Financial Principles for Business Investment and Funding

Investment Project Analysis

Initial Disbursement

The initial disbursement is the payment amount required to purchase the active elements needed for a project.

Annual Cash Flow

The annual cash flow of an investment project is the difference between the cash receipts and payments a company makes within a specific period.

Residual Value of an Asset

This is the value of an investment asset at the end of its useful life. This residual value is included as a cash receipt in the final period's cash flow.

Investment Valuation Methods

Statistical Methods

These methods, such as the payback period, assume that the value of money is constant over time. They are typically used only for a preliminary assessment of an investment.

Dynamic Methods

Dynamic methods take into account the timing of cash inflows and outflows. They recognize that equal amounts of money have different values at different times due to factors like inflation, which changes the purchasing power of money.

Internal Rate of Return (IRR)

The Internal Rate of Return is the discount rate ("i") that makes the Net Present Value (NPV) formula result in zero.

Sources of Corporate Financing

Own and Other Resources

Own Resources (Equity)

These are the company's capital and reserves. They do not have to be returned as long as the company exists. In the case of failure, these resources are distributed among the company's members.

• Capital: Contributions made by members during the company's formation and for subsequent expansions.
• Reserves: Profits from business activities that have not been distributed but are retained within the company to enable new investments or company growth.

Self-Financing

Many companies can obtain more resources than required through self-financing before using external financing.

• Amortization (Depreciation): Another form of self-financing where funds from the company's results are retained within the company.
• Provisions: Similar to amortization, these are funds set aside from profits.

Note: Dividends are the portion of profits distributed among the members.

External Resources (Debt)

When companies need money and banks do not offer loans or the conditions are not favorable, they may issue bonds or obligations.

Short-Term Financing

Companies sometimes use short-term financing, which includes:

• Short-term loans
• Bank credits
• Discounting of commercial paper
• Factoring
• Commercial credit

Medium or Long-Term Financing

• Bonds and Obligations: Financial instruments issued by companies. They are returned after an agreed-upon term with interest.

Leasing

Through this system, a company can use an element necessary for its activity in exchange for a rental fee. The process involves three parties: the company supplying the goods, the company using the asset, and the leasing company.