Spreadsheet summary - analysis of the Geo Tech case

Spreadsheet 2 'DCF base case'

Contains the base case model based on the assumptions described in the case.
A couple of important factors are overlooked in this model:
- The model does not take into account the fact that the contracts signed in 2018 and 2019 still continue after 2019, and th
- The equipment cannot be sold before all Canadian contracts expired
- The model does not consider the built up brand awareness and the fact that some Canadian timberland owners might be
- The model incorporates inflation on the operating costs, but does not adjust the other cash flows nor the WACC for inflati
- The corporate WACC is applied which underestimates the risk of expanding to a new country, where this type of product

Spreadsheet 3 'DCF fees adjusted'

The model in the sheet 'DCF base case' only considers the fluctuation in exchange rates when converting the cash flows fro
However, it works with fees that are pinned at the 2014 exchange rate. Even though the USD fees do not rise in the upcom
This model applies fees pinned to the forecasted exchange rates rather than the 2014 spot rate, to represent the differenc

Spreadsheet 4 'DCF final version'

This model assumes that the fees are pinned at the 2014 exchange rate (just like model 1) but applies multiple adjustment
- The WACC is adjusted to represent the high risk of expanding to a new country with a product that is a relatively new pro
- The inflation on operating costs have been left out of the analysis to treat the entire calculation in nominal terms.
- The years 2020 and 2021 have been added to the model to represent the two years in which some Canadian contracts sti
- The year in which the equipmet is sold is moved towards 2021, after all Canadian contracts have expired
- A terminal value is added to the model (year 2019). This terminal value considers the fact that every year, 4 new custome

As model 3 (spreadsheet 4 'DCF final version') is considered as being the most representative model, this sprea
continue after 2019, and thereby still generate revenues and costs

mberland owners might become a customer of a US facility after 2019

ws nor the WACC for inflation
where this type of product is not often employed yet.

nverting the cash flows from CAD to USD.

es do not rise in the upcoming five years, the devaluation of the CAD causes the CAD equivalent to be lower than US fees when Geo Te
to represent the difference in NPV this alternative could provide

pplies multiple adjustments to the DCF model

that is a relatively new product for this country
n in nominal terms.
ome Canadian contracts still generate revenue and costs.

every year, 4 new customers sign a contract at a US facility who wouldn't have done so when the Canadian facility had never existed.

ntative model, this spreadsheet contais the most detailed sensitivity analyses
than US fees when Geo Tech applies the fixed fees

acility had never existed.

DCF calculation assumptions made in the case
Model inputs (in USD) 2014 2015 2016 2017 2018 2019
Exchange rate (USD per CAD) 0.86 0.76 0.72 0.68 0.66 0.62 Worst case
Exchange rate (USD per CAD) 0.86 0.83 0.81 0.79 0.75 0.78 Most likely case
Exchange rate (USD per CAD) 0.86 0.84 0.83 0.83 0.81 0.83 Best case
This model (based on the assumptions in the case) does consider the fluctuations in
Model inputs (in CAD) exchange rates. Therefore, the cash flows of each year are converted to USD at
Foresight setup fee 21,000 differing exchange rates.
Foresight annual fee 9,000
Investment in equipment 840,000 However, some important elements have not been considered in this model. See
Residual value 100,000 'spreadsheet summary' for a detailed description of these elements.
Setup costs per contract 14,000
Cash operating costs
- At <55 ongoing contracts 240,000
- At >= 55 ongoing contracts 360,000

0 1 2 3 4 5
(x $1.000) Index 2014 2015 2016 2017 2018 2019
Investments
Equipment in Canada -0.72

Amount of contracts sold 90 20 30 20 10 10

Amount of ongoing contracts 20 50 70 60 40

Revenue
Setup fee 0.35 0.51 0.33 0.16 0.16
Annual licensing fee 0.15 0.36 0.50 0.40 0.28
Total revenue 0.49 0.87 0.83 0.56 0.44

Costs
Setup costs -0.23 -0.34 -0.22 -0.10 -0.11
Operating costs 1.75% -0.20 -0.20 -0.30 -0.29 -0.20
- At <55 ongoing contracts
- At >= 55 ongoing contracts
Total costs -0.43 -0.54 -0.52 -0.39 -0.31

Residual value 0.08

EBITDA 0.06 0.33 0.31 0.17 0.21

Depreciation -0.24 -0.24 -0.24
Profit before taxes -0.18 0.09 0.07 0.17 0.21
Taxes -35% 0.06 -0.03 -0.02 -0.06 -0.07
Profit after taxes -0.12 0.06 0.04 0.11 0.14

