WEBVTT 1 00:00:00.400 --> 00:00:03.500 The decision is taken to consider the purchase of 2 00:00:03.500 --> 00:00:07.100 a production machine in order to control our supply 3 00:00:06.100 --> 00:00:09.900 and to gain in operating flexibility. 4 00:00:10.900 --> 00:00:13.400 We were therefore first analyzer project 5 00:00:13.400 --> 00:00:16.700 the economic and financial conditions of 6 00:00:16.700 --> 00:00:19.700 this investment project. Let's go back a 7 00:00:19.700 --> 00:00:23.000 minute on the rationality of this investment decision. We 8 00:00:22.200 --> 00:00:26.600 want to ensource we want to control manufacturing 9 00:00:25.600 --> 00:00:28.700 why simply because 10 00:00:28.700 --> 00:00:32.100 we observe that the supplier is not 100% flexible 11 00:00:31.100 --> 00:00:34.600 in terms of capacity and supply 12 00:00:34.600 --> 00:00:36.400 and we want to control that. 13 00:00:37.400 --> 00:00:40.600 But in the meantime, we are going to acquire some skills. 14 00:00:40.600 --> 00:00:43.700 Some know-how some competences which are 15 00:00:43.700 --> 00:00:46.700 going to be very useful in the future development of 16 00:00:46.700 --> 00:00:47.700 our business. 17 00:00:49.100 --> 00:00:52.300 Last but not least. We are going to gain very much 18 00:00:52.300 --> 00:00:55.600 in agility in the ability of our company 19 00:00:55.600 --> 00:00:58.000 to react promptly to what's going to 20 00:00:58.400 --> 00:01:01.900 happen in business the evolution of demand from customers 21 00:01:01.900 --> 00:01:04.600 the financial consequence of 22 00:01:04.600 --> 00:01:07.200 manufacturing by ourselves is that 23 00:01:07.200 --> 00:01:10.200 we are going to ensource a suppliers margin. 24 00:01:11.500 --> 00:01:14.600 We will have to calculate and confront revenues and 25 00:01:14.600 --> 00:01:17.600 cost but this margin has to be confronted 26 00:01:17.600 --> 00:01:20.500 with the cost of the investment itself. This is 27 00:01:20.500 --> 00:01:24.600 a project financial analysis the attractiveness 28 00:01:23.600 --> 00:01:26.500 on an economic and financial point 29 00:01:26.500 --> 00:01:29.500 of view the objective being to improve the 30 00:01:29.500 --> 00:01:32.500 economic and financial performance of the company in 31 00:01:32.500 --> 00:01:33.800 order to create value. 32 00:01:35.200 --> 00:01:38.700 Capacity is at stake. Because if you remember we 33 00:01:38.700 --> 00:01:41.200 hired a salesperson in order to make 34 00:01:41.200 --> 00:01:45.200 some Market studies and the economic rationality 35 00:01:44.200 --> 00:01:47.500 is we have to do it by or sales 36 00:01:47.500 --> 00:01:51.100 because sales are growing there's a potential sales 37 00:01:50.100 --> 00:01:54.400 Evolution very much in the upside. Then 38 00:01:53.400 --> 00:01:57.000 we consider a project an investment 39 00:01:56.900 --> 00:01:59.100 opportunity and we'll have to 40 00:01:59.100 --> 00:02:02.700 calculate the cost structure so that we understand how 41 00:02:02.700 --> 00:02:05.900 much profit we are going to generate out of that. This 42 00:02:05.900 --> 00:02:09.000 is about the project economic attractiveness. 43 00:02:10.400 --> 00:02:12.800 Let's start first with evolution of sales. 44 00:02:14.200 --> 00:02:18.000 On the slide, you have the historical data generate to 45 00:02:17.200 --> 00:02:20.200 march in March. We've sold 46 00:02:20.200 --> 00:02:23.500 1,400 units and we anticipated for 47 00:02:23.500 --> 00:02:28.200 the next quarter. It's going to double b2c B2B. 48 00:02:27.200 --> 00:02:30.100 We have nice prospects in terms 49 00:02:30.100 --> 00:02:33.100 of upside growth for volume. Then we have to be able 50 00:02:33.100 --> 00:02:36.500 to manufacture by ourselves because the supply 51 00:02:36.500 --> 00:02:37.800 just can't do it. 52 00:02:38.500 --> 00:02:41.800 We visit different machine suppliers and we 53 00:02:41.800 --> 00:02:44.200 look at the metrics of the machines which 54 00:02:44.200 --> 00:02:46.000 are proposed by one of them. 55 00:02:47.800 --> 00:02:50.300 Among The Matrix the first one is at which price 56 00:02:50.300 --> 00:02:55.200 are we going to buy the machine? 