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INTRODUCTION

Learn about value-based management and the key drivers of value creation in companies. Explore methods to determine if a project creates value and how to measure it.

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INTRODUCTION

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  1. INTRODUCTION Prof. Luc Keuleneer

  2. IntroductionI.A. Ultimate objective of a company Value Creation What about shareholder value?

  3. Key value drivers • Cash flows:  operational cash flow  free cash flow to the firm • WACC:  ‘weighted average cost of capital’

  4. I.B. Definition Value Based Management Implement concept of value creation at all levels in the company

  5. Key factors in VBM Value based Management Increase cashflows / decrease WACC Balanced Scorecard

  6. Balanced Scorecard FinancialKSFPerformance indicator ClientDoelstellingPerformance indicator OrganizationalKSFPerformance indicator R & DKSFPerformance indicator

  7. II. Value creation on company level • Yes ! IF ROIC > WACC ROIC = return on invested capital WACC = weighted average cost of capital • EVA = Economic Value Added = (ROIC – WACC) * Average invested capital

  8. III. Does a project create value? Methods • Average accounting rate of return • Pay back method • Internal rate of return • Net present value method

  9. IV. Example Initial investment 18.000 EBITDA 7.600 Lifetime 5 years Tax rate 50% Accounting O.C.F. approach EBITDA 7.600 +7.600 Dep. 3.600 - EBT 4.000 - Tax 2.000 -2.000 Net profit 2.000O.C.F. +5.600

  10. A. Accounting rate of return – ARR Definition ARR = average net profit = 2000 = 22,2% average investment 9000

  11. B. Pay Back method Definition Pay back = how long does it take to earn back the investment 18.000 = 3,2 years 5.600

  12. C. Internal rate of return Definition 18.000 = IRR : 16,8%

  13. D. Net present value Definition Dus NCW = If r = 10%  NPV = 5. 600 x 3.7908 – 18.000 = 3.228

  14. V. Conclusion

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