The Illinois State Collegiate Compendium, Academic Lecture in Business and Economics.
This is Business Finance, FIL 240 for Autumn semester 2023.
Today, Forecasting Cash Flow.
As I said, we will have a surprise quiz on Wednesday.
It will have a few different exciting components.
And I do want to bring up one quick, couple of last points about weighted average cost
of capital.
The quiz will be primarily on that.
And then this week is Forecasting Cash Flows.
And then we go into special topics.
And then it's over, a few special topics, and then it's over with.
And the dream that has been this class will end.
Or something like that.
Now here we go.
The numbers for the day.
And it is a rather odd day on the street.
Not sure how to explain it, but you've got a sort of a tepid market.
They're all positive.
But there was a drop.
And I'm not sure what spooked the markets.
As you can see, the Dow and the S&P 500 and the NASDAQ were all up and then they went
down and up.
And then they all dipped into negative territory for a while.
For about an hour or so, hour and a half.
And then they came back up again.
But that's barely anything.
Dow is up a lousy four hundredths of a percent.
S&P 500 is not much better.
Six hundredths of a percent.
And the Dow, or rather the NASDAQ, is up.14 percent.
It's just not an exciting day on the street at all.
And what that means, it's kind of hard to say.
But interestingly enough, crude oil had a bull surge and then it dropped back down to
about 81.
It's still below the trading range that it had established, 82 to 88.
But the price of gasoline has suddenly gone up at the pump.
Most likely because the supply of gasoline is being sacrificed somewhat to get more of
the distillates into the market.
But it's kind of hard to say.
Now here's the interesting part.
The 10-year bond.
The yield is up, or rather, yeah, the yield is up so the price is down.
Now that surge in the yield kind of doesn't mean great things for the economy.
It's not a disaster or anything.
But you've got the yields are up, which means prices are down, which means that investors
are getting out of bonds.
And over here, they're not putting that money into equities at all.
So it looks like money is going to the sideline.
Looking at the activity on the S&P 500, oh yeah, look at that.
Very weak activity.
Remember last week we were beginning to see numbers in the upper two billions.
And now we're back down there.
It's probably not going to even have half of the average daily volume.
So like I said, that's money pulling off the markets, the bonds, and the stocks, and just
going back into cash to kind of hold on and wait to see what happens next.
You know, who knows?
It's difficult to say what will make the markets happy again, but it's nothing big.
Give me a brief moment here.
I'll look at the other ones.
Gold's down, so there's no fear of a crisis in the economy.
The gold bugs are bailing out again.
But oddly, well, that's interesting because the euro had appreciated.
As a matter of fact, the pound and the euro both appreciated, and then they fell back
down to depreciate.
Well that would probably be because those yields on the bonds, US bonds were pulling
upward a little bit, making the dollar stronger.
But it's really all over the place.
Although the euro does seem to have gained some ground, it's up to about $1.07 right
now.
Hard to say though.
Over here on the other side of the world, here's another day when the Nikkei had a blast
right off the bat, and then it just floated on that.
That was a two and a third percent rise in the Nikkei, all at the opening pretty much,
and then it just floated.
So something is getting the investors to jump in at the beginning, and then spend the rest
of the day just staring at the market.
Kind of hard to say, but there's one again.
It has been showing so much volatility lately.
If you've been watching this with me, that bouncing around has been just sort of like
what it's been doing.
Sort of like our market did.
It was down, then up, then down, and sort of like what ours was doing somewhat too.
Just a lot of volatility, but no direction on where it wants to go.
Looking around the markets just for a few minutes here, just to see and to remind you
of some of the things that we do here.
Looking at bank stocks.
Citi.
Citi Group.
Big huge bank.
Down for the day, not spectacularly.
Highly volatile, but it's just been in negative territory through the day.
Not a happy sight at all.
Now if you look at the P-E ratio, undervalued, but boy is that a risky stock.
This is one of those 10 too big to fail banks, and that thing is really a risky stock.
Looking quickly just to remind you about how to do this in case I ask it on the final exam
or something like that.
What you have here is we would take the 49.48, this is a projected one year holding period
return divided by the current price one year before you sell it, 4205 minus one, and then
you add that nice fat dividend yield, 4.92%.
Let's try that again.
49.48.
Try it again.
49.48 divided by 4204 minus one plus the dividend yield 4.92, oh I forgot, that's what the problem
is, times, I forgot to, times the result by 100.
Oh that's not bad.