60,000 a 57 00:02:53.200 --> 00:02:56.700 second. Very important parameter 58 00:02:56.700 --> 00:02:59.300 is how long are we going to be able to 59 00:02:59.300 --> 00:03:02.400 use the machine? The expected life 60 00:03:02.400 --> 00:03:06.100 of machine is five years which represents 60 61 00:03:05.100 --> 00:03:06.200 months. 62 00:03:07.400 --> 00:03:10.600 The machine has a capacity and this is a fundamental point. 63 00:03:10.600 --> 00:03:13.800 It's not infinite capacity the machine 64 00:03:13.800 --> 00:03:16.400 as a price which is related with its capacity, 65 00:03:16.400 --> 00:03:19.300 which is 5,000 units per month. 66 00:03:19.300 --> 00:03:22.300 So up to 5,000 units. That's fine 67 00:03:22.300 --> 00:03:25.200 Beyond 5000 units. You need 68 00:03:25.200 --> 00:03:27.200 an upgrade all you need a second machine. 69 00:03:28.200 --> 00:03:31.300 The machine is not going to manufacture the units by 70 00:03:31.300 --> 00:03:31.500 itself. 71 00:03:32.200 --> 00:03:36.200 You need labor and you need input raw materials. 72 00:03:37.200 --> 00:03:40.500 You need three people in order to manufacture from zero 73 00:03:40.500 --> 00:03:43.800 to 2,500 units. It's 74 00:03:43.800 --> 00:03:46.500 one shift, but you need a second shift. 75 00:03:46.500 --> 00:03:49.500 If you go beyond 2,500 so 76 00:03:49.500 --> 00:03:52.600 from 2500 units to 5,000 unit. 77 00:03:52.600 --> 00:03:56.100 You need six people instead of three. The 78 00:03:55.100 --> 00:03:58.600 total labor cost per person is 79 00:03:58.600 --> 00:04:01.300 1,000 forget about the figure But 80 00:04:01.300 --> 00:04:04.700 it includes the sari and the taxes. 81 00:04:05.400 --> 00:04:09.600 Now this is a fixed cost from 0 to 2500 82 00:04:08.600 --> 00:04:11.500 units and it's a fixed 83 00:04:11.500 --> 00:04:14.300 cost from 2,500 to 5,000. But 84 00:04:14.300 --> 00:04:17.900 you understand that you are going to move from 3 to 6% 85 00:04:17.900 --> 00:04:21.200 There will be an escalation in this fixed 86 00:04:20.200 --> 00:04:21.300 cost. 87 00:04:21.900 --> 00:04:24.700 There's a cost which is obviously variable. It's 88 00:04:24.700 --> 00:04:27.500 raw material cost. It costs 89 00:04:27.500 --> 00:04:30.600 you 16 dollars per unit produced. So 90 00:04:30.600 --> 00:04:33.300 if you produce one unit, you're going 91 00:04:33.300 --> 00:04:37.000 to consume 16 dollars two. You need 32 dollars 92 00:04:36.900 --> 00:04:40.300 1,000 units 16,000. This 93 00:04:39.300 --> 00:04:41.700 is perfectly variable. 94 00:04:42.400 --> 00:04:45.900 Now you can start the calculation of short costs a 95 00:04:45.900 --> 00:04:48.800 cost is an expanse. It's a usage. 96 00:04:48.800 --> 00:04:51.400 It's a consumption. So in order 97 00:04:51.400 --> 00:04:55.400 to manufacture your puzzles, you need to consume raw 98 00:04:54.400 --> 00:04:57.500 materials. You need to consume labor and 99 00:04:57.500 --> 00:05:00.300 you need to consume Capital you consume the machine. 100 00:05:01.200 --> 00:05:04.300 There are two kinds of consumptions in counting and 101 00:05:04.300 --> 00:05:08.100 finals. Some consumptions are directly related 102 00:05:07.100 --> 00:05:11.500 with one unique operating Cycles. It's 103 00:05:10.500 --> 00:05:13.600 example of raw materials and labor. 104 00:05:13.600 --> 00:05:16.400 You're going to consume kilograms or 105 00:05:16.400 --> 00:05:20.400 square meters for the manufacturing of one unique 106 00:05:19.400 --> 00:05:21.500 single product. 107 00:05:22.400 --> 00:05:26.300 You are going to need some man-hours necessary 108 00:05:25.300 --> 00:05:29.100 to manufacture one unique single 109 00:05:28.100 --> 00:05:31.600 product. So you understand that these 110 00:05:31.600 --> 00:05:34.700 consumption are very directly related with 111 00:05:34.700 --> 00:05:36.400 one unique product. 