FCF -0.72 0.12 0.30 0.28 0.11 0.14

NPV calculation
Discount rate 9.7%
NPV 0.02
Equivalent annuity 4,548 The base case model applies a discount rate equal to the corporate WACC. This way, the WACC is
not adjusted for inflation and the risk of the expansion to Canada is underestimated. Expansion to a
Sensitivity analysis on sales volume new country, where this type of technology is relatively new, is more risky than the day-to-day
business. Therefore, the WACC should be adjusted upwards which will result in a negative NPV. In
conclusion, the base case in which prices are kept constant based on the 2014 exchange rate
Contracts sold volume results in a negative NPV
NPV 0.02 70 80 90 100 110 120 130 140
18,000 -0.22 -0.16 -0.09 -0.04 0.07 0.18 0.24 0.35
Setup fee in CAD

19,000 -0.19 -0.13 -0.06 0.00 0.11 0.23 0.30 0.41

20,000 -0.16 -0.09 -0.02 0.04 0.16 0.28 0.35 0.47 Comments:
21,000 -0.13 -0.06 0.02 0.08 0.20 0.33 0.40 0.52 At the current setup fee, the minimum amount of contracts that must be sold is 90
22,000 -0.10 -0.03 0.05 0.13 0.25 0.37 0.46 0.58 Not achieving the forecasted number of contracts will result in a negative NPV
23,000 -0.07 0.01 0.09 0.17 0.30 0.42 0.51 0.64 Exceeding the forecasted number of contracts increases the positive value of the NPV significantly
24,000 -0.04 0.04 0.13 0.21 0.34 0.47 0.57 0.70

Scenario analysis on exchange rates

Scenariosamenvatting
Huidige waarden: Worst case likely case Best case
Veranderende cellen:
Exchange rate_2014 0.86 0.86 0.86 0.86 Comments:
Exchange rate_2015 0.83 0.76 0.83 0.84 The NPV is highly sensitive to the exchange rate
Exchange rate_2016 0.81 0.72 0.81 0.83 As the NPV of this base case is quite low, a further devaluation of the Canadian dollar would result in a negative NPV
Exchange rate_2017 0.79 0.68 0.79 0.83 A possible solution to this problem could be to adjust the fees corresponding to the forecasted exchange rates (see next spreadsheet)
Exchange rate_2018 0.75 0.66 0.75 0.83
Exchange rate_2019 0.78 0.62 0.78 0.78
Resultaatcellen:
NPV_Base case 0.02 -0.05 0.02 0.04
Opmerkingen: de kolom Huidige waarden geeft de waarden van veranderende cellen weer op
het moment dat het overzichtsrapport van het scenario werd gemaakt.
De veranderende cellen voor elk scenario zijn grijs weergegeven.
DCF calculation adjusted fees
Model inputs (in USD) 2014 2015 2016 2017 2018 2019
Exchange rate (USD per CAD) 0.86 0.76 0.72 0.68 0.66 0.62 Worst case
Exchange rate (USD per CAD) 0.86 0.83 0.81 0.79 0.75 0.78 Most likely case
Exchange rate (USD per CAD) 0.86 0.84 0.83 0.83 0.81 0.83 Best case

Foresight setup fee 18000 18000 18000 18000 18000 18000 The model in the sheet 'DCF base case' only considers the fluctuation in exchange
Foresight annual fee 8000 8000 8000 8000 8000 8000 rates when converting the cash flows from CAD to USD. However, it works with fees
that are pinned at the 2014 exchange rate. Even though the USD fees do not rise in
the upcoming five years, the devaluation of the CAD causes the CAD equivalent to
Model inputs (in CAD)
be lower than US fees when Geo Tech applies the fixed fees from column C. Earning
Foresight setup fee 20,930 21,818 22,360 22,785 24,064 23,226 less revenue might be a strategic choice. Otherwise Geo Tech should consider
Foresight annual fee 9,302 9,697 9,938 10,127 10,695 10,323 adjusting the fees to the forecasted exchange rates. No further price increases are
Foresight setup fee (rounded) 21,000 22,000 22,000 23,000 24,000 23,000 taken into account as market pressure does not allow it.
Foresight annual fee (rounded) 9,000 10,000 10,000 10,000 11,000 10,000
Investment in equipment 840,000
Residual value 100,000
Setup costs per contract 14,000
Cash operating costs
- At <55 ongoing contracts 240,000
- At >= 55 ongoing contracts 360,000

0 1 2 3 4 5
(x $1.000) Index 2014 2015 2016 2017 2018 2019
Investments
Equipment in Canada -0.72

Amount of contracts sold 90 20 30 20 10 10

Amount of ongoing contracts 20 50 70 60 40

Revenue
Setup fee 0.36 0.53 0.36 0.18 0.18 Setup fee changes every year according to the forecasted exchange rate - no further price increases
Annual licensing fee 0.16 0.41 0.56 0.48 0.32 Annual fee changes every year according to the forecasted exchange rate, but is fixed during the 3-year contract - no further price increases
Total revenue 0.53 0.94 0.93 0.66 0.50

