Now we need to rethink all of that.

Consider alternative courses of action, alternative scenarios.

Reality checks, did these statements really make sense?

Is our forecasted sales price realistic?

Would people actually pay that much?

Why would they pay that much?

Can we reasonably expect to sell that many?

Even if we could, can we produce that many?

What are our constraints in terms of productive capacity?

The balances of the receivables, and the inventory, the liabilities.

Do those seem plausible as well?

We want to check all of those things.

So let's start with sales.

Remember, this is the source of all of our inflows.

So if there's no sales, there's no profits.

So remember we assume the following in our spreadsheet with respect to sales.

Sales are going to start in period 3.

They're going to be 2,000 units year, there's no growth based on

that 2,000 unit starting point, the sales price is $100.

It stays at $100.

It doesn't go up over time, say with inflation or

anything like that, and the margin on our product is 55%.

These assumptions, at this point, partly reflect our best estimate as to what

we think will happen, but also involves some simplifications we probably made

just to make it easier to check that our spreadsheet was actually working right.

So now let's go into alternative scenarios, what if analysis?

Our calculations assumed that volume will be 2000 units a year but

what if sales volume is different?

How bigger are the profits in present value terms at different sales levels?

We can go back to the spreadsheet and change that INITIAL SALES VOLUME cell.

It's 2000 now, change it to something else, 2400 say.

If you setup the spreadsheet correctly, all the cells will automatically update.

So here's some examples of re-calculation of the net present value if the sales

volume is 20% higher or 20% lower than our baseline forecasted case.

It's always a good idea to do a more optimistic case and

a more pessimistic case.

So if things turn out better than expected, our NPV is much higher.

It goes up to 61,961 and the IRR accordingly higher as well,

so we would be perfectly happy if that's the way things turned out.

But if the demand is lower, only 20% lower,

1,600 units a year, we lose money.

Okay, this is an important thing to note.

So, let's go into that in a little bit more detail now.

What sales volume still allows us to make money?

That is, what is the break even point for sales?

Breakeven means earns a Net Present Value of Zero.

Equivalently, it means that the Venture Earns an IRR of 6%.

Now, we could try to figure this out by trial and error, by putting in different

volumes into the spreadsheet and see where we end up with an NPV of zero.

We know from the prior slide that it's going to be somewhere around 1600 units,

probably a little bit bigger than that.

But we can actually use a built in function in Excel called Goalseek

to help us figure that out.