Finance

Lecture # 2

Jan H. Jansen

E-mail: jan.jansen@han.nl

Wind energy

Minor Wind Energy Project Management

Project

Finance

Law

Supply Chain Management

Construction

Mechanical Engineering

Energy

Minor Wind Energy Project Management

Project

Finance

Law

Supply Chain Management

Construction

Mechanical Engineering

Energy

Programme

Lecture Topic

1 Overview Energy Market

2 Annual Reports & Management Accounting

3 Project Financials, Value Propositions & Business Model

4 Business plan I

5 Business plan II

6 Case study WEPM

7 Case study WEPM

8 Written Exam

Energy Market

• ElectricityOil• ElectricityGas• ElectricityCoal• ElectricityNuclear• ElectricityWind• ElectricityHydro• ElectricitySolar• ElectricityBiomass• ElectricityGeothermal

Overview Energy Market

• Macro level– Energy prices (P)– Energy demand (Q)

• Meso level / Industry level• Micro level / Firm level

Supply Chain

Wind Energy Farm

DistributionSuppliers

Value Chain

Wind Energy Farm

Input > Throughput > OutputProcurement > Production > Sales

Annual reports

• Market & Strategy• Corporate Governance• Corporate Social Responsibility (CSR)• Sustainability• Financial ratios

– Profitability– Liquidity– Solvency– Activity– Z-score– Dupont

Analyses Annual ReportSustainable Energy Industry

# Company Team0 Van Oord1 Eneco2 Vestas3 ABB4 RWE5 GE6 Siemens7 Nordex8 BP9 Shell

Decision levels

Strategical

Tactical

Operational

Decision levels

Strategical

•Investment decision (where, when & why)

Tactical

•Infrastructure

•Process design

•Organisation structure

Operational

•Business processes

•Maintenance

The role of decision maker (manager)

Past Present Future

Bookkeeper

Manager

Economic Trade-Off (ETO)

Revenues

Costs &

Risks

Economic Trade Off’s

• TCO approachΔ+ InvestmentΔ- Maintenance costs

Make/Buy DecisionsOutsourcing Insourcing

Quality costs

Economic Trade-Off’s

• Quantitative trade-off:– Costs– Revenues

• Risk trade-off• Qualitative trade-off

– Hidden costs– Hidden revenues

Economic Trade-Off’s

• Relevant costs:

Future costs that vary with the decision under consideration

• Opportunity costs– The cost of being deprived of the next best

option• Future outlay costs

– Cost that vary with the decision

Economic Trade-Off’s

• Irrelevant costs:

Future costs that do not vary with the decision under consideration

– Past costs• Costs that were incurred as a result of a past

decision (sunk costs) – Future outlay costs

• Cost that do not vary with the decision

Example of opportunity costs

Let us assume that you own a car, for which you

paid a purchase price of € 10,000.

You just have been offered € 12,000 for this car.

What are the opportunity costs by keeping this car?

Opportunity costs

‘Opportunity cost is the contribution to operating

income that is forgone or rejected by not using a

limited resource in its next-best alternative use’

Opportunity costs can not be found in the financial

accounting records!

The role of decision maker (manager)

Past Present Future

Bookkeeper

Manager

Metaphor of the pipeline

Costs of Quality

Economic Trade Off:

• Extra revenues – More competitive– Higher customer satisfaction

• Initial investment & Extra costs• Cost savings

ActualPerformance

Customer

SatisfactionDesign

Specifications

ConformanceQualtiy

Quality ofDesign

Quality gap

Actual performance vs. Customer satisfaction

– Conformance Quality» Design specifications vs. Actual

performance– Quality of Design

» Customer satisfaction vs. Design specifications

Metaphor of the pipeline

Input

Output

Throughput

I II

III

IV

Costs of Quality

I. Prevention costs

II. Appraisal costs

III. Internal failure costs

IV. External failure costs

Prevention costs

Costs incurred in precluding the production of products that do not conform to specifications

Prevention costs (examples)

• Design engineering• Process engineering• Quality engineering• Supplier evaluations• Preventive equipment maintenance• Quality training• New materials used to manufacture products

Appraisal costs

Costs incurred in detecting which of the individual units of products do not confirm to specifications

Appraisal costs (examples)

• Inspection• On-line product manufacturing and process

inspection• Product testing

Internal failure costs

Costs incurred when a nonconforming product is detected before it is shipped to customers

Internal failure costs (examples)

• Spoilage• Rework• Scrap• Break down maintenance• Manufacturing / Process engineering on internal

failure

External failure costs

Costs incurred when a nonconforming product is detected after it is shipped to customers

External failure costs (examples)

• Customer support• Transportation costs• Manufacturing / Process engineering• Warranty repair costs• Liability claims• Complaints department

Literature

• Management Accounting for Decision Makers, Atrill cs• Management Accounting, Kaplan cs• Advanced Management Accounting, Kaplan cs• Cost Accounting, Horngren cs• Fundamentals of Corporate Finance, Ross cs• Fundamentals of Corporate Finance, Brealy cs• Multinational Business Finance, Eitman• Wind Energy (Fundamentals, Resource Analysis and

Economics), Sathyajith• Wind turbines (Fundamentals, Technologies, Application,

Economics), Hau