Enterprise Valuation of A Multi-Product Industrial Cleaner Business

Enterprise Valuation of a Multi-Product
Industrial Cleaner Business
A stochastic optimization approach
Guillermo J. Costa
Vuong Global
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 Overview of Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2.1 General-purpose cleaners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2.2 Surface disinfectants and hand sanitizers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2.3 Degreasers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.3 Scope of Present Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2 Cost Modeling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.1 Startup Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.1.1 Filling machines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.1.2 Label machines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.1.3 Over-the-road tanker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.1.4 Transfer tanks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.1.5 Phase converter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.1.6 Inventory management software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1.7 Initial UPC setup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.1.8 Website . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.1.9 Computers & miscellaneous software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.1.10 Office furniture & equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.1.11 Shop furniture & equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.1.12 Stakebed truck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.1.13 Management reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.1.14 Total startup costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.2 Fixed Operating Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.2.1 Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.2.2 UPC renewal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.2.3 Shop labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.2.4 Management salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.2.5 Electricity (fixed connection) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.2.6 Shop lighting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.2.7 Water (fixed meter) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
VI Contents
2.2.8 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.2.9 Plant lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.2.10 Phone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.2.11 Annual burn rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.3 Variable Operating Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.3.1 Common costs per bottle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.3.2 Electricity (variable rate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.3.3 Fluids cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.3.4 Bottle costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.3.5 Box costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.3.6 Packing tape costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.3.7 Pallet costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.3.8 Wrapping costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.3.9 Shipping costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
2.3.10 Maintenance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2.3.11 Refill costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2.3.12 Total variable cost per bottle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3 Valuation Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
3.1 Hurdle and Terminal Growth Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
3.2 Company Assumptions for DCF Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
3.3 Customer Build . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
3.3.1 Marketing channel optimization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
3.3.2 Product mix optimization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
3.3.3 Customer base forecast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
3.4 Projected Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
3.4.1 Product sales mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
3.4.2 Sales commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
3.4.3 Projected sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
3.5 Projected Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3.6 Projected Payback Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
4 Results and Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

4.1 Projected Enterprise Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
4.2 Projected Optimized Enterprise Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
4.3 Stress Testing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
4.4 Projected Survival Score by Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
4.5 Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
5 Conclusions and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

5.1 Summary of Present Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
5.2 Recommendations for Future Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
5.2.1 Acquisition of market research data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
5.2.2 Formulation of strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
5.2.3 Effectiveness of disinfectant formulations against quaternary ammonium
compounds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
5.2.4 Trade study of automated bottling machines . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Contents VII
5.2.5 Reclassification of expenses and restructuring of available data . . . . . . . . . . . . 89

5.2.6 Restructured analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Contents 1
Executive Summary
The optimized enterprise value of an ethanol-based mixed-product line of industrial cleaners
presented herein is estimated to be approximately $5.10 M, based on a mean startup cost of ap-
proximately $75,000 and an eight-year projection period. This represents a 36.82% return on assets.
Mean operating and net profits were calculated to be 10.97% and 7.13% of sales, respectively. These
values were calculated using a mean hurdle rate of 6.95%, projected to be the weighted-average cost
of capital for the enterprise. Positive net income was not projected to occur until the fifth year of
operation, with payback and discounted payback periods, calculated using discounted cash flows,
were both found to be in excess of eight years; for this reason, as well as the negative average return
on equity, investment in this enterprise is not recommended.
The analysis presented herein was performed using Palisade @Risk to perform distribution fitting
and Monte Carlo simulations. Optimization studies were performed using a nonlinear generalized
reduced gradient schema and genetic algorithm. The settings used in these studies are presented in
the body of the report where appropriate. Optimization studies focused on optimizing product mix,
year-over-year marketing budget, and marketing expenses per channel to maximize or minimize
the appropriate objective function. For instance, marketing expenses were optimized by marketing
channel mix in order to find the minimum cost per lead, whereas product mix was varied to find
the maximum profit from the “product bundle” – viz. finding the maximum profit if one of each
type of product were sold simultaneously. Dollar amounts presented are for 2018 constant dollars;
inflationary and monetary policy effects are not considered. The optimized structure of the enter-
prise was found to reduce the probability of zero or negative enterprise return by over 50% relative
to the base case.
Product mix and infrastructure (filling machines, label machines, transfer tanks, etc.) were
constrained by the maximum number of each infrastructure item that would likely fit in the current
facility space, given the extant square footage and footprint of each infrastructure item. These are
only estimates, and variations from the assumptions herein will directly affect startup cost and
enterprise value. Where appropriate, values for certain items of fixed operating costs – such as
electricity connection costs, plant lease, and insurance – are explicitly identified as data given per
guidance of the customer. Enterprise financial metrics – such as required cash as a percentage of
sales, days payable, and days sales outstanding – are assumed by the author. As industrial cleaners
are a mature industry, terminal growth rate was conservatively set at 0.25%, and was held fixed at
this value for all analyses.
While the existing business holds an SDS permit from the Bureau of Alcohol, Tobacco, Firearms,
and Explosives, said permit limits the business to drawing 12,000 gallons of denatured ethanol per
fiscal year. This is not a hard constraint, and the permit is able to be amended (or the permit count
increased) as needed, if a financial case can be made to do so. As such, the analysis presented herein
ignores this draw limit in favor of finding the maximum potential value of the operation.
Chapter 1
Introduction
1.1 Background
The existing business is currently in possession of one rail tanker car partially filled with several
thousand gallons of denatured ethanol. Due to its denatured state, this ethanol is axiomatically
exempt from taxation from the Treasury & Tax Board (unlike the non-denatured ethanol found in
alcoholic drinks). The nature of ethanol, including its miscibility in water and low freezing point
(−114 ◦ C, or −173.73 ◦ F, at 100% mass fraction and standard ambient temperature and pressure
[6]), presents the possibility of economically “cutting” the chemical into a variety of general-purpose
and low-temperature cleaning products using solution agents such as low-hardness public water
and bisphenol-A. The objective of the present work is to find the maximum value of this denatured
alcohol once it has been processed into cleaning solutions.
The existing business presently holds a permit from the Bureau of Alcohol, Tobacco, Firearms,
and Explosives (ATF) to draw up to 12,000 gallons of specially denatured spirits (SDS) per fiscal
year. The permit is currently in good standing in accordance with the guidelines set forth by
the Alcohol and Tobacco Tax & Trade Bureau (TTB) in Form 5150.19. Several of the products
presented herein are considered “general-use” formulas as specified by 27CFR §20.112-20.119, and a
5150.19 permit is not required. The type of SDS used for the present analysis is defined as a “special
industrial solvent” by 27CFR§20.112, and has been denatured to the requirements of 27CFR§21.31.
SDS permits may be amended to allow for a greater draw of SDS per fiscal year, and as such the
current 12,000 gallon limit is not considered a hard constraint. Maximizing the potential economic
value of the denatured ethanol, then, is an effort that is optimally performed when the 12,000 gallon
limit is ignored. Such is the case with the present work.
The phrase “general-use,” as defined in 27CFR§20.116, refers to low-alcohol end products wherein
the end product contains less than 5% alcohol by weight or by volume. These formulations do not
require disclosure of the end product’s formula via TTB Form 5150.18 (“formula,” in this use,
refers to the mixture of alcohol and other solvents; e.g. “To every 100 gallons of water, add 30
gallons of denatured ethanol” would be considered a formula for the purposes of Form 5150.18).
The specific formulations of the products analyzed have been presented in the proprietary financial
model developed for this effort, and are not given in the present work.
4 1 Introduction
1.2 Overview of Markets

