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Alan Kring Productions in association with Emergent Light Studio presents

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the Illinois State Collegiate Compendium, Academic Lecture in Business and Economics.

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This is Business Finance, FIL 240 for autumn semester 2023.

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Today, Project Analysis.

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And just as a few preliminary words, we have a surprise quiz on Wednesday.

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I'm going to take you through, just to make absolutely sure,

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that you know how to use the templates to be able to accomplish it like a boss.

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And from there we'll go on to the project analysis.

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For today, that'll spill of course into Wednesday.

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I'll do more of the setup today and then just the mathy thing on Wednesday.

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But first, a look at the numbers.

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And just as a point of departure, take note that the advertisements at Yahoo Finance are generally finance oriented.

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And here we have a place where you can actually do your trades in stocks.

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It says stocks, options and futures.

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And the name of this brokerage house is Tasty Trade.

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Now, I'll just leave it at that and let you decide if that's a really good place for you to do your stock trading.

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Perhaps you get a meal with every 100 shares you buy.

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Something like that.

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But anyway, here we go.

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The S&P, this was a kind of a rocking session because first the market was up a little bit

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and then it dropped just around the end of the midday.

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And then it managed to rally and there was more of a rally there at the end.

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About an hour and a half ago, these numbers were barely in the positive.

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Just a couple hundredths of a percent.

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But it did manage to find its wind in its sails.

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The Dow ended up about one tenth of a percent up, whoop-de-doo.

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And the S&P 500 not quite two tenths of a percent.

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And the Nasdaq up three tenths of a percent.

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So I would qualify this was a bull day by saying it was about the weakest bull you could get.

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Now, and notice here, interestingly enough, something happened at the end that got the markets a little bit awakened.

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An hour and a half before the end of trading today, the S&P 500 was not even half,

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the volume was not even half of what has been on a typical day.

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But there was a surge there at the end and it finished with about 2.2 billion shares

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against the average for the year over the past year of 3.7.

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So it's not spectacular at all.

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There's still a lot of skittishness among investors right now.

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They're keeping a lot of money in cash.

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Oil is well below that range of 82 to 88.

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And it dropped, it tried to rally today, and it finished down, barely up.

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Interestingly enough, the price of gasoline has gone up a little bit at the retail level today.

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And that probably is more that there is, that oil is being used to produce distillates

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because the price of diesel has been up quite, has been rather high lately.

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So they may be allocating more of the production to distillates for now.

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But if the prices stay down here, eventually you'll see gasoline prices being pretty darned cheap, comparatively speaking.

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The gold bugs have backed off a lot, which kind of is an indication that they certainly don't see

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any economic apocalypse on the horizon.

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And the euro, well, let me talk here.

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The 10-year bond, the yield surged up, whoa, almost about 10 basis points, which means the price fell.

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Price fell and investors were getting out of bonds.

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Looks like a little of their money went into equities, but most of it's probably just going into cash

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as the investors want to survey the landscape.

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Yields going up will slow down in an economy.

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But this is just a one-day thing, so we can hope that that will wane as the week goes along.

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The euro and the pound were appreciating into the midday, and then they just started to go down.

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Part of it's because our yields on interest rate yields are going up, stronger dollar, weaker euro,

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weaker pound, and, well, that's interesting.

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The Japanese yen, no, it's weaker too.

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Yeah, I keep forgetting the yen is backwards, depreciating.

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Okay, so now over here, this is a couple of times recently I've seen this with the Nikkei.

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It popped on the opening bell, and then it just floated there for the rest of the day.

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So there was news building before the bell, good news building before the bell, and the Nikkei 225 jumps.

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And then there's no more into good news, so it just floats right there where it was at the beginning,

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up 2 and 1 3% for the day, which is a good day, but I mean, all the good happened on the very opening bell.

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London is doing weird things. It just keeps having these volatile sessions.

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It was up, then down, and then it surged, and then went down, up, down.

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There's a lot of volatility over there in Great Britain and the London exchanges kind of having a hard time

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deciding whether it's a bull or a bear every day recently.

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Look at a few stocks, just to have a look around, to refresh your memory of how to do things and how to look at them.

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And I haven't looked at bank stocks recently, so let's look at Citigroup, one of the 10 too big to fail.

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Well, that's interesting because you've got a beta that is, but that's a high-risk beta, 1.55,

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but it's undervalued. That PE ratio indicates an undervalued stock, and they're obviously quite profitable,

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$6.30 per share, and a nice dividend, almost 5% dividend yield, so there you are.

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Kind of a hard call on that one, but just to remind you of doing that calculation for capital gains and dividend yield and all that,

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we would take, if you bought it today, in a year, Yahoo is predicting 49.48 per share,

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divided by the current price, which you would buy it at a year before you sold it,

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42.04 minus 1 equals, and then I multiply that by 100 to get a percent,

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and then I add in the dividend yield, 4.92%.

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Oh, that's decent. I mean, that's a high beta. Obviously, you expect a high return on it, 22.62%.

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That's a healthy yield if it lives up to this projection.

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I mean, it's one of those stocks, if you're a risk taker, Citigroup would be something you would look at.

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I don't know how excited I would be about it, though, but there you go.

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Now, trying to think, oh, let's have a look at something completely different.

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I don't pay too much attention to the monsters of the earth, but let's look at Microsoft, MSFT.

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It's a rich person's stock, 356.53 per share, up more than a percent today,

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but it's lost a lot of that ground, or at least it's lost some of that ground in the aftermarket trading.

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But anyway, as you can see, it's relatively safe stock at beta of.88, somewhat overvalued,

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and it's got kind of a crappy dividend,.85%.

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Obviously, it's a profitable company.

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So let's look at what we would get a one-year holding period return, total return on this one.

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We'd have $370.22 in a year, divided by the current price you'd buy it at.

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It's 356.53 minus one, and then you times that by 100, and then you add the dividend yield,.85%.

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So you get a total holding period return of a lousy 4.69%.

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I mean, it's below one, so you don't expect a magnificent return, but that's kind of a lousy return for Microsoft.

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Didn't see that coming.

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So there you go. Just a quick look around, see what kinds of great investments there are out there,

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and not so great investments.

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But right now, we're kind of looking at a period where the markets are trying to decide

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whether they should keep being bullish or if they want to back down from that.

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Who knows?

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Let me show you something here. Let me get this off.

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This is for quiz-type stuff and final, and I talked about this last time,

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but when you look at the weighted average cost of capital,

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weighted average cost of capital versus the percent of debt in the capital structure.

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And of course, one minus that would be the percent of equity in the capital structure.

