Advanced Spreadsheet Use. Head/analysis Heart/passion Gut check/faith

Advanced Spreadsheet Use

Head/analysis Heart/passion Gut check/faith

Measuring returns

Project return Invest $100,000,000 Profit $15,000,000 15% pa

Case 1 Invest $100,000,000 Finance 75%, 4.5%,

15 years Profit ≠ $15,000,000 EBITDA

http://www.old.dramatispersonae.org/images/roe-case-1.xls

ROE, Case 1

Project investment $ 100,000,000.00

Finance $ 75,000,000.00 75% 4.50% 15 yrs

Equity $ 25,000,000.00

EBITDA $15,000,000 per yr

Debt financing ($6,983,535.61) per yr

Profit $8,016,464 per yr

ROE 32.1% pa

Case 2 Invest $100,000,000 Finance 75%, 9%,

ROE, Case 2

Finance $ 75,000,000.00 75% 9.00% 15 yrs

Equity $ 25,000,000.00

ROE 22.8% pa

Case 3 Invest $100,000,000 Finance 75%, 9%,

ROE, Case 3

Finance $ 75,000,000.00 75% 9.00% 8 yrs

Equity $ 25,000,000.00

ROE 5.8% pa

Target range Large cos 20% to 24% Students 20% to 30% (architects 14%) Credit card cos 18% to 39% VCs 30%+ Vultures 35%+ Maximum allowed under CDN Criminal Code = 60% pa

including extra charges or service fees

Owners of Winnipeg payday lending co charged Investigation reveals people paying criminally high

interest Det-Sgt Terlinski says co allegedly charging rates of

several thousand per cent http://www.cbc.ca/news/canada/loan-company-charged-i

n-criminal-interest-rate-case-1.601087

Decreases with age

Canada housing

Compound Growth Rate in Average Canadian House Prices 1980-2012

Year Avg Price Compound Growth

1980 $60,000.00 2012 $370,000.00 5.85% p.a.

32 $310,000.00

E&OE/Approx

Canada housing Simple Housing Example

2011 $ 349,551.25 5.85% pa housing inflation in Canada

2012 $ 370,000.00

Delta $ 20,448.75 5.85% pa check

Debt $ (262,163.44) 75%

Equity $ 87,387.81 25%

ROE 23.40% pa

http://www.old.dramatispersonae.org/images/simple-housing-example-roe.xls

Leverage– ten main sources

great HR using OPM forced savings innovation capital equipment

location network effects biz models/marketing channels reduce problem from

one to many to one to a few branding, co-branding, co-opetition and co-creation inflation

HR/hire up

OPM/as long as cost of OPM < project returns

Forced savings Forced Savings

Lab space 20,000 sf

Rental cost $27 per sf per yr gross*

Rental cost $540,000 per yr

HST $70,200 13%

Total rental cost $610,200 per yr

http://www.old.dramatispersonae.org/images/forced-savings.xls

Forced savings

Purchase price $200 per sf

Purchase price $4,000,000

Debt $4,000,000 100% 4.50% 15 yrs

Equity $0 0%

Debt payment ($372,455.23) per yr

1 ($192,455.23)

2 ($201,115.72)

3 ($210,165.93)

Forced savings $603,736.88

* Including operating costs, admin, prop taxes, utilities

Forced savings Principal v interest curve/bank term limit may reset

Forced savings P v I

Amortization Made Simple

Loan to prof $ 1,000.00

Interest rate 15%

Annual repayment by prof $ 298.31

Year Interest Principal (PPMT) Principal Outstanding

1 $ (150.00) $ 148.31 $ 851.69

2 $ (127.75) $ 170.56 $ 681.13

3 $ (102.17) $ 196.14 $ 484.99

4 $ (72.75) $ 225.56 $ 259.43

5 $ (38.91) $ 259.40 $ 0.04

Financial engineering Treat investors at least

as well as promoter

BMC Financing

Corp Promoter Total Capital Investor

1 $5,000,000 51% $9,803,921.57 $4,803,921.57

2 $9,803,921.57 51% $19,223,375.62 $9,419,454.06

3 $19,223,375.62 51% $37,692,893.38 $18,469,517.76

4 $37,692,893.38 51% $73,907,634.08 $36,214,740.70

5 $73,907,634.08 51% $144,916,929.57 $71,009,295.49

6 $144,916,929.57 51% $284,150,842.30 $139,233,912.73

7 $284,150,842.30 51% $557,158,514.31 $273,007,672.01

8 $557,158,514.31 51% $1,092,467,675.12 $535,309,160.81

9 $1,092,467,675.12 51% $2,142,093,480.63 $1,049,625,805.51

10 $2,142,093,480.63 51% $4,200,183,295.36 $2,058,089,814.73

http://www.old.dramatispersonae.org/images/bmc-financing.xls

Financial engineering Treat investors at least as well as promoter Sweat equity 10% to 25% All shareholders equal Otherwise, it’s a form of debt