112 00:05:37.500 --> 00:05:41.100 Interestingly there is a certain kind of consumption which 113 00:05:40.100 --> 00:05:43.900 is a consumption of capital when you 114 00:05:43.900 --> 00:05:46.500 buy the machine. The machine is not going to be consumed 115 00:05:46.500 --> 00:05:49.600 by the manufacturing of one puzzle, but during 116 00:05:49.600 --> 00:05:52.200 60 months. The machine is going to 117 00:05:52.200 --> 00:05:56.400 constantly manufacture plenty of puzzles. And 118 00:05:55.400 --> 00:05:58.700 so you have to allocate this 119 00:05:58.700 --> 00:06:01.500 usage of capital to the different 120 00:06:01.500 --> 00:06:05.000 operating Cycles not to one unique 121 00:06:04.300 --> 00:06:07.700 cycle consisting in manufacturing one 122 00:06:07.700 --> 00:06:08.200 unit. 123 00:06:09.100 --> 00:06:12.200 There are two perspectives for operating Cycles. You can 124 00:06:12.200 --> 00:06:15.500 consider that an operating cycle is a batch the production 125 00:06:15.500 --> 00:06:18.800 badge a volume of production or you 126 00:06:18.800 --> 00:06:21.600 can consider that it is a period a month 127 00:06:21.600 --> 00:06:23.000 a year a period. 128 00:06:23.600 --> 00:06:26.700 Generally speaking you use the period as an 129 00:06:26.700 --> 00:06:29.600 operating cycle. So you are going to allocate the consumption 130 00:06:29.600 --> 00:06:32.700 of capital which is going to be named depreciation for 131 00:06:32.700 --> 00:06:36.200 tangible assets and amortization for 132 00:06:35.200 --> 00:06:37.800 intangible assets. 133 00:06:38.600 --> 00:06:41.600 and you are going to allocate this Capital to 134 00:06:41.600 --> 00:06:43.400 each and every period 135 00:06:44.100 --> 00:06:47.800 The depreciation it's a machine. It's tangible is a 136 00:06:47.800 --> 00:06:51.100 capital amount the amount we pay for the machine divided 137 00:06:50.100 --> 00:06:54.300 simply by the number of operating Cycles 138 00:06:53.300 --> 00:06:56.900 in this case the number of periods. 139 00:06:58.200 --> 00:07:02.300 The purchase price is a machine is 60,000. We are 140 00:07:01.300 --> 00:07:04.200 supposedly going to use the machine 141 00:07:04.200 --> 00:07:07.700 during 60 months. The monthly depreciation 142 00:07:07.700 --> 00:07:10.700 is sixty thousand dollars divided by 143 00:07:10.700 --> 00:07:14.000 60 months, which is 1,000 per month. 144 00:07:13.200 --> 00:07:16.700 This amount is going to be allocated to 145 00:07:16.700 --> 00:07:19.300 each and every product manufactured by 146 00:07:19.300 --> 00:07:21.100 the machine During the period 147 00:07:22.200 --> 00:07:25.100 And that's an interesting point because you understand it's a fixed 148 00:07:25.100 --> 00:07:28.400 cost if you manufacture one unit 149 00:07:28.400 --> 00:07:31.600 or 10 units of 4,000 units. 150 00:07:31.600 --> 00:07:34.700 It's going to be the same amount of depreciation, which 151 00:07:34.700 --> 00:07:36.500 is going to be allocated to the volume. 152 00:07:38.400 --> 00:07:41.800 So if the volume is up the same amount 153 00:07:41.800 --> 00:07:44.500 1,000 divided by a large volume 154 00:07:44.500 --> 00:07:48.100 will give a depreciation per unit 155 00:07:47.100 --> 00:07:50.900 which will be lower lower cost per 156 00:07:50.900 --> 00:07:53.300 unit. It's name economies of scale. We 157 00:07:53.300 --> 00:07:55.100 already discuss this concept. 158 00:07:56.400 --> 00:07:58.400 Now we can calculate our costs. 159 00:07:58.900 --> 00:08:01.200 The cost are going to be sensitive to 160 00:08:01.200 --> 00:08:04.300 volume number of units produced. 161 00:08:05.200 --> 00:08:09.200 Let's calculate for volume which is from 1000 to 162 00:08:09.200 --> 00:08:12.400 4,000 units. You remember that the capacity is 163 00:08:12.400 --> 00:08:14.000 limited to 5,000. 164 00:08:14.500 --> 00:08:17.200 Depreciation is definitely a fixed cost. 165 00:08:17.200 --> 00:08:20.800 We are going to depreciate one child then per month 166 00:08:20.800 --> 00:08:23.800 if the volume is 1000 or 167 00:08:23.800 --> 00:08:26.300 2,000 or 4,000. It's going to be the same 168 00:08:26.300 --> 00:08:30.200 thing labor costs are fixed within. 