What you will be able to do
- Reconstruct incremental project cash from operating assumptions.
- Calculate downside value, liquidity needs and switching values.
- Translate uncertainty into evidence requests and conditional investment decisions.
Before you begin: Basic understanding of revenue, costs, profit and spreadsheet arithmetic.
Compare the project with a credible alternative
Begin with the counterfactual: what happens if the organisation does not buy the line? Existing overhead that continues under either option does not become an incremental cost merely because accounting allocates it to the project. Conversely, using a building already owned can have an opportunity cost if it displaces a credible rental income. Ignore expenditure that cannot now be recovered, but include avoidable future implementation costs. Model project cash before financing when applying a project discount rate; adding loan proceeds and subtracting debt service would mix valuation perspectives. Document these boundaries before collecting data. Otherwise two competent analysts can calculate different values simply because they are valuing different decisions.
Investment also finances the cash cycle
The equipment requires four million today, but the project also needs six hundred thousand tied up in receivables and inventories, net of supplier credit. Initial cash outflow is therefore four point six million. Each year's additional one hundred thousand of working capital is already deducted from operating cash in our bridge. After five years the accumulated working capital balance is one point one million. We assume only six hundred thousand is recoverable at closure; the remainder is not a hidden extra terminal receipt. Build receivable, inventory and payable schedules in a practical model so that sales growth drives funding needs. Treat recovery as an evidence question, including ageing, obsolete stock and collection costs.
Positive value does not prevent a cash crisis
Annual cash totals can conceal the moment a business runs out of money. A customer might pay in December while imported materials and wages must be paid in March. Build a monthly schedule from invoice dates, contractual credit periods, seasonal inventory and construction milestones. Carry the opening cash balance forward and identify the most negative cumulative position before funding. Then test available facilities against actual draw conditions, expiry dates and covenants. A promising project can still fail because funding arrives too late or cannot be drawn when needed. Keep this liquidity question separate from project value: a loan can bridge timing, but its existence does not repair an investment whose underlying commercial economics destroy value.
Write a recommendation that can be challenged
A professional investment note should let a reviewer reconstruct the recommendation without trusting the spreadsheet author. State the decision boundary, counterfactual, cash-flow perspective and key operating assumptions. Show the base case beside an economically coherent downside and a monthly funding requirement. Highlight switching values and the evidence supporting assumptions near those thresholds. Distinguish verified facts, management estimates and unresolved questions. Recommend approval, redesign or deferral with explicit conditions, responsible owners and dates. Where implementation proceeds, specify leading indicators such as paid orders, realised margin and collection delays that trigger a review. This creates a link between appraisal and management action instead of leaving the financial model as a document completed only for approval.
Apply the method
Work through each task before opening the model answer. Compare your reasoning with the review criteria. Written answers stay on this page and clear when you leave or reload it.
Applied task 1
Show model answer and review criteria
Base cash is 1.70 million and NPV 1.397 million; lower-volume cash is 1.10 million and NPV −0.614 million. Verify sustainable paid demand around the approximate 86,109-unit switching value and inspect cost/tax thresholds before approval.
- Reconciles profit to cash without double-counting depreciation or capital expenditure.
- Discounts five annual flows and the separate year-five recovery consistently.
- Links a specific evidence request to a decision threshold and owner.
Applied task 2
Show model answer and review criteria
Schedule invoice collections, materials, payroll and investment by month, roll forward cash and test committed facility conditions. Reconcile terminal receivables and inventory to recoverable cash using subsequent receipts or supported disposal values; halving recovery reduces NPV by 0.149 million.
- Distinguishes valuation from timing and funding availability.
- Identifies evidence and responsible owners for recovery assumptions.
- States a management response to a projected cash deficit.
Method references
- HM Treasury — The Green Book (2026)
General appraisal principles: options, uncertainty and sensitivity. Original hypothetical commercial calculations; the 15% rate is not the Green Book social discount rate.