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Okay, so the WAC equation is the weight of debt times the after-tax cost of debt

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plus the weight of equity times the cost of equity.

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Nothing spectacular about that.

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Okay, so look at two scenarios.

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No debt. Suppose a company does not use any long-term debt.

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Then that would mean that the weight of debt in the portfolio is zero

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times the after-tax cost of debt

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plus the weight of equity, which would be 100%, times the cost of equity,

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which of course means that your weighted average cost of capital would be nothing but the cost of equity.

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So in other words, when the weight of debt, when the percent of debt is zero,

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the weighted average cost of capital is just the cost of equity.

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Now suppose you had a company that was all debt.

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Suppose you had one that was all debt.

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And in that case, the weight of debt would be 100% times the after-tax cost of debt

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plus the weight of equity, there would be no equity, times the cost of equity,

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which would then be equal to just the after-tax cost of debt.

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So at 100% debt, you would have just the after-tax cost of debt.

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And so that would be the weighted average cost of capital curve.

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It is in a straight line because as you use more and more debt,

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the cost of debt is cheap, so your weighted average cost of capital goes down.

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But there's a point where a company borrows so much that it begins to get a high default premium in its debt cost.

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And so eventually it starts to turn around.

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The bottoming out point is called the optimal capital structure.

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It's the combination of debt and equity that minimizes the weighted average cost of capital.

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It would do you a world of favor if you knew those three points, where it anchors to the horizontal axis,

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where it ends, and where what we call the bottoming out point.

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It would be worth your while to know those three values.

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And as I had already whined to you, knowing how to use the Excel template that I provided for you

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is going to be worth your while to know.

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Your job is to read the narrative of the problem and fill in the numbers where they belong in the sheets.

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So for example, if I had something where, let's say that you had preferred stock that was going off at, let's say, a 4.8% dividend, par value, $120 a share.

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And the current price of it is, oh, let's say, $91.70.

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Now, interestingly enough, your book, The Homework Problems, always gave you the next period dividend.

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Instead of the current dividend that you would have to grow one period.

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But we'll just do it as I've been doing before.

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They just paid a dividend of, let's say, $2.50 per share.

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And it's expected to grow at, let's say, 6% per year.

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And the current price of the stock is, let's say, $29.65.

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Now, the bond narrative, I'll give you a price on the 100 for the bond.

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Let's say that the price of the bond right now is floating at $105.50.

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And this one, let's make it due in 2029.

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It pays a coupon of 5.75%.

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Par value of the bonds outstanding of the company is $15 million.

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Let's say the number of preferred shares is $240,000.

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And the number of common shares, let's say it has 30 million common shares.

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What you will want to do is just get the numbers out of the narrative,

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these boxes as I've put it here, and put them where they belong in the template.

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The preferred dividend is 4.8%.

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The price of the par value of the stock is $120.

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The price of the preferred stock is $91.70.

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The number of preferred shares, which you find over here, this is kind of a hodgepodge,

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24,240,000.

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And the common dividend they just paid is $2.50.

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The growth rate of the common stock is 6%.

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And the current price is $29.65.

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Really should have made that two decimal places.

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Now the bond.

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The bond matures in six years, so we put in six for the term.

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The coupon is 5.75%.

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The price on the hundred is $105.50.

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And that's all you need to do, you've got your yield.

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Now, the par value of the bonds is $15,000,000.

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The price of the bonds will calculate itself.

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Par value times the price on the hundred.

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Number of preferred shares is $240,000.

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Number of common shares, $30,000,000.

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And you don't need to worry about new common, new issue.

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And there's your weighted average cost of capital.

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All you have to do is put the numbers in the right places,

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and the weighted average cost of capital will calculate out.

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As a side note, the capital structure of this company right now is 1.7% debt and 98.3% equity.

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You see that?

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The equity would be the preferred plus the common,

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and that comes up to about 2.4 plus, yeah.

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So the capital structure, you don't need to worry too much about this, but

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that divided by

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well, yeah, divided by 100, one, oh well, divided by some.

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And the weight of equity, margin center, would be sum of those two, the equities,

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would be the sum of the equities divided by, oops, close the parenthesis,

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divided by the sum of all of them equals percentages.

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Sum of the equities divided by the sum of all of them.

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Oh, those are supposed to be percents.

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I don't get that at all.

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Why is that doing that?

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Let's try it again.

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Equals the sum of those two divided by the sum of all three of them.

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There we go.

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So it's about 98% equity and 2% debt.

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That's called the capital structure.

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The capital structure is a combination of debt and equity that makes up the total assets.

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And again, you don't have to worry about doing any of these calculations.

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This calcu- not even this one actually, should have shaded that in.

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These will calculate themselves.

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All you have to do is get all of the numbers into their boxes and then it does it itself.

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So I am going to give you 20 minutes for this quiz just to make sure that you have enough time to sort out the numbers

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and put them in the right places.

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That's the main thing.

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Yeah?

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You're going to look up over that second equation.

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That thing that I did up here?

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Up at the top, yeah.

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Right there, that?

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The second one, one of them.

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All I did in this one was, okay, I said, okay, the debt to the total assets would be that number divided by that.

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Matter of fact, I can even make it easier.

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I can say, okay, why won't that delete?

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I'll just say, what in the world?

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Oh, I unplugged my-

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Why is this sucking?

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There, sorry about that.

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Let's try that again.

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Nope.

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Oh.

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Did I break something?

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What did I just do?

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I don't-

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My God, I've broken the computer in here.

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00:29:34,000 --> 00:29:43,000
Hang on.

223
00:29:43,000 --> 00:29:51,000
There, see if it's-

224
00:29:51,000 --> 00:29:52,000
Try that again.

225
00:29:52,000 --> 00:29:53,000
Sorry about that.

226
00:29:53,000 --> 00:29:54,000
Let's try that.

227
00:29:54,000 --> 00:29:55,000
Okay, one more time.

228
00:29:55,000 --> 00:29:58,000
I take- actually, I'll do it easier this time.

229
00:29:58,000 --> 00:30:06,000
Equals that divided by the total-

230
00:30:06,000 --> 00:30:07,000
Try that again.

231
00:30:07,000 --> 00:30:10,000
Equals that-

232
00:30:10,000 --> 00:30:12,000
No, I'm sorry.

233
00:30:12,000 --> 00:30:21,000
Equals that divided by the total.

234
00:30:21,000 --> 00:30:36,000
And then this one is equal to the sum of the two equity parts, the preferred stock plus the dividend stock-

235
00:30:36,000 --> 00:30:43,000
preferred stock plus the common stock divided by the total.