169 00:08:30.500 --> 00:08:34.100 A certain capacity. So from 1,000 170 00:08:33.100 --> 00:08:36.900 to 2000 is going to be three head counts 171 00:08:36.900 --> 00:08:39.400 3,000 starting at 172 00:08:39.400 --> 00:08:42.500 the level of 2,500 up to 173 00:08:42.500 --> 00:08:45.800 5,000. We need to shifts six head 174 00:08:45.800 --> 00:08:48.200 counts 6,000. So you understand 175 00:08:48.200 --> 00:08:52.800 that these costs are semi-fixed semi 176 00:08:51.800 --> 00:08:54.700 variable. The total quotes 177 00:08:54.700 --> 00:08:57.800 fixed cost is then depreciation plus labor 178 00:08:57.800 --> 00:09:00.700 Fix Plus semi fixed 4,000 to 179 00:09:00.700 --> 00:09:01.600 7000. 180 00:09:02.200 --> 00:09:06.000 Romaterials course is definitely variable one 181 00:09:05.900 --> 00:09:09.500 unit 16 1000 unit 182 00:09:09.500 --> 00:09:13.100 16,000 2,000 units 32,000. 183 00:09:12.100 --> 00:09:15.300 No problem. Total cost is 184 00:09:15.300 --> 00:09:18.700 fixed plus semifix plus variable cost. 185 00:09:18.700 --> 00:09:21.200 Then you calculate the total cost which you 186 00:09:21.200 --> 00:09:24.500 can divide by the number of units. The total 187 00:09:24.500 --> 00:09:28.200 cost per unit is for example with 1,000 188 00:09:27.200 --> 00:09:30.400 units twenty thousand divided 189 00:09:30.400 --> 00:09:33.400 by 1,000 is $20 per unit. 190 00:09:34.100 --> 00:09:37.200 And then you understand you generate economies of 191 00:09:37.200 --> 00:09:40.500 scale because if the volume is 1000 is 192 00:09:40.500 --> 00:09:42.700 20 if the volume is 2000 is 18. 193 00:09:43.800 --> 00:09:47.000 But when you increase volume from 2000 to 194 00:09:46.200 --> 00:09:49.200 2,500 do you need cost is 195 00:09:49.200 --> 00:09:52.500 up? Why because there's a fixed cost 196 00:09:52.500 --> 00:09:54.700 which looks a little bit variable. 197 00:09:55.300 --> 00:09:58.200 Then you start generating economies of scale again. 198 00:09:59.300 --> 00:10:02.700 There's a couple of graphs which I want to show you and 199 00:10:02.700 --> 00:10:05.800 which are extremely important to understand the business 200 00:10:05.800 --> 00:10:09.000 rationality of growing sales. 201 00:10:10.200 --> 00:10:13.300 The first graph is about total cost you have the 202 00:10:13.300 --> 00:10:16.600 variable cost which are perfectly related with 203 00:10:16.600 --> 00:10:19.300 volume and you have the fixed cost 204 00:10:19.300 --> 00:10:22.500 which again are fixed within a capacity range 205 00:10:22.500 --> 00:10:25.600 from 1,000 to 2,000 that's 206 00:10:25.600 --> 00:10:28.400 fixed from 2,500 to 207 00:10:28.400 --> 00:10:31.500 4,000 is fixed, but from 2000 to 208 00:10:31.500 --> 00:10:34.000 2,500 then you have 209 00:10:34.500 --> 00:10:36.000 an increase in the fixed cost. 210 00:10:36.800 --> 00:10:39.700 The second graph is now about cost per 211 00:10:39.700 --> 00:10:42.600 unit you start from 20 and 212 00:10:42.600 --> 00:10:45.100 you understand that from 1,000 to 213 00:10:45.100 --> 00:10:49.000 1,500. You generate very significant economies of 214 00:10:48.100 --> 00:10:52.200 scale. The unit cost is significantly down 215 00:10:51.200 --> 00:10:55.800 it still down from 1,500 to 216 00:10:55.800 --> 00:10:58.700 2,000 a bit less, but you still generate 217 00:10:58.700 --> 00:11:01.700 economies of scale now, there is a threat hole 218 00:11:01.700 --> 00:11:04.600 effect because when you move from 2000 to 219 00:11:04.600 --> 00:11:08.000 2,500 you have to hide three 220 00:11:07.300 --> 00:11:11.000 additional workers operators, and 221 00:11:10.500 --> 00:11:12.900 then the cost per unit is going to increase 222 00:11:13.900 --> 00:11:16.900 Then further on you're going to keep on generating economies 223 00:11:16.900 --> 00:11:19.900 of scale. This graph is very fundamental 224 00:11:19.900 --> 00:11:22.300 to understand why companies always 225 00:11:22.300 --> 00:11:25.200 communicate on their growth strategy. 