Money companies

When ordering items mentioned or advertised in PMA, please write for current prices/info before sending money.Companies come and go rapidly these days as in the case of Special Parts Limited of Atlanta, (a PMA advertiser).Check the Shotgun News for new sources of compaiiies to fill your needs, or MX Military Exchange P.O.Box 3,Torrington,CT 06790/ 7.50-yr. 

Note again that the full cost of bringing a new drug to market is much higher than the amount of money companies must actually raise to fund R D projects. To pursue R D, companies must raise only enough cash to cover the actual outlays associated with the successful and unsuccessful... 

The objective of any exploration venture is to find new volumes of hydrocarbons at a low cost and in a short period of time. Exploration budgets are in direct competition with acquisition opportunities. If a company spends more money finding oil than it would have had to spend buying the equivalent amount in the market place there is little Incentive to continue exploration. Conversely, a company which manages to find new reserves at low cost has a significant competitive edge since it can afford more exploration, find and develop reservoirs more profitably, and can target and develop smaller prospects. 

From an overall economic viewpoint, any investment proposal may be considered as an activity which initially absorbs funds and later generates money. The funds may be raised from loan capital or from shareholders capital, and the net (after tax and costs) money generated may be used to repay interest on loans and loan capital, with the balance being due to the shareholders. The shareholders profit can either be paid out as dividends, or reinvested in the company to fund the existing venture or new ventures. The following diagram indicates the overall flow of funds for a proposed project. The detailed cash movements are contained within the box labelled the project . 

From the oil company s point of view, the balance of the money absorbed by the project (capex, opex) and the money generated (the oil company s after-tax share of the profit) yields the project cashflow. 

The project cashflow s constructed by performing the calculation for every year of the project life. Atypical project cashflow is shown in Figure 13.9, along with a cumulative cashflow showing how cumulative revenue is typically split between the capex, opex, the host government (through tax and royalty) and the investor (say the oil company). The cumulative amount of money accruing to the company at the endof the project is the cumulative cash surplus or field life net cash flow. 

In the above example, the discount rate used was the annual compound interest rate offered by the bank. In business investment opportunities the appropriate discount rate is the cost of capital to the company. This may be calculated in different ways, but should always reflect how much it costs the oil company to borrow the money which it uses to invest in its projects. This may be a weighted average of the cost of the share capital and loan capital of a company. 

The maximum net outlay is veiy important, since no matter how profitable a project is, the matter is academic if the company is unable to raise the money to undertake the project. 

For many years, companies and countries have lived with the problem of inflation, or the faUing value of money. Costs—in particular, labor costs—tend to rise each year. Failure to account for this trend in predicting future cash flows can lead to serious errors and misleading profitabihty estimates. 

If the potential loss can bankrupt the company, then decisions are not necessarily made on the basis of expecded value even though the potential gain may be veiy high. Also, decisions are not necessarily made on the basis of expected value if the potential loss represents a relatively small amount of money to the company. Between these two extremes, expected value can be a veiy usehil criterion, particularly for a company with a large number of projects. 

A company may be considering a project with a very high potential rate of return and a low risk, but it may prove impossible to raise the money to start the project. Conversely, the company may be prepared to undertake an extremely risky project if the investment is trivial. Thus, the attitude of a company to risk depends on the circumstances. 

Money does not hold the same value for each company or each individual. A dollar may keep a pauper from starvation while being a trivial amount to the person who gave it. Attempts have been made to quantify a company s attitude to money, risk, and uncertainty by asking business executives a number of questions such as the following ... 

The same questions may then be asked for different values of the probabilities p and po. The answers to these questions can give an indication of the importance to the company of P at various levels of risk and are used to plot the utility curve in Fig. 9-25. Positive values are the amounts of money that the company would accept in order to forgo participation. Negative values are the amounts the company woiild pay in order to avoid participation. Only when the utihty value and the expected value (i.e., the straight line in Fig. 9-25) are the same can net present value (NPV) and discounted-cash-flow rate of return (DCFRR) be justified as investment criteria. 

