BareBones NPV Evaluation Software
User Guide
Created in 2005 by Adrian Becker, Lee Tobey and Justin Sapolsky
BareBones Real Options Software
Table of Contents
Introduction........................................................................................................................ 1
Step-by-Step Example ........................................................................................................ 2
Sea Products Project ............................................................................................................................. 2
Sea Products Illustrative Table ............................................................................................................. 3
Sea Products Walk Through ................................................................................................................. 4
Using the BareBones Real Options Software ................................................................... 6
Entering Stage 1 Estimates....................................................................................................... 6
Initial Investment at Launch ................................................................................................................. 6
Years from Today to Project Launch .................................................................................................... 6
Project Fixed Costs per Year ................................................................................................................ 6
Project Fixed Revenues per Year .......................................................................................................... 6
Entering Stage 2 Estimates....................................................................................................... 6
Annual Variable Cost in Stead State ..................................................................................................... 6
Annual Variable Revenue in Steady State ............................................................................................ 6
Entering Stage 3 and 4 Estimates ............................................................................................ 7
Number of Years from Launch to Steady State .................................................................................... 7
Project Lifespan (From Launch to Termination) .................................................................................. 7
Number of Years from Launch to Competitive Entrance ..................................................................... 7
Entering Rate of Return Estimates ......................................................................................... 7
Project Rate of Return ........................................................................................................................... 7
NPV Graph ................................................................................................................................ 8
BareBones Real Options Software
Introduction
The BareBones Real Options tool provides users with a fast, straightforward method of
calculating the net present value and real option value of a project. The software builds
these estimates using a method based on yearly business milestones, along with revenue
and cost assumptions. The user-defined assumptions are then entered into a mathematical
distribution that outputs the NPV and Real Options values. NOTE: Some references in
this tutorial refer to the more advanced version of this program, BareBones Real Options.
Figure 1.1 Introduction Screen
In addition to the ability to analyze the NPV for a project, the BareBones Real Options
tool allows you to define uncertain parameters on the Intermediate-Advanced sheet and
obtain Real Option value.
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Step-by-Step Example
Sea Products Project
We will illustrate the use of this software through a sample project, named Sea Products.
Sea Products is considering a project with the following characteristics:
Before launching, the company must take out a license for $5 million to obtain exclusive
use of a new technology. They must also build a pilot plant for $10 million.
If the product passes regulatory approval, the company can be ready to start sales in 1 ¼
years.
It will take one additional year to ramp up revenues to full potential.
Full variable revenues are assumed to be $40 million per year.
Full variable costs are assumed to be $36 million per year.
Full fixed revenues are assumed to be $2 million per year.
Full fixed costs are assumed to be $1.8 million per year.
The bad news is that competition does not sleep at the wheel, and we can expect
competitive erosion to start within four years of launch.
We can expect margins to be gone in eighteen years.
The risk-free rate for Sea Products’ investments is 5%.
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Sea Products Illustrative Table
1) Take out a $5 million license and build
a $10 million pilot plant.
1) Initial Investment = $15 million.
2) Begin sales in 1 ¼ years.
2) Years to launch = 1.25
3) Needs an additional year to ramp up.
3) Launch to ramp-up = 2.25
4) Full variable revenues are assumed to
be $40 million per year.
4) Steady state variable revenues = $40
million.
5) Full variable costs are assumed to be
$36 million per year.
5) Steady state variable costs = $36
million.
6) Full fixed revenues are assumed to be
$2 million per year.
6) Steady state fixed revenues = $2
million
7) Full fixed costs are assumed to be $1.8
million per year.
7) Steady state fixed costs = $1.8 million
8) Competitive erosion will begin 4 years
after launch.
8) Launch to competitive entrance = 4
9) Margins will be gone in 18 years.
9) Project Lifespan = 18
10) The risk-free rate of investments is 5%.
10) Rate of Return = .05
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Sea Products Walk Through-Basic
Task
Exercise
1.
□ GOAL: To calculate NPV for a project using yearly milestones, revenues, and costs.
Calculating
NPV
STEP 1
Open the BareBones Real Options workbook and select the Basic NPV worksheet.
STEP 2
Enter estimates for the required investment, fixed costs, fixed revenues and time of
the product launch.
STEP 3
Enter estimates for your steady state parameters.
STEP 4
Estimate the number of years from the product launch to competitive entrance and
product termination.
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Task
Exercise
STEP 5
Estimate rate of return for the project.
STEP 6
The NVP will automatically be calculated as long as your license is valid.
STEP 7
View the Steady State Expectation Profile Graph. This will show you the expected
profits for each year of the project.
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Using the BareBones Real Options Software
Entering Initial Investment and Fixed Cost and Revenue Data
Upon opening the program, there are 10 assumptions that must be input before the NPV
can be calculated. The following stage 1 parameters are located at the top of the
spreadsheet:
Initial Investment at Launch
The initial cost of investment in the project.
Years to From Today to Project Launch
The time from the initial investment date to
the first sales.
Project Fixed Costs per Year
Estimated fixed costs per year.
Project Fixed Revenues per Year
Estimated fixed revenues per year.
Figure 2.1 Initial Investment and Fixed Cost Data
Entering Steady State Parameters
Refer to Stage 2 of the worksheet. The assumptions here define the context for the
variable costs and revenues, and build a framework for the accurate calculation of NPV.
The input boxes are as follows:
Number of Years from Launch to Steady
State
Annual Variable Costs in Steady State
The time from launch date to the time when
stable, peak revenues are achieved.
Annual Variable Revenues in Steady State
Variable revenues once variable profits
have leveled
BareBones Real Options Software
Variable costs once variable profits have
leveled
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Figure 2.2 Steady State Parameter Estimates
Competitive Entrance and Lifespan
Refer to Stage 3 of the worksheet. The assumptions here determine how long the firm
will experience full revenues before competitive entrance and how long the project will
last before termination. The input boxes are as follows:
Project Lifespan
The time from launch date to the end of the
project.
Launch to Competitive Entrance
The time from launch date to the first
entrance of competitors.
Rate of Return
The return achieved on re-invested profits.
Figure 2.3 Competitive entrance and lifespan
Rate of Return
Refer to Stage 4 of the worksheet. This assumption will determine the current value of a
dollar received during each year of the projects life. The input box is as follows:
Rate of Return
The return achieved on re-invested profits.
Figure 2.4 Rate of Return
After the input boxes must be filled in, press the Calculate button to obtain valuation.
NPV Graph
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A graph will also appear. This graph illustrates the expected profits for each year of the
project, which are the numbers used to calculate the NPV.
Figure 2.5 Steady State Expectation Profile – Basic and Intermediate/Complete/Advanced Views
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