Step 0: The basic set-up

Assume that you have, at the beginning of the year, the following simple balance sheet projection in front of you:

Balance Sheet: Step 0

This goes along with an even simpler P&L projection:

Profit & Loss: Step 0

We can observe the following:

• At the end of 2016/the beginning of 2017, we just have 10 monetary units (MU) of cash paid in as equity.
• In 2017, we start investing at the very beginning of the year.  We build a factory for 125 MU. Let us assume that it starts operating immediately.
• The factory is depreciated linearly over 10 years but we expect to use it for another 5 years.
• The investment is financed with a 10 year loan of 125 MU.
• On the loan, we pay an interest of 8% p.a. (=10 MU).
• The revenue (a quantity of 100 units of a product A times a price of 20 MU per unit of product A) is flat over the whole period (assume for the moment a delivery contract).
• Variable cost (per unit) and fixed costs (total) are also given.

Under this given scenario, there is no uncertainty to account for.  Let’s drop this assumption in the next step.