The same money invested in a project with a (DCFRR) of 10 percent would, by Eq. (9-108), obtain an entrepreneurial return i = 8.37 percent on the whole investment, i.e., 8.37/ 100. Investment of the entrepreneur s own money would only achieve an aftertax return of (0.1)(1 — 0.40) = 6 percent on 50, or 3/ 100 of total investment. The incentive to the entrepreneur to manage the projeci thus corresponds to a tax-free income of 5.37/ 100 of total investment. In practice, money is borrowed from more than one source at different interest rates and at different tax liabihties. The effective cost of capital in such cases can be obtained by an extension of the above reasoning and is treated in detail by A. J. Merrett and A. Sykes Capital Budgeting and Company Finance, Longmans, London, 1966, pp. 30 8). 

Concept 1. Money measurement means that only those facts that can be represented in monetary terms are recorded. The balance sheet and income statement for a company give no indication as to what might happen in the future. The company may be about to be successfully sued for a large sum of money, or a competitor may be launching a new product that will seriously reduce future sales of the company s products. 

Sometimes a company uses a sinking fund to retire a bond. A series of equal annual payments A, invested at a fractional interest rate i and made at the end of each year over a period of n years, is equivalent to a sum of money of present value P, given by... 

A shortage of cash may prevent a company from taking advantage of large discounts available for bulk purchase of raw materials. The importance of the availability of adequate cash or near cash can be seen by considering an account payable within 28 days, with a 2 percent discount allowed if paid within 7 days. If cash is not available to pay the account within 7 days, this is then equivalent to paying 2 percent interest on the money for the remaining 21-day period, or an annual compound-interest rate of more than 41 percent. 

An accounts-receivable-turnover ratio of 12 is considered fairly good for a manufacturing company This implies an average collection period of about 1 month. The price obtained for the goods should include an allowance for interest (otherwise obtainable) on the money tied up for such a period. 

Types and Accuracy of Estimates Capital-cost estimates may be required for a variety of reasons, among others to enable feasibility studies to be carried out, to enable a manufacturing company to select from alternative investments, to assist in selection from alternative designs, to provide information for planning the appropriation of capital, and to enable a contractor to bid on a new project. It is therefore essential to achieve the greatest accuracy of estimation with a minimum expenditure of time and money. 

Iron and steel industries have been concerned with emissions from their furnaces and cupolas since the industry started. Pressures for control have forced the companies to such a low level of permissible emissions that some of the older operations have been closed rather than spend the money to comply. The companies controlling these operations have not gone out of business but rather have opened a new, controlled plant to replace each old plant. Table 6-3 illustrates the changes in the steelmaking processes that have occurred in the United States. 

If money and time are short and the system is fairly ideal, commercial computer services available to the company might have shortcut options available in lieu of the more expensive rigorous routines. Finally, methods will be recommended for checking the separations by hand. 

Banks are not in business to take risks. They rent money and do everything they can to insure the return of their principal as well as the interest. Elaborate rating systems have been developed to measure each company s ability to repay its loans. One criterion is the debt to equity ratio. The higher the debt the more risk in a loan, and the higher the interest rate. 

Once the bids are tabulated for specification compliance in the form of a chart for easy review by all others involved in the project, an overall evaluation should be made, factoring in energy cost, first cost, and time value of money using an established economic equation. Most companies have a standardized formula. If the data are available, total cost of ownership can be estimated, which for larger equipment is considered a good measure for evaluation. 

Interest Expense - Investment in equipment implies that one of two things must occur Either a company must pay for the project out of its own cash, or it must finance the cost by borrowing money from a bank, by issuing bonds, or by some other means. When a firm pays for a project out of its own cash reserves, the action is sometimes called an opportunity cost. If you must borrow the cash, there is an interest charge associated with using someone else s money. It is important to recognize that interest is a true expense and must be treated, like insurance expense. 

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