The cost and performance of the chemicals formulated for this study are irrelevant if they cannot
be delivered efficiently and economically to a robust market. As such, some strategic-level mention
must be made regarding the present and near-term dynamics of the target market segments. The
line of cleaners examined is targeted toward three segments of the overall cleaners market: general-
purpose, surface disinfectants and hand sanitizers, and industrial degreasers.
These segments were chosen due to their forecasted growth rates over the next 7-10 years, as well
as the ability of the formulations presented herein to compete with established products on the basis
of both cost and performance. Logically, high-growth segments should be sought for the possibility
of forecasted demand outstripping the current manufacturing capabilities of suppliers within the
industry, creating niches into which new competitors may enter; however, as these forecasts are
publicly available to all potential competitors, a type of semi-strong form efficiency of the efficient
market hypothesis may be assumed. Analysis of a market’s attractiveness beyond the information
available in the open literature requires the application of behavioral economics, which is beyond the
present scope. Thus, this report makes no effort to predict the long-term dynamics of the markets
in question, instead focusing on likely outcomes within clearly-defined probabilistic constraints.
Details of the target markets are given as follows:
1.2.1 General-purpose cleaners
General-purpose cleaners are defined herein as multi-surface cleaners that do not profess to have
disinfecting properties. For the present work, these are considered to include
• glass cleaners
• windshield washer fluid
• stovetop and countertop cleaners
• miscellaneous non-specialty janitorial and industrial cleaners
The inclusion of windshield washer fluid is intentional, per guidance, given the preexisting rela-
tionships between the contracting entity and several customers within the rail industry. A subset
of low-temperature (−40 and −50 ◦ F) cleaner formulations was examined expressly to address the
need of the rail industry for windshield cleaners capable of operating below the current market
standard of −20 ◦ F. Forecasted compound annual growth rate (CAGR) within this market segment
is consistently given between 4.6-5.7% globally, with a global sector value of$43 billion by 2021
([10], [29], [31]). The United States is expected to contribute approximately half ($22 billion) of
this figure.
1.2.2 Surface disinfectants and hand sanitizers
Surface disinfectants and sanitizers (the generic term “disinfectant” is used throughout this report
to refer to both types of products) are specifically formulated to possess antiseptic, antimicrobial,
and disinfecting properties. This is typically accomplished by increasing the concentration of the
alcohol in the disinfecting agent (up to 70% or more, in many cases), with the attendant increase in
price on a per-fluid-ounce basis compared to general-purpose cleaners. While these products may
be subcategorized by their constituent chemistry (e.g. hypochlorites, phenols, peroxides, peracetic
acids, and quaternary ammonium compounds [QACs], among others), the hypochlorite and phenol
1.3 Scope of Present Work 5
groups are of primary concern, since they compete directly with the disinfectants formulated for
the present work.
Among the market segments examined, the disinfectant market is forecasted to have the highest
valuation and highest growth rate: current predictions value the global disinfectant market between
$600 million and $8.1 billion by 2023, with a CAGR between 6.1% and 11% ([27], [9], [11], [12],
[24], [26], [34]). As with general-purpose cleaners, the bulk of this demand (approximately 53%) is
predicted to be within the United States, with a sizable percentage (20-35%) of demand located in
the APEJ and EMEA regions. Increases in demand have been generally attributable to increased
global awareness of the dangers of improper hygiene and increased awareness of outbreaks such as
avian flu and ebola. A more granular analysis of the increased demand for QACs and peracetic
acids in hospitals, clinics, and outpatient centers – as well as the performance of these disinfectants
relative to the formulations created for the present work – will likely be a key discriminator of
market success within these sectors, and is left as a future work item.
1.2.3 Degreasers
A “degreaser” is defined for the present effort as a solution formulated to remove water-insoluble
material from a hard surface. While this definition does not include assumptions of time dependence
on the working chemical’s efficacy, it must be noted that the maintenance and cleaning schedules
of potential end-users is unknowable a priori. Therefore, continued customer satisfaction requires
that the formulation developed during the present effort remove months-old residue as readily as
day-old residue.
Of the market segments examined, the degreaser segment is decidedly average, with a total
valuation of $45.3 billion by 2025 and a CAGR of 1.91% [21]. Furthermore, the degreaser market
is inextricably tied to the dynamics of the industrial MRO (maintenance, repair, and operation)
and automotive OEM markets, as well as the automotive maintenance market [15]. Despite this,
the degreaser formulation prepared for the present work has a profit margin that is comparable
(to a reasonable degree of statistical significance) to the rest of the product line; furthermore, the
degreaser formulation has the operational advantage of requiring a dedicated production line (the
formulations for the other products are, to some extent, varying mixtures of the same chemicals),
and thus the degreaser formulation has the highest throughput on a per-bottle basis for a fixed
production shift.
1.3 Scope of Present Work