Times 100 plus the dividend yield 4.92%, and you get a nice, actually that's a decent return
on Citibank.
It's risky, I mean don't get me wrong about that.
That's a 22.62% total holding period return, capital gain and dividend yield, but you're
taking a risk on that at that 1.55, although it does seem to be undervalued right now.
So if you're into bank stocks, that's a bank stock that would see, that at least is projected
to earn a darn decent return.
Turning to some other industry, let me think about, fast and all.
I bring this up because I've had a surprising number of students who've gotten jobs with
this company, and I'm not sure what it is about it.
It's down hard today, really hard.
It's got a beta of 1.11 PE ratio, it's pretty much valued appropriately, and it's EPS, it's
a profitable company, but that return looks lousy.
Let me try it.
Divide it by, that would be the projected one year price, divide it by 58.69 minus one,
then multiply the result by 100, then add that dividend 2.34%.
This is a dog.
3.43% return.
It's above average risk too, so you can see that this is not a, shall we say, a prospective
investment.
It's not a, it's something to get really excited about putting your money into.
But going to the wild side here, just to have a look at MSFT, Microsoft, might as well look
at one of the behemoths of the earth, it's up about.83, 8.84%.
It's got a low beta, it's slightly overvalued, projected for one year from now at 370.22,
370.22 divided by an initial investment one year previous.
Let's try this again.
Wow.
Okay.
Looking at it again, let's try 370.22 divided by the current price one year before the sell
of 355.83 minus one, and then multiply the result times 100, and then add the dividend,
which is a lousy dividend, dividend yield,.85.
Oh, that's not a great return.
Of course, again, it's below one, so lower risk, lower expected return, but 4.89% isn't
spectacular, not really spectacular.
One of the reasons is the dividend yield on Microsoft is really not that great.
It's just a.85% dividend yield, so what to say about that would be hard to tell.
Well, it's nothing great.
Let me take you off this for a little bit.
I'm going to pull something up here.
Let me go in, just so you are aware of how to do, because on the quiz I'm going to do
a weighted average cost of capital problem, so getting one of those, you want to get to
your WAC, weighted average cost of capital.
I can find it.
I couldn't find it.
There it is.
Note it.
And you get, that's not the one I want.
That is so not the one I want.
Where is the one that I want?
I'm not seeing it.
I might not do this because it seems to have disappeared.
How did it get there?
Let me try and see if this is the one.
It's the one that's got the pricing in it.
That's not it either.
I wonder where it is.
It was WACC1, and I'm not seeing it anywhere in the files.
Did you click on the spreadsheets?
Yeah, let me do that.
I did do that the first time, and I just wanted to see if it had migrated somehow up to the
higher level.
Spreadsheets.
There it is.
Whoa, I've got to stop.
My coffee's getting too strong for me.
Let me show you this now.
There it is.
Ah, I was going to say I spent way too much time on this for that to happen.
Now all you're going to do, all you need to do is let's say, well I'll put in another
example.
Preferred, wait.
Let's take one, it'll look very similar to this.
Preferred, let's say it has a 3.2% dividend.
Par value is, take any number you want, let's say $110 a share.
It's currently priced at $75 a share.
$75.25 per share.
And the common stock.
Now the way you notice it in the book, they gave you problems where they were telling
you next year's dividend.
It doesn't matter, all you have to do is put in the numbers correctly.
But I will frame it so that you have the dividend that has just been paid.
Let's say $2.50.
It's expected to grow at let's say 4.5% per year.
And the current price of it is let's say $38.45 per share.
$28.
No, let's do higher price.
Let's do $35.51 per share.
Bond price, let's say the bond price is right now $105.30 on the $100.
And I'll give it to you on the $100 for the bond price so that you won't make the mistake
up here.
And then over here, par value of the company's bonds is let's say $15 million.
Number of shares is $240,000.
Number of shares authorized is let's say $30 million.
And I also want to put in here with six years to maturity.
And I will do what I can to parallel this wording on the quiz and on the exam where
you'll get this stuff.
Let me see if there's anything else I've forgotten.
Okay, so now with the bonds.
They're priced at par value of the bonds, market values.
Let me get up here.
Now the par value of the bonds, get those done first.
I said five years or six years to maturity.
Coupon is 4.25%.
I'll just leave that 4.25.
And they are at 105.30 on the $100.
My ass.
Price, 105.105.30.
There.
That's better.
Okay, is that right?
Six years to maturity.
Yep.
Okay, so we got that.
Go over here and fix these up.
