Would the Investment Survive a Worse Scenario?

Project A has a base-case NPV of approximately THB 290,579. That result depends on annual operating cash of THB 450,000. What happens if only THB 300,000 is generated? This episode changes a defined assumption, keeps the rest of the model visible, and separates a lower value estimate from the practical ability to fund and operate the project.

Both scenarios retain a THB 1,000,000 initial investment, a THB 200,000 working-capital release at the end of year three, a 9.12% rate, and nominal after-tax year-end baht flows. There are no debt proceeds or financing interest inside FCFF. The downside is hypothetical, not a probability-weighted forecast or a report of actual project deterioration.

Before generating many tables, identify what changes, what stays fixed, and whether the combination is coherent. If demand falls, full working-capital recovery may also deserve review. Here it is deliberately held constant to isolate operating cash. A real downside case should revisit connected assumptions rather than rely on the classroom simplification unnoticed.

Change operating cash and recalculate

The base vector is −1,000,000; 450,000; 450,000; 650,000. The downside vector is −1,000,000; 300,000; 300,000; 500,000. Both final-year figures already include the working-capital release. Keeping that terminal component separate makes it easier to see which part of the change comes from recurring operating performance.

At 9.12%, the downside NPV is approximately negative THB 88,304.99 and IRR is approximately 4.50%, below the hurdle. It fails the value criterion under these assumptions even though total undiscounted receipts exceed the initial outlay. The example shows why nominal cash recovery alone does not establish compensation for time and the required return.

If operating cash is identical in all three years and other assumptions remain fixed, NPV reaches zero at approximately THB 334,959.94 of annual operating cash. This is a cash-flow value threshold, not directly a break-even sales figure. Converting it into customers, utilization, or price requires a separate model of revenue, variable costs, fixed commitments, and tax.

Sensitivity and scenarios answer different questions

Sensitivity changes one input at a time to identify what moves the result. A scenario changes a coherent group, such as lower demand, delayed collection, and higher support costs. Do not stack every adverse adjustment without checking whether the same problem is being counted twice or whether the changes could realistically occur together.

If the forecast is reduced for a specific expected problem and the discount rate is increased for the same issue, explain how the two adjustments differ. Unexplained double counting is not disciplined caution. The reviewer should understand whether a change represents an expected cash outcome, a risk adjustment, or a scenario selected to test the company’s tolerance.

Probabilities should have a basis rather than default to 50% because the analyst is unsure. A positive expected value does not necessarily make a project feasible if a plausible downside threatens obligations the company cannot absorb. Discuss the size, timing, reversibility, and concentration of exposure as well as an average calculated across scenarios.

Positive NPV still requires financing and capacity

The base case still requires THB 1,000,000 at time zero. If available company cash is insufficient, management needs a credible funding route or a revised scope. Long-term attractiveness does not make funds appear automatically, and an unapproved facility or an owner’s informal intention should not be recorded as cash already available.

People, suppliers, and deployment windows are constraints too. Several individually positive-NPV projects may compete for the same team and delay the receipts each forecast assumes. Choose a feasible combination rather than add stand-alone models in which every manager assumes full access to shared staff. The portfolio decision includes operational interactions, not just the sum of isolated NPVs.

A factory may be constrained by machinery or materials; a service business may be constrained by reviewers and customer support. Translate those constraints into the acceptance of work, investment timing, or the cash forecast. Assuming everyone will somehow finish on schedule leaves the most important execution risk outside the financial model.

Define the decision when evidence changes

Staging an investment can create learning before the entire commitment is made. Include pilot costs, delay costs, and commitments that cannot be cancelled. Waiting or abandoning is not free in every contract. The useful question is which option remains available at each decision date and what money must be paid to preserve it.

Exercise: if annual operating cash is THB 300,000 but a lender offers financing, does the downside become attractive? Not under the unchanged project assumptions: its NPV remains negative. Financing availability answers a different question from value creation. A cheaper or different financing arrangement would need a coherent revised analysis, not a declaration that approval of a loan validates the operating case.

Read OpenStax on choosing projects under capital constraints, then write Company A’s conditions for proceeding: what must be confirmed about cash, demand, and delivery capacity, who reviews the evidence, and when the decision will be revisited. Episode 9 uses that decision context to compare financing arrangements rather than choose debt or equity from an interest rate alone.