The present work focuses solely on determining the enterprise value of a proposed multi-product
line of cleaners, disinfectants, and degreasers. These products are detailed as follows:
• General-purpose cleaner, 12 oz. spray bottle

• General-purpose cleaner, 32 oz. spray bottle
• General-purpose cleaner, 128 oz. (gallon) jug
• Low-temperature (-40 ◦ F) cleaner, 30 gal. drum
• Low-temperature (-40 ◦ F) cleaner, 50 gal. drum
• Low-temperature (-40 ◦ F) cleaner, 275 gal. tote
• Ultra low-temperature (-50 ◦ F) cleaner, 30 gal. drum
6 1 Introduction
• Ultra low-temperature (-50 ◦ F) cleaner, 50 gal. drum

• Ultra low-temperature (-50 ◦ F) cleaner, 275 gal. tote
• Disinfectant, 12 oz. spray bottle
• Degreaser, 12 oz. spray bottle
The income method of discounted cash flows was the primary tool used to calculate enterprise
values, using the methods outlined in [16] and [22], among others. While it is tempting to analyze
the line of cleaners as a new enterprise (thus falling under the auspices of young-company valua-
tion techniques, c.f. [4]), the line of cleaners is an extension of the present company’s continuing
operations. As the cleaner production will share certain resources with the present company’s other
operations, treating the cleaner production as de facto established is appropriate.
Deterministic predictions were avoided wherever appropriate. Certain asset classes and expenses
were “hard-coded” into the financial model based on guidance and previous experience; other ex-
penses (e.g. electricity and water base rates) were held fixed based on publicly-available documen-
tation from utilities, service providers, or other entities as appropriate. Data were allowed to vary
where sensible (e.g. customer conversion and re-conversion rates), and were defined according to the
appropriate distributions. Price and conversion data were typically assigned triangular distributions
to enforce non-negative results during simulation, whereas certain parameters (e.g. startup cost and
year-over-year marketing budget) were of sufficiently small standard deviation that the chance of
the parameter taking on a negative value during simulation were acceptably small. Data such as
weighted-average cost of capital (WACC), for which only a small number of relevant samples were
available, were assigned distributions using the distribution-fit functionality within Palisade @Risk
software; typically, these were exponential, Laplacian, or Weibull distributions.
Simulations were performed using the built-in Monte Carlo functionality of @Risk. Unless oth-
erwise noted, all simulations were performed using 100,000 iterations. Optimization studies were
performed using the OptQuest solver; to avoid overflow errors, optimization studies were performed
using 1,000 iterations for 1,000 studies. The “enterprise value” given in this report refers to the
arithmetic mean enterprise value. Stress tests were performed to examine the sensitivity of the
calculated enterprise value to variations in relevant parameters. In this fashion, the use of repeated
data tables is avoided.
In lieu of the adage “All models are wrong, but some are useful,” some disclaimers must be
made concerning the limitations of the financial model. First and foremost, the effects of inflation
are ignored throughout the projection period; all values presented herein are therefore given in
2018 constant dollars. When calculating labor rates, the effects of sick time, holidays, personal
emergencies, etc. were ignored. Macroeconomic forces, the effects of monetary policy, and salary
growth were ignored, and an infinite velocity of money was assumed throughout all projections.
Certain assumptions were necessary to scope the present work efficiently. For instance, demand
was assumed “symmetric” for the purposes of calculating lead generation costs, viz. it was assumed
that the most cost-effective marketing mix for generating leads matched the demand response of the
target customers. Certain time-varying parameters, such as depreciation, were calculated using the
appropriate tools (e.g. MACRS), whereas others, such as the collection probability of aging accounts
receivable, were ignored. Per guidance, general administrative and overhead expenses were assumed
to be step functions of sufficiently small magnitude that they would be readily absorbed by the
organization at large; vehicle operating and maintenance expenses are assumed to be “rolled up”
