ENGM 401
Fundamentals of Engineering Finance
Fundamentals of Engineering Finance
Peter Flynn Peter Flynn
Department of Mechanical Engineering Department of Mechanical Engineering
University of l!erta University of l!erta
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Department of Mechanical Engineering
Engineering Management Group
Course Overview
Course Overview
Course outline:
How social and commercial values interact.
hat management information do financial statements contain.
How do we analy!e and choose investments"
#is$ analysis and mitigation in pro%ects.
*eys to success:
+o the homewor$ to master the tools.
,ee message above.
hen writing: clear, brief and thoughtful.
Thin$ li$e a manager 'for three months only(, and see if you li$e it.
Has opinions that will lea$ out that are no more or less valid
than those of others.
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Department of Mechanical Engineering
Engineering Management Group
Marks
Marks
Erom the time you get the ta$e home pro%ects until you turn
it in, you are on your professional, student and personal
honor not to discuss
The pro%ect
#elated homewor$ assignments
The te-t
The course concepts
with any other person, student or otherwise. Ff you can&t
meet this obligation, drop the course nowG
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Department of Mechanical Engineering
Engineering Management Group
"ociety and #usiness
"ociety and #usiness
,ome systems are very critical in the short term, some have
a long term hori!on.
Einancial analysis:
Can read financial statements and determine the appropriate action.
Einance:
Can raise money from different sources.
Company organi!ation:
*nows the ta- and liability implications of forms of organi!ation.
4usiness law:
*nows the elements of a contract and how to protect intellectual
property.
8D
Department of Mechanical Engineering
Engineering Management Group
+ !ana'er,s skill set (()
+ !ana'er,s skill set (()
:ar$eting:
Can identify a need, target the mar$et for it, understand the benefit
to the customer, and the channels to mar$et.
,elling:
6 critical subset of mar$eting: can discuss Nfeatures and benefits&,
overcome ob%ections, and Nas$ for the orderO.
Human resources:
*nows the basics of benefits, employment law, severance, and
union legislation and contracts.
1ro%ect management:
can plan and then run a one time effort on schedule and budget.
8A
Department of Mechanical Engineering
Engineering Management Group
+ !ana'er,s skill set (-)
+ !ana'er,s skill set (-)
<perations management:
Can budget and operate for steady growth with continuous
improvement, can push responsibility downwards.
1eople management:
*nows management styles and personality variations, can lead
'communicate, motivate, assess, and if needed, discipline(.
,trategic planning:
Can assess synergies and set broad directions.
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Department of Mechanical Engineering
Engineering Management Group
"ociety and values: a su!!ary
"ociety and values: a su!!ary
1erforms activities.
4oo$$eeping:
Thousands of transactions a day, each generating a trail.
The first level of processing is to ma$e a double entry in a %ournal,
chronologically by sub%ect area.
5ntries are then transferred to ledgers that categori!e transactions
into accounts.
2A
Department of Mechanical Engineering
Engineering Management Group
)he conce*t o$ the double entry
)he conce*t o$ the double entry
Cash
+ebt
)8
Department of Mechanical Engineering
Engineering Management Group
#ookkee*in' illustrated (()
#ookkee*in' illustrated (()
#eceiving material
4uying a pump
0ou have a stable s$illed wor$force and you find things for
them to do during slow times rather than lay them off.
as value created"
3=
Department of Mechanical Engineering
Engineering Management Group
8on' ter! assets wearin' out is loss o$ value
8on' ter! assets wearin' out is loss o$ value
Consider:
Total income for the ten years is the same for all three
cases.
+ifferent language:
This year&s depreciation for ta- purposes is called Capital Cost
6llowance 'CC6(
The original cost is called the 6d%usted Cost 4ase
The remaining value not depreciated for ta- purposes is called
2nclaimed Capital Cost '2CC(
;2
Department of Mechanical Engineering
Engineering Management Group
Cash vs. inco!e
Cash vs. inco!e
0ou borrow J) million at ;> for a three year term with e.ual
principal repayments, and combine it with your e.uity to buy
a business.
