- •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
4.3. Summary of Simulation model analysis
And now have a good look at the Table 4.11 and 4.12. it is possible to see that NPV and PI do not change dramatically, consequently the advantages of the third contract could not be preserved, but rules of IRR tell us to reject all three contract (11.35, 13, and 20.36 lower than 23.5171 and 25.2705), but it is not real situation. I have a doubt about result which IRR is showing us. I may be mistaken estimating the free-risk rate, may be something I wrong with market-rate, may be beta is not appropriate. There are lots of possibilities to make a mistake, that’s why I make conclusion that the easiest and the most reliable method of estimation the discount rate of contract is estimating the WACC of company and using it as discount rate.
4.4. Scenario analysis and calculation
Scenario Analysis, if the variables are interrelated, may help to consider some alternative plausible scenarios. Managers often find scenario analysis helpful. It allows them to look at different but consistent combinations of variables. Forecast generally prefers to give an estimation of discount rate under particular scenario than to give some optimistic or pessimistic estimation. Company tries to cope with problem of future estimation by examining the effect on the project of alternative plausible combinations of variables. In other words, they estimate the NPV for example as the project under different scenarios and compare these estimations with the base results. Scenario analysis can also be used to work out “best” and “worst” scenarios to establish a rage of possible future value. Then the annual standard deviation should be found to generate this range.
In my research it is possible to look through “optimistic” and “pessimistic” scenarios, because I take the calculations which exist as most probable scenario.
4.4.1. Discount rates that based on wacc
As you’ve seen in Table 4.13 there are results of calculations with WACC as discount rate (see the topic 4.2.1.) where the WACC is 0.1226.
Experts’ estimation Optimistic is 0.1226; Most Probable is 0.1338, and Pessimistic is 0.1499 (see the Appendix 9 Part 2)
I would like to present the result of calculation with WACC as discount rate in tables as the following:
Optimistic scenario WACC = 0.1226
|
I contract |
II contract |
III contract |
NPV |
229 919.45 |
229 925.62 |
244 573.83 |
PI |
0.63866 |
0.63868 |
0.70891 |
IRR |
11.35% |
13.15% |
20.36% |
PP |
4.867 |
4.867 |
3.767 |
Table 4.13
Most Probable scenario WACC = 0.1338
|
I contract |
II contract |
III contract |
NPV |
229 905.32 |
229 911.42 |
244 535.03 |
PI |
0.63625 |
0.638642 |
0.708797 |
IRR |
11.35% |
13.15% |
20.36% |
PP |
4.867 |
4.867 |
3.767 |
Table 4.14
Pessimistic scenario WACC = 0.1499
|
I contract |
II contract |
III contract |
NPV |
229 904.47 |
229 907.39 |
244 533.73 |
PI |
0.638623 |
0.638631 |
0.708793 |
IRR |
11.35% |
13.15% |
20.36% |
PP |
|
|
|
Table 4.14