Costs
Setup costs -0.23 -0.34 -0.22 -0.10 -0.11
Operating costs 1.75% -0.20 -0.20 -0.30 -0.29 -0.20
- At <55 ongoing contracts
- At >= 55 ongoing contracts
Total costs -0.43 -0.54 -0.52 -0.39 -0.31

Residual value 0.08

EBITDA 0.10 0.40 0.41 0.27 0.26

Depreciation -0.24 -0.24 -0.24
Profit before taxes -0.15 0.16 0.17 0.27 0.26
Taxes -35% 0.05 -0.06 -0.06 -0.09 -0.09
Profit after taxes -0.09 0.10 0.11 0.17 0.17

FCF -0.72 0.15 0.34 0.35 0.17 0.17

NPV calculation
Discount rate 9.7% When Geo Tech is able to increase its fees corresponding to the forecasted changing
NPV 0.19 exchange rates, the investment in Canada generates a positive NPV and seems to be a solid
Equivalent annuity 49,620 investment opportunity.

Sensitivity analysis on sales volume

Contracts sold volume

NPV 0.19 70 80 90 100 110 120 130 140
18,000 -0.08 -0.01 0.08 0.15 0.28 0.41 0.49 0.62
Setup fee in CAD

19,000 -0.06 0.03 0.12 0.19 0.32 0.46 0.55 0.68 Comments:
20,000 -0.03 0.06 0.15 0.23 0.37 0.51 0.60 0.74 At the current setup fee, not achieving the forecasted number of contracts will not result in a negative NPV
21,000 0.00 0.09 0.19 0.28 0.42 0.55 0.65 0.79 Due to the fact that revenues are adjusted to the forecasted exchange rate, the NPV is less sensitive to the sales volume
22,000 0.03 0.13 0.23 0.32 0.46 0.60 0.71 0.85 Therefore, this alternative might be worth considering as it reduces the risk related to the sales
23,000 0.06 0.16 0.26 0.36 0.51 0.65 0.76 0.91
24,000 0.09 0.19 0.30 0.40 0.55 0.70 0.81 0.97

Scenario analysis on exchange rates

Scenariosamenvatting
Huidige waarden: Worst case likely case Best case
Veranderende cellen:
Exchange rate_2014 0.86 0.86 0.86 0.86 Comments:
Exchange rate_2015 0.83 0.76 0.83 0.84 Not only the risk of sales volume is reduced, also the possible negative impact of the devaluation of CAD is less stringent
Exchange rate_2016 0.81 0.72 0.81 0.83 Even though the worst case scenario would significantly lower the NPV, the NPV stays positive.
Exchange rate_2017 0.79 0.68 0.79 0.83 Therefore, pinning the fees according to the forecasted exchange rate rather than on the 2014 spot rate might be an alternative to consider
Exchange rate_2018 0.75 0.66 0.75 0.81
Exchange rate_2019 0.78 0.62 0.78 0.83
Resultaatcellen:
NPV_fees adjusted 0.19 0.12 0.19 0.21
Opmerkingen: de kolom Huidige waarden geeft de waarden van veranderende cellen weer op
het moment dat het overzichtsrapport van het scenario werd gemaakt.
De veranderende cellen voor elk scenario zijn grijs weergegeven.
DCF calculation all adjustments
Model inputs (in USD) 2014 2015 2016 2017 2018 2019
Exchange rate (USD per CAD) 0.86 0.76 0.72 0.68 0.66 0.62 Worst case
Exchange rate (USD per CAD) 0.86 0.825 0.805 0.79 0.748 0.775 Most likely case
Exchange rate (USD per CAD) 0.86 0.84 0.83 0.83 0.81 0.83 Best case
This model assumes that the alternative discussed in the second model ('DCF fees
Foresight setup fee 18000 18000 18000 18000 18000 18000 adjusted' sheet) will not be feasible.
Therefore, this model is based on the base case model but applies numerous
Foresight annual fee 8000 8000 8000 8000 8000 8000
adjustments to the base case.
The adjustments made are discussed in de spreadsheet summary in detail
Model inputs (in CAD)
Foresight setup fee (rounded) 21,000
Foresight annual fee (rounded) 9,000
Investment in equipment 840,000
Residual value 100,000
Setup costs per contract 14,000
Cash operating costs
- At <55 ongoing contracts 240,000
- At >= 55 ongoing contracts 360,000

0 1 2 3 4 5 6 7
(x $1.000) Index 2014 2015 2016 2017 2018 2019 2020 2021 Base for CV (at year 2019)
Investments
Equipment in Canada -0.72

Amount of contracts sold 90 20 30 20 10 10 0 0 4 Even though no new Canadian contracts are sold, there are still two years in which revenues and costs are generated
Amount of ongoing contracts 20 50 70 60 40 20 10