6 bas$et case.
Cut costs.
6 Nrich uncleO gave you J3==$ to see what you could do.
0ou and some friends spent two years and J/==$ doing
the software.
Can you harvest the benefit" Thin$ li$e a ban$er, and also
thin$ li$e a manager.
The se.uence:
0ou order the material 'terms net )=( at time !ero 'receipt of
order(.
0ou hire the labor force in month two to finish the product.
They ship the product at the start of month three, terms net
)=. 5arnings are boo$ed at this time.
:ost with wealth wish to preserve and grow it, but wealth
and entrepreneurial spirit often don&t align.
+ebt doesn&t get the Nblue s$yO potential: its returns are
fi-ed and low.
The borrower has higher ris$ 'since failure to pay the debt
means the business goes into receivership(, and an
e-pectation of higher return if the business succeeds.
4he ris% avoided !y the lender goes to the investor#
4his *levers+ the investorAs return 8gro&th in &ealth71
!oth up and do&n# %ey financial management
decision9 ho& much de!t(
4he ris% avoided !y the lender goes to the investor#
4his *levers+ the investorAs return 8gro&th in &ealth71
!oth up and do&n# %ey financial management
decision9 ho& much de!t(
8==
Department of Mechanical Engineering
Engineering Management Group
8evera'e
8evera'e
Have the same starting balance sheet: they own the same
assets and got the money from the same sources.
e $now that:
,ources T uses.
88;
Department of Mechanical Engineering
Engineering Management Group
"te* (: the "tate!ent o$ Cash Flow
"te* (: the "tate!ent o$ Cash Flow
,tandard categories:
<perating activities
Fnvesting activities
Einancing activities
Fnventory Turnover:
+ebt #atio:
#eturn on 5.uity:
Cash is:
,torable.
e rent out the use of our money at a price that offsets the
loss of those four factors.
Fnflation
#is$
6pply the half year rule for assets in their first year: reduce
the CC6 by one half.
,ubtract this from the 2CC: the balance is the 2CC for the
ne-t year.
Calculate F##.
1ic$ the pro%ect that has the highest 'least negative( B1S.
"eturn: the higher the perceived ris$, the higher the hurdle
rate. Ff fully e-posed to mar$et price ris$, e-pect a higher
return.
*ey .uestions:
4uy the assets. The company that sells the assets still
e-ists, but its only asset is cash, which is disperses to its
shareholders as a repayment of capital and a dividend.
4hese t&o methods have very different ris% and
ta; implications# @egal and ta; advice is needed#
4hese t&o methods have very different ris% and
ta; implications# @egal and ta; advice is needed#
8A=
Department of Mechanical Engineering
Engineering Management Group
+sset vs. share sale (()
+sset vs. share sale (()
,hare sale:
6sset sale:
Li.uidity
6ccessibility
Eairness
Salue: loo$ for low 1H5 and steady 'usually low( growth
in income.
,ales:
,hare is a bigger signal than absolute sales level. ,low growth
plus loss of share spells trouble.
:argin:
:argins fall as a business matures and competitors focus on price
to buildHhold share.
N1ass it onO is crucial to holding margin.
,KU6:
The natural tendency in good times is to get soft. Too much or too
little softness spells trouble.
#eceivables:
Collect them by nagging N%ust the right amountO.
Fnventory:
+o you need so much '%ust in time("
ill your supplier own it"
Fs e-press shipping a cheaperHbetter alternative"
6void the big hit, write down stale inventory in small doses.
1ayables
Tap this for special needs 'Nthe big saleO(.
4e fair, not foolish.
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Fn Constant 8999J
Salues
89)
Department of Mechanical Engineering
Engineering Management Group
Why does cyclical *ricin' occur?
Why does cyclical *ricin' occur?