Base quiz 1- study guide PDF

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The study guide for the first quiz...

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1. financial metrics ○ What are the financial metrics we used? ■ Cumulative Operating Cash Flows (NOCF): ● Total net cash inflows and outflows generated by project over its lifespan a. OCF = Revenue - [COGS + Operations l expenses including depreciation] = Operating Profit i. Note: COGS = Beginning inventory + Purchases Ending Inventory b. (Operating Profit - Income Tax Expenses) + Depreciation expenses re-added = OCF i. Depreciation is re added because it is not incurred immediately. ■ Net Income Margin ● The portion of your revenue which the net income covers ● = Net Income / Revenue ■ Net present Value (NPV) ● Present value of annual future cash flows generated by a project minus initial investment ● If positive within the desired time, accept the project a. = Present value of cash flows - initial investment b. Excel: = (WACC, CF1-CF Final) + CF0 ■ Internal Rate of Return (IRR) ● Rate of return that a firm earns on capital deployed in the project if it receives projected cash flows ● That is, discount rate at which NPV = 0 due to breaking even on initial level on investment; and your rate of return on any subsequent gains a. Compare to the WACC; if IRR is higher, accept the project, if lower, reject it. b. Excel: =IRR(All cash flows, including CF0) ■ Payback Period = the amount of time required for cash inflows to offset initial investment ● Downsides that it doesn’t doesn’t consider time value of money, no accounting of cash flows beyond payback period, and its inherent subjectivity Payback Period = Years needed to reach positive cumulative cash flows + Absolute Value of (unrecovered cost of at beginning of last year / cash flow in following year)

why of financial metrics understand how metrics are used in decision making IRR and NPV are the most popular metrics utilized by Chief Financial Officers especially in large firms ○ Payback approach often used by smaller businesses and industries ○ See other notes on how they are used in individual cases 2. other evaluation criteria metrics ○ market attractiveness ■ Pertains to market size, level of competition in the industry, rate of growth of the market, and the amount of market share a firm can feasibly acquire ● Consolidated market implies oligopoly + hard for new competitors to enter; fragmented market allows for easier competition ○ technical feasibility ■ Criteria used ● Sourcing of new ingredients for product ● How many new processes or new equipment are necessary ● Distribution: Is storing and handling feasible or does it need new investments ● Logistics: Movement of product from factory to storage to retail. ○ strategic fit ■ Brand image often starts with how consumers view the brand - what does it stand for in consumers’ eyes? 3. stage gate ○ applications ○ stage-gate process ■ Stages utilized as stepping stones for new product development; Gates used as checkpoints determining whether to proceed, hold, kill, or recycle a project. Helps preserve quality while also saving on costs incurred throughout the project ● Increases time required for R&D ○ ○ ○

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Characteristics of Stage Gate: ■ Consumer Driven focus = Validate ideas with voice of customer analysis + work on it form the perspective of consumers. ■ Upfront Activities - Sharpening of product and project definition + confirming design early in the process. Minimization of costly last minute changes. ■ Tough Go/Kill Decisions - Willingness to commit to specific projects to ensure the best products get the bulk of resources, and wasteful projects are culled. ■ Truly cross-functional teams ■ Top management involvement - Top management needs to have a level of investment in a strong and visible manner. ○ Pros and Cons of Stage Gate ■ Pros: ● Helps companies weed out bad projects before investment levels are too big to eat ● Increases clarity and alignment between day to day project team + leadership ● Makes for structured process + due diligence -> more product success ■ Cons: ● Takes a long time to get through the process 4. positioning and differentiation ○ Positioning Statements used to directly articulate brand image, and help differentiate a product from competitors by highlighting the needs it covers. ○ For [target audience], [brand] is the [competitive framework] that [provides differentiating benefit] because [reason to believe]... ○ Differentiating can also be done on charts showing spectrums of two desired qualities 5. JNB background ○ Justin was raised as vegetarian + mother liked organics despite inconsistent taste. ■ Law school dropout before moving to Colorado; eventually used Leeds’ business library. ○ Started small; made peanut butter to get vegetarian friendly portable protein w/o excess sugar; made it for him + roommates -> Boulder Farmers’ Markets -> local Whole Foods -> Whole Foods at large + other retailers

Pioneered squeeze packs due to it being a niche unfilled by the nut butter market. Placed in the proteins section rather than the nut butters in some spots(?) ○ Second video: Justin’s espouses renovation, then innovation because people need to prioritize improving what they have as much as innovation. ● Likewise, interdisciplinary cooperation + marketing’s job to get products off the shelf are important factors which help Justin’s function. ■ Amplified via organic sourcing of secondary ingredients, improving transparency with palm oil tracing + farmer relations. ■ Put employers’ payments before him, and built assembly line with disparate machines ○ Acquired by Hormel in 2016. Mutually beneficial for Justin’s b/c of larger access to markets as increased resources for investment; good for Hormel due to having a sustainable/organics focused product partner. ○ Snack Pack was a failure because of… ■ No proper Stage Gate-esque infrastructure for new product development + compressed launch time -> less research; research mostly focused on the concept but not the product’s usability or its price. ■ Had to crank up prices in order to cover bulk sum costs paid to the manufacturer ■ Dippers were of infirm quality and the nut butter’s materials would separate + leak; some of it would also harden too. ■ Targeted to millennials despite the product appearing to have more appeal to children in appearance and packaging. ● Following this they created their Stage-Gate adjacent NPD process (Assess, Initiate, Launch) 6. Communications ○ CATME dimensions ■ contributing to the team’s work ● Seeks to accomplish high quality work consistently + assists their teammates ■ interacting with team members ● Contributes ideas, asks for input + feedback to improve, and encourages/enthuses the team ■ keeping the team on track ● Monitors progress and provides succinct feedback ■ expecting quality ● Believes the team can do great things and tries to motivate the team to do excellent work regardless of reward ■ having relevant knowledge, skills, and experience ● Can perform any role of the team if need be or acquires the skills necessary to do so in the process. ○

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How is the cost of goods sold calculated? ○ #sold * price per unit Is depreciation relevant to taxes? why or why not

Yes, it effects the amount that is taxed. More depreciation-less tax Depreciation also helps increase NPV because it is readded to the operating income and therefore the cash flows ● when wacc goes up, what happens to npv(won't have to calculate)? ○ Npv goes down ● when wacc goes up, what happens to irr? ○ Irr is unaffected ● when wacc goes up, what happens to cumulative net cash flows? ○ It is unaffected as well ------------------------------------------------------------Other questions ○ ○

Are payback period and IRR related? How? Not related, payback period is the amount of time it takes to recover from the initial investment IRR is just how much is the rate of return at which the Net Present Value of an investment becomes zero. net income margin = net profit margin...