The entrepreneurs always confronted with questions whether to take a particular order or not ; whether to expand the business by further investment or not; whether to take up a particular project or not.

3. Break-even Analysis
 This concept helps us know at what quantity of
production/sales we incur no loss nor gain any profit.
 The formula for Break Even point
= Fixed Cost/ Sales price per unit – Variable cost per
unit.
 Illustration: Sales price= Rs. 100; Variable cost = Rs.60,
Fixed Cost = 25,000/-
 Therefore Breakeven quantity = ????

4. Marginal Revenue Pricing
 This is extension of Break even analysis.
 Revenue earned by selling additional unit, after having
covered the fixed expenses, is called Marginal
Revenue.
 Illustration : Transport operator incurs Rs17,000/ as
fixed operating expense per trip. Per passenger
variable cost incurred is Rs.50. The ticket fare is
Rs.500.Total capacity is 35 seats. Current occupancy is
34. What price you can offer under marginal revenue
pricing concept???

5. Marginal Revenue Pricing
 Exercise :
 Price =20; Variable cost is Rs.10; fixed overhead per
month Rs.10,000/ You are producing 1000 units per
month. Break even is achieved. Now additional order
of 100 units are ordered by another party for Rs.15/-
can we accept? What would be the net effect?

6. Capital Budgeting – Payback Method
 Payback Analysis :
The investment which gives back quickly is generally
considered for investments, other things being
equal.
How to calculate payback method :
Illustration : Entrepreneur wants to invest Rs. 250,000 in
one of the below 2 projects, which project should he
choose based on Pay Back method
( Cont…..)

7. Capital Budgeting – Payback Method
(Cont..)
Projected Payback :
Project A Project B
 Year 1 100,000 20,000
 Year 2 80,000 40,000
 Year 3 70,000 50,000
 Year 4 30,000 60,000
 Year 5 20,000 80,000

8. Capital Budgeting – Payback Method
(Cont..)
 Project A takes about 3 years to pay back the
investment while Project B takes about 5 years to pay
back.
 Applying Pay back method the entrepreneur should
select Project A as it has shorter pay back period.

9. Capital Budgeting – Net Present Value
 Net Present Value :
 By this method value of future cash flow is discounted
by a chosen discounting factor, which is represented
by interest rate / Inflation rate.
 The formula is :

10. Capital Budgeting – Net Present Value
 Initial Investment 50,000;
Cash Flow 10% Discount factor Present value
Y1 25,000 0.9091 22,728
Y2 20,000 0.8264 16,528
Y3 15,000 0.7513 11,270
Y4 1,000 0.683 683
Y5 550 0.6209 341
61,550 Present Value of Cash flow 51,549

11. Capital Budgeting – Net Present Value
 Initial Investment 50,000
 Net Present Value 1,549
You select the project which offers higher NPV for the
same discounting factor.

12. Ratio Analysis
 Return on Investment (ROI)= Net Income
Owner’s Equity
Why this ratio is calculated?
 Return on Assets = Net Income
Total assets

13. Ratio Analysis
 Net profit Margin : = Net Income
Sales
 Asset Turnover Ratio = Sale/Total Assets
 Average Collection period : Accounts Receivable X 365
Annual Credit Sales


14. Ratio Analysis
 Average age payables = Average Accounts Payable x 365
Purchase
 Inventory turnover = Cost of Goods Sold
Average Inventory

15. Ratio Analysis
 Current Ratio = Current Assets
Current liability
 Debt Servicing Ratio : Net Income
Interest Expenses
 Cash Flow to Liabilities : Operating Cash Flow
Total Liabilities