Build a Base-Case Financial Model

CI-700 Project Schedule from Inception through Market Withdrawal.

1.- Computing the NPV requires that the net cash flor for each period be determined,

Constructing the base-case model consists of estimating the timing and magnitude

and then this cash flow be converted to its present value (its value in today's dollars),

of future cash flows and then computing the net present value (NPV) of those cash

as shown in the last rows of the table.

Considering the calculations for year 3, first quarter:

The most basic categories of cash flow for a typical new product development

The period cash flow is the sum of inflows and outflows.

- Development cost (all remaining design, testing, and refinement costs up to

Product revenues

production ramp-up)

Mergin the Project Financials and Schedule into a Cash Flow Report

Production cost

- Ramp-up costs.

Period cash flow

- Marketing and support cost.

- Production cost.

2.- The present value of this period cash flow discounted at 10 percent per year

- Sales revenue.

(2.5% per quarter) back to the first quarter of year 1 (a total of nine quarters) is

The following are cost estimates that we will use for our sample model.

3.- The project NPV is the sum of the discounted cash flows for each of the

For our model, we assume that all renevue and expenses that have occurred

prior to today are sunk costs and are irrelevant to NPV calculations.

The discount rate is 10% / year, so 2.5% / quarter.

The NPV of this project, according to the base-case model, is positive, so the model supports and is consistent with the decision to proceed with development.