We'll leave the tax rate at 21%.
The cost of debt has been the preferred dividend is 3.2%.
All right, 3.20%.
Whoops, I didn't mean to do that there.
4% par value of the preferred is $110.
Current price is 75.25 up per share.
Now where we share preferred shares outstanding, it's over here.
240,000 shares.
Common dividend is $250.
Worth rate, 4.5% per year.
The price of the common stock right now is $25.51 per share.
That should be everything.
Let me make sure, $15 million here.
That one should be, oops, that's $15 million.
Number of preferred shares outstanding is 240.
I don't think I need that.
I think I have it over there somewhere.
But number of common shares is, how many common shares do they have outstanding?
30 million.
You don't need to worry about that new issue.
That's irrelevant.
Weighted average cost of capital should come out to be 14.27%.
That's about all there is to it.
You just got to fill in a lot of numbers, so I will give you more time, 20 minutes on
the exam, on the quiz.
Just because it's not calculating, it's just making sure you got all the numbers filled
in.
And that's how you do it.
If you got that number, then you're in good shape.
Notice something here.
I should have scooted that over.
They won't show you all the numbers, but they're okay.
Anyway, that's how you do this problem.
You just look at the numbers, you fill in all these little tables here, and once you've
filled in all the tables with the numbers that you are given, the weighted average cost
of capital will come out on its own.
And you can try a few yourself just to make sure that you can do it.
Just tweak the numbers around and see what happens to the weighted average cost of capital.
That will be most of it.
One other thing I want to help make sure that you know about.
It's graphical, but I expect that you will need to know it for the quiz and or the final
exam.
I'm going to draw something on the board here.
I drew it before, but I want to make sure that you know that one of those things is
actually a serious point.
Let me show you something.
Matter of fact, nope, I already got, oh well, I could have shown it to you with that graph.
The percent of debt in the capital structure versus the weighted average cost of capital.
Now you remember the weighted average cost of capital is the weight of debt in the portfolio
times the after-tax cost of debt plus the weight of equity times the cost of equity.
Now if I were to draw the weighted average cost of capital, if I have no debt in the
portfolio, then the weight of debt, no debt, then the weight of debt would be zero times
the after-tax cost of debt plus 100% times the cost of equity.
If there's no debt, then it's all equity.
So if there is 0% debt, then the weighted average cost of capital is the cost of equity.
If the company is all debt, that would mean the weighted average cost of capital is 100%
times the cost of debt plus zero times the cost of equity.
Gasp.
Oh, like that helped anything?
So if we're a 100% debt company, then we would have just the pure after-tax cost of
debt, like somewhere here.
So the weighted average cost of capital curve should look something like this.
As you accumulate, use more debt and less equity, at first debt is cheaper than equity,
so you have a declining curve.
But eventually you start getting so much debt that the default premium, new debt, starts
to hit hard and it starts to rise again.
This is called the bottom.
The lowest point is called the optimal capital structure.
The optimal capital structure is the combination of debt and equity that minimizes the weighted
average cost of capital.
Make sure you understand that little graph there.
There are three points of interest.
I will ask something about this on the quiz and on possibly on the final exam.
You just have to know what that graph, what the meaning of that graph is, what those important
places on the graph are, what they're called.
Enough of that one.
Okay.
Now some new material just for you new material fans out there.
As my markers are dying here.
Let me see if I...
There's another one.
See if that one's any better.
Oh, that one's good.
Okay.
Now, this lecture is about forecasting cash flows.
This is how we...
It has so many uses in corporate finance and in corporations in general.
We need to know where we are going to go from here and what each project is going to do
with how we go from now to the future.
This is the basis of figuring out how we finance our new projects, what decisions we make with
respect to issuing stock versus issuing debt and all of that.
Projecting cash flows.
Now this thing, what I'm doing here, overall we have to project the full cash flows of
the corporation.
But in the path to that, we need to find out whether projects are worth our time or not
as go or no go.
So the first thing we have to do is project analysis.
Project analysis.
Well, that's going to...
We got a new project.
It could be a new product.
It could be a new machine.
It could be a new location.
A project can be a lot of things.
There are two different kinds.
There are expansion projects and there are replacement projects.
Now I've gone through some of this before, somewhat informally, and here's where we hit
it over the head directly.
Expansion projects.
You're going to bring in a new product.
You're going to build a new factory.
You're going to buy some more cars or trucks.
It's an expansion of what you're doing now.
You're going to build a new skyscraper, whatever.
