WEBVTT NOTE IDER in-house training materials. Captions follow measured phrase audio timings. Hypothetical worked cases; figures are instructional examples. 00:00:00.000 --> 00:00:06.429 Imagine an investment committee considering a processing line. Your task is to identify which 00:00:06.429 --> 00:00:11.940 commercial conditions justify committing scarce capital, and which conditions would reverse that 00:00:11.940 --> 00:00:12.399 recommendation. 00:00:12.519 --> 00:00:19.461 We will construct an incremental cash model, challenge its downside and specify evidence that management must 00:00:19.461 --> 00:00:20.763 obtain before approval. 00:00:20.883 --> 00:00:28.079 Every amount in this case is hypothetical and expressed in millions of Ghana cedis unless stated 00:00:28.079 --> 00:00:33.027 otherwise. Keep a calculator and a blank assumptions register beside you. 00:00:33.147 --> 00:00:39.541 For each number, ask what operational event creates the cash movement, when that movement occurs and who 00:00:39.541 --> 00:00:40.670 can verify it. 00:00:40.790 --> 00:00:49.720 That discipline turns a valuation exercise into an investment decision that another practitioner can 00:00:49.720 --> 00:00:51.634 inspect and reproduce. 00:00:52.304 --> 00:00:58.062 Begin with the counterfactual: what happens if the organisation does not buy the line? 00:00:58.182 --> 00:01:04.402 Existing overhead that continues under either option does not become an incremental cost merely because 00:01:04.402 --> 00:01:06.890 accounting allocates it to the project. 00:01:07.010 --> 00:01:14.357 Conversely, using a building already owned can have an opportunity cost if it displaces a credible rental 00:01:14.357 --> 00:01:19.975 income. Ignore expenditure that cannot now be recovered, but include avoidable future implementation 00:01:19.975 --> 00:01:20.407 costs. 00:01:20.527 --> 00:01:27.388 Model project cash before financing when applying a project discount rate; adding loan proceeds and 00:01:27.388 --> 00:01:32.419 subtracting debt service would mix valuation perspectives. Document these boundaries before 00:01:32.419 --> 00:01:33.333 collecting data. 00:01:33.453 --> 00:01:39.450 Otherwise two competent analysts can calculate different values simply because they are valuing 00:01:39.450 --> 00:01:40.373 different decisions. 00:01:41.043 --> 00:01:47.667 Our base case sells one hundred thousand units annually at one hundred cedis each. Variable cash cost 00:01:47.667 --> 00:01:53.512 is sixty cedis per unit and annual fixed cash cost is one point six million. 00:01:53.632 --> 00:02:00.886 Do not treat those entries as equally certain. Reconcile volume with production capacity, customer 00:02:00.886 --> 00:02:07.104 commitments and achievable utilisation. Derive realised price after discounts, returns and channel 00:02:07.104 --> 00:02:07.622 deductions. 00:02:07.742 --> 00:02:15.026 Separate genuinely variable inputs from costs that change only when another shift or machine is required. 00:02:15.026 --> 00:02:20.490 Give every material assumption a source, observation date, plausible range and owner. 00:02:20.610 --> 00:02:27.039 For new markets, a signed expression of interest is weaker evidence than repeat paid orders. The model 00:02:27.039 --> 00:02:30.443 should make that distinction visible to the decision maker. 00:02:31.113 --> 00:02:39.282 Revenue of ten million less variable costs of six million, fixed cash costs of one point six million and 00:02:39.282 --> 00:02:44.871 depreciation of eight hundred thousand leaves operating profit of one point six million. 00:02:44.991 --> 00:02:52.725 Apply our illustrative twenty five percent tax rate to obtain one point two million after tax. Add 00:02:52.725 --> 00:02:57.275 depreciation back because it reduced profit without consuming current cash. 00:02:57.395 --> 00:03:02.855 Then deduct two hundred thousand of maintenance investment and one hundred thousand of additional 00:03:02.855 --> 00:03:07.925 working capital. The result is one point seven million of annual project cash. 00:03:08.045 --> 00:03:14.323 Notice that adding depreciation back does not make equipment free: its initial purchase appears 00:03:14.323 --> 00:03:20.153 separately. Actual tax allowances, payment timing and loss treatment must replace these simplified 00:03:20.153 --> 00:03:22.395 assumptions in a live appraisal. 