Joint-Venture Projects: Proposals' Financial Analysis Information

     In order to have a valid financial assessment of all the proposals for each project, the total start-up capital requirements and the expected revenue streams for the next five to ten years for each project should be calculated. The start-up capital should be calculated in such a way as to cover all the expected expenses till the time when revenues start to be generated by the JV and can be utilized to run the business. The cash flow situation should be taken in consideration at all times.

The total capital requirements (equity and debt percentages should be established). The % equity contributed by each partner, based on his ownership share, should also be defined and negotiated.

Detailed cost analysis:

     For each of the projects, all the assumed costs related to the initial project start-up should be clearly detailed in US$. The assumed conversion rate from the local currency should be given.

Assumed initial spending elements such as: engineering costs, environmental studies, technology licensing costs, start-up taxes and permits, raw material and purchased subassembly costs, start-up manpower (how many, what categories, what salary scale rate, etc.), and recurring operating costs should be clearly categorized, explained, and totaled up accordingly. The cost/piece, if required, should be developed based on above costs.

Thus, a "fabrication cost" and a "cost of goods sold" should be developed on an yearly basis.

Based on that, a product selling price should be developed and the assumptions to establish that particular selling price clearly explained, and a break even analysis should be performed, to assess when the JV will reach profitability, and at what production level.

The financial structure of a JV:

Once the amount of capital required to start a JV is established (based on the initial technology cost, licenses, equipment, buildings, transportation, cost of salaries, permits, manufacturing costs, operating costs, etc.), this capital has to be raised in two forms:

Equity:

     This is the total capital portion which represents the ownership in the JV of its partners. Generally about 30 to 40% of the total capital is put as equity, and is issued as stocks to the partners, proportional to their respective share in the JV (this % should be negotiated between the two partners).

Debt:

     The balance of required capital (70 to 60%) is borrowed from various international banks, investment firms, or private investors. The JV issues bonds which show its debt obligations (at an assumed yearly interest rate, based on the prevailing interest rates).

For example:

     If a JV with two partners needs 100 million dollars to start operations, the partners will put lets say 40 million between them two as equity, and receive stock in the JV. If their ownership shares are 49 and 51% respectively, one will put in equity 19.6 mil. and the other 20.4 mil., or other agreed upon amounts, based on their negotiations. The JV will issue stock for 40 mil. dollars.

The rest of 60 mil. will be raised as debt of the JV from banks, private investors, etc. The JV will issue bonds corresponding to this sum.

Financial analyses to be submitted with the responding Proposal:

      The following financial documents should be submitted in the responding proposals:

1. A clear analysis of the "cost of goods sold" and "fabrication cost" listing all assumptions used in deriving these figures,

2. The product selling price and the way that price was derived

3. A calculation of the capital and resources required to start the JV operations,

4. A break even analysis, showing when and under what circumstances a profit from operations will be reached. A graph of the discussed break analysis should also be presented.

5. Yearly operations balance sheets, and a Net Present Value (NPV) of the project, based on the assumed expense and revenue streams for the next 5 to 10 years of the project.

6. Any other financial documents, at the discretion of the Proposal writing team, that would help explain and document the assumptions made in the financial calculations.

Since none of us are financial experts, all calculations, formulas, and assumptions should be clearly presented so everybody could follow, and hopefully understand (or be able to ask questions) the work done in the proposals.

If you have any questions, please contact Prof. Jacoby at jacoby@cooper.edu