And with these expansion projects, well, let me go over here.
Replacement.
You're going to get rid of something and replace it with something else.
Now there would be some reason you do that.
Most likely, if you're going to do a replacement project, it's going to be replacing one machine
with another, replacing an existing fleet of trucks with a new set of trucks, something
along that line, or replacing one old building with another new building.
But one way or the other, you are not looking at these two projects in the same way.
This one is adding revenue.
Incremental revenues.
And as a consequence, incremental costs.
Again, this is something I talked about before.
We are sandboxing the project.
All that we look at is what the new thing is going to do for us in terms of revenue
and in terms of cost.
With a replacement project, that is just an change, increment, or decrement in cost.
Generally speaking, replacement will happen only if the increment is negative.
In other words, if we're saving money.
A new fleet of electric vehicles is going to cost us less than the existing fleet of
diesel powered vehicles or gas powered vehicles, something along that line.
The new building is going to be more energy efficient than the old building would be,
something along that line.
But it's an incremental cost almost exclusively.
So in other words, in this one, you would have the old cost, new cost of let's say fuel,
15,000 versus 12,000.
So the increment is you are saving $3,000.
But there's a cost upfront to doing that.
So that's where we start.
Now as far as these sandboxing and all this is concerned, focusing on expansion projects
right now.
The first thing is the upfront cost.
The upfront investment as it were.
What's it going to be?
And then from there, the new revenues from the project.
New revenue.
And the new costs associated with generating that revenue.
That's where we start.
First things first, you look only at the new project.
Don't look at it in the context of the company.
However, you do have to watch out for two things.
One is on the negative side, cannibalism.
If it's a new product, is it going to take revenues from something we already have on
the shelves?
If it is, that is a subtraction from the new revenues.
Most companies try their best not to cannibalize an existing product.
Unless that project is in its decline phase.
If you remember possibly from marketing or something like that, you have this introductory
phase and then you have the growth phase and then the maturity phase and then the decline
phase.
That's the introductory phase.
This is the growth phase.
This is the maturity phase.
And this right here is the decline phase.
You might actually allow cannibalism.
You got a new product and what you want to do is get that out there before you kill off
an old product that's going to replace it.
You might start bringing that new product in knowing very well that it will start to
impact on the revenues.
Once you get into the growth phase, it's going to cause this decline to steepen.
So you might see a place where cannibalism, even though companies do try to avoid cannibalism,
you might see once in a while a product line do that.
There's a new product in the product line.
Then there's an old product that is in its decline phase in the same product line.
And you might, well, let's start getting this new product into the consumer's eyes now.
While this other product, the old one, is still on the shelves, recognizing that it
will eventually kill off the old product.
And during its early years, the new product will cannibalize some of the revenues from
the old product.
It happens.
It's not actually not that uncommon to phase out a product with an introduction of a new
product to replace it.
But cannibalism in general, you just want to be careful that you're not cannibalizing
an old product.
If you are, then you have to subtract the revenues that you're cannibalizing from something
else.
Now on the other hand, you can have synergies where a product actually benefits a product
that's already out there.
It's an add-on.
Other companies do this, where a product that is only for a specialized group, you will
begin to offer new products which add on to the old product and therefore make it easier
for more people to use it.
And that would create a synergy.
Not only would you sell the new product, you would also get more people to jump in on the
old product as well.
I guess you could even argue that Adobe has done that to some extent with its line of
products.
The more it offers add-ons, the more people embrace it.
In a way, Microsoft bringing in these new add-ins for Microsoft, and they just seem
to be coming out all over the place, these new add-ins just make it so that more people
would be willing to use Microsoft Office products.
It's just the way it is.
And also with Excel, you've seen the introduction of Python, which gives more people the interest
in Excel because they've generally been using Python, now they can use the two together.
So you would embrace Excel because you've got your Python right in there with it.
That's a new thing that's out there right now.
So sometimes there can be a synergy.
You don't assume it unless you have good knowledge that your consumers are going to embrace this
product and give that synergy, add that synergy to it.
Those are the warnings about always sandboxing.
You can have cannibalism or you can have synergies happen in them.
One way or the other though.
What to watch out for.
The big one is sunk costs.
You've done a feasibility study on a new project.
Okay, well that's good.
You don't add that to, you don't put that as part of your upfront investment.
You've already spent money.
It's over.
It's gone.
It's not to be used in the analysis of the project itself.
Whatever has already been spent is not part of the analysis.
The next, I can't emphasize that enough.