226 00:11:26.100 --> 00:11:29.400 We want to grow why the first reason is 227 00:11:29.400 --> 00:11:33.300 why we are growing we are generating economies 228 00:11:32.300 --> 00:11:35.900 of scale, but you have to be very cautious 229 00:11:35.900 --> 00:11:38.300 about this statement because here You 230 00:11:38.300 --> 00:11:41.400 observe once wrath hall effect, which is you 231 00:11:41.400 --> 00:11:44.700 have to hire a second shift and there 232 00:11:44.700 --> 00:11:47.200 will be a servants threshold because when you get to 233 00:11:47.200 --> 00:11:50.600 the capacity of 5,000 units, then 234 00:11:50.600 --> 00:11:53.900 you need to invest in upgrading the machine or you 235 00:11:53.900 --> 00:11:56.800 need to invest in buying a new machine and then 236 00:11:56.800 --> 00:11:59.400 depreciation is not going to be a 237 00:11:59.400 --> 00:12:02.700 fixed cost. You will have to depreciate the upgrade 238 00:12:02.700 --> 00:12:05.600 all the additional machine sir gone 239 00:12:05.600 --> 00:12:07.800 threshold effect on the machine capacity. 240 00:12:08.800 --> 00:12:11.400 So, of course you generate economies of scale 241 00:12:11.400 --> 00:12:14.100 but within a capacity range. 242 00:12:15.200 --> 00:12:19.500 Now you can transform this observations into profitability 243 00:12:18.500 --> 00:12:22.000 calculation. What are 244 00:12:21.500 --> 00:12:24.500 the project economics? What is the economic 245 00:12:24.500 --> 00:12:27.800 and financial attractivity of the machine you 246 00:12:27.800 --> 00:12:30.700 remember first? We had a look at the cost volume 247 00:12:30.700 --> 00:12:31.400 relationship. 248 00:12:32.900 --> 00:12:36.000 We are considering buying a machine. The unit 249 00:12:35.200 --> 00:12:39.100 cost will be depending on the volume 20 250 00:12:38.100 --> 00:12:41.400 18.7 etc. 251 00:12:41.900 --> 00:12:44.700 Etc. This is the cost volume relationship. We 252 00:12:44.700 --> 00:12:47.600 already discussed. We are going to compare 253 00:12:47.600 --> 00:12:50.800 this unit costs with purchasing the 254 00:12:50.800 --> 00:12:54.000 puzzle from the supplier, which is $20 255 00:12:54.400 --> 00:12:54.700 per unit. 256 00:12:55.400 --> 00:12:58.400 You understand that if the volume is 1000 we produce 257 00:12:58.400 --> 00:13:01.900 at 20 and we can buy at 20. 258 00:13:02.600 --> 00:13:05.600 Which margin are we going to generate out of 259 00:13:05.600 --> 00:13:08.400 manufacturing by ourselves the difference between 260 00:13:08.400 --> 00:13:10.300 20 and 20 0? 261 00:13:11.500 --> 00:13:14.200 Of course, we are going to generate a margin if we 262 00:13:14.200 --> 00:13:15.900 generate economies of scale. 263 00:13:16.500 --> 00:13:19.500 And then you understand that if for example the volume is 264 00:13:19.500 --> 00:13:23.600 three thousand we produce at 18.3 265 00:13:22.600 --> 00:13:25.800 instead of buying at 20. 266 00:13:25.800 --> 00:13:28.800 We generate a margin of 1.7. This 267 00:13:28.800 --> 00:13:31.500 is an accounting margin, which is very important 268 00:13:31.500 --> 00:13:34.700 to calculate but we Finance people 269 00:13:34.700 --> 00:13:37.500 when we want to estimate the financial 270 00:13:37.500 --> 00:13:40.700 profitability and the value which is created by an investment. 271 00:13:40.700 --> 00:13:43.800 We don't use these accounting. Margin. 272 00:13:43.800 --> 00:13:47.000 We use a cash Margie for 273 00:13:46.200 --> 00:13:50.000 a very simple reason which is described in 274 00:13:49.300 --> 00:13:52.200 the module available on the platform, 275 00:13:52.200 --> 00:13:55.200 which is about investment appraisal uncontrol. 276 00:13:55.700 --> 00:13:58.600 We use cash flows because when 277 00:13:58.600 --> 00:14:01.100 you buy a machine you cash out. 278 00:14:02.300 --> 00:14:05.300 As you are Cashing Out significant amount of money. 