to the overarching business in a similar fashion. Other relevant assumptions, and the supporting
arguments and methodologies pertinent to them, are presented where appropriate.
Chapter 2
Cost Modeling
The valuation model is created using a bottom-up approach, with the cost of consumables assigned
to end products on a proportional per-unit basis. For instance, a 32 oz. bottle of the general-purpose
formulation is shipped twelve to a box, and has a share of the cost of the box and shrink wrap
used to ship it absorbed into its per-unit cost. Variable costs, such as electricity and water, are
assigned to the unit level in a similar fashion. Startup costs are assumed sunk in toto in Year 0 for
all financial projections and DCF analysis.
2.1 Startup Costs
Startup costs are constrained to all one-time investments and capital expenditures needed to begin
production, and are detailed as follows.
2.1.1 Filling machines
Seventeen semi-automatic filling machines were examined, from both domestic and international
suppliers. Unlike fully-automated bottling and capping machines found in large-scale production
facilities (often capable of filling up to 40,000 bottles per hour), these machines require human
intervention to begin the filling process. The filling process stops automatically based on a user-set
position mechanism, typically a position-adjustable weight on a jackscrew. The filling machines
examined also have the advantage of a small footprint (in the range of 8-10 in. wide and 12-
18 in. long) and, with one exception, are able to operate on single-phase 110 VAC power. This
last characteristic is especially important, since three-phase power is not available at the planned
production facility, and the use of three-phase machines would require the purchase (and subsequent
maintenance) of a phase converter.
The fill time (in hours) per machine was calculated by dividing the machine’s mean bottles per
hour capacity by the planned production maximum of 300 base-unit bottles per day:
300
tf ill = (2.1)
BP H
8 2 Cost Modeling
The “base-unit bottle” is taken to be the 32 oz. size, from which other bottle and barrel sizes (and
their attendant production costs) are scaled. The total energy used in filling a bottle is the product
of an individual machine’s power consumption and the per-bottle fill time, in hours:
E = (P ) (tf ill ) (2.2)

The average BPH capacity of the filling machines examined was used to estimate the fill times for
each of the product units.
Acquisition costs for the filling machines examined varied greatly, as did the total time that a
given machine had been in service. While it is certainly reasonable to assume that price is directly
proportional to filling capacity and inversely proportional to time in service, the data presented in
Table 2.1 are given as-is, and the inspection and selection of the individual machines to be used in
production is left to managerial discretion. The mean fill times, by product size, used to estimate
annual production capabilities are given in Table 2.2; a strong argument is made by Table 2.2 for
the acquisition of highly-automated, high-fill rate filling/capping machines despite the additional
cost. The necessary trade study to justify this (usually six-figure) acquisition expense based on
actual market demand is left as a future decision for management.
2.1 Startup Costs 9
Table 2.1: Filling machine data.
Machine Voltage Power, kW BPH Fill time, hrs. Energy, kWh Cost
1 110 1.65 2,400 0.1250 0.2063 $335.99
2 110 1.65 6,480 0.0463 0.0764 $84.29
3 110 1.65 2,400 0.1250 0.2063 $365.55
4 110 1.65 4,800 0.0625 0.1031 $598.66
5 110 1.65 2,400 0.1250 0.2063 $1,000.17
6 110 1.65 4,800 0.0625 0.1031 $325.99
7 110 1.65 2,400 0.1250 0.2063 $345.34
8 110 1.65 2,400 0.1250 0.2063 $335.99
9 110 1.65 203 1.4787 2.4399 $105.74
10 110 1.65 203 1.4787 2.4399 $91.50
11 110 1.65 203 1.4787 2.4399 $84.32
12 110 1.65 203 1.4787 2.4399 $84.36
13 110 1.65 1,200 0.2500 0.4125 $519.00
14 110 1.65 203 1.4787 2.4399 $84.30
15 110 1.65 203 1.4787 2.4399 $105.75
16 110 1.65 2,400 0.1250 0.2063 $335.99
17 220 2.20 2,400 0.1250 0.2063 $778.68
Min 0.0764 $84.29
Mean 2,076 0.9910 $328.33
Max 2.4399 $1,000.17
Mean estimated acquisition cost, total $2,354.65
@Risk function (Energy) =RiskTriang(0.0764,0.9910,2.4399)
@Risk function (Cost) =RiskTriang(84.29,328.33,1,000.17)
Table 2.2: Mean fill time by product.
Size Fill time, hrs.

