Winnipeg Free Press

Winnipeg Free Press (Newspaper) - May 8, 1973, Winnipeg, Manitoba Winnipeg free press tuesday May 8, 1973 managing a Small business by bar group holding meet at u of m every business is faced with opportunities from Lime to Lime to invest funds in business ventures real estate equipment and other similar Long term projects. All of these have a common characteristic you have to spend Money today but wait for a period of years to realize the benefits. And once a decision is made it is usually not reversible. In the final analysis any Long term investment Deci Sion is a matter of judgment taking into account the circumstances intangible factors and assumptions of each Case. But in each decision one Factor stands out above All others As the most influential the rate of return which can be earned on the investment. For no matter How at Tractive an investment Opportunity May appear its eco nomic justification must be demonstrated in terms of Rale of return. Although this concept is widely accepted Many Man agers have difficulty in applying in in practice. Take the following hypothetical situation for example. You have an Opportunity to invest in a joint venture which will last for four years. Your share of the profits of the venture is estimated to be Over the four years. What will be your rate of return on this investment the most common approach to solve this question is to Divide the estimated profit by the investment. This produces a Rale of return of 80 per cent Over four years or 20 per cent per annul. But if you receive repayment of your investment in addition to your profit Over the four years in t your in vestment base progressively reduced so perhaps you should use an average investment of s25.000 one half of in your calculation. In that Case your rate of re turn would be 40 per rent per annul. Which calculation is Correct 20 per cent or 40 per cent return neither because they fail to take into account the time value of Money. Assume for example that. The original investment of and earned profits of arc repaid As follows year Cash flow 1 2 3 4 total questions and comments from readers on topics discussed in this column Are Welcome and will be answered in subsequent issues of business report. To calculate the True Rale of return in is necessary to use a which takes into account the time value of Money the discounted Cash flow def method. This tech Nique utilizes elementary principles of compound interest to determine a time adjusted rate of the following simple example shows How compound in Terest and present Worth calculations Are used in the def method. If you borrow Al 10 per cell interest compounded annually and undertake to repay the principal and in Terest at the end of three years the total amount you will have to repay can be calculated As follows principal interest first year no 10 per cent 100 amount end of first year 1.100 interest second year at 10 per cent 110 Ami Tel end of second year Hitler Cal third year at 10 per cent 121 amount end of third year thus at the present Lime is Worth three Vicai from now. If on the other hand you wished to find out he present value of an obligation of due three years Trout now Al 10 Pur cent interest the reverse calculation could he made to arrive at this process of convert ing a future value to the present time is known As Dis counting. Of particular significance is the fad that if you know both the present and the future value you can determine what the interest Rale would be to make the two values equivalent in this example 10 per this will enable you to determine the Rale of return. Time adjusted Rale of return can be defined As the maximum rate of interest that could be paid for inc Capi Tal employed Over the life of an investment without incur ring a loss on the alternatively the Rale of re turn can be defined As the discount rate that makes the present value of future benefits equal to the Cost of the in present value tables arc available to simplify Calculi Lions. from such a abcs arc shown below present value 01 is received n years from now years docs 12% or .18 o 2 Ili 24ri 28 i .893 .877 .862 .847 .833 .820 .806 .71m .781. .797 .770 .743 .718 .6114 .672 .050 .630 .610 .712 .675 .041 .603 .551 .524 .500 .477 .635 .5s2 .552 .510 .482 .423 .372 .567 .511 .476 .437 .402 .370 .341 .315 .507 .456 .410 .370 .335 .303 .275 .250 .227 .452 .401 .354 .314 .2711 .2411 .222 .108 .178 .404 .351. .305 .266 .2113 .204 .157 .361 .307 .263 .226 .104 .167 .144 .125 .108 .322 .270 .227 .191 .161 .137 .116 0011 .085 .287 .237 .195 .162 .135 .112 .071 006 .257 .208 .168 .137 .112 .0112 .076 .062 .052 .229 .182 .145 .116 .093 .075 .061 .050 .040 .203 .205 .160 .125 .098 .078 .062 .019 .032 .183 .140 .108 .083 .065 .051 .040 .031 .025 to find uie Rale of return in our earlier example we have to find by trial and error the discount rate