Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

Current assets include:- receivables;- stocks at every stage of the production process;- cash and net short term liquidity.Current liabilities include mainly accounts payable to suppliers (but do not include mid to long term debtsto suppliers of machinery).It should be observed that, like current assets and current liabilities, the net working capital is by nature afund: in order to be transformed into a flow, only the year-on-year increments should be considered.These increments will obviously be sizeable at the beginning, when stocks and other components need tobe built-up for the first time, and subsequently they will stabilize or they may even diminish: in which casethere will, respectively, be no further investments in working capital or there will be dis-investments.Table 2.3 Total investment costs – Millions of EurosYEARS1 2 3 4 5 6 7 8 9 10Land -40Buildings -70Equipment -43 -25 -26Extraordinary Maintenance -3Residual value 12Total fixed assets (A) -153 0 0 -25 -3 0 -26 0 0 12Licences -1Patents -4Other pre-production expenses -2Total start-up costs (B) -7 0 0 0 0 0 0 0 0 0Current Assets (receivables, stocks, cash) 7 11 16 16 16 16 16 16 16 16Current Liabilities 2 2 3 4 4 4 4 4 4 4Net working capital -5 -9 -13 -12 -12 -12 -12 -12 -12 -12Variations in working capital (C) -5 -4 -4 1 0 0 0 0 0 0Total investment costs (A)+(B)+(C) -165 -4 -4 -24 -3 0 -26 0 0 12Residual value should always be included atend year. It is considered with a positive signin this table because it is an inflow, while allthe other items are outflows.These are funds, not flows.In this and the following tables negativenumbers are outflows, positive numbers areinflows.FOCUS: THE RESIDUAL VALUE OF THE INVESTMENTThe discounted value of any net future revenue after the time horizon is to be included in the residual value. More specifically,this is the present value at year n of the revenues, net of operating costs, the project will be able to generate because of theremaining service potential of fixed assets whose economic life is not yet completely exhausted. The latter will be zero ornegligible if a sufficiently long time horizon has been selected. However, for practical reasons this is not always the case, butthen it is important to record either as negative investment or as a benefit the salvage value of fixed asset or any remainingcapacity to generate net revenues. In other words, the residual value can be defined as the virtual liquidation value.It may be calculated in three ways:- by considering the residual market value of fixed assets, as if it were to be sold at the end of the time horizon considered, andof remaining net liabilities;- by computing the residual value of all assets and liabilities, based on some standard accounting economic depreciation formula(usually different from depreciation for the determination of capital income taxes);- by computing the net present value of cash flows in the remaining life-years of the project.36