12 oz. 0.4384
32 oz. 1.1691
128 oz. 4.676
30 gal. 140.3
50 gal. 233.8
275 gal. 1,286
10 2 Cost Modeling
2.1.2 Label machines
Twelve hand-operated label machines were examined, from both domestic and international suppli-
ers. Per guidance, the desired production rate would not necessitate automated labeling machines.
From a rough estimate of the time required to label a typical spray bottle, it was assumed that each
label machine would support two filling machines (for initial calculations, Qlabelers = 3, although
this figure would vary during optimization studies); thus, capital expenditure on label machines is
directly tied to capex on filling. This assumption was held constant for the purposes of enterprise
value forecasting and optimization. Specifics of the label machines examined are given in Table 2.3.
Given the short amount of time required to label a typical spray bottle, as well as the low-intensity
nature of the labeling process no “labeling rate” or maintenance cost per label figures was calculated:
only acquisition cost was considered.
Table 2.3: Label machine data.
Machine Cost
1 $399.00
2 $429.99
3 $335.12
4 $378.51
5 $336.86
6 $435.99
7 $664.62
8 $485.00
9 $665.00
10 $423.80
11 $500.00
12 $449.00
Min $335.12
Mean $458.57
Max $665.00
Mean acquisition cost, total $1,458.69
@Risk function =RiskTriang(335.12,458.57,665.00)∗Qlabelers
2.1 Startup Costs 11
2.1.3 Over-the-road tanker
A total of twenty-nine used over-the-road (OTR) tankers were examined to estimate the acquisition
cost of a “refill tanker,” intended to transfer denatured ethanol from an off-site filling facility to the
production facility. For the present analysis, only chem-rated stainless steel tankers were examined.
The triangular distribution function within @Risk was used to calculate the probabilistic acquisition
cost of an OTR tanker based upon the known prices and capacities of the units examined and the
desired volume, Vtanker = 6, 000 gallons, of the tanker for the production facility.
Table 2.4: OTR tanker data.
Tanker Price Capacity, gal. Price / gal.

Altank $160,000 16,500 $9.90
Bar-Bell $27,900 7,500 $3.72
Bar-Bell $17,500 6,500 $2.69
Bar-Bell $9,500 5,000 $1.90
Beall $15,000 6,700 $2.24
Beall $14,500 6,700 $2.16
Brenner $16,500 6,250 $2.64
Brenner $16,000 6,000 $2.67
Brenner $7,500 5,800 $1.29
Bulk $29,500 7,000 $4.21
Butler $17,900 5,500 $3.25
Butler $12,000 12,000 $1.00
Butler $10,800 6,000 $1.80
Freuhauf $17,000 6,300 $2.70
Lubbok $59,500 10,000 $5.95
Polar $68,800 6,500 $10.58
Polar $60,000 5,600 $10.71
Polar $44,495 7,000 $6.36
Polar $26,500 7,000 $3.79
Polar $14,500 6,500 $2.23
Polar $6,000 $5,000 $1.20
STE $49,900 4,500 $11.09
STE $27,500 4,600 $5.98
Walker $29,900 6,200 $4.82
Walker $17,500 6,200 $2.82
Walker $16,000 6,200 $2.58
Walker $6,900 6,200 $1.11
Walker $6,900 6,200 $1.11
West-Mark $18,000 6,700 $2.69
Min $1.00
Mean $3.97
Max $11.09
Vtanker , gallons 6,000
@Risk function =RiskTriang(1.00,3.97,11.09)*Vtanker
12 2 Cost Modeling
2.1.4 Transfer tanks
Forty-two plastic transfer tanks were examined. These tanks are to be used to house denatured
ethanol at 100% mass fraction until it is mixed downstream into the desired product. Because of
this, the transfer tanks must be made from specific types of polyethylene (LDPE, LMDPE, HDPE),
polypropylene, or cross-linked polyethylene. The cost of the transfer tanks used in production is
a function of the desired transfer tank volume (Vtransfer = 500 gallons), as well as the tank’s
composition and mounting configuration. For the present work, only tanks of acceptable chemistry
were examined, but no segregation was made between tanks of different compositions; thus, the
calculated acquisition cost is blended across all acceptable tank chemistries, and the selection of
a specific tank chemistry is left as an exercise for management. The number of transfer tanks
used in the calculation of startup cost was held constant at Qtransfer = 5: one transfer tank for
each downstream ethanol concentration. No analyses were conducted of the acquisition costs of the
pumps, valves, hoses, fittings, etc. necessary to transfer fluid from the transfer tanks to the filling
machines, as the requisite mechanisms and assemblies are extant within the production facility.
Transfer tank cost data are given in Table 2.5.
Table 2.5: Transfer tank data.
Tank Price Capacity, gal. Price / gal.