279 00:14:05.300 --> 00:14:08.500 You have two mobilize your investors. Your investors are 280 00:14:08.500 --> 00:14:12.200 shareholders or financial craters and these 281 00:14:11.200 --> 00:14:14.100 investors they use cash flows to 282 00:14:14.100 --> 00:14:17.300 estimate their own profitability their own 283 00:14:17.300 --> 00:14:20.300 return investment. If you're share order you cash out 284 00:14:20.300 --> 00:14:23.400 to buy a stock you cash in when you sell the 285 00:14:23.400 --> 00:14:26.600 stock and you cash in when you receive a dividend when you're 286 00:14:26.600 --> 00:14:29.900 a banker you provide cash for the mortgage for 287 00:14:29.900 --> 00:14:32.600 the borrowing and then you receive 288 00:14:32.600 --> 00:14:35.500 cash from the borrowers you receive 289 00:14:35.500 --> 00:14:38.300 cash to pay the interest and to repair the loan. So 290 00:14:38.300 --> 00:14:41.700 as investors are using cash flows in order 291 00:14:41.700 --> 00:14:44.100 to estimate their rate of 292 00:14:44.100 --> 00:14:47.100 return in financing the project you use cash 293 00:14:47.100 --> 00:14:50.300 flows. It's just about being consistent in the 294 00:14:50.300 --> 00:14:50.900 calculation. 295 00:14:52.100 --> 00:14:55.300 Now, let's go back to the unit cost to calculate the 296 00:14:55.300 --> 00:14:57.400 cash content of this cost. 297 00:14:58.400 --> 00:15:01.200 1000 units unit cost is 298 00:15:01.600 --> 00:15:04.100 $20. It's made of what 16 dollars of 299 00:15:04.100 --> 00:15:05.000 raw materials. 300 00:15:05.800 --> 00:15:08.600 3 Doors of Labor related 301 00:15:08.600 --> 00:15:12.900 expenses because you need to pay 3,000 divided 302 00:15:11.900 --> 00:15:14.500 by 1,000 units. 303 00:15:14.500 --> 00:15:17.500 It's three dollars per unit and one door for 304 00:15:17.500 --> 00:15:20.100 depreciation. But the Precision is 305 00:15:20.100 --> 00:15:21.000 not a cash out. 306 00:15:21.800 --> 00:15:24.400 The one on unique cash out, which is related with 307 00:15:24.400 --> 00:15:28.200 the machine is a purchase of the machine 60,000 not 308 00:15:27.200 --> 00:15:31.400 the Precision that depreciation is simply a 309 00:15:30.400 --> 00:15:33.500 book figure which you are going to introduce in 310 00:15:33.500 --> 00:15:36.300 the calculation of your production cost. It's no cash 311 00:15:36.300 --> 00:15:39.900 out. You don't cash out the Precision you account 312 00:15:39.900 --> 00:15:42.500 for depreciation. So the only cash 313 00:15:42.500 --> 00:15:45.800 which is going to leave your bank account is $19 314 00:15:45.800 --> 00:15:46.700 per unit. 315 00:15:47.400 --> 00:15:51.900 So you understand that the cash margin is 20 cash 316 00:15:51.900 --> 00:15:54.100 paid to the suppliers as opposed to 317 00:15:54.100 --> 00:15:57.900 19 Cash Pad to raw materials 318 00:15:57.900 --> 00:16:00.600 and labor related expenses. The cash 319 00:16:00.600 --> 00:16:04.000 margin per unit is one dollar multiplied by 320 00:16:03.100 --> 00:16:06.400 the number of units. You generate 321 00:16:06.400 --> 00:16:10.300 a total cash margin of 1,000 if 322 00:16:09.300 --> 00:16:12.700 you produce 1,000 units. 323 00:16:13.700 --> 00:16:16.400 You remember your pet 60,000 for 324 00:16:16.400 --> 00:16:19.700 the machine? So if you generate cash flow 325 00:16:19.700 --> 00:16:22.800 of 1,000 per month, 326 00:16:22.800 --> 00:16:25.800 it's going to take 60 months to 327 00:16:25.800 --> 00:16:29.100 pair the machine back the payback 328 00:16:28.100 --> 00:16:32.200 period without any discounting of 329 00:16:32.200 --> 00:16:36.000 any kind is going to be 60 months. So 330 00:16:35.100 --> 00:16:38.300 you understand that it takes 60 months and 331 00:16:38.300 --> 00:16:41.500 the Machine hasn't expected life of 60 months. It 332 00:16:41.500 --> 00:16:43.100 does not look very attractive. 333 00:16:44.100 --> 00:16:49.200 When the volume is no more 1,000 unit, but 1500 334 00:16:47.200 --> 00:16:50.400 units you are 335 00:16:50.400 --> 00:16:53.300 going to significantly increase the total cash 336 00:16:53.300 --> 00:16:56.700 margin and for two reasons, which are 337 00:16:56.700 --> 00:16:59.600 multiplying one by the other. The first 338 00:16:59.600 --> 00:17:02.300 reason is a cache margin per unit is 339 00:17:02.300 --> 00:17:03.000 higher. 