It just drives me crazy, it drove me crazy as a consultant seeing these companies that
it's thrown into research for a project, for a product or a project.
And then they think, well we have to keep going here because we've already spent all
this money.
Instead of just dumping and running, you hold on to what you've already done and your analysis
is all wrong if you do that.
You've already bought it, so it's done.
It's gone.
So after you buy a new car, you don't include what you paid for that car in any future analysis
of the use of that car or that vehicle.
It's already gone.
You made the decision.
Another one that is just a disaster.
Opportunity cost.
Repurposing something to use in a new project means that it becomes an upfront cost of that
new project.
I've brought up examples of this before and also what happens when you ignore those opportunity
costs.
We're going to build this new stadium, the city is, this new arena and well we already
have the land so we don't have to worry about that cost.
Oh yes you do.
If you don't, then you are going to overvalue the net present value of the project because
that land could have been sold for some price.
So the fact that you're going to repurpose that land for this project means that it becomes
a cost of the project.
We don't have to worry about the director of this project because we've already got
someone who knows how to do this.
No, that person's salary becomes part of the cost of the new project.
Well we've got all this machinery, it's just sitting around and now we can use it for something.
So that's not a cost to us.
We're saving money by using what we already have.
No, you are not saving money at all.
You could have sold that machinery.
That's just the reality of it.
You could have gotten rid of it.
And so anything that you use that you already have, it's still an upfront cost of the project
because you're giving up the next best foregone alternative.
Opportunity cost.
Try that.
Okay, those are the big ones to watch out for.
There are a few other subtle ones along the way that are in the arena of indirect cost,
but I should actually put that here.
Overall, indirect costs, hidden costs of the new project.
We ignore what we think are not really part of it.
Well we've had 18 meetings dealing with getting this new project off the ground.
You are spending on those projects, that project.
You don't see it as that, but the opportunity cost of the time burned up worrying about
this project was part of the cost.
Did you have C-suite people doing this?
Well guess how their salaries, the part of their salaries that you could increment on
this project, that's a cost you should look at when you start doing the analysis.
Okay, enough of all that.
Let me go do this now.
The free cash flow is going to be the revenues minus the costs, and I'm going to put here
operating costs, minus the depreciation and amortization, times one minus your tax rate.
Now right now we have 21% is what you would use, because that's what the Tax Act of 2017
set for all corporations.
It used to go up until it reached 39%, but now it doesn't.
This piece right here is called NOPAT, the Net Operating Profit After Taxes, NOPAT.
Once you have got NOPAT, you add back the depreciation and amortization, because it
didn't really spend that money.
And then you subtract out your capital expenditures, which you actually spent in physical dollars
to get the project started, and then you calculate the change in net operating working capital.
Net operating working capital is the change is the net operating working capital now minus
the net operating working capital one period back, where NOWC is current assets minus current
liabilities.
Really current operating assets minus current operating liabilities, but don't worry about
that in my class.
I'll make you suffer with that if you take another class.
What's the difference between an operating current asset and a non-operating current asset
and all that?
Just take it as current assets minus current liabilities this period minus the current assets
minus the current liabilities in the next period.
You start a project.
Right now you have inventory at the end of the year of $10 million.
Well once this project is starting, that first year of the project, your inventory is going
to balloon to $12 million.
So your change is positive $2 million, which is a hit to your free cash flow.
As you build up the inventory for the new product, you'll have a hit to your free cash
flow.
You would also in that, well it depends on the product, but in corporate buying, you're
also probably going to have an increase in your receivables.
You're offering terms to get people going with your new product, so you're going to
have your receivables go up from before you had this product.
And also interestingly enough on the liability side though, those are both hits to free cash
flow.
See it's minus a change.
You're using cash to build up your inventory.
You are putting off cash from revenues by allowing receivables to balloon.
Now on the other side, current liabilities, those might actually go up too.
I mean you'll probably owe some suppliers, you'll owe suppliers of your new products,
parts, some money, so your payables will go up too.
So that would be a positive benefit to your net operating working capital, free cash flow.
So it can go both ways.
Net operating working capital, the change can be positive if inventory and receivables
go up a lot, but it could also be negative if your payables go up.
You're not spending money, but you're earning revenue off it.
Kind of hard to explain that way, it's better to just do it in practice than here.
But anyway, these are the pieces of it.
Now salvage value.
I'm putting together the pieces of this today and then putting it into a more of a comprehensive
thing on Wednesday.