Innovation

All of life experiment until proven otherwise Try something, works, do more Try something else, doesn’t work, stop As soon as implementation begins, experimentation

starts/change happens

Innovation/list of 30 accidental discoveries changed world

a. penicillin b. post-it-notes c. strikeable match d. the lever e. plastic f. velcro

g. law of gravity h. radioactivity i. microwave j. mauve color k. dynamite l. pacemaker m. anesthesia

n. teflon o. saccharin p. x-ray q. vaseline r. vulcanized rubber s. chicken cholera vaccine

t. nuclear fission u. LSD v. safety glass w. making fire x. cave painting ochre y. cellophane

z. chirality (right and left-handed chemical molecules) aa. gunpowder (blasting gelatin) bb. nylon cc. DNA dd. density

Luck plays role—scientific, business, artistic even political but harder you work, luckier you get…

Innovation/things you can only learn by doing

business models, whether they work as planned or require modification

beta product launches, what reaction markets have battle plans, whether they work as planned or require

modification catalysts, whether they speed things along or not weather, too unpredictable to be meaningfully forecast

weather, too unpredictable to be meaningfully forecast

Canada’s 2013 federal budget finance minister Jim Flaherty announced additional $248

million over five years to strengthen Canada’s meteorological services

billions spent on weather forecasting weather channel huge hit apparently, watching floods, fire, tornadoes, hurricanes,

other disasters profitable and fun (as long as happening somewhere else)

Overall success rates generally 77% better than flipping coin accuracy in Palm Beach higher than for northern shelf

city like Ottawa where much more variability in climate differences small, perhaps 75% versus 79% so far, so good

but real issue not whether Meteorological Service of Canada accurately predicts high temp tomorrow (within three degrees, generally accepted range) or whether it will rain or snow or hail or flood…

real issue is can they predict when a change will occur?

freakonomics blog, JD Eggleston, in study of local weather for Kansas City, found forecaster who always and arbitrarily predicted never rain right 86.3%

3 of KC’s local TV channels 1-day out success rates— 87% difference unlikely to be statistically significant

http://profbruce.tumblr.com/post/58779699201/how-accurate-are-weather-forecasts-in-canadas

economic policies, whether the law of unintended consequences invoked

children, how they respond to discipline and incentives motivation, how to get a team to work together HR, who to recruit taste, what you like/don’t like in clothes, fashion, food,

film, music, people

sports, how to ski, snowboard, hang glide, windsurf, golf, sail, ride a bike, play tennis, skateboard…

party and events, what works, what doesn’t YouTube video, what goes viral, what doesn’t film, music, novel, what hits/what misses…

Stan Jaffe

Capital equipment/hand looms to automated ones

Location/by occupying one location, automatically exclude everyone else

Network effects/law of large nos

USD Telephone Fax Email Browser Google Skype Amazon

Network effects/community forms through SM

Reddit TechCrunch Twitter Facebook Digg (before iterations) YouTube Kiva LooseButton Khan Academy

Biz models/marketing channels reduce problem from one to many to one to a few

Project Wonderful/reverse out pricing work to advertisers Virtual homebuilder/reverse out design to consumers,

bidding/scheduling to trade contractors Grade A Techs/matching suppliers (techies) with

consumers Apple stores Amazon resellers

Branding, co-branding, co-opetition and co-creation

Apple macbook pro $3,500 Windows machine $900 Threadless consumers vote on t-shirt designs

well respected brand creates opportunity to sell successfully

work hard (for years) to establish reputation for good work, high ethical standards and trustworthiness

trust creates environment for you where clients send you more and more work

trust creates environment where clients refer other clients

trust gives breathing room when make a mistake trust creates personal brand for you individually,

independent of firm change firms, many clients follow trust creates brand brand creates opportunity to turn market into sales

Marketing Branding Trust Sales Profits Marketing …

(2)Your Reputation and Brand build Trust in you

(3)Trust in you creates an

opportunity for you to Sell in a separate Sales Process

‘TRUST POWERS SALES’

Sales provides additional resources for Marketing

(1)Marketing through a

Marketing Process builds your Reputation

and Brand

Clarica Life Insurance (now a Sunlife Financial member)

Inflation/go where all boats are rising

Nano tech AI Digital data Green PB4L 3-d printing Entertainment

Power Transportation/hyperloop

http://www.youtube.com/watch?v=IlnlkMbukmA Farm-in-a-box Mega-cities Continuing ed Entrepreneurship Curation

Customer service Authenticity Land Financial planning ESL Self-help Coaching

Mentoring Elder care Yoga/physiotherapy Marijuana/wine/foodie Design Fashion/clothing Future will surprise us

Cap Rate

Most real estate professionals use Cap Rates to compare one project with another

Cap Rate (Capitalization Rate) is approximate measure All financial measures are

Cap Rate

Cap Rate determined by dividing Operating Income of property by Selling Price

Inverse of Cap Rate is approximation for number of years to earn back capital

Widely used in commercial real estate sector Higher Cap Rate, better for Buyer/worse for Seller

Cap Rate Cap Rate Simplified Case 1

Purchase Price $1,320,000 10 unit apartment building

Rent $1,100 per apartment per mth

Rent $132,000 per annum

Property taxes ($19,800) 1.50%

Water ($14,500)

Insurance ($9,800)

Property management ($7,920) 6%

Utilities ($15,000.00)

NOI $64,980

http://www.old.dramatispersonae.org/images/cap-rate-simplified.xls

Cap Rate Contingencies ($3,249.00) 5%

Repairs and maintenance ($1,949.40) 3%

Vacancy allowance ($2,599.20) 4%

Adjusted NOI $57,182

Cap rate 4.3% p.a.