340 00:17:03.900 --> 00:17:06.600 The cash cost is now $18 341 00:17:06.600 --> 00:17:09.700 why you still have 16 dollars 342 00:17:09.700 --> 00:17:10.600 of raw materials? 343 00:17:11.400 --> 00:17:15.000 And the labor related expenses which are still $3,000 344 00:17:14.800 --> 00:17:18.700 are allocated to 1,500 345 00:17:17.700 --> 00:17:20.800 units which represent two dollars 346 00:17:20.800 --> 00:17:23.300 per unit as a consequence. Your total 347 00:17:23.300 --> 00:17:26.400 cash cost is 16 plus 2 348 00:17:26.400 --> 00:17:29.200 is 18. Do you understand that you have 349 00:17:29.200 --> 00:17:32.300 multiplied by two your cash? Margin per 350 00:17:32.300 --> 00:17:36.000 unit. It's no more one is two dollars. But the 351 00:17:35.100 --> 00:17:39.200 second effect is this higher 352 00:17:38.200 --> 00:17:41.400 cash margin per unit is going 353 00:17:41.400 --> 00:17:45.000 to be multiplied by a significantly larger number 354 00:17:44.300 --> 00:17:48.300 of units. So it's not 1,000 times 355 00:17:48.300 --> 00:17:52.300 one. It's 1,500 times 356 00:17:51.300 --> 00:17:54.800 2. So the total cash margin 357 00:17:54.800 --> 00:17:56.500 is going to be 3,000. 358 00:17:57.200 --> 00:18:00.200 Now if you look at the payback period it's not 359 00:18:00.200 --> 00:18:04.400 going to be 60 months of operations, 60 months 360 00:18:04.400 --> 00:18:07.300 of 1,000 per month to pay the initial 361 00:18:07.300 --> 00:18:10.400 investment back only 20 months of 362 00:18:10.400 --> 00:18:14.100 operations are going to pay for the machine 20 multiplied 363 00:18:13.100 --> 00:18:16.800 by 3,000. It pays a 364 00:18:16.800 --> 00:18:17.600 60,000. 365 00:18:18.700 --> 00:18:21.900 So you understand that you have divided by three the 366 00:18:21.900 --> 00:18:24.500 payback. The attractiveness is absolutely 367 00:18:24.500 --> 00:18:27.500 boosted by the number of units 368 00:18:27.500 --> 00:18:28.100 produced. 369 00:18:29.200 --> 00:18:33.000 And now it's your very optimistic on you produce. 4,000 units 370 00:18:32.200 --> 00:18:35.400 per month. You just need six months 371 00:18:35.400 --> 00:18:38.800 to pay the machine, which is absolutely fantastic. 372 00:18:38.800 --> 00:18:41.400 You understand that the pair back period 373 00:18:41.400 --> 00:18:44.100 has to be confronted with the visibility you have on your 374 00:18:44.100 --> 00:18:44.400 business. 375 00:18:45.300 --> 00:18:47.500 Let's go back to the volume forecast. 376 00:18:48.700 --> 00:18:51.300 You remember that in June? We anticipate we 377 00:18:51.300 --> 00:18:54.300 are going to sell 2,900 units. It's between 378 00:18:54.300 --> 00:18:57.100 2,500 and 3,000. So you understand that 379 00:18:57.100 --> 00:19:00.200 the payback is going to be 10 to 15 months. 380 00:19:00.200 --> 00:19:01.000 It's about a year. 381 00:19:02.100 --> 00:19:05.300 So it's a year for the payback and it's five 382 00:19:05.300 --> 00:19:09.100 years for the machine. You understand that it's very attractive 383 00:19:08.100 --> 00:19:11.300 to consider the acquisition of this 384 00:19:11.300 --> 00:19:14.400 machine decision taken we buy 385 00:19:14.400 --> 00:19:14.700 the machine. 386 00:19:16.700 --> 00:19:19.800 Because this 60,000 is a 387 00:19:19.800 --> 00:19:22.600 significant cash outlay. Then the 388 00:19:22.600 --> 00:19:25.200 question is is cash available in our bank 389 00:19:25.200 --> 00:19:26.600 account. The answer is no. 390 00:19:27.400 --> 00:19:30.600 Then we need to mobilize our investors. There are 391 00:19:30.600 --> 00:19:33.500 two categories of investors the owners of the company 392 00:19:33.500 --> 00:19:36.100 the shareholders. Are they ready to 393 00:19:36.100 --> 00:19:39.300 contribute? I am the share order and I don't want to 394 00:19:39.300 --> 00:19:43.300 add an additional contribution from my personal wealth. Then 395 00:19:42.300 --> 00:19:45.600 there is no other Alternatives and visiting 396 00:19:45.600 --> 00:19:48.500 the second category of investors the financial 397 