Ace $499.99 500 $1.00
Ace $449.99 500 $0.90
Aquabarrel $470.00 500 $0.94
CRMI $599.99 500 $1.20
CRMI $429.99 500 $0.86
Dura-cast $459.99 500 $0.92
Dura-cast $407.00 500 $0.81
EWPS $779.95 500 $1.56
EWPS $679.95 500 $1.36
EWPS $564.95 500 $1.13
EWPS $464.95 500 $0.93
Norwesco $929.99 500 $1.86
Norwesco $489.99 500 $0.98
Norwesco $449.99 500 $0.90
NTO Tank $609.95 500 $1.22
NTO Tank $464.95 500 $0.93
PlasticMart $799.95 500 $1.60
PlasticMart $749.94 600 $1.25
PlasticMart $699.95 500 $1.40
PlasticMart $649.95 600 $1.08
PlasticMart $564.95 500 $1.13
PlasticMart $464.94 500 $0.93
PolyMart $1,074.95 600 $1.79
PolyMart $917.95 600 $1.53
PolyMart $464.95 500 $0.93
Rainwater Equipment $474.95 500 $0.95
Snyder $869.99 500 $1.74
Tank and Barrel $799.95 500 $1.60
Tank and Barrel $699.95 500 $1.40
Tank and Barrel $619.95 500 $1.24
Tank and Barrel $799.95 500 $1.60
Tank and Barrel $609.95 500 $1.22
Tank and Barrel $599.95 500 $1.20
Tank and Barrel $574.95 500 $1.15
Tank and Barrel $569.95 500 $1.14
Tank and Barrel $564.95 500 $1.13
Tank and Barrel $544.95 500 $1.09
Tank and Barrel $474.95 500 $0.95
Tank and Barrel $464.95 500 $0.93
Tank and Barrel $449.95 500 $0.90
Min $0.81
Mean $1.16
Max $1.86
Vtransfer , gallons 500
@Risk function =RiskTriang(0.81,1.16,1.86)*Vtransfer *Qtransfer
14 2 Cost Modeling
2.1.5 Phase converter
A phase converter is used to convert single-phase power to three-phase power, since three-phase
power is not available at the production facility. Phase converters are segregated by one of three
types of configuration: static, rotary, and inverter; as static phase converters tend to cause the
motors downstream to run slower (approximately 1/3 slower than the motor’s operating RPM),
they are not considered here. Twenty-seven phase converters were examined, of the rotary and
inverter type. Phase converters are further categorized by the converter’s capacity, typically given
as electrical horsepower; a cost per horsepower metric can then be calculated. Phase converter data
are presented in Table 2.6 with an assumed required capacity of 1 hp. Where output horsepower
was not specified by the manufacturer, it was estimated as
220 (A)
HP = (2.3)
746
where A denotes the output current in amperes, and 746 is a constant used to convert from watts
to horsepower.
The use of a phase converter in production may not actually be necessary, since the overwhelming
majority of the filling machines analyzed were operable with 110 VAC single-phase power. The
phase converter data are therefore presented for completeness, and for future reference if expansion
is desired; the acquisition cost of a phase converter represents a marginal amount (on the order of
0.6%) of the total startup cost, and the inclusion or omission of a phase converter in the calculation
of startup costs will not alter the results in any meaningful fashion.
Table 2.6: Phase converter data.
Item HP Price Price / HP

1 1.000 $895.00 $895.00
2 1.2386 $955.00 $771.03
3 1.9750 $1,129.00 $571.39
4 2.000 $1,030.00 $515.00
5 2.684 $1,326.00 $494.10
6 3.000 $1,190.00 $396.67
7 4.099 $1,691.00 $413.74
8 5.000 $1,500.00 $300.00
9 6.783 $2,250.00 $331.72
10 7.500 $2,000.00 $266.67
11 8.257 $2,904.00 $351.69
12 10.00 $2,550.00 $255.00
13 12.39 $4,081.00 $329.48
14 15.00 $3,350.00 $223.33
15 16.22 $4,807.00 $296.37
16 20.00 $4,350.00 $217.50
17 20.64 $5,706.00 $276.41
18 24.18 $6,672.00 $275.90
19 25.00 $5,250.00 $210.00
20 30.00 $5,900.00 $196.67
21 30.00 $5,686.00 $189.03
22 37.16 $6,873.00 $184.97
23 40.00 $7,000.00 $175.00
24 50.00 $8,700.00 $174.00
25 69.30 $12,580.00 $181.52
26 76.00 $13,000.00 $173.33
27 100.0 $15,800.00 $158.00
Min $158.00
Mean $326.80
Max $895.00
Desired output, HP 1.00
@Risk function =RiskTriang(158.00,326.80,895.00)*HP
16 2 Cost Modeling
2.1.6 Inventory management software
Thirty-one subscription-priced, cloud-based inventory management software options were examined.

These software options were specifically chosen to reduce the likelihood of data handling errors (as
would be the case with manual-entry schema, such as spreadsheets) as well as for the ability for
the software to integrate with other enterprise-level functions (e.g. sales forecasting and tracking,
report generation), in order to automate as many accounting and management functions as possible.
Pricing of inventory software was found to vary greatly, but was typically driven by functionality,
automation, and maximum number of supported users.
All inventory software options featured zero initial cost, and are purely priced on a subscription
basis. Software options are available at various levels of support and complexity, the selection of
which is beyond the scope of the present work. Inventory software data are presented in Table 2.7.
Software options were categorized into “Basic,” “Mid-tier,” and “Premium” regardless of a given
brand’s specific name for the available service levels; software options for which public pricing was
not available (e.g. “Call for pricing” ultra-premium options) were not considered.
Table 2.7: Inventory management software data.
Software Level Price / mo.