236
00:30:43,000 --> 00:30:46,000
That's it.

237
00:30:46,000 --> 00:30:47,000
Well, that was awkward.

238
00:30:47,000 --> 00:30:49,000
I almost broke their computer.

239
00:30:49,000 --> 00:30:53,000
I kicked it out of its USB port, the keyboard.

240
00:30:53,000 --> 00:31:05,000
Anyway, so like I said, if you just put the numbers in, you'll get the answer that you want out.

241
00:31:05,000 --> 00:31:08,000
And think about it this way.

242
00:31:08,000 --> 00:31:15,000
If you get a whack, the whack should be in a range between maybe-

243
00:31:15,000 --> 00:31:21,000
it shouldn't be much- anything lower than about 6 to 8 percent.

244
00:31:21,000 --> 00:31:26,000
It shouldn't be anything higher than 18 to 20 percent.

245
00:31:26,000 --> 00:31:38,000
It should be in a- so if you get something in that range, at least you know that you've got a chance at being right.

246
00:31:38,000 --> 00:31:41,000
Okay.

247
00:31:41,000 --> 00:31:46,000
Now, just feel free to try some numbers of your own.

248
00:31:46,000 --> 00:31:49,000
Just play with the worksheet.

249
00:31:49,000 --> 00:31:53,000
Obviously, don't save what you've done.

250
00:31:53,000 --> 00:31:54,000
But just work with it.

251
00:31:54,000 --> 00:31:58,000
Just make sure that you know how to put the numbers in the right places.

252
00:31:58,000 --> 00:32:04,000
And you shouldn't have a problem with the problem- well, I guess it's a problem.

253
00:32:04,000 --> 00:32:11,000
But you shouldn't have much of a problem with the problems on the quiz that do this.

254
00:32:11,000 --> 00:32:18,000
It'll look like you're a hero because the narrative describes all these different parts of the company-

255
00:32:18,000 --> 00:32:27,000
the stock, the prices, and the bonds, and their coupons, and all that kind of- the time to maturity.

256
00:32:27,000 --> 00:32:36,000
So it should work out that you get a right answer for a problem that looks absolutely beastly.

257
00:32:36,000 --> 00:32:40,000
Okay, enough of that.

258
00:32:40,000 --> 00:32:49,000
This is project analysis.

259
00:32:49,000 --> 00:32:55,000
What we are looking for are projections of free cash flow.

260
00:32:55,000 --> 00:33:01,000
But we are going to do it on the level of individual projects.

261
00:33:01,000 --> 00:33:04,000
Now, there are two kinds of individual projects.

262
00:33:04,000 --> 00:33:11,000
There are expansion projects, and this is some stuff that I've talked about before,

263
00:33:11,000 --> 00:33:13,000
which is the way I do things.

264
00:33:13,000 --> 00:33:15,000
I talk about it, and then I formally introduce it.

265
00:33:15,000 --> 00:33:17,000
And here's the formal introduction.

266
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There are expansion projects, and then there are replacement projects.

267
00:33:25,000 --> 00:33:31,000
An expansion project, a good example would be we're going to make a new product.

268
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We've got a product line, we're going to put another product in it.

269
00:33:34,000 --> 00:33:39,000
Or we're going to go to a whole new product line, something like that.

270
00:33:39,000 --> 00:33:47,000
Or we're going to build a new factory, or a new office building, or something along that line.

271
00:33:47,000 --> 00:33:52,000
You are expanding the company in one way or another.

272
00:33:52,000 --> 00:33:59,000
A replacement project is where you are going to take something that you already have

273
00:33:59,000 --> 00:34:06,000
and replace it with something else.

274
00:34:06,000 --> 00:34:13,000
Now, with an expansion project, or with a replacement project,

275
00:34:13,000 --> 00:34:19,000
one important feature of your analysis is going to be what I call the sandbox,

276
00:34:19,000 --> 00:34:20,000
what we call sandbox.

277
00:34:20,000 --> 00:34:25,000
That project exists on its own, separate from anything else.

278
00:34:25,000 --> 00:34:39,000
And all we are looking at is incremental, additional cash flows.

279
00:34:39,000 --> 00:34:44,000
We don't combine them with the company's overall revenues and costs.

280
00:34:44,000 --> 00:34:54,000
We look at the project as it stands on its own.

281
00:34:54,000 --> 00:35:13,000
Now, the only times when you might spill out of the sandbox is if you have a product

282
00:35:13,000 --> 00:35:16,000
that's going to cannibalize another product.

283
00:35:16,000 --> 00:35:21,000
Companies try their best not to have that happen,

284
00:35:21,000 --> 00:35:30,000
unless, I'm going to give you a sort of a broad example of times when you might actually have,

285
00:35:30,000 --> 00:35:35,000
deliberately, some cannibalization.

286
00:35:35,000 --> 00:35:43,000
From your marketing, and you may have seen this somewhere besides marketing,

287
00:35:43,000 --> 00:35:56,000
but when you look at products, over time, you're going to have an introductory phase,

288
00:35:56,000 --> 00:36:00,000
where you don't get hardly any sales.

289
00:36:00,000 --> 00:36:09,000
But then you're going to have a growth phase, and then the maturity phase, and the decline phase.

290
00:36:09,000 --> 00:36:13,000
This is the introductory phase.

291
00:36:13,000 --> 00:36:18,000
You're bringing the product to the shelves, and you're trying to get people to buy it.

292
00:36:18,000 --> 00:36:21,000
Notice it. First, you've got to get people to notice it.

293
00:36:21,000 --> 00:36:29,000
This will be when the people begin to start buying it more.

294
00:36:29,000 --> 00:36:36,000
More buyers, growing market share, whatever you want to call it.

295
00:36:36,000 --> 00:36:40,000
And then you've got this maturity phase.

296
00:36:40,000 --> 00:36:48,000
Sometimes I use an old term, which I don't know is even around now, the cash cow.

297
00:36:48,000 --> 00:36:54,000
It's just there. You're not growing it. You're not taking market share. It just exists.

298
00:36:54,000 --> 00:36:58,000
It's just there. You've got a loyal following for it.

299
00:36:58,000 --> 00:37:02,000
And of course, this is when the barbarians are coming to the gates

300
00:37:02,000 --> 00:37:08,000
with their new and improved knockoffs of your product.

301
00:37:08,000 --> 00:37:18,000
And eventually, you start sliding into this decline phase.

302
00:37:18,000 --> 00:37:22,000
It's not worth pushing marketing campaigns on it.