Full salvage value is, how do I want to put this, I don't care for the book's way of saying,
it's what you sell the old equipment for at the end of the project.
I don't want to use the word revenue here.
Well, okay, sale price of equipment minus the book value of the equipment.
Let me explain.
At the end of a project, you sell the equipment for $80,000.
Now you'd been depreciating it from its original, whatever you paid for it at the beginning,
you'd been depreciating it along the way.
The book value at the time of sale is only $20,000.
You depreciated out all of it, but it's $20,000.
So the taxable salvage is the $80,000 you sold it for minus the $20,000 that's book
value.
So you face a tax of $60,000, that's a taxable amount of it.
The tax would be T, the tax rate, times the taxable salvage value.
So you don't get, let's say that that's 21% times $60,000.
So your net salvage value is going to be equal to $80,000 minus 21% times
$80,000.
Otherwise you have to pay tax on the part of that that you hadn't depreciated away.
So in a case like this, if I were to do that, calculator, $80,000 minus.21 times $80,000
equals.
So you get only $63,200.
That would be what you would put in your cash flow analysis, is $63,200.
That's what you get.
It's a lot like work.
Okay got it.
Now here's the thing.
There are a lot of assets, fixed assets, that qualify for what the book calls fast depreciation.
That wasn't a term we used in the old days, but there are these scheduled items that you
can depreciate all of it in one year, or all of it in just a couple of years.
So in cases like that, you know, I mean in a case like that, the book value after a year
or a couple of years is zero.
So you're basically paying tax on the entire price you sell of salvage.
If you depreciate away the whole thing, then whatever you get for it is taxed.
And that's why rapid depreciation is very popular, of course, obviously for tax reasons.
But when you dump that equipment, if you sell it at the end of a project's life, you get
hit with a tax on it.
Because you've wiped out all the book value that would have taken away some of that taxable
salvage value.
It used to be, not even that many years ago, the list of items that qualified for that
fast depreciation wasn't that large.
But anymore, it's like a lot of fixed assets, what are normally fixed assets, are actually
quite surprising.
So yeah, you depreciate them rapidly in a year or a couple of years, but then at the
end when you go to sell off the old equipment, you use the project, you're going to move
on.
You sell that stuff for $100,000 to some company that wants it, and you get hit on the whole
$100,000.
You don't have any book value left to shield the exposure to the tax.
So that can happen.
But anyway, essentially, everything that you're going to do is going to be essentially a project.
You'll have your initial investment, but you're going to have something else too.
Because it's in that initial investment phase that you will start to have your inventory.
Your inventory, you'll have to build that up before you start the operations.
So you're going to have to appreciate that there's going to be a change in net operating
working capital right off the bat.
Well for the equipment to do this product, we paid a million dollars.
And also in that first, before we launched the product, we put in, we build our inventory
up, we spent $100,000 on inventory.
Well that's going to go in your initial, your first year.
You may have other things happen too in that first year.
So this initial investment, when you think about it being just your capital expenditures
starting out the project, no, there could be other things involved in it too.
So you've got to appreciate that.
And then from year to year, one, two, three, and then let's say year seven, you're just
going to be working on this free cash flow.
Year one, free cash flow in year two, free cash flow in year three on down through to
whatever remaining free cash flow you have in the last year, in this case the seventh
year.
Don't forget that there will be two things happening there.
You'll have your free cash flow, but you also don't forget that you will have the net salvage
value and you'll have an extra special.
Now you may have changes in net working capital up here, net operating working capital down
here, because you're going to burn off the last of the inventory, that's going to make
net operating, change in net operating working capital go down.
So that frees up cash.
In that last year, you sell off inventory, but you don't replace it.
So that's going to be a source of free cash flow in the last year of the project.
The net salvage value is going to be a source of free cash flow in the last year.
Whatever final year sales you have of the product will be free cash flow in the last
year.
So that last year will be kind of an exciting thing, because numbers that remain kind of
stable, maybe grew with the growth of the product or whatever, suddenly they begin to
change rather quickly.
Your free cash flow from revenues is dying, but you're going to get money from net salvage
value and you're going to free up cash because you're letting inventory dwindle and you're
not replacing it.
That's all the background.
And once I put some numbers on the board, I won't talk so much about this, it will just
be part of the analysis.
And ultimately all we're doing, once we've gotten those free cash flows laid out, we
find the net present value of the future expected free cash flows and that's how we decide whether
a project is a go or a no go.
That's all I have for you today.
I thank you.