My Client's Situation. Wanted: A System to Analyze ROI.
With over $600 million in annual sales, acquisition analysis is an important process that involves considerable risk and uncertainty. Yet, the company must be able to attempt projection to know what they can afford to pay today, which is 20-30 years before the investment begins to realize a return.
What we did. A Financial Simulation Model to Analyze ROI on Lease/Buy Decisions.
John and I developed a computerized simulation model, called the Acquisition Analysis System to analyze "lease/buy" considerations involving acquisitions.
Our simulation model lets management analyze potential acquisitions in terms of expected cash flows and ROI, given certain assumptions that we easily put into the model. We can adjust these parameters to fit any negotiation terms.
Thus, management can see in advance the possible effects of paying a certain amount per year to the seller at x% inflation rate over the next 30 years. But, if the seller prefers a lower fixed rate and higher compensation for inflation, we can plug that into the model and see results in seconds.
Our simulation model covers 20+ variables, ranging from applicable tax rates to industry various indexes. Critical assumptions revolve around future values and the escalation rates of costs, lease, or sale prices. These rates are not single-value inputs. Rather, a range is required which specifies the low, high, and most likely values.
A run's output includes a cumulative probability distribution of the ROI. We also print a list, by period, for items such as after-tax profit, cash flows, net investment, and net present value. Our program analyzes all these items for both lease and buy cases.
The Results. Fast, Easy Lease/Buy Decisions.
The result is that my client's buyers now have only to place a call to headquarters with potential acquisition information. Proposed lease/buy data is immediately fed into the model. If the ROI looks good, the resource is either bought or leased, or further negotiated. Any subsequent changes can be quickly reported, and alternate simulations run.
Questions? Comments? Send me an email.
Mike Hayden, Principal/Consultant
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(c) 2005 Mike Hayden
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