303
00:37:22,000 --> 00:37:27,000
You're just letting it kind of fizzle out.

304
00:37:27,000 --> 00:37:31,000
There's an interesting thing about cannibalization, though.

305
00:37:31,000 --> 00:37:39,000
Sometimes what you'll do is you'll bring a new product to market

306
00:37:39,000 --> 00:37:44,000
during the decline phase of a product that is like it.

307
00:37:44,000 --> 00:37:52,000
Simply because you can then bring a little more slowly your customers

308
00:37:52,000 --> 00:37:55,000
from the old one to the new one.

309
00:37:55,000 --> 00:38:03,000
And of course, what that will do is that will steepen this decline phase.

310
00:38:03,000 --> 00:38:07,000
But yeah, there's where cannibalization can actually happen.

311
00:38:07,000 --> 00:38:10,000
And it's not a bad thing.

312
00:38:10,000 --> 00:38:17,000
You're just weaning people off the older product and bringing them to the newer product.

313
00:38:17,000 --> 00:38:22,000
So cannibalization isn't a totally negative term.

314
00:38:22,000 --> 00:38:28,000
Now, the other thing that you can sometimes do is have a synergy

315
00:38:28,000 --> 00:38:38,000
where a new product is actually working to increase revenues of an older product,

316
00:38:38,000 --> 00:38:43,000
increase customer embrace.

317
00:38:43,000 --> 00:38:49,000
Now, you see this sometimes in software where a company will have a product.

318
00:38:49,000 --> 00:38:53,000
It's good, but it's for a limited audience.

319
00:38:53,000 --> 00:39:02,000
But over time, what you'll do is add to that product add-ins, filters,

320
00:39:02,000 --> 00:39:08,000
whatever you want to call them, that will make more people embrace your product

321
00:39:08,000 --> 00:39:12,000
because it has now does things that it didn't used to do.

322
00:39:12,000 --> 00:39:15,000
Just slap on a few things onto it.

323
00:39:15,000 --> 00:39:21,000
To some extent, Adobe is in that kind of a category.

324
00:39:21,000 --> 00:39:29,000
Even Microsoft, they have add-ins that merely enhance the value of the core product

325
00:39:29,000 --> 00:39:32,000
and make it even more embraceable.

326
00:39:32,000 --> 00:39:39,000
Like, for example, Microsoft for Excel, they will soon be coming out,

327
00:39:39,000 --> 00:39:42,000
if they haven't already. I don't know if it's already there.

328
00:39:42,000 --> 00:39:45,000
They have integrated Python into Excel.

329
00:39:45,000 --> 00:39:51,000
So your Python users, your programmers who are, well, I do, Al goes,

330
00:39:51,000 --> 00:39:55,000
well, now you can just use Excel, which you should use anyway,

331
00:39:55,000 --> 00:39:59,000
but now you can have Python right in your Excel.

332
00:39:59,000 --> 00:40:03,000
And of course, AI is this AI, quote, unquote, which is an AI.

333
00:40:03,000 --> 00:40:07,000
It's a fast machine learning so far, we hope.

334
00:40:07,000 --> 00:40:11,000
But enhancing, well, by this add-in.

335
00:40:11,000 --> 00:40:14,000
Here's an add-in. We're going to spend money to build it,

336
00:40:14,000 --> 00:40:22,000
and then what you'll do is you will buy the core product because you have this add-in.

337
00:40:22,000 --> 00:40:32,000
The social media platform, formerly known as Twitter, is in the process of that too.

338
00:40:32,000 --> 00:40:37,000
First, they're going to charge almost everyone to use Twitter, okay?

339
00:40:37,000 --> 00:40:45,000
But then they're going to throw in with it their work they're doing on a proprietary AI.

340
00:40:45,000 --> 00:40:48,000
They call it XAI, I think.

341
00:40:48,000 --> 00:40:55,000
So that that will add value to the core product Twitter, which you will have to pay for.

342
00:40:55,000 --> 00:41:03,000
Right now, if you want any possibility of notice, you have to pay a fee of, what is it, $8.99 a month,

343
00:41:03,000 --> 00:41:13,000
and soon anyone who uses Twitter, even if you don't pay the premium fee, you'll have to pay a dollar to be on Twitter.

344
00:41:13,000 --> 00:41:20,000
So in order to enhance the purchase of Twitter, they'll throw in a new goodie,

345
00:41:20,000 --> 00:41:24,000
which I don't know what it's supposed to do, but you know, it's AI,

346
00:41:24,000 --> 00:41:30,000
so some people may pay the dollar just so they have access to the AI on Twitter.

347
00:41:30,000 --> 00:41:40,000
Anyway, pitfalls in the analysis.

348
00:41:40,000 --> 00:41:46,000
The biggest one of all is some costs.

349
00:41:46,000 --> 00:41:57,000
What you've already paid for has nothing to do with the analysis you're doing right now.

350
00:41:57,000 --> 00:42:01,000
Well, we put a lot of money into the research on this.

351
00:42:01,000 --> 00:42:04,000
Now we're ready to look at whether we should do it or not.

352
00:42:04,000 --> 00:42:07,000
We got all the data. Well, that'll be part of the initial investment.

353
00:42:07,000 --> 00:42:12,000
We'll add that $750,000 we did for the research.

354
00:42:12,000 --> 00:42:17,000
No, you won't. You already paid it. It's gone. It's with Jesus now.

355
00:42:17,000 --> 00:42:20,000
You don't need to put it in there. You should not put it in there.

356
00:42:20,000 --> 00:42:24,000
You're never going to get that $750,000 back.

357
00:42:24,000 --> 00:42:28,000
You've already done it, so don't worry about it.

358
00:42:28,000 --> 00:42:38,000
You buy a new car. Well, man, I better keep this car up because I spent all this money.

359
00:42:38,000 --> 00:42:44,000
That's not why you should keep the car, putting money into the car.

360
00:42:44,000 --> 00:42:49,000
All that you're putting money into the car is to hold its current value,

361
00:42:49,000 --> 00:42:53,000
not to recover your initial price you paid.

362
00:42:53,000 --> 00:43:00,000
That's the most difficult thing I had as a consultant was convincing these companies, the executives,

363
00:43:00,000 --> 00:43:03,000
you already spent this money. It's gone.

364
00:43:03,000 --> 00:43:12,000
It has nothing whatsoever to do with your decisions about whether to proceed from here with it.

365
00:43:12,000 --> 00:43:17,000
That's very difficult. And there are even some larger corporations that seem to keep thinking,

366
00:43:17,000 --> 00:43:20,000
well, we've already spent this money, so we better keep going.