00:03:23.065 --> 00:03:30.228 The equipment requires four million today, but the project also needs six hundred thousand tied up in 00:03:30.228 --> 00:03:33.177 receivables and inventories, net of supplier credit. 00:03:33.297 --> 00:03:38.947 Initial cash outflow is therefore four point six million. Each year's additional one hundred thousand 00:03:38.947 --> 00:03:43.467 of working capital is already deducted from operating cash in our bridge. 00:03:43.587 --> 00:03:50.347 After five years the accumulated working capital balance is one point one million. We assume only six 00:03:50.347 --> 00:03:56.312 hundred thousand is recoverable at closure; the remainder is not a hidden extra terminal receipt. 00:03:56.432 --> 00:04:04.048 Build receivable, inventory and payable schedules in a practical model so that sales growth drives funding 00:04:04.048 --> 00:04:10.712 needs. Treat recovery as an evidence question, including ageing, obsolete stock and collection costs. 00:04:11.382 --> 00:04:14.981 Place the initial four point six million outflow at time zero. 00:04:15.101 --> 00:04:21.664 Discount each of five annual receipts of one point seven million by fifteen percent, then discount the 00:04:21.664 --> 00:04:25.910 separate six hundred thousand recovery from the end of year five. 00:04:26.030 --> 00:04:32.922 The resulting net present value is approximately one point four million. This measures value relative to 00:04:32.922 --> 00:04:38.522 our assumed required return, not the balance of money available to pay bills. 00:04:38.642 --> 00:04:45.610 The fifteen percent rate is an illustrative project assumption, not an official public appraisal rate or a 00:04:45.610 --> 00:04:46.839 recommended financing quote. 00:04:46.959 --> 00:04:53.589 Match nominal cash flows with a nominal rate and ensure currency and inflation assumptions agree. 00:04:53.589 --> 00:04:59.776 Monthly timing may materially change the result when construction or sales ramp up slowly. 00:05:00.446 --> 00:05:08.551 Pause the recording and rebuild the cash bridge for eighty thousand units. Retain the same selling price, 00:05:08.551 --> 00:05:14.272 variable cost per unit, fixed cash costs, depreciation, maintenance investment and additional 00:05:14.272 --> 00:05:15.226 working capital. 00:05:15.346 --> 00:05:22.969 Use the illustrative tax rule from the base case. First calculate revenue and total variable costs; then 00:05:22.969 --> 00:05:26.108 work through operating profit, tax and cash. 00:05:26.228 --> 00:05:33.052 Do not reduce every spreadsheet row by twenty percent. Write one sentence explaining why a twenty percent 00:05:33.052 --> 00:05:37.467 volume decline can cause a larger percentage decline in project cash. 00:05:37.587 --> 00:05:43.752 Finally predict whether the original positive net present value will necessarily survive. Your answer 00:05:43.752 --> 00:05:49.917 should identify the mechanism before you inspect the numerical solution on the following slide. 00:05:50.587 --> 00:05:56.752 At eighty thousand units, revenue is eight million and variable cost is four point eight million. 00:05:56.872 --> 00:06:04.219 Deduct fixed cash costs of one point six million and depreciation of eight hundred thousand: operating 00:06:04.219 --> 00:06:10.188 profit becomes eight hundred thousand. After illustrative tax, profit is six hundred thousand. 00:06:10.308 --> 00:06:17.607 Add depreciation, deduct maintenance and extra working capital, and annual project cash is one point one 00:06:17.607 --> 00:06:18.064 million. 00:06:18.184 --> 00:06:24.735 Cash has fallen by approximately thirty five percent despite volume falling twenty percent because fixed 00:06:24.735 --> 00:06:27.356 commitments did not contract with sales. 00:06:27.476 --> 00:06:34.098 Discounting the lower cash receipts and the same terminal recovery gives a negative net present value 00:06:34.098 --> 00:06:36.996 of about six hundred and fourteen thousand. 00:06:37.116 --> 00:06:43.130 This is a commercially meaningful reversal, not merely a smaller spreadsheet output. 