all right excellent we’ve come a long
way now that we know so much about capital budgeting techniques it’s time
for a practical exercise together we’ll build a complete capital budgeting
model from scratch sounds good doesn’t it nowadays companies try to maximize
their value by investing in the best possible projects which makes business
and financial sense to be able to compare different projects financially
firms need models precisely like the one we’ll build here so this is a valuable
exercise we’ll consider a situation in which an auto producer company in Italy
tries to assess whether it would make financial sense to move some of its
production to Vietnam lower cost of personnel land taxes and raw materials
are some of the main reasons the company expects to improve its cash flows if it
moves to Vietnam however several board members are not necessarily convinced
therefore they have requested a formal financial assessment the capital
budgeting exercise will build including worst base and best case scenarios so
they can have a sense of the possible risks the company will face if things
don’t go well in addition for greater precision you are asked to build a 10
year model the main source of income the company would expect to generate from
this endeavor is savings derived from the cheaper production of automobiles
right we’ll compare the end price of one car produced in Italy and the end price
of one car produced in Vietnam the difference between the two gives us the
actual savings per car our operations and controller ship teams have done the
heavy lifting estimating the costs per car it is our task to model the rest and
come up with a conclusion that tells us whether the project generates or
destroys value right we’ve worked hard to prepare an exercise that is a real
case study and comes as close as the ones carried out in practice by large
corporations when deciding on an investment opportunity in addition as
with most financial models throughout our solution we’ve made a few hypotheses
and assumptions every time this happens we’ll provide an explanation and allow
right on the type of assumption we’ve made okay perfect starting from our next
lesson we’ll dig deeper into the exercise