367
00:43:20,000 --> 00:43:24,000
It has nothing whatsoever to do with the issue.

368
00:43:24,000 --> 00:43:28,000
So, okay, so there's one.

369
00:43:28,000 --> 00:43:38,000
The next one is opportunity cost.

370
00:43:38,000 --> 00:43:42,000
What else could you have done?

371
00:43:42,000 --> 00:43:49,000
The example that I keep going back to, which I probably used right here.

372
00:43:49,000 --> 00:43:59,000
A city decides to throw the money, taxpayer money, into building some kind of an entertainment venue,

373
00:43:59,000 --> 00:44:04,000
an arena or a stadium. And I saw this.

374
00:44:04,000 --> 00:44:12,000
I've seen this several times, and one, I was in the direct line of fire of it because I asked the wrong question.

375
00:44:12,000 --> 00:44:17,000
Where are the costs of the land that you're going to put this arena on?

376
00:44:17,000 --> 00:44:21,000
Well, we already have the land, so that's a cost we can avoid.

377
00:44:21,000 --> 00:44:24,000
No, it's not. You could have sold the land.

378
00:44:24,000 --> 00:44:31,000
The fact that you're going to build an arena on it means that you gave up the best alternative,

379
00:44:31,000 --> 00:44:33,000
which would have been to sell it.

380
00:44:33,000 --> 00:44:38,000
That piece of land would have gone for about $3 million.

381
00:44:38,000 --> 00:44:47,000
So that's $3 million addition that you will add to the initial investment of building the Dagon thing.

382
00:44:47,000 --> 00:44:50,000
That's a common mistake.

383
00:44:50,000 --> 00:45:02,000
And it falls into the category of a somewhat broader idea of indirect costs, the hidden costs,

384
00:45:02,000 --> 00:45:09,000
the costs you don't see that are still there, but you ignore them.

385
00:45:09,000 --> 00:45:14,000
And that can be a killer on a project.

386
00:45:14,000 --> 00:45:23,000
You think you're saving money, but you're not because you are using resources at the same time.

387
00:45:23,000 --> 00:45:26,000
Well, we've already got our director chosen.

388
00:45:26,000 --> 00:45:29,000
We're going to just shift this guy over here.

389
00:45:29,000 --> 00:45:31,000
He doesn't have enough to do in his current job.

390
00:45:31,000 --> 00:45:34,000
Well, what's his salary? It's $90,000 a year.

391
00:45:34,000 --> 00:45:38,000
Well, that's $90,000 per year added to the wages and salaries.

392
00:45:38,000 --> 00:45:41,000
Well, no, because we already have him on board.

393
00:45:41,000 --> 00:45:46,000
No, you are moving him. You are using him for this project.

394
00:45:46,000 --> 00:45:52,000
So that's $90,000 each year added to the costs.

395
00:45:52,000 --> 00:46:00,000
It's hard for people outside of our world to understand those kinds of concepts.

396
00:46:00,000 --> 00:46:06,000
The do-it-yourselfer who does something, well, I would have paid $500 for this.

397
00:46:06,000 --> 00:46:09,000
It took me about 100 hours to do it.

398
00:46:09,000 --> 00:46:12,000
Well, how much do you make an hour at your job? About $30 an hour.

399
00:46:12,000 --> 00:46:16,000
30 times 100 is $3,000.

400
00:46:16,000 --> 00:46:19,000
And you think you saved money? No, you blew a lot of money.

401
00:46:19,000 --> 00:46:21,000
You creamed yourself on money.

402
00:46:21,000 --> 00:46:25,000
But people don't think about it that way.

403
00:46:25,000 --> 00:46:27,000
Okay, that's fine.

404
00:46:27,000 --> 00:46:33,000
But keep in mind these are all part of what you will probably have to do at some point.

405
00:46:33,000 --> 00:46:37,000
You'll have to be one of those people who is looking through these.

406
00:46:37,000 --> 00:46:43,000
No matter whether you're in finance or marketing or whatever or production,

407
00:46:43,000 --> 00:46:48,000
you have to think about these things and find out what the full cost is.

408
00:46:48,000 --> 00:46:56,000
If you don't, no one will notice until the project dies from losses,

409
00:46:56,000 --> 00:46:59,000
as happens with these arenas.

410
00:46:59,000 --> 00:47:04,000
City after city gets suckered in because they don't look at full cost,

411
00:47:04,000 --> 00:47:07,000
plus the indirect cost.

412
00:47:07,000 --> 00:47:12,000
And then just like somewhere around this area, you have,

413
00:47:12,000 --> 00:47:14,000
we lost another $2 million this year.

414
00:47:14,000 --> 00:47:21,000
We're really, yeah, and that's $2 million that you owe back to the taxpayers

415
00:47:21,000 --> 00:47:27,000
because you screwed up on the forward look on the project.

416
00:47:27,000 --> 00:47:32,000
A little bit, just for your purposes.

417
00:47:32,000 --> 00:47:35,000
Okay, now.

418
00:47:35,000 --> 00:47:49,000
Got a project year, free cash flow.

419
00:47:49,000 --> 00:47:56,000
Got your zero year, one year, two years, three years, four years.

420
00:47:56,000 --> 00:47:58,000
Let's do five years.

421
00:47:58,000 --> 00:48:01,000
And I'm not going to write so much numbers here,

422
00:48:01,000 --> 00:48:05,000
but I'm just going to write the basic idea here.

423
00:48:05,000 --> 00:48:10,000
Okay, free cash flow.

424
00:48:10,000 --> 00:48:19,000
From earlier in the semester, your revenues minus your operating costs

425
00:48:19,000 --> 00:48:29,000
minus your depreciation and amortization

426
00:48:29,000 --> 00:48:38,000
times one minus your tax rate, which is right now 0.21

427
00:48:38,000 --> 00:48:46,000
thanks to the Tax Act of 2017.

428
00:48:46,000 --> 00:48:49,000
Okay.

429
00:48:49,000 --> 00:48:54,000
That animal right there is what we call NOPAT,

430
00:48:54,000 --> 00:49:02,000
Net Operating Profit After Taxes, NOPAT.

431
00:49:02,000 --> 00:49:10,000
And then, so free cash flow is going to be NOPAT.

432
00:49:10,000 --> 00:49:17,000
Now you add back in the depreciation and amortization

433
00:49:17,000 --> 00:49:19,000
because it never really happened.

434
00:49:19,000 --> 00:49:22,000
All you have it there for is because it's a tax shield.

