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Finance Lecture # 2

Finance Lecture # 2. Jan H. Jansen E-mail: jan.jansen@han.nl. Wind energy. Minor Wind Energy Project Management. Minor Wind Energy Project Management. Programme. Energy Market. Overview Energy Market. Macro level Energy prices (P) Energy demand (Q) Meso level / Industry level

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Finance Lecture # 2

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  1. Finance Lecture # 2 Jan H. Jansen E-mail: jan.jansen@han.nl

  2. Wind energy

  3. Minor Wind Energy Project Management

  4. Minor Wind Energy Project Management

  5. Programme

  6. Energy Market

  7. Overview Energy Market • Macro level • Energy prices (P) • Energy demand (Q) • Meso level / Industry level • Micro level / Firm level

  8. Supply Chain Wind Energy Farm Distribution Suppliers

  9. Value Chain Wind Energy Farm Input > Throughput > Output Procurement > Production > Sales

  10. Annual reports • Market & Strategy • Corporate Governance • Corporate Social Responsibility (CSR) • Sustainability • Financial ratios • Profitability • Liquidity • Solvency • Activity • Z-score • Dupont

  11. Analyses Annual ReportSustainable Energy Industry

  12. Decision levels

  13. Decision levels

  14. The role of decision maker (manager) Bookkeeper Manager Present Past Future

  15. Economic Trade-Off (ETO) Costs & Risks Revenues

  16. Economic Trade Off’s • TCO approach • Δ+ Investment • Δ- Maintenance costs • Make/Buy Decisions • Outsourcing • Insourcing • Quality costs

  17. Economic Trade-Off’s • Quantitative trade-off: • Costs • Revenues • Risk trade-off • Qualitative trade-off • Hidden costs • Hidden revenues

  18. Economic Trade-Off’s • Relevant costs: Future costs that vary with the decision under consideration • Opportunity costs • The cost of being deprived of the next best option • Future outlay costs • Cost that vary with the decision

  19. Economic Trade-Off’s • Irrelevant costs: Future costs that do not vary with the decision under consideration • Past costs • Costs that were incurred as a result of a past decision (sunk costs) • Future outlay costs • Cost that do not vary with the decision

  20. Example of opportunity costs Let us assume that you own a car, for which you paid a purchase price of € 10,000. You just have been offered € 12,000 for this car. What are the opportunity costs by keeping this car?

  21. Opportunity costs ‘Opportunity cost is the contribution to operating income that is forgone or rejected by not using a limited resource in its next-best alternative use’ Opportunity costs can not be found in the financial accounting records!

  22. The role of decision maker (manager) Bookkeeper Manager Present Past Future

  23. Metaphor of the pipeline

  24. Costs of Quality Economic Trade Off: • Extra revenues • More competitive • Higher customer satisfaction • Initial investment & Extra costs • Cost savings

  25. Customer Satisfaction Actual Performance Design Specifications Conformance Qualtiy Quality of Design

  26. Quality gap Actual performance vs. Customer satisfaction • Conformance Quality • Design specifications vs. Actual performance • Quality of Design • Customer satisfaction vs. Design specifications

  27. Metaphor of the pipeline Input III Throughput I II Output IV

  28. Costs of Quality • Prevention costs • Appraisal costs • Internal failure costs • External failure costs

  29. Prevention costs Costs incurred in precluding the production of products that do not conform to specifications

  30. Prevention costs (examples) • Design engineering • Process engineering • Quality engineering • Supplier evaluations • Preventive equipment maintenance • Quality training • New materials used to manufacture products

  31. Appraisal costs Costs incurred in detecting which of the individual units of products do not confirm to specifications

  32. Appraisal costs (examples) • Inspection • On-line product manufacturing and process inspection • Product testing

  33. Internal failure costs Costs incurred when a nonconforming product is detected before it is shipped to customers

  34. Internal failure costs (examples) • Spoilage • Rework • Scrap • Break down maintenance • Manufacturing / Process engineering on internal failure

  35. External failure costs Costs incurred when a nonconforming product is detected after it is shipped to customers

  36. External failure costs (examples) • Customer support • Transportation costs • Manufacturing / Process engineering • Warranty repair costs • Liability claims • Complaints department

  37. Literature • Management Accounting for Decision Makers, Atrill cs • Management Accounting, Kaplan cs • Advanced Management Accounting, Kaplan cs • Cost Accounting, Horngren cs • Fundamentals of Corporate Finance, Ross cs • Fundamentals of Corporate Finance, Brealy cs • Multinational Business Finance, Eitman • Wind Energy (Fundamentals, Resource Analysis and Economics), Sathyajith • Wind turbines (Fundamentals, Technologies, Application, Economics), Hau

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