Al which the future Cash flows cd Ute the Cost of the investment. The closest approximation is found at a rate of 26 per cell. Group picks officers 10 .820 .751. .683 .621 .564 .513 .466 .424 .385 .350 .319 How to measure rate of return Cash i a. Present year flow Factor value investment 1 Cash flow 1 s20.000 .7114 2 .030 3 .500 4 .3117 the present value factors Are taken from the table under inc 26 per cent column. When multiplied by the amounts of annual Cash flows they produce the present value of these amounts. Although the discount rate used in this example does not exactly equate the investment and inc present value of Cash flows the calculation of the rate of return at 2g per cent is accurate enough for most Pur uses. The More precise Rale is actually 20.4 per cent. To summarize the total amount of All future proceeds from the joint venture is but when these proceeds arc discounted at a 26 per cent Rale their present value today is approximately equivalent to the required invest ment of in other words if Money were borrowed at an effective interest rate of 26 per cent inc Cash inflow from the Ven Ture would exactly repay the hypothetical loan plus the in Terest Over four years. If the Cost of the borrowed Money exceeds 26 per cent the Cash inflow will be insufficient to repay principal and interest. Therefore 26 per cent is the time adjusted rate of return for this venture. In using the discounted Cash flow m c i h o it care should be taken to base the calculations on the Cash flow not on the net income generated by a project. It is unnecessary in fact incorrect to deduct depreciation from operating Cash inflows because the def method automatically provides for the recovery of investment principal. The def method has wide application to a number it investment decisions. It can be used for example to deter mine the justification of purchasing new production equip ment. Suppose hot ye1. Oivo packaging machine which Ami purchased three years ago for it still works Well and will last another five years but it will need a major overhaul in two years Lime which will Cost you its residual Salvage value five years from now is expected to be a More efficient machine has come on the Market which is cheaper than the one you bought. You could buy the new replacement machine for less a Trade in allowance of on your old machine. The new machine will reduce your Cash operating costs by per year will not require any overhauls and will last for five years. It will have a disc sisal value of at the end of five years. Should you buy the new machine what rate of return will you earn on your investment first of All you should identify the Cost information which is relevant to the problem investment new machine Tost of less Trade in of annual Cost saving overhaul saving reduced Salvage value for old machine less for new machine note that neither the original Cost nor inc depreciated value of inc old machine is relevant to Hie problem Hoy Are sunk depreciation of the new machine is also ignored. The next step is to discount the future Cash flows to determine Hie Rale of return. Using the present value Able tile Rah of re inn can be found to he 10 per cent As follows i a. Present amount Factor value investment year 1 1.000 Cost saving year i .862 year i .7-13 years year 4 .551 year 5 8.000 .-176 3.808 overhaul saving year 2 10.000 .743 Salvage value year 5 ci.018 Cash inflows assumed received at end of each year the Rale of 16 cent would be found by trial and error. You May first of All try a rate of .12 per cent and find it to be Loo Low. You May Ihen iry a Rale of 18 per cent and find it to be too High. Eventually you will find 1c per cent to be he discount Rale rate of return at which tic discounted Cash flows Are equivalent to the original in Vest men. Many other capital investment problems can he solved using the def method. Properly used the def method can he an invaluable management look for increasing prof its. Or. Brookes h a Winnipeg chartered accountant with a Cloite Haskins Anil Sells. The following officers elected for the year 11173-7.4 at the annual Gener Al meeting of the personnel association of greater Winnipeg president r. Campbell Simpsons scars Ltd. Vice president John Chilton Curling breweries Ltd. Vice president Brian Sander son Bristol aerospace Ltd. Secretary. Mrs. Merle i Laffner Batons treasurer if. Mcmullin Royal Bank University representative g a r 1 y Nuttal associate professor. University o f Manitoba acco Mcclation director mrs. Joanne Ca Meron James Richardson and sons Ltd., education director inn Gordon great West life Assurance inc b e r s h i p director Bruce Cromb Hudson s Bay com p a n y publicity director George Scott Bank of Mon Treal past president r. Csc Etc Manitoba govern ment. Office space available chamber of Commerce building and Union Tower building Ideal location