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Chapter 16 -
Accounting, Economicsand Financial
Management Basics
Management for Engineers,Technologists and
Scientists
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Study Objectives - Ch. 16
explain product demand and supply
explain the function of the variousfinancial statements
differentiate between different
types of costs apply the CVP method in decision
making
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Chapter 16
Engineers are involved in the following
financial management tasks (p. 336):
y Evaluating projects
y Planning and controlling budgets
y Cost estimatingy Analysing of economic risks
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Chapter 16 - Models
y Bookkeeping Model - classifying, recording,and reporting financial transactions
y Cost-Volume-Profit Model: Decisionmaking regarding selling price, sales volume& product mix.
y
Budget and performance analysis model -Ch. 17
y Net Present Value Model: Capitalinvestment decisions.
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Chapter 16 - Economics
Economics is the science which studies
human behaviour as a relationshipbetween ends and scarce means whichhave alternative uses.
(Lord Robbins)
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Chapter 16
Example: Why the cost of an asset
may be a poor indicator of its value
A mine shaft system may cost R2 billion
to develop but it may have no or verylittle economic value if it is notproviding access to an ore body thatcan be mined at a profit.
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Chapter 16
Factors to consider when evaluating an
asset for investment purposes (p.338): amount of expected return or income
timing of income
risk associated with return Invest in a project when (p. 338):
y NP V > 0
y IRR > hurdle rate
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Chapter 16
Economic efficiency = worth / cost;
must be greater than 100% Resources used by organisations:
land (natural resources)
labour (operate machines)
capital (e.g. machinery & equipment)
enterprise (entrepreneurs)
knowledge (primary resource?)
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Chapter 16
Law of diminishing returns (p. 339)
Returns to scale (p. 340) Opportunity cost (p. 341)
When evaluating a number of projects
y Which projects will create wealth?
y Which projects should the companychoose if the necessary capital is notavailable to invest in all those with apositive net present value?
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Quantity demanded of
product X (p. 341) Qd,x = Qd,x(Px, Y , P1, ,, Pn, T, A)
where: Px is the price of product x
Y is the level of household income
P1, ..., Pn refers to prices of other related
products e.g. substitutes and complements T refers to the tastes of consumers
A refers to advertising
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Quantity of product X that
businesses will supply Qs,x = Qs,x(Px, P1, ,, Pn, F1, , Fm, T, Z)
where: Qs,x refers to the quantity supplied
Px refers to the price of product X
P1 - Pn = prices of other products F1 - Fm = factors of production costs
T refers to the state of technology
Z - other factors
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Chapter 16
Difference between:y
Balance sheety Income statement
y Cash flow statement
The effect of the following
transactions on cash flow (p. 346): An increase in stock
An increase in debtors
An increase in creditors
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Balance sheet
C u r r e n t a s s e t s
y I n v e n t o r i e sy D e b t o r sy P r e p a id a c c o u n t sy D
e p o s i t sy C a s hy S h o r t - t e r m
i n v e s t m e n t s
C u r r e n t l ia b i l it ie s
y S h o r t - te r m l o a n sy T r a d e c r e d i to r sy T a x p r o v i s io n sy B a n k o v e r d r a f tsy D i v i d e n d s t o b e
p a i d
y I n t e re s t d u e
F i x e d a s s e t s
y La n d
y B u i l d i n g sy P l a n t sy V e c h i c l e sI n t a n g i b l e a s s e t s
y P a t e n t s
E m p l o y m e n t o f c a p i t a l
C a p i t a l e m p l o y e d
L o n g t e r m l i a b i l i t i e s
y M o r t g a g e o n l a n dy B o n d o n b u i ld i n gO w n e r s e q u i t y
y S h a r e c a p i t a ly R e s e r v e s
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Nature of cost
Fi . 1 . r s t ti v ri l sts (p. )
l
ri l sts
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Nature of cost
Fig . 16 .8 Representat ion of f ixed costs (p. 347 )
Rand
Volume
Fixed costs
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CVP Example
B l u e S k y A i r w a y s p r o v i d e s a d a i l y s e r v i c e b e t w e e n
J o h a n n e s b u r g a n d D u r b a n . T h e a i r c r a f t h a s a c a p a c i t y o f
2 2 0 p a s s e n g e r s a n d e a c h t r i p c o s t s t h e c o m p a n y R 7 0
0 0 0 , r e g a r d le s s o f t h e n u m b e r o f p a s s e n g e r s . A d d it io n a l
c o s t s a r e R 6 0 p e r p a s s e n g e r (b a g g a g e , c a b in s e r v ic e s a n d
b o o k in g c o s t s ) .
a ) I f B l u e S k y A ir w a y s c h a r g e R 4 5 0 p e r p a s s e n g e r ,h o w m a n y p a s s e n g e r s d o t h e y n e e d t o b r e a k e v e n
w it h e a c h f l ig h t ?
b )
R e s e a r c h s h o w e d t h a t p l a n e s a r e a c t u a l l y c a r r y i n ga n a v e r a g e o f 8 0 % o f i t s c a p a c i t y o f p a s s e n g e r s .
W h a t p r o f it (o r lo s s ) is r e a l i s e d a t 8 0 % c a p a c i t y a n d
R 4 5 0 p e r t ic k e t ?
c ) W h a t p r ic e s h o u ld B lu e S k y A ir w a y s c h a r g e if t h e yw a n t t o r e a l is e a p r o f i t o f R 1 0 0 0 0 0 o n e a c h t r ip (a t
8 0 % c a p a c it y )?