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EVALUATION GUIDE UPDATED FOR IFRS
2004 III-2 H2O
PRIMARY INDICATORS OF COMPETENCE
The reader is reminded that the solutions are developed for the UFE candidate and that therefore all
the complexities of a real life situation may not be fully reflected in the following solution. The UFE
Report is not an authoritative source of IFRS.
REPORT TO BETH WILSON
Overview
This report has been prepared exclusively for you, and your interest is the sole consideration. You want to
start a business based on the technology you helped to develop. From our discussions, you have made it
clear that this project has captured your passion and could be the fulfillment of a long-term goal. This
endeavour encompasses certain risks and will require management skills different from those you have
developed in your career to date and in the research lab at EH. In developing financial strategies, I have
used a five-year planning horizon and a strategy for building financial independence.
Primary Indicator #1
The candidate explores the option of starting a new business. The candidate calculates future
cash flows to assess the project’s viability.
The candidate demonstrates competence in Finance.
Analysis of viability of Pure Air and Water (PAW)
In this section, I provide a comprehensive cash flow forecast for PAW for the period 2005 through 2010.
This forecast is based on the information that you provided. Results may differ substantially if the actual
amounts and timing of the cash flows are different from the information you provided. The cash flow
forecast is important because it will provide an indication of whether PAW is a viable venture. The
forecast also gives information about the amount of cash you will have to provide to get the venture going.
It is essential that you have adequate resources to support PAW during its start-up phase. The forecast will
also give you an idea of areas where you could save money. For example, the salaries that you anticipate
paying Gordon and yourself could be reduced to conserve cash. The analysis will also allow for sensitivity
analyses that will show the impact of different assumptions on cash flow. For example, we could make
different assumptions about sales levels or expenses to see the impact on cash flow.
Assumptions
Below are a number of key assumptions:
1. You are willing to use the personal resources available to you to finance the start-up of PAW.
2. The project will be terminated at the end of the first year if the results from the test site do not provide
the expected result and you have not been able to sign contracts with several feedlot operators.
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3. You would prefer to minimize your personal and corporate tax expense.
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Pure Air & Water
Cash Flow Projection
2005–2010
2005
2007
2009
2010
Revenue:
Pumps – average
10 per year @
$50,000 installed
$ –
$ 500,000
$ 500,000
$ 500,000
Bio-enzyme
solution – $1 per
head of cattle
200,000
600,000
800,000
–
700,000
1,100,000
1,300,000
Outflows:
Pumps – average
10 per year @
$50,000 x 50%
cost
–
250,000
250,000
250,000
Bio-enzyme
solution – $1 per
head x 30% cost
–
60,000
180,000
240,000
Other variable costs
@ 20% – (18% for
costs + 2% royalty
to EH)
–
140,000
220,000
260,000
–
450,000
650,000
750,000
Contribution margin
–
250,000
450,000
550,000
Fixed cash flows:
Rental of premises
from EH
25,000
–
–
–
Lab materials
30,000
–
–
–
Gordon & Beth
earnings @ $75,000
each per year
–
150,000
150,000
150,000
Beth living expenses
@ $40,000
40,000
–
–
–
New premises lease
(2007)
–
52,000
52,000
52,000
Utilities, etc. at new
premises
–
6,000
6,000
6,000
95,000
208,000
208,000
208,000
Net operating cash
flow
(95,000)
42,000
242,000
342,000
Cumulative
operating cash flow
(95,000)
(148,000)
236,000
578,000
Non-operating cash
flows:
Purchase payments
On signing
50,000
–
–
–
–
Annual payments
125,000
125,000
125,000
–
–
Used tanker truck
from father
–
–
–
–
–
Bigger truck-
needed when
enzyme sales reach
$500,000
–
–
–
60,000
–
Renovations/cap
assets at new
premises
–
150,000
–
–
–
175,000
275,000
125,000
60,000
0
Net
(270,000)
(233,000)
17,000
182,000
342,000
Cumulative cash
flow