Dear Systems Mid $199.00
Inflow Basic $69.00
Inflow Mid-tier $149.00
Inflow Premium $599.00
Inventory Cloud Basic $795.00
Inventory Cloud Mid-tier $2,692.00
Inventory Cloud Premium $4,495.00
Megaventory Mid-tier $135.00
Orderhive Basic $50.00
Orderhive Mid-tier $100.00
Orderhive Premium $150.00
SalesBinder Basic $9.00
SalesBinder Mid-tier $19.00
SalesBinder Premium $49.00
Stitch Labs Basic $499.00
Stitch Labs Mid-tier $499.00
Trade Gekko Basic $199.00
Trade Gekko Mid-tier $459.00
Trade Gekko Premium $799.00
Unleashed Basic $85.00
Unleashed Mid-tier $165.00
Unleashed Premium 1 $329.00
Unleashed Premium 2 $579.00
Veeqo Basic $200.00
Veeqo Mid-tier $475.00
Veeqo Premium $1,350.00
Zoho Basic $29.00
Zoho Mid-tier $79.00
Zoho Premium $249.00
Min $9.00
Mean $515.58
Max $4,495.00
Estimated (stochastic) monthly cost $1,673.19
@Risk function =RiskTriang(9.00,515.58,4495.00)
18 2 Cost Modeling
2.1.7 Initial UPC setup
A fixed, one-time cost of $1,000 is required to set up eleven UPCs with a unique GS1 company
prefix, per [14].
2.1.8 Website
A fixed, one-time cost of $1,000 was assumed for the creation of a website. As the website will be
hosted and maintained using existing company resources, maintenance and updating costs are not
considered.
2.1.9 Computers & miscellaneous software
A total of $3,000 was assumed for computers and miscellaneous software (operating system, office
productivity suite, etc.). Specific system requirements are to be analyzed during the build-out phase
of the production facility and are not considered here.
2.1.10 Office furniture & equipment
A total of $5,000 was assumed for office furniture and equipment, including tables, desks, chairs,
and miscellaneous supplies. The production facility is expected to use printers, fax machines, and
the like that currently exist within the business, and the cost of these was not considered.
2.1.11 Shop furniture & equipment
A total of $5,000 was assumed for shop furniture and equipment, including tables with cut-safe
tops, tools, personal protective equipment, cleaning and sanitation supplies, etc.
2.1.12 Stakebed truck
A stakebed truck was assumed to be a necessity for deliveries within a 100-mile radius from the
production facility. Per guidance, the cost of this vehicle was given as $15,000, and further analysis
on the acquisition cost was not performed.
2.1.13 Management reserve
A $5,000 management reserve was assumed, in order to cover unforeseen expenses and required spot-
purchases of additional equipment. It is assumed that whatever amount of management reserved
is left unused at the time production begins will be added to the balance sheet as cash, with an
attendant adjusting entry to the appropriate equity account.
2.1.14 Total startup costs
The total startup costs were simulated using a Monte Carlo method, with the results given in Table
2.8 and Fig. 2.1. It is readily apparent that the OTR tanker and the stakebed truck make up the
majority of the startup cost – 42.46% and 19.83%, respectively. Thus, efforts to minimize startup
costs should be focused on reducing the acquisition cost of these two assets.
Table 2.8: Startup cost summary. Mean values of stochastic variables highlighted.
Item Value Pct. of total

Filling machines $2,354.65 3.11%
Label machines $1,458.69 1.93%
Stainless steel tanker $32,109.25 42.46%
Transfer tanks (total) $3,198.47 4.23%
Phase converter $459.93 0.61%
UPC initial setup $1,000.00 1.32%
Inventory software $1,673.19 2.21%
Website $1,000.00 1.32%
Computers & software $3,000.00 3.97%
Office furniture & equipment $5,000.00 6.61%
Shop furniture & equipment $5,000.00 6.61%
Stakebed truck $15,000.00 19.83%
Management reserve $5,000.00 6.61%
Total startup cost $75,654.20
Standard deviation of startup cost $12,791.92
20 2 Cost Modeling
Fig. 2.1: Startup cost.