00:06:43.800 --> 00:06:50.835 One variable at a time is useful for diagnosis, but a market shock rarely respects that convenience. 00:06:50.955 --> 00:06:57.696 Suppose demand weakens to eighty thousand units, competitive pressure reduces price to ninety cedis and 00:06:57.696 --> 00:07:01.741 imported inputs raise variable cost to sixty six cedis. 00:07:01.861 --> 00:07:09.565 Revenue becomes seven point two million and variable cost five point two eight million. After fixed costs 00:07:09.565 --> 00:07:14.551 and depreciation, operating profit is negative four hundred and eighty thousand. 00:07:14.671 --> 00:07:21.091 Under our simplified rule there is no current tax and no immediate cash refund for the loss. 00:07:21.211 --> 00:07:27.378 Adding depreciation and deducting maintenance and additional working capital leaves only twenty thousand 00:07:27.378 --> 00:07:34.494 of annual cash. Assign joint scenarios a defensible narrative; multiplying unrelated worst cases can also 00:07:34.494 --> 00:07:34.969 mislead. 00:07:35.639 --> 00:07:41.838 Annual cash totals can conceal the moment a business runs out of money. A customer might pay in December 00:07:41.838 --> 00:07:45.101 while imported materials and wages must be paid in March. 00:07:45.221 --> 00:07:51.082 Build a monthly schedule from invoice dates, contractual credit periods, seasonal inventory and 00:07:51.082 --> 00:07:56.943 construction milestones. Carry the opening cash balance forward and identify the most negative 00:07:56.943 --> 00:07:58.747 cumulative position before funding. 00:07:58.867 --> 00:08:04.880 Then test available facilities against actual draw conditions, expiry dates and covenants. A promising 00:08:04.880 --> 00:08:11.324 project can still fail because funding arrives too late or cannot be drawn when needed. 00:08:11.444 --> 00:08:18.420 Keep this liquidity question separate from project value: a loan can bridge timing, but its existence 00:08:18.420 --> 00:08:23.217 does not repair an investment whose underlying commercial economics destroy value. 00:08:23.887 --> 00:08:28.914 A switching value translates sensitivity into a useful research target. 00:08:29.034 --> 00:08:36.593 In this case, annual cash of about one point two eight three million makes net present value zero, holding 00:08:36.593 --> 00:08:39.378 terminal recovery and all other assumptions fixed. 00:08:39.498 --> 00:08:46.762 Within the positive taxable profit region, project cash equals thirty cedis times annual units, less one 00:08:46.762 --> 00:08:48.124 point three million. 00:08:48.244 --> 00:08:54.945 Dividing the required cash plus that fixed amount by thirty gives roughly eighty six thousand one hundred 00:08:54.945 --> 00:08:56.128 and nine units. 00:08:56.248 --> 00:09:03.740 This is the minimum volume implied by this simplified valuation, not a guaranteed safe production target. 00:09:03.740 --> 00:09:08.891 Check whether the formula crosses tax, capacity or cost step changes. 00:09:09.011 --> 00:09:15.385 Then ask commercial researchers whether evidence supports sustainable paid demand above that threshold. 00:09:16.055 --> 00:09:22.300 Do not commission more research merely because uncertainty exists. Compare the decision impact of 00:09:22.300 --> 00:09:27.653 each uncertain assumption with the cost and speed of obtaining better evidence. 00:09:27.773 --> 00:09:34.028 If attainable volume is close to the switching threshold, a paid pilot with representative customers 00:09:34.028 --> 00:09:37.781 may matter more than refining a minor maintenance estimate. 00:09:37.901 --> 00:09:45.356 Specify in advance what result would support launch, redesign or deferral. Where possible, negotiate staged 00:09:45.356 --> 00:09:50.823 equipment orders or a smaller initial capacity to reduce irreversible exposure. 00:09:50.943 --> 00:09:57.401 Such flexibility has practical value, but describe its conditions rather than attaching an unsupported 00:09:57.401 --> 00:09:57.862 premium. 00:09:57.982 --> 00:10:03.516 Assign each evidence gap an owner and deadline so that the investment committee can see what remains unknown 00:10:03.516 --> 00:10:05.053 at the point of commitment. 