direct Access from covered Parade Lom Birj main Man fld by Northwest Trast property management department 947.0631 advising the Small Busi Ness Man is the theme of inc 14th a n n u a 1 Isaac Pilblade lectures on continuing Legal education to be presented by the Manitoba bar association at Robson Hall at the University of Manitoba Friday and Satur Day. The lectures arc part of the Legal profession s pro Gram to Advance the Educa Tion of lawyers already in practice. The lecture covers such topics As Purchase and Sale of a Small business taking in a partner retire or society names new president David Liffey is the Mani Loba president of Canadian Public relations society for or. Roffey manager of corporate co Munica t i o n s for investors Syndicate limited was elected recently at the society s annual meeting in w i n n i p e he succeeds until Drew Community re lations director for the United Way of greater Winnipeg. Ted Holland up news representative was named vice president with Barrie Stephenson Public relations manager Winnipeg Hydro retaining the position of Secretary treasurer. New directors Are Robert Haiti Stock partner with Hain Siock and Hewer Ltd., and Kent Morgan regional in formation officer Central mortgage and housing corporation. Mint of uie owner and Transfer of assets to the heirs when he Dies. Taking part apart from lawyers Are two chartered accountants and a banker Eldon k. Brown of the Winnipeg office of Price waterhouse an co. John g. Mcfarlane o f Burgh Findlay me Farlance and co., and Keith k. Palmer divisional credit manager of the Bank of Montreal in Winnipeg. Seven prominent members of the Manitoba Legal profession Are serving As speakers Harold Buch Waltl author of a number of papers and articles on Taxa Tion and estate planning Allan p. Cantor vice chair Man of the commercial consumer and corporate Law Section of the Canad an bar association Irwin Dorfman a past president of both the Manitoba bar association and the Law society of Manitoba and a former governor of the Ca n a d i a n tax foundation Martin Freedman lecturer for the estate planning Institute and the Canadian Institute of chartered accountants Duncan j. Jessimay a member of a special com Mittee of the Manitoba bar association to consider Revi Sion of the Manitoba con p a n i c s act Archie r. Micah past president of the Manitoba bar association and former lecturer in corporation Law for the Law society Manitoba bar admission course and Mel Ville Neuman former lec Turer in corporation Law for the Law society of Mani Toba bar admission course and a contributor to Ziegel studies Canadian company Law. Ask for this Booklet to learn How you May obtain an ids loan to assist in starting modernizing or expanding your business anywhere in Canada. Regional office 161 Winnipeg Man. R3b 0y4 i Brandon re rent a Whatton Lett Bridga Edmonton Grande farm facts and food prices when demand exceeds Supply prices Rise Low meat prices particularly for hogs in 1970 and 1971 forced Many Farmers out of production. Domestic and foreign demand is now greater than the Supply. Similarly the beef production Cycle is particularly Long and orderly marketing conditions Are very important in minimizing the Farmer s production costs. Consumer Boycotts could disrupt the Market and make it difficult for Farmers to increase supplies sufficiently to meet Canadian needs and lower unit costs. Rising incomes outpace rising food costs a recent study by the grocery product manufacturers of Canada indicates that from 1967 to 1972, All items of consumer Index moved up while the food Price Index moved up average hourly earnings in manufacturing organizations increased 51.5% in the same period. Thus in Canada a smaller proportion of take Home pay was spent on food than at any previous period. At present food costs represent 18% of the average income. Average Manitoba farm income below welfare level Manitoba farm incomes increased significantly from 1971 to 1972. However the average annual farm income in Manitoba was Only in 1972. This is Well below the per annul designated for welfare recipients in towns and cities. Consumer and producer need each other primary producers of food Farmers depend on Consumers to Purchase food at a Price which is fair to both. Consumer groups Are urged to work More closely with the already Well established Farmer producer Market groups to achieve a greater degree of under standing Between producer and consumer and to help maintain food prices at a reason Able level. Are government controls the answer failing All else prevention of High food Cost increases can possibly be accomplished if All segments of the Economy including wages and prices Are placed under a system of government control. Is such action Worth the resulting bureaucratic control Manitoba Pool elevators Call 943-9331 to buy or sell through the classified ;