |
CORPORATE BUSINESS RISKS - Revenue/expenses demand & supply - Market and competition - Flexibility to meet change management competence - Running operation CORPORATE FINANCIAL RISKS - F/x and interest - Availability - Transportation - Counterparty risks |
Figure 2.8
The risk that potentially can be eliminated by somehow is a unique risk. Unique risk stems from the fact that many of the perils that surround an individual company are peculiar to that company and perhaps it immediate competitors. But there is some risk that we can not avoid. This risk generally knows as market risk. Market risk stems from the fact that there are other economy wide perils that threaten all businesses. The market risk is measured by β.
The development of modern theories linking risk and return, decision maker adjusted for risk in capital budgeting. They understand that risky projects are less valuable than safe one. Therefore they demanded higher rate of return from risky projects, or they based their decision about risky project on conservative forecasts cash flow.
Most companies start with the company cost of capital as a benchmark risk-adjusted discount rate for new investment. The company cost of capital is the opportunity cost of capital for investment in the firm as whole. It is usually calculated as a weighted average cost of capital, that is, the average rate of return demanded. In part two we considered how to value a capital investment project by a four-step:
1. Forecast after-tax cash flows.
2. Asses the project’s risk.
3. Estimate the opportunity cast of capital.
4. Calculate NPV, using the opportunity cost of capital as the discount rate.
Now we are going to include value contributed be invest decisions. There are adjusting the discount rate. The adjustment is typically downward, to account for value interest tax shields. This is approach, which is implemented via the after-tax weighted-average cost of capital (WACC).