opening issues things we need to discuss!. lifforce the strange case of misconception! week 9...
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Opening IssuesThings we need to discuss!
• Lifforce the strange case of misconception!
• Week 9 Assignments• Skill Module 17.2 Whole Life Costing• Inventory Valuation • Eli Consulting advice• The three books and what they said to
Lensbabies
LifforceOr man is this strange!
• Risk from most to least – 2 then 1& 3. – Why? In 2 Albert is risking almost 75% of his net worth
and is risking none of it in the others.
• Rewards from most to least – 2, 3, 1. – But that that far apart given case assumptions.
• Revise based on the Theorem #6 makes 1 & 2 many times higher rewards than 3!– They are close enough together that risking net worth
just doesn't seem worth it.
LifforceTheorem #6
• If Phase 1 fails everything is lost in all options. – Albert is worse off in 2.
• If Phase 2 fails after 1 succeeds then everyone losses all those paper gains and are left with nothing.– Albert probably got enough out of IPO to recover his net worth and get
some salary in Phase 2 though not stated in case.
• BUT if Phase 2 Succeeds then the stock that Albert got at the end of Phase I IPO and had to leave in stock, would skyrocket in price at least 2-4x so his returns would be say $300 million or so depending. – This is far more than 3 making it a really bad deal all the way around.
– This makes 1 and 2 generate huge returns.
– To me 1 is the overwhelming choice – less risk with the same gain [about]! [But you could argue with me on the risk/reward of risking 75% of your net worth now verses gaining an extra $30 million! To me it depends on the probability of the successful outcome at the end.]
LifforceMisconceptions Abound!
• Loan has no risk impact on Albert, they are debt of the company. D/E ratios are meaningless. Albert’s personal risk and reward is NOT = to the risk of the company. Loans are responsibility of company an interest paid by company.
• Amount of control does NOT = Risk [he loses control in all options]
• Amount of rewards does not = ownership %
• The grant has nothing to do with risk except maybe increase it?
• Don’t the family, wife and personal life have any risk?
• Expected value is an important tool in these situations. [Maybe NPV does to!] [EV is the probability of an event happening times the return of that event.] Add that to PV and you have a winner!
LifforceJonathan’s Insight
• Even to the very end new insights emerge. I call this one “The Jonathan Insight”!
• He ask me after class why alternative two had to go to an IPO, they didn’t need all that much money which they could get by a small IPO [I said not likely, too small but it could be raised with another investor which would cost a lot less than the first since Phase I successful! Amazing, I hadn’t thought of that.
• Then Albert could keep a higher percentage and likely maintain control of the company and get a lot, and I mean a lot, more money if Phase 2 successful.
• This was a really good insight and I thank Jonathan for it. Oh how binders can get in the way of good insight and analysis.
Thanks, Jonathan!
Skill Module 17.2 Whole Life Costing
Kyrobi Delta
Whole Life
Costs NPV-20% NPV 10%Whole Life
Costs NPV-20% NPV 10%
Purchase Price 1 $ 110,000 $ 110,000 $ 110,000 $ 80,000 $ 80,000 $ 80,000
Shipping 1 $ 3,500 $ 3,500 $ 3,500 $ 1,000 $ 1,000 $ 1,000
Installation 1 $ 6,500 $ 6,500 $ 6,500 $ 4,000 $ 4,000 $ 4,000
Testing 1 $ 3,500 $ 3,500 $ 3,500 $ 4,500 $ 4,500 $ 4,500
Maintenance 1-10 $ 120,000 $ 50,310 $ 73,735 $ 149,000 $ 62,468 $ 91,554
Energy costs 1-10 $ 85,000 $ 35,636 $ 52,229 $ 130,000 $ 54,502 $ 79,879
Rebuilding 7 $ 25,000 $ 6,977 $ 12,829 $ 35,000 $ 9,768 $ 17,961
Disposal 10 $ 4,850 $ 783 $ 1,870 $ 6,000 $ 969 $ 2,313
Whole Life Costs $ 358,350
$ 217,206 $ 264,163
$ 409,500 $ 217,207
$ 281,207
Whole Life Costs Kyrobi is clearly the winner
NPV At 20% COC Indifferent either one I
NPV At 10% COC Kyrobi clearly the winner
Why? The late year cost of the Delta is higher while the initial cost of Kyrobi is higher. With the higher the discount rate the last year costs count less
and with a lower rate they count more.
Inventory Valuation
Beginning inventory 0 units
Purchases 70 units 30@ $1.00, 20@ $1.10, 20@ $1.15
Ending inventory 25 units
Inventory used 45 units
LIFO - Last In First Out 25 @ $1.00 $ 25.00
FIFO - First In First Out 20 @ $1.15 and 5 @ $1.10 $ 28.50
Weighted Average 25 @ $1.07 $ 26.75
Weighted Average cost = [30x$1.00 + 20x$1.10 + 20x$1.15]/70 = $1.07
IMPACT LIFO Falling prices INCREASE value of inventory First cost moreLeaves the first ones Rising prices DECREASES value of inventory First cost lessFIFO Rising prices INCREASES value of inventory Last cost moreLeaves the last ones Falling prices DECREASES value of inventory Last cost less
Can have a major impact on asset valuation and on Gross Profit [Sales less Costs of Goods]
If higher value then New worth up and income down. If lower Net worth down and income up!
