Cost benefit analysis; A comparison analysis of two companies.
Graduate Presenter: Aaqib Ashraf Mohammed ‘17
Mentor: Dr. Regina Pope-Ford
Example: Comparison analysis of Ford motors to General motors.
Introduction
 Cost benefit analysis is an economic evaluation
technique that measures all the positive and negative
consequences of an intervention or program in
monetary terms.
 The valuation of all program outcomes in monetary
units allows decision makers to directly compare
the outcomes of different types of interventions.
Methodology
The analysis has been done based upon the
information collected via internet and using the
techniques suggested in Michael S. Bowman’s book.
The formulas considered to acquire the results are as
follows:
Accounting equation:
Assets = Liabilities + Owners’ equity +
Revenue - costs
Balance Sheet for Ford Motor Company for Fiscal Year
Jan-Dec 2016
Liabilities and
$ stockholders'
$
Assets
Million equity
Million
Current assets
Liabilities
Cash
Current liabilities
Cash and cash
15905 Account payable
21296
equivalents
Short-term
22922 Short-term debt
49669
investments
Other current
Receivables
57368 liabilities
19316
Total current
Inventories
8896 liabilities
90281
Other current assets
3368 Long-term debt
93301
Deferred
Total current assets 108461 liabilities
691
Long term
investments
53228 Misc. stock
96
Fixed assets
Good will
Intangible assets
Other assets
Deferred asset
charges
Depreciation: Reducing fixed assets such as
equipment or buildings in value over time. The
reduction in value is entered as an expense in the cost
category of the income statement.
Total assets
Straight-line Depreciation: A depreciation method
that reduces the asset at a constant rate over its life.
Annual Dep(SL) = D(SL) = First cost – Salvage
value / Life
= P-S / n
Company’s name
Ford motor
company
General motors
Depreciation
method
Straight line
depreciation
Straight line
depreciation
Depreciation
value (2016)
9.020 Billion
9.820 Billion
Break even analysis: It is used to determine when
your business will be able to cover all its expenses
and begin to make a profit.
Break-even Point = Fixed Costs/ (Unit Selling
Price – Variable Costs)
60901 Minority interest
0 Common stock
Additional paid-in
0 capital
5656 Retained earnings
17
41
Financial Statements
Balance sheet: A statement
which shows Assets equal to
liabilities plus owners’ equity at a
point of time.
Cash flow statement: It shows the
receipts and disbursements to the
cash account – the operating,
investing, and financing flows
Income statement: A profit and loss
statement which equals profit or net
income over a period of time.
21630
15
Income Statement for General
motors for Fiscal Year Jan - Dec
2016 in USD Millions
Revenue
166380
Cost of revenue
136770
Gross profit
29610
Sales, General and
19090
administrative
Other operating
expenses
Operating income
2440
Interest Expense
5720
Income before
11680
taxes
Net income
9430
Net income
available to
common
9430
shareholders
1122
9705 Treasury stock
Accumulated
other
comprehensive
7013
income
Total stockholders'
29170
equity
Total liabilities
and stockholders'
237951 equity
237951
Cash flow statement for Ford
Motor Company for Fiscal Year
Jan - Dec 2016 in USD Millions
Net income
4596
Depreciation &
8717
amortization
Investments losses (gains)
Accounts receivable
-2855
Inventory
-815
Accounts payable
Other working capital
6595
Net cash provided by
19792
operating activities
Acquisitions, net
Purchases of
-6992
investments
Sales/Maturities of
37585
investments
Other investing
-55945
activities
Net cash used for
-25352
investing activities
Net Cash Flow
Net cash flow
1633
Income Statement for Ford
Motor Company for Fiscal Year
Jan - Dec 2016 in USD
Millions
Revenue
151800
Cost of revenue
135488
Gross profit
16312
Sales, General and
12196
administrative
Total operating
12196
expenses
Operating income
4116
Interest Expense
894
Income before taxes
6796
Net income from
continuing
operations
6376
Net income
4596
Net income available
to common
shareholders
4596
Balance Sheet for General motors for Fiscal Year
Jan-Dec 2016
Liabilities and
$
$
stockholders'
Assets
Million equity
Million
Current assets
Liabilities
Cash
Current liabilities
Cash and cash
14570 Short-term debt
27860
equivalents
Short-term
11840 Accrued liabilities
3070
investments
Total current
Receivables
31700 liabilities
85180
Deferred
Inventories
13790 liabilities
35090
Total current
76280 Common stock
0.015
assets
Gross property,
plant and
26170
equipment
88310 Retained earnings
Accumulated other
Accumulated
comprehensive
17960 income
44080
depreciation
Total liabilities
and stockholders'
Total assets
221690 equity
221690
Operating cash flow
Capital expense
Sale of fixed assets
Purchase of investments
12620
29170
2560
15440
Exchange rate effect
Net change in cash
Free cash flow
Net cash used for investing
activities
Net cash flow
2130
2170
12620
1,5
1,2
0,89
0,5
0
FORD
GENERAL MOTORS
The quick ratio is an
indicator of a
company’s shortterm liquidity.
Quick Ratio
1,1
1,2
1
0,73
0,8
0,6
0,2
0
FORD
-35643
2172
Current ratio is
a liquidity and efficiency
ratio that measures a firm's
ability to pay off its shortterm liabilities with its
current assets.
Current Assets/ Current
Liabilities
0,4
Quick ratio = (current assets – inventories) /
current liabilities
General
motors
166.38
139.388
70.35 &
96.03
2.32
Billion
Total Revenue (TR)
Total Cost (TC)
Fixed & Variable Costs (FC &
VC)
Cash flow statement for General motors for Fiscal Year
Jan - Dec 2016 in USD Millions
Cash Flows From Operating Activities
Net income
9270
Depreciation & amortization
10150
Current Ratio
1
Ford
Motors
151.800
125.100
60.98 &
90.32
2.22
GENERAL MOTORS
Conclusion
• The annual return on investment of General motors
(6.78%) is higher than of Ford (2.47%) and the
overall cash flow general motors is more investible
and profitable. But results also depend upon the
intangibles and changing market scenarios.
• The break even point after which the companies
make profit is also known.
Acknowledgement.
I am highly obliged and grateful to Dr. Regina PopeFord, my mentor and faculty advisor for guiding me
throughout the course study.
References:
1) Applied Economic Analysis For Technologists, Engineers, and Managers.
Book by Michael S. Bowman.
2)http://www.marketwatch.com
3) http://www.nasdaq.com/symbol
4)http://www.investopedia.com