Debt $0 0%

Equity $1,320,000 100%

Years to get capital back 23.1

Years to get capital back 23.1 check

Cap Rate Cap Rate Simplified Case 2

Purchase Price $1,320,000 10 unit apartment building

Rent $1,100 per apartment per mth

Rent $132,000 per annum

Property taxes ($19,800) 1.50%

Water ($14,500)

Insurance ($9,800)

Property management ($7,920) 6%

Utilities $0.00 tenant pays utilities

NOI $79,980

http://www.old.dramatispersonae.org/images/cap-rate-simplified-case-2.xls

Cap RateContingencies ($3,999.00) 5%

Repairs and maintenance ($2,399.40) 3%

Vacancy allowance ($3,199.20) 4%

Adjusted NOI $70,382

Cap rate 5.3% p.a.

Debt $0 0%

Equity $1,320,000 100%

Years to get capital back 18.8

Years to get capital back 18.8 check

Cap Rate

Cap Rate measures only cash on cash returns Ignores forced savings Ignores inflation NOI often misstated

IRR, Internal Rate of Return

Best measure so far Can result in > 1 answer/need commonsense

IRR, Internal Rate of ReturnIRR Made Simple

Interest rate 15%

Year Interest Principal (PPMT) Principal Outstanding

1 $ (150.00) $ 148.31 $ 851.69

2 $ (127.75) $ 170.56 $ 681.13

3 $ (102.17) $ 196.14 $ 484.99

4 $ (72.75) $ 225.56 $ 259.43

5 $ (38.91) $ 259.40 $ 0.04

$ 999.96 check

http://www.old.dramatispersonae.org/images/irr-made-simple.xls

Lender

0 $ (1,000.00)

1 $ 298.31

2 $ 298.31

3 $ 298.31

4 $ 298.31

5 $ 298.27 $ 1,491.51

irr 15% pa

IRR, Internal Rate of ReturnIRR Made Simple Case 2

Interest rate

Lender

0 $ (1,000.00)

1 $ 350.00

2 $ 350.00

3 $ 350.00

4 $ 350.00

5 $ 350.00 $ 1,750.00

irr 22.1% pa

http://www.old.dramatispersonae.org/images/irr-made-simple-case-2.xls

IRR, Internal Rate of ReturnIRR Made Simple Case 3

Interest rate

Lender

0 $ (1,000.00)

1 $ 350.00

2 $ 225.00

3 $ 225.00

4 $ 225.00

5 $ 225.00 $ 1,250.00

irr 8.6% pa

http://www.old.dramatispersonae.org/images/irr-made-simple-case-3.xls

Apple’s iPhonePhones Sold

1 2,320,849 units sold 2 13,727,740 units sold 3 25,103,770 units sold

4 35,000,000 units sold est. 5 46,391,461 units sold est. 6 57,332,809 units sold est. 7 68,274,157 units sold est.

Apple’s iPhone Regression Statistics

Multiple R 0.999436215R Square 0.998872748Adjusted R Square 0.998309123Standard Error 581160.6385Observations 4

ANOVAdf SSRegression 1 5.98566E+14Residual 2 6.75495E+11Total 3 5.99241E+14

Coefficients Standard ErrorIntercept -8315281 711773.5115X Variable 1 10941348.3 259902.9387

Apple’s iPhone

No iPhones sold per annum = -8,315,281 + 10,941,348.3 x (Year – 2006)

Apple’s iPhone

IRR Cash Out Cash In Cashflow2006 $ (1,150,000,000.00) $ (1,150,000,000.00)2007 $ (1,150,000,000.00) $ 1,521,123,592.60 $ 371,123,592.62008 $ (1,150,000,000.00) $ 8,997,392,414.17 $ 7,847,392,414.172009 $ (1,150,000,000.00) $ 22,939,590,529.53 $21,789,590,529.532010 $ 22,939,590,529.53 $22,939,590,529.532011 $ 37,576,890,222.28 $37,576,890,222.282012 $ 44,748,034,503.51 $44,748,034,503.51 IRR 288% p.a.

Assignment

Server Farm Analysis Iowa v Luleå, Sweden

Assignment

Server Farm Analysis

http://www.old.dramatispersonae.org/images/server-farm-analysis.xls

Hand in your spreadsheet assignment next lecture

Reminders! Have a good study week! Slides:

http://www.old.dramatispersonae.org/images/advanced-spreadsheet-use.ppt

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