435
00:49:22,000 --> 00:49:26,000
And then you take away your capital expenditures,

436
00:49:26,000 --> 00:49:29,000
which you actually paid,

437
00:49:29,000 --> 00:49:35,000
and you take away your change in net operating working capital.

438
00:49:35,000 --> 00:49:53,000
So now, net operating working capital is just your current operating assets

439
00:49:53,000 --> 00:49:55,000
minus your current operating liabilities.

440
00:49:55,000 --> 00:49:58,000
And for the purposes of a course like this,

441
00:49:58,000 --> 00:50:03,000
we don't distinguish between what is operating current

442
00:50:03,000 --> 00:50:05,000
and what is not an operating current.

443
00:50:05,000 --> 00:50:10,000
They're pretty much about the same for most cases anyway.

444
00:50:10,000 --> 00:50:14,000
And the change in net operating working capital

445
00:50:14,000 --> 00:50:25,000
is net operating working capital in the current period

446
00:50:25,000 --> 00:50:36,000
minus net operating working capital in the previous period.

447
00:50:36,000 --> 00:50:37,000
Stop for a minute.

448
00:50:37,000 --> 00:50:43,000
I'll let you breathe here while I talk a little bit.

449
00:50:43,000 --> 00:50:47,000
Current assets and current liabilities.

450
00:50:47,000 --> 00:50:53,000
At the beginning of a project, well, let's say it's a product.

451
00:50:53,000 --> 00:50:56,000
Before that product hits the shelves,

452
00:50:56,000 --> 00:51:00,000
you've got to build the inventory for it.

453
00:51:00,000 --> 00:51:02,000
So that's a change.

454
00:51:02,000 --> 00:51:07,000
Say you had, your company has inventory of $10 million.

455
00:51:07,000 --> 00:51:13,000
Well, you're figuring that your first year of sales are going to be about,

456
00:51:13,000 --> 00:51:18,000
would justify about $2 million in additional inventory.

457
00:51:18,000 --> 00:51:22,000
So your current assets go up against your current liabilities.

458
00:51:22,000 --> 00:51:28,000
That is a drain on your cash flow.

459
00:51:28,000 --> 00:51:36,000
Another thing that's going to happen on the current assets side is your receivables.

460
00:51:36,000 --> 00:51:39,000
You want to get people to buy, get the product bought,

461
00:51:39,000 --> 00:51:44,000
you will have your receivables will go up.

462
00:51:44,000 --> 00:51:48,000
So in other words, your revenues are going to overstate what happens

463
00:51:48,000 --> 00:51:53,000
because you'll have some of that will show up just as receivables, not cash.

464
00:51:53,000 --> 00:51:56,000
So that would be a drain.

465
00:51:56,000 --> 00:52:01,000
So in other words, current assets going up against current liabilities

466
00:52:01,000 --> 00:52:05,000
will be a drain on free cash flow.

467
00:52:05,000 --> 00:52:15,000
The change in net operating working capital increasing is a drain on free cash flow.

468
00:52:15,000 --> 00:52:22,000
Similarly though, well you got suppliers sending you stuff.

469
00:52:22,000 --> 00:52:27,000
So you're going to have your payables go up, your accounts payable go up.

470
00:52:27,000 --> 00:52:33,000
That means that your expense you report in accounting overstates

471
00:52:33,000 --> 00:52:35,000
what really happened in cash flow.

472
00:52:35,000 --> 00:52:45,000
So your current liabilities going up would be an addition to free cash flow.

473
00:52:45,000 --> 00:52:48,000
You did that on the first test, I gave you one of those,

474
00:52:48,000 --> 00:52:51,000
and I'll probably try it again on the final.

475
00:52:51,000 --> 00:52:59,000
But anyway, so you have this kind of complex thing going on.

476
00:52:59,000 --> 00:53:05,000
You'll have your initial investment at the beginning.

477
00:53:05,000 --> 00:53:14,000
In other words, capital expenditures is going to be the big 800-pound gorilla.

478
00:53:14,000 --> 00:53:20,000
You won't have any real revenues or operating costs so much.

479
00:53:20,000 --> 00:53:24,000
You won't have any depreciation or amortization yet.

480
00:53:24,000 --> 00:53:30,000
So this is going to be dominated by the capital expenditures

481
00:53:30,000 --> 00:53:36,000
and by the net operating working capital increasing.

482
00:53:36,000 --> 00:53:39,000
Now at the end of the project, suppose that you've got a product

483
00:53:39,000 --> 00:53:42,000
and you're going to run it for let's say five years.

484
00:53:42,000 --> 00:53:48,000
In the last year, your inventories, you're going to kill them off.

485
00:53:48,000 --> 00:53:55,000
So that decline in inventories is going to be a source of free cash flow.

486
00:53:55,000 --> 00:54:03,000
But anyway, you'll have your initial investment,

487
00:54:03,000 --> 00:54:10,000
which will include, will be dominated by capital expenditures

488
00:54:10,000 --> 00:54:13,000
and change in net operating working capital.

489
00:54:13,000 --> 00:54:16,000
Those will be the big ones.

490
00:54:16,000 --> 00:54:23,000
And then you'll be cruising along, free cash flow, one free cash flow,

491
00:54:23,000 --> 00:54:30,000
two as these kick in and you don't do much capital expenditure,

492
00:54:30,000 --> 00:54:32,000
and hopefully that stabilizes.

493
00:54:32,000 --> 00:54:35,000
Although if the product is in its growth phase,

494
00:54:35,000 --> 00:54:41,000
you'll probably add more inventory than you pull out year to year

495
00:54:41,000 --> 00:54:44,000
as you need more inventory to satisfy increasing demand.

496
00:54:44,000 --> 00:54:48,000
But what were the other free cash flow?

497
00:54:48,000 --> 00:54:53,000
Three, free cash flow, four.

498
00:54:53,000 --> 00:54:59,000
And then here at the end, some odd things can happen.

499
00:54:59,000 --> 00:55:03,000
One thing is that revenues will be declining

500
00:55:03,000 --> 00:55:06,000
and your variable costs will be declining.

501
00:55:06,000 --> 00:55:10,000
Depreciation and amortization I'll talk about in a minute.

502
00:55:10,000 --> 00:55:15,000
But there will be these other animals showing up.

503
00:55:15,000 --> 00:55:29,000
The capital expenditures may switch to positive because salvage value.

504
00:55:29,000 --> 00:55:33,000
The ending free cash flow in period five,

505
00:55:33,000 --> 00:55:43,000
which will include salvage value.

