Assumptions financial

A variety of obstacles and bad habits explain this misplaced emphasis on activities instead of outcomes. At their root lie the old assumptions, financial-focus, internal orientation, and silo organization models we reviewed above. These obstacles and bad habits include ... 

Rarely, all of the information needed for analysis is made obvious on the balance sheet, income statement, or statement of cash flows. Instead, it may require closer examination to find the necessary information. The numbers reported in the financial statements may not be exactly what is needed for financial analysis and day-to-day decision making by those in supply chain and operations because of the assumptions made by a company s financial experts. Accountants have the liberty to make assumptions based on historical trends when preparing financial statements. Examples of these assumptions include the amount of accounts receivable will not be collected, or what liabilities exist, such as tax, pension, and legal liabilities. Accountants also make assumptions about how to value tangible assets, how to value brand and intangible assets, and an amount to allocate to goodwill. As a result of these assumptions, financial results can vary widely. 

The purpose of a scoping analysis is to determine, under worst case assumptions, if there is a risk that can cause injury, death or financial impact to the public, workers, company, or environment. The PSA begins by identifying the hazards, their physical and chemical properties, the confinement, conditions and distance for transport to a target, estimating the effects on the target, and comparing these effects with accepted criteria. 

Much of the apparent complexity of current approaches to real-options analysis arises from the attempt to fit financial-option formulae to real-world problems. Usually this does not work since real-world options are often quite different from financial options. Option-pricing formulae are treated as a pro-crustean bed by academics Either the real world is simplified beyond recognition or unwarranted assumptions are added to make the facts fit the theory. Neither approach satisfies managers. 

In a fully developed financial planning model, all the key estimates and assumptions are expressed as general mathematical relationships. Then software programs (e.g., Microsoft Excel) are used to determine the impact of different combinations of these unknown variables. What if questions can be answered about such unknown variables as inflation, interest rates, the value of the dollar, demand, competitors actions, union demands in forthcoming wage negotiations, and a host of other factors. 

The concept of continuous interest is that the cost or income due to interest flows regularly, and this is just as reasonable an assumption for most cases as the concept of interest accumulating only at discrete intervals. The reason why continuous interest has not been used widely is that most industrial and financial practices are based on methods which executives and the public are used to and can understand. Because normal interest comprehension is based on the discrete-interval approach, little attention has been paid to the concept of continuous interest even though this may represent a more realistic and idealized situation. 

The central financial assumption for the calculation of second generation leve-lized PV electricity and H2 prices is the assignment of the depreciated 10% value of first generation assets as the second generation investment value for equity holders. All other second generation capital investments, revenues, expenses, depreciation, and taxes are entered into the net present value cash flow model in exactly the same manner as the first generation model. The capital structure of H2 production and distribution firms is assumed to remain 30% equity and 70% debt. The rate of return on equity remains 10%, the rate of return on debt remains 7%, the income tax rate remains 39%, and the discount rate remains 6%. 

There are several differences in the financial assumptions. The H2A real after-tax discount rate is 10%, whereas in this study the real after tax discount rate is 6%. The variation is attributable to differences in the capital structure for investments. The H2A uses a 100%-equity capital structure, whereas this study uses a capital structure of 30% equity capital and 70%-debt capital. The cost of debt is 10% for the H2A default value for 7% (30-year coupon bond) for this study. The tax rate is the same in both studies. The H2A assumptions include an inflation factor of 1.29%, while this study does not include an inflation factor, which is explained in Appendix 2. The net effect of these differences in financial assumptions is a lower levelized H2 pump price estimate for this study compared to the levelized H2 pump price under the H2A financial assumptions. 

For one, the difference in financial assumptions explains part of the difference. Possibly the largest factor is a difference in the assumption regarding operating life of H2 storage containers. H2 storage containers, composite tube trailers for com-... 

Fig. 15.2 Expectations of the financial markets on total synergies Assumption WACC of 10%, no growth Source McKinsey...

Most business endeavors evolve from a series of assumptions related to functionality, outcomes, value, process, price, and so on. To identify which key assumptions need to be tested for your innovation, start by creating a comprehensive list of assumptions that are built into your idea. You can use the approach of Innovation Financial Management (Technique 11) to help with this task. Once you have a comprehensive list, prioritize your assumptions and select ones that will have the greatest impact on the success of the innovation. List these on the Project Charter. 

To complete the initial project investment estimates, identify the cost of raw materials, people, training, time, capital expenditures, and other costs that will be required to bring your innovation to market. You can use Innovation Financial Management (Technique 11) to help you identify investment costs relative to your assumptions. 

Any innovation is risky. Innovation financial management reduces this risk by increasing the ratio of verified knowledge to unverified assumptions as the project unfolds. This learn-as-you-go approach ensures that you have the most accurate and updated information possible and enables you to confidently proceed or abandon the project at any point. 

Innovation financial management offers an alternative to these methods by identifying, tracking, and updating key assumptions, and linking the verification of these assumptions to the investment decision-making process. 

The extent to which you can complete the innovation financial management documents early in the project depends on the level of innovation you hope to achieve. During incremental innovation, your initial ratio of knowledge to assumptions (Exhibit 11.1) will be higher than for substantial or breakthrough innovation. In either case, you should update the relevant financial documents, as well as the Project Charter, as you uncover new data throughout the project. 

For example. Pikes Peak Coffee knows that it currently has 32 locations, and that if the innovative breakfast offering proves to be viable, it would be offered in all locations. What the company doesn t know yet is the details of the offering, the retail price, the demand, or the cost (materials, personnel, and new equipment). However, for each of these assumptions, innovation financial management encourages you to put forth an educated guess. The point is not to show what you know, but to learn as you go (Exhibit 11.2). 

Make a list of any critical assumptions that, if left unchecked, could seriously impact your innovation financially. Many of these you have already created for the income statements and operations specs. Include the following ... 

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