Just to remind you, Lisa said FIFO is most often used, others methods require much documentation.
Eli Associates – Advise for Business!Deal with all parties – clients, employees, renters, partners
Cover legal, ethical and professional issues
• Get a good lawyer• Get a good accountant• Organize a professional corporation• General liability insurance for building• Professional business liability
insurance• Standard contract terms and
conditions• Non-compete, don disclosure and
client confidentiality agreements• All agreements in writing• Accept a prime contractor only that
you trust and will accept your terms• Figure out ownership of writings,
consulting and copyrights.
• Copyright everything automatically• Ensure terms with clients are clear on
product ownership• Be selective with clients• Don’t promise what you can’t give just
to get a job• Review process by owners of every
contract prior to signing• Give specific rather than general
advise• Be sure in writing client know the
recommendations based on facts and goals provided
• Follow terms of contract• Set up standard contract with
conditions, ownership and payment
What Did The Books Say?Just a few of the things that could impact Lensbabies!
THE TIPPING POINT• Just a few people determine the
success of the “buzz”• Know who the connectors [ones who
knows lots of people] and mavens [the ones that collect information]
• Message must be in context• Word of mouth as shows and
conferences and on line blogs
E- MYTH• Have to get past the technician• Deal with the triad of management,
entrepreneur and dreamer in the founders.
CROSSING THE CHASM• The process of the diffusion of
innovations• Chasm is the problem between the
early adopters and the early majority. Critical for this product
• They have to figure out strategy to make the leap across the chasm
• Product definition, positioning the product, channels all are key in finding the right people.
Accounts Receivable
• Critical to cash flow of business, never underestimate importance.
• You need to now what appropriate goals are.
• You must have a plan to control A/R.
• Dalton example.
• Check out www.allbusiness.com articles on A/R
Dalton A/R Example
• Goal less than 60 days given government clients
• Call each client and determine their methods on AP. Bill to fit that.
• Identify problem clients and get a strategy for each
• Strategy to contact every client over 30-45 days.
• Make collections part of PM job
• Make A/R part of weekly management briefing.
Inventory & Asset Value
• Inventory– Huge consumer of cash– Keep it low and then get it lower– Different ways to value inventory and their impact.
• Asset valuation– Remember have choices, correct isn’t always the best– Big impact on balance sheet and even income
statement
Capital Budgeting
• You need a method to help you make choices.
• Simple are “payback” and ROI.• More complex but better are NPV,
IRR• Rent or buy decision• This is worth a course in itself, your
job is
Legal Issues
• Lawyers – yes but must fit• Negotiation – everything!• Litigation, Arbitration, Mediation• Zorro Example
There is just so much here and so little time. It is critical!
Negotiate EverythingGreat Section!
• Prepare• Position• Propose• Seek to create value• Seek long term solutions• Seek balance• Seek mutual safety• Seek outcomes commensurate with
investment• Pounce! Never ever compromise unless it is part of the deal
or they won’t accept it as a compromise. Gratuitous compromises will only hurt. Nice is not always good.
LiabilitiesExcellent Section!
• How to avoid torts in contracting.• Litigation vs. Arbitration vs.
Mediation• Intellectual property – patents,
secrets, copyright, trademarks.• The problem of infringement• The Zorro Example
Litigation vs. Arbitration vs. Mediation
• Litigation– Courts system, torts– Appeal, costly, slowest, public– Favors those with deep pockets
• Arbitration– Outside courts, private judges– Mutual agreement to do it, binding decision– Confidential, costly, faster, balanced
• Mediation– Outside courts, informal, mediation specialists or
lawyers– Binding only if mutually agree, non binding– Confidential, least costly, fastest, best for small
business, put it in contracts.
ProtectionNever enter a relationship without protection!
Zorro25% of staff are lawyers and they are a profit center!
WHAT DO• Warning on every page• Clipping service world wide no
name and similarities• Screen books, TV and movies• Respond to 100% of possible
infringements• If no response call and follow up• Have all distributors and agents
sign agreements• Investigates potential money
issues – did infringer make money?
• File suit if necessary
WHY DO IT?• Must protect rights through due
diligence – or lose it! Must show they make good faith effort.
• They have a few cases every year that generate from $1,000 to $10,000 in settlement.
• They have one or two cases a year that can be a windfall. They got $50,000 from Wal-Mart.
• In a TV show they where offered a settlement of $500,000. John wanted the millions and lost so it cost him $250,000.
• Keeps his current wife busy and it’s a good business expense.
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