00:10:05.723 --> 00:10:09.775 For the second exercise, return to the base operating case. 00:10:09.895 --> 00:10:15.192 Suppose an inventory review shows that only three hundred thousand, rather than six hundred thousand, 00:10:15.192 --> 00:10:18.370 can be recovered at the end of year five. 00:10:18.490 --> 00:10:24.214 Calculate the reduction in present value and the revised net present value. Resist subtracting three 00:10:24.214 --> 00:10:29.937 hundred thousand directly from today's value, because the lost receipt occurs five years from now. 00:10:30.057 --> 00:10:36.960 Then write a short explanation of why this correction matters even when the recommendation remains positive. 00:10:36.960 --> 00:10:43.432 Identify one item of documentary evidence you would request to support the revised recovery estimate. 00:10:43.552 --> 00:10:49.748 Pause now and complete both the calculation and the evidence request before advancing to the worked 00:10:49.748 --> 00:10:50.135 response. 00:10:50.805 --> 00:10:54.601 The lost receipt is three hundred thousand at the end of year five. 00:10:54.721 --> 00:11:01.406 Divide it by one point one five raised to the fifth power: the present-value reduction is approximately 00:11:01.406 --> 00:11:03.765 one hundred and forty nine thousand. 00:11:03.885 --> 00:11:10.692 Subtract this from the base net present value to obtain approximately one point two five million. The 00:11:10.692 --> 00:11:16.297 model still indicates positive value under the remaining assumptions, but the margin has narrowed. 00:11:16.417 --> 00:11:22.730 Useful evidence might include an aged receivables schedule with subsequent collections, an inventory 00:11:22.730 --> 00:11:29.528 disposal assessment or enforceable resale quotations. Distinguish a genuine cash recovery from an accounting 00:11:29.528 --> 00:11:30.499 book value. 00:11:30.619 --> 00:11:36.780 Explain the effect separately so that reviewers can see what changed and avoid counting the same 00:11:36.780 --> 00:11:37.551 impairment twice. 00:11:38.221 --> 00:11:45.577 A professional investment note should let a reviewer reconstruct the recommendation without trusting the 00:11:45.577 --> 00:11:51.357 spreadsheet author. State the decision boundary, counterfactual, cash-flow perspective and key 00:11:51.357 --> 00:11:52.408 operating assumptions. 00:11:52.528 --> 00:11:58.999 Show the base case beside an economically coherent downside and a monthly funding requirement. Highlight 00:11:58.999 --> 00:12:03.314 switching values and the evidence supporting assumptions near those thresholds. 00:12:03.434 --> 00:12:10.170 Distinguish verified facts, management estimates and unresolved questions. Recommend approval, redesign or 00:12:10.170 --> 00:12:14.660 deferral with explicit conditions, responsible owners and dates. 00:12:14.780 --> 00:12:21.278 Where implementation proceeds, specify leading indicators such as paid orders, realised margin and 00:12:21.278 --> 00:12:24.277 collection delays that trigger a review. 00:12:24.397 --> 00:12:30.713 This creates a link between appraisal and management action instead of leaving the financial model as a 00:12:30.713 --> 00:12:32.571 document completed only for approval. 00:12:33.241 --> 00:12:40.537 For independent practice, choose a real investment proposal and rebuild one year's cash bridge from its 00:12:40.537 --> 00:12:41.449 operating assumptions. 00:12:41.569 --> 00:12:49.272 Reconcile every adjustment to an identifiable cash event, then inspect the timing of working capital and 00:12:49.272 --> 00:12:56.494 terminal recovery. Create one coherent downside and calculate a switching value for the weakest material 00:12:56.494 --> 00:12:56.976 assumption. 00:12:57.096 --> 00:13:02.610 Explain which further evidence would most improve the decision and what it would cost to obtain. 00:13:02.730 --> 00:13:09.514 Complete the six questions and two applied tasks accompanying this clinic; use their explanations to 00:13:09.514 --> 00:13:12.680 diagnose errors in reasoning, not just arithmetic. 00:13:12.800 --> 00:13:19.398 A good practitioner can defend why an assumption belongs in the model, how it changes the 00:13:19.398 --> 00:13:23.110 recommendation and what evidence would justify revising it tomorrow.