506
00:55:43,000 --> 00:55:47,000
It will also have, like I said, the normal components,

507
00:55:47,000 --> 00:55:50,000
although these will be declining,

508
00:55:50,000 --> 00:55:53,000
maybe not depreciating and amortization,

509
00:55:53,000 --> 00:55:57,000
but certainly revenues and operating costs are going to be slowing down

510
00:55:57,000 --> 00:56:00,000
as you kill the project off.

511
00:56:00,000 --> 00:56:04,000
You'll be getting some money, free cash flow increase

512
00:56:04,000 --> 00:56:09,000
as you let the inventory just sell off and you don't replace it.

513
00:56:09,000 --> 00:56:14,000
Now the salvage value.

514
00:56:14,000 --> 00:56:26,000
Net salvage value will be the gross salvage,

515
00:56:26,000 --> 00:56:32,000
what you sell it for,

516
00:56:32,000 --> 00:56:42,000
minus the tax on the salvage value.

517
00:56:42,000 --> 00:56:48,000
That's where it gets a little fun, quote unquote fun,

518
00:56:48,000 --> 00:56:59,000
because the tax will be the gross salvage value

519
00:56:59,000 --> 00:57:07,000
minus the book value of the asset

520
00:57:07,000 --> 00:57:11,000
times the tax rate.

521
00:57:11,000 --> 00:57:16,000
You will be taxed on the sale price minus the book value.

522
00:57:16,000 --> 00:57:21,000
So in other words, suppose that you sell the goods

523
00:57:21,000 --> 00:57:28,000
for let's say $800,000.

524
00:57:28,000 --> 00:57:33,000
Now the book value, you haven't depreciated it all the way,

525
00:57:33,000 --> 00:57:44,000
so the book value is still standing at $200,000.

526
00:57:44,000 --> 00:57:54,000
So net salvage value is going to be $600,000.

527
00:57:54,000 --> 00:58:04,000
The tax on that at 21% makes your net salvage value

528
00:58:04,000 --> 00:58:15,000
after tax only,

529
00:58:15,000 --> 00:58:21,000
I'm not even going to try to do that in my head.

530
00:58:21,000 --> 00:58:23,000
I'm going to have a calculator here

531
00:58:23,000 --> 00:58:46,000
and take 600,000 times.21, 126,000.

532
00:58:46,000 --> 00:58:54,000
So your net salvage value is $474,000.

533
00:58:54,000 --> 00:58:57,000
That's how much you get to keep after you pay taxes

534
00:58:57,000 --> 00:59:07,000
on the gross salvage value minus the book.

535
00:59:07,000 --> 00:59:10,000
Couple of pointers here.

536
00:59:10,000 --> 00:59:16,000
And I'll go through this again so I don't sweat that part.

537
00:59:16,000 --> 00:59:19,000
But a couple of pointers here about this.

538
00:59:19,000 --> 00:59:25,000
Notice that the longer you keep the asset,

539
00:59:25,000 --> 00:59:30,000
the more of the depreciation,

540
00:59:30,000 --> 00:59:35,000
the closer you're getting to a book value of zero

541
00:59:35,000 --> 00:59:39,000
because you have more years that you're depreciating.

542
00:59:39,000 --> 00:59:44,000
So that means that you will be exposed to more tax

543
00:59:44,000 --> 00:59:50,000
the longer you keep it, so your net will be lower.

544
00:59:50,000 --> 00:59:54,000
Another interesting part of this,

545
00:59:54,000 --> 00:59:58,000
just a little not too long history.

546
00:59:58,000 --> 01:00:04,000
Back when I was, even when I was founding my own company,

547
01:00:04,000 --> 01:00:08,000
this last one which is still alive for some reason,

548
01:00:08,000 --> 01:00:14,000
there were in that time some assets

549
01:00:14,000 --> 01:00:21,000
which you could depreciate the whole amount in one year.

550
01:00:21,000 --> 01:00:24,000
I think it was called Schedule 179.

551
01:00:24,000 --> 01:00:28,000
It was a very short list though of types of assets

552
01:00:28,000 --> 01:00:32,000
that you could, okay, just knock it off as an expense.

553
01:00:32,000 --> 01:00:36,000
First year, the whole thing.

554
01:00:36,000 --> 01:00:39,000
And there was a list, it was a schedule.

555
01:00:39,000 --> 01:00:42,000
This is something on the list, this is of assets

556
01:00:42,000 --> 01:00:45,000
that you could wipe out the whole salvage value.

557
01:00:45,000 --> 01:00:48,000
Now interestingly enough, over time,

558
01:00:48,000 --> 01:00:52,000
that list has increased quite a bit

559
01:00:52,000 --> 01:00:59,000
the assets that can be expensed all at once

560
01:00:59,000 --> 01:01:02,000
in the year of purchase.

561
01:01:02,000 --> 01:01:09,000
And so that means that there are a lot of assets

562
01:01:09,000 --> 01:01:15,000
where the book value is zero after only a few years.

563
01:01:15,000 --> 01:01:22,000
And so that essentially increases the tax exposure

564
01:01:22,000 --> 01:01:24,000
of the salvage value sale.

565
01:01:24,000 --> 01:01:26,000
Well, we've got this equipment.

566
01:01:26,000 --> 01:01:28,000
We're closing down the project.

567
01:01:28,000 --> 01:01:31,000
We're in year five, and we're going to close down the project.

568
01:01:31,000 --> 01:01:36,000
Okay, we're going to sell the stuff for $600,000.

569
01:01:36,000 --> 01:01:40,000
Well, if under the old rules,

570
01:01:40,000 --> 01:01:44,000
well, we get to subtract $126,000 of that,

571
01:01:44,000 --> 01:01:49,000
and so we pay tax only on $474,000.

572
01:01:49,000 --> 01:01:55,000
But these days, you might find out that after five years,

573
01:01:55,000 --> 01:02:00,000
well, we expense the whole asset on the first year.

574
01:02:00,000 --> 01:02:02,000
So there's a book value of zero,

575
01:02:02,000 --> 01:02:07,000
so you pay tax on the entire amount that you sell the stuff for

576
01:02:07,000 --> 01:02:09,000
at the end of the project.

577
01:02:09,000 --> 01:02:16,000
So that super accelerated depreciation

578
01:02:16,000 --> 01:02:23,000
has the effect of causing you to pay more tax

579
01:02:23,000 --> 01:02:27,000
on the stuff at the end of the project you sell.

580
01:02:27,000 --> 01:02:30,000
It's just the way it is.

