Chapter 10.1 Investing in the Free Enterprise System What does Finance mean? Who uses Finance and why? How Savings could be turned into investment? Read this picture in a financial meaning and explain in details. Assume you own a fast food restaurant and you are planning to expand into a new location. - What are the sources of finance you have to finance this expansion? - Do you consider that your expansion is worthwhile? Cost-benefit analysis Is a financial process used to estimate the costs result from doing an action and compares it with the benefits of that action. How to develop a cost-benefit analysis for a certain project? Cost-benefit analysis involves 5 steps: 1- estimate the cost (fc+vc) of expansion. 2-calculate expected revenues or total income from sales 3- calculate expected profit 4- calculate cost of borrowing 5- compare the amount of the expected profit with the cost of finance to know if your venture is warranted or not. Numerical example Refer to slide 5 1- Estimate the value of 7 fixed and variable monthly costs for your new restaurant branch 2- Determine the price of two popular meals sold in your restaurant and then their expected number of sales per week 3- calculate the monthly profit then the annual profits 4- assume that you cannot use internal source of finance and you should to take a bank loan for 3 years to finance the cost you estimated in step 1 with a 5 % compound interest 5- write a detailed judgment shows if it is worthwhile to expand or not.