00:19:48.500 --> 00:19:52.100 creditors. They have to contribute a bank 398 00:19:51.100 --> 00:19:54.800 accept to provide some financing and 399 00:19:54.800 --> 00:19:57.500 I'm going to create a financial debt a 400 00:19:57.500 --> 00:20:01.100 financial liability in my activity and in 401 00:20:00.100 --> 00:20:03.200 my accounts What are the main 402 00:20:03.200 --> 00:20:05.600 characteristics of the financial debt? 403 00:20:06.300 --> 00:20:09.100 First you have to compare the debt with the amount of 404 00:20:09.100 --> 00:20:12.400 cash outlay generated by the purchase 405 00:20:12.400 --> 00:20:15.400 of the machine. We want to buy a machine which costs 406 00:20:15.400 --> 00:20:18.100 60,000 the banker does not want to 407 00:20:18.100 --> 00:20:21.100 finance in most cases 100% of the machine. 408 00:20:21.100 --> 00:20:24.600 They want also a contribution from the company 409 00:20:24.600 --> 00:20:27.100 and from the shareholders the amount of 410 00:20:27.100 --> 00:20:30.900 financial debt, which is accepted by the bank is 48,000. It's 411 00:20:30.900 --> 00:20:33.500 a liability which is going to show in my 412 00:20:33.500 --> 00:20:34.500 balancy. 413 00:20:35.100 --> 00:20:38.000 This is a first characteristic and parameter of 414 00:20:38.200 --> 00:20:39.700 the Dead the second one is. 415 00:20:40.500 --> 00:20:44.000 How long is it going to last because a 416 00:20:43.500 --> 00:20:46.900 debt has an end as a duration in 417 00:20:46.900 --> 00:20:49.100 this case. I negotiate five years, 418 00:20:49.100 --> 00:20:52.700 which is exactly the expected life of the machine. That's fine. 419 00:20:53.600 --> 00:20:56.300 Now what will be the planning for 420 00:20:56.300 --> 00:21:00.000 the Redemption of the debt? What is negotiated? This 421 00:20:59.200 --> 00:21:02.900 is a third parameter is a 422 00:21:02.900 --> 00:21:05.300 repayment in Finlay. So I'm going 423 00:21:05.300 --> 00:21:08.100 to pay the interest each and every month and I'm going to 424 00:21:08.100 --> 00:21:11.400 repair bullet infinite 100% of 425 00:21:11.400 --> 00:21:14.800 the 48,000 at the end of the dead. So in 426 00:21:14.800 --> 00:21:17.700 60 months time fourth and 427 00:21:17.700 --> 00:21:20.100 very important parameter. I have 428 00:21:20.100 --> 00:21:23.800 to remunerate the bankers the financial creator for providing 429 00:21:23.800 --> 00:21:27.100 a service which consists in providing 430 00:21:26.100 --> 00:21:29.400 forms for emitted period of 431 00:21:29.400 --> 00:21:32.800 time 6% annual interest 432 00:21:32.800 --> 00:21:35.500 rate is what I negotiate with my banker, so 433 00:21:35.500 --> 00:21:40.000 I will have to pay 6% of 48,000 each 434 00:21:39.300 --> 00:21:40.600 and every year. 435 00:21:41.300 --> 00:21:44.300 Divided by 12 months per year. It represents 436 00:21:44.300 --> 00:21:49.300 a monthly interest payment of 240 437 00:21:47.300 --> 00:21:50.400 dollars per month 438 00:21:50.400 --> 00:21:53.500 last but not least as the amount 439 00:21:53.500 --> 00:21:56.500 of that is 48,000 and the purchase 440 00:21:56.500 --> 00:22:00.800 price of the machine is 60,000. I have to take 12,000 441 00:21:59.800 --> 00:22:02.500 out of the cash account of 442 00:22:02.500 --> 00:22:05.700 my company. It's a reasonable financing 443 00:22:05.700 --> 00:22:08.800 to close the project Finance. Now I 444 00:22:08.800 --> 00:22:11.400 have demonstrated that the machine is 445 00:22:11.400 --> 00:22:14.300 useful for the production of the company. 446 00:22:15.100 --> 00:22:18.700 On an economic point of view it creates value. 447 00:22:18.700 --> 00:22:21.300 It's very attractive and I'm quite 448 00:22:21.300 --> 00:22:24.200 happy with the financing. I have closed a 449 00:22:24.200 --> 00:22:27.500 financing of the machine with the banker. I am 450 00:22:27.500 --> 00:22:30.900 ready now to buy the machine to purchase a 451 00:22:30.900 --> 00:22:33.500 machine and to start the production in the 452 00:22:33.500 --> 00:22:36.100 first month of this module, which is April.