581
01:02:30,000 --> 01:02:38,000
Okay, so, taking all together,

582
01:02:38,000 --> 01:02:46,000
we construct the free cash flow stream,

583
01:02:46,000 --> 01:02:49,000
following all this stuff that we're going to do,

584
01:02:49,000 --> 01:02:51,000
the note path, minus capital expenditures,

585
01:02:51,000 --> 01:02:55,000
minus change in net operating, working capital, year to year,

586
01:02:55,000 --> 01:02:59,000
and then we come up with these numbers here,

587
01:02:59,000 --> 01:03:01,000
and then we just take the net present value.

588
01:03:01,000 --> 01:03:04,000
That's the end of the problem.

589
01:03:04,000 --> 01:03:06,000
We just take the NPV of the project

590
01:03:06,000 --> 01:03:10,000
or the internal rate of return, if you will,

591
01:03:10,000 --> 01:03:12,000
and there's the end of the project, right?

592
01:03:12,000 --> 01:03:15,000
There's the end of our analysis.

593
01:03:15,000 --> 01:03:18,000
In talking about it, it's kind of complicated,

594
01:03:18,000 --> 01:03:22,000
but like as an Excel routine or something like that,

595
01:03:22,000 --> 01:03:24,000
it's not all that bad.

596
01:03:24,000 --> 01:03:26,000
Where your danger comes in, of course,

597
01:03:26,000 --> 01:03:31,000
is projecting the revenues.

598
01:03:31,000 --> 01:03:33,000
Operating costs.

599
01:03:33,000 --> 01:03:36,000
Well, how do we project the operating costs?

600
01:03:36,000 --> 01:03:38,000
We do it the old fashioned way.

601
01:03:38,000 --> 01:03:40,000
We take a percentage.

602
01:03:40,000 --> 01:03:43,000
We consider operating costs to be a variable cost,

603
01:03:43,000 --> 01:03:46,000
so they're a percentage of the revenue.

604
01:03:46,000 --> 01:03:48,000
So once you project the revenues, you say,

605
01:03:48,000 --> 01:03:52,000
well, operating costs will be 40% of revenues.

606
01:03:52,000 --> 01:03:56,000
And so, and we know how to write the depreciation.

607
01:03:56,000 --> 01:04:00,000
We just use a depreciation schedule in Excel,

608
01:04:00,000 --> 01:04:01,000
so that's not hard.

609
01:04:01,000 --> 01:04:02,000
We know our tax rate.

610
01:04:02,000 --> 01:04:04,000
That's not hard.

611
01:04:04,000 --> 01:04:06,000
We know what our capital expenditures are going to be

612
01:04:06,000 --> 01:04:08,000
because we've got the bids,

613
01:04:08,000 --> 01:04:10,000
and we've got the winning bid and all that.

614
01:04:10,000 --> 01:04:13,000
Projecting the operating working capital,

615
01:04:13,000 --> 01:04:20,000
we actually do that by a percent of revenues.

616
01:04:20,000 --> 01:04:22,000
Think about it this way.

617
01:04:22,000 --> 01:04:25,000
Your accounts receivable.

618
01:04:25,000 --> 01:04:28,000
We would hope that your accounts receivable

619
01:04:28,000 --> 01:04:33,000
will be a stable percentage of your revenues.

620
01:04:33,000 --> 01:04:36,000
And inventory.

621
01:04:36,000 --> 01:04:42,000
Well, inventory, that should be a fairly stable percentage

622
01:04:42,000 --> 01:04:46,000
of your sales, too.

623
01:04:46,000 --> 01:04:48,000
That's how you get gross margin.

624
01:04:48,000 --> 01:04:51,000
We calculated the gross margin for a product similar to that

625
01:04:51,000 --> 01:04:57,000
as 20%, as 65%.

626
01:04:57,000 --> 01:05:02,000
Okay, that would mean the cost of goods sold was 35% of revenues.

627
01:05:02,000 --> 01:05:08,000
Aha, so it looks kind of complicated procedurally,

628
01:05:08,000 --> 01:05:12,000
but we usually use the percentages,

629
01:05:12,000 --> 01:05:20,000
and we project the numbers based on those percentages.

630
01:05:20,000 --> 01:05:25,000
And then the only challenge is projecting the revenues.

631
01:05:25,000 --> 01:05:28,000
And that's where the pitfalls come in.

632
01:05:28,000 --> 01:05:30,000
You can be overly optimistic.

633
01:05:30,000 --> 01:05:33,000
Well, we're going to sell this product like hotcakes

634
01:05:33,000 --> 01:05:35,000
right out of the box.

635
01:05:35,000 --> 01:05:38,000
Oh, you didn't, did you?

636
01:05:38,000 --> 01:05:40,000
No, we had about a year or two there

637
01:05:40,000 --> 01:05:44,000
where people didn't know what the hell we were selling.

638
01:05:44,000 --> 01:05:45,000
That's the problem, too.

639
01:05:45,000 --> 01:05:49,000
And also another problem is when to kill it.

640
01:05:49,000 --> 01:05:52,000
How long you want to keep it.

641
01:05:52,000 --> 01:05:54,000
You're going to go into, well, I erased it,

642
01:05:54,000 --> 01:05:56,000
but you're going to go into that maturity phase.

643
01:05:56,000 --> 01:05:59,000
Well, when is the maturity phase going to hit?

644
01:05:59,000 --> 01:06:02,000
Three years? Five years? Ten years?

645
01:06:02,000 --> 01:06:05,000
How long is it going to take our competition to figure out

646
01:06:05,000 --> 01:06:08,000
that we've got a winner, and they're going to come in,

647
01:06:08,000 --> 01:06:12,000
and they're going to bleed market share off us like a boss?

648
01:06:12,000 --> 01:06:14,000
Those are the kinds of challenges.

649
01:06:14,000 --> 01:06:22,000
So really, the hard part in a way is projecting the revenues,

650
01:06:22,000 --> 01:06:28,000
being realistic about how quickly the market is going to embrace the product,

651
01:06:28,000 --> 01:06:31,000
how quickly the competition is going to come in

652
01:06:31,000 --> 01:06:35,000
and take our game away from us, and all that.

653
01:06:35,000 --> 01:06:39,000
The rest of it is kind of like just put the numbers together,

654
01:06:39,000 --> 01:06:44,000
and then when it's all over, you just look back and say,

655
01:06:44,000 --> 01:06:47,000
how could we do better the next time we project the cash,

656
01:06:47,000 --> 01:06:50,000
free cash flows for our project?

657
01:06:50,000 --> 01:07:05,000
Well, that's all I have for you today. I thank you.