Revenue
Setup fee 0.35 0.51 0.33 0.16 0.16 0 0 0.07 As exchange rate for 2020 and 2021 is not known, the rate of 2019 is applied
Annual licensing fee 0.15 0.36 0.50 0.40 0.28 0.14 0.07 0.03
Total revenue 0.49 0.87 0.83 0.56 0.44 0.14 0.07 0.10

Costs
Setup costs -0.23 -0.34 -0.22 -0.10 -0.11 0 0 -0.04
Operating costs -0.20 -0.19 -0.28 -0.27 -0.19 -0.19 -0.19
- At <55 ongoing contracts
- At >= 55 ongoing contracts
Total costs -0.43 -0.53 -0.51 -0.37 -0.29 -0.19 -0.19 -0.04

Residual value 0.08 The equipment cannot be sold before all Canadian contracts have ended

EBITDA 0.07 0.34 0.32 0.19 0.15 -0.05 -0.04 0.06

Depreciation -0.24 -0.24 -0.24
Profit before taxes -0.17 0.10 0.08 0.19 0.15 -0.05 -0.04 0.06
Taxes -35% 0.06 -0.03 -0.03 -0.07 -0.05 0.02 0.01 -0.02
Profit after taxes -0.11 0.06 0.05 0.12 0.10 -0.03 -0.03 0.04

FCF -0.72 0.13 0.30 0.29 0.12 0.10 -0.03 -0.03 0.33 The terminal value is based on the assumptions of 0% growth, 12% WACC, and 9% RONIC

FCF including terminal value at year 2019 -0.72 0.13 0.30 0.29 0.12 0.42 -0.03 -0.03

NPV calculation
Discount rate 12.0%
NPV 0.13
Equivalent annuity 29,445

Sensitivity analysis on the NPV

Contracts sold volume

NPV 0.13 70 80 90 100 110 120 130 140
2 -0.12 -0.04 0.04 0.11 0.23 0.35 0.44 0.56
4 -0.03 0.05 0.13 0.21 0.33 0.45 0.53 0.65 Comments:
Contracts sold

6 0.07 0.14 0.23 0.30 0.42 0.54 0.63 0.75 NPV highly sensitive to both sales volume and the assumption about the contracts sold in the US after 2019
in the US
per year

8 0.16 0.24 0.32 0.39 0.51 0.63 0.72 0.84 4 additional contracts at the US facility per year might be conservative as I assume Geo Tech had +- 70 new customers in Canada
10 0.25 0.33 0.41 0.48 0.61 0.73 0.81 0.93 Only a lower sales volume in combination with a lower additional sales volume in the US would result in a negative NPV
12 0.35 0.42 0.51 0.58 0.70 0.82 0.91 1.03 Therefore, the investment opportunity to open a facility in Canada seems robust enough to the uncertainty in sales volume
14 0.44 0.52 0.60 0.67 0.79 0.91 1.00 1.12
16 0.53 0.61 0.69 0.76 0.88 1.01 1.09 1.21

Residual value
NPV 0.13 60,000 80,000 100,000 120,000 140,000 160,000
200,000 0.19 0.20 0.20 0.21 0.21 0.21 Comments:
costs (low)
Operating

240,000 0.13 0.13 0.13 0.14 0.14 0.15 Residual value hardly affects the outcome of the NPV
300,000 0.03 0.03 0.03 0.04 0.04 0.05
360,000 -0.07 -0.07 -0.07 -0.06 -0.06 -0.05
400,000 -0.14 -0.14 -0.13 -0.13 -0.12 -0.12

Scenario analysis on exchange rates

Scenariosamenvatting
Huidige waarden: Worst case likely case Best case
Veranderende cellen:
Exchange rate_2014 0.86 0.86 0.86 0.86
Exchange rate_2015 0.825 0.76 0.825 0.84 Comments:
Exchange rate_2016 0.805 0.72 0.805 0.83 In this model, which is seen as the most representative, is the impact of the worst case scenario the least (compared to the models 1 and 2)
Exchange rate_2017 0.79 0.68 0.79 0.83 Moreover, even though the worst case scenario does impact the NPV, it does not result in a negative NPV
Exchange rate_2018 0.748 0.66 0.748 0.81 Therefore, the investment opportunity to open a facility in Canada seems robust enough to the volatile exchange rate
Exchange rate_2019 0.775 0.62 0.775 0.83
Resultaatcellen:
NPV_fees adjusted 0.13 0.10 0.13 0.15
Opmerkingen: de kolom Huidige waarden geeft de waarden van veranderende cellen weer op
het moment dat het overzichtsrapport van het scenario werd gemaakt.
De veranderende cellen voor elk scenario zijn grijs weergegeven.