2.2 Fixed Operating Costs 21
2.2 Fixed Operating Costs

2.2.1 Marketing
For initial calculations of enterprise value, annual marketing budget was given as $100,000 per
guidance. This was one of the sensitivity variables swept during optimization studies, but for initial
enterprise value calculations the annual marketing budget was held constant.
2.2.2 UPC renewal
Per requirements set out by [14], the annual renewal cost for the UPCs needed for the present effort
was held constant at $150 for all valuation studies.
2.2.3 Shop labor
Shop technician salary was held constant at $15 hourly, or $28,800 annually per technician. The
total number of technicians required was assumed to be a function of the total quantity of filling
machines and labeling machines. It was assumed that each labeling machine is capable of supporting
the production efforts of two filling machines,
Qfill
Qlabelers = (2.4)
2
which in turn creates a “production pack” of Qlabelers labeling machines and Qfill filling machines.
The total amount of required shop labor thus becomes a function of the number of filling ma-
chines present, which in turn is driven by forecasted customer demand. The total number of shop
technicians is therefore
Qlabelers + Qfill
Qtech =
2
Qfill
+ Q fill (2.5)
Qtech = 2
2
3Qfill
Qtech =
4
with all results rounded up to the next “whole” technician. For the present work, a total of five filling
machines were assumed. As each concentration of product is given a dedicated transfer tank (for
a total of five transfer tanks), one filling machine per transfer tank is assumed in order to simplify
the production process. The optimization of total number of filling machines required, as well as
the level of automation available (and its attendant effects on acquisition and maintenance costs of
the filling machines) is left as a future work item.
2.2.4 Management salary
One full-time shop manager was assumed for all calculations, at a constant wage rate of $30 hourly,
or $57,600 annually.
22 2 Cost Modeling
2.2.5 Electricity (fixed connection)
Per guidance and prior experience with other business units, the cost of an electrical connection
was held constant at $6,000 annually.
2.2.6 Shop lighting
The current production and shop facilities were used to estimate the total amount of lighting
necessary for the cleaner production line. Based on the illumination levels of the current facility, it
was estimated that twelve fluorescent tubes would be necessary to illuminate the production line.
Using the energy consumption data from [23] and [8], the shop lighting cost was estimated to be
$50.22 annually.
2.2.7 Water (fixed meter)
From [30], the fixed charge for 5/8 in., 3/4 in., and 1 in. meters is given $4.50 monthly, or $54.00
annually. Per guidance, the rates quoted in [30] and the historical rates at the candidate plant sites
are not sufficiently different to make a significant impact to operations.
2.2.8 Insurance
Per guidance and prior experience with other business units, the insurance cost was assumed to be
$5,000 annually.
2.2.9 Plant lease
Per guidance and prior experience with other business units, the plant lease was assumed to be
$1,200 monthly, or $14,400 annually.
2.2.10 Phone
Per guidance and prior experience with other business units, the cost of phone connection and
service was assumed to be $300 monthly, or $3,600 annually.
2.2.11 Annual burn rate
The total annual burn rate is shown in Table 2.9 and Fig. 2.2; data presented in Table 2.9 are not
corrected for rounding errors. Annual fixed costs are broadly categorized as either direct operating
costs (DOC) or administration and overhead (Admin/OH); DOC costs are limited to items necessary
to produce and sell the cleaner lines (viz. directly traceable to an end product), whereas Admin/OH
costs denote costs that are shared between the cleaner production effort and the rest of the business.
Note that inventory software is considered an administrative item, since the capabilities of the
inventory software can be shared amongst multiple business units; while the inventory software was
modeled in Sec. 2.1, that represented only one month’s expense for the subscription service. The
inventory software cost modeled as part of the burn rate focuses solely on the annual subscription
costs. As shown in Table 2.9, direct operating costs represent 84.67% of the total annual burn rate,
with 42.23% of DOC and over 35% of annual fixed costs comprised of shop labor. This represents a
significant portion of expenses for the production effort, and optimization of shop labor requirements
is left as a future work item. Administrative and overhead items represent a minority of total burn
rate – and, truthfully, not only are the overhead costs unlikely to have a measurable influence
over enterprise value, but most of the overhead costs are rates set by third parties (e.g. insurance
companies, lease agents, and municipalities) and are thus outside of direct influence at any rate.
24 2 Cost Modeling
Table 2.9: Annual fixed costs.
Category Item Annual Pct. of total

DOC Shop labor $115,200.00 35.76%
DOC Management salary $57,600.00 17.88%
DOC Marketing $100,000.00 31.04%
Admin/OH Inventory software $20,136.53 6.25%
Admin/OH Plant lease $14,400.00 4.47%
Admin/OH Electricity (fixed connection) $6,000.00 1.86%
Admin/OH Insurance $5,000.00 1.55%
Admin/OH Phone $3,600.00 1.12%
Admin/OH UPC renewal $150.00 0.05%
Admin/OH Water (fixed meter) $54.00 0.02%
Admin/OH Lighting $50.22 0.02%
Total annual fixed cost $322,190.75
Fig. 2.2: Annual fixed costs.

26 2 Cost Modeling
2.3 Variable Operating Costs

Variable operating costs were assumed to be limited to those costs directly pertaining to (and
absorbed thereby) the manufacture of the cleaning products. Sales commissions are modeled as
part of the projected income statement, as described in Sec. 3.4.
2.3.1 Common costs per bottle
All cleaners, regardless of unit size or chemical composition, will share specific costs of production.
These are referred to as “common costs” for the present work, and consist of the cost of electricity,
filling machine maintenance, and label. As shown in Table 2.10 and Fig. 2.3, the label (at a prescribed
cost of $0.05 each) represents the majority (65.60%) of the per-unit common costs. Note that the
filling cost shown in Table 2.10 and Fig. 2.3 are for the 32 oz. general purpose cleaner; the common
costs of other products are scaled from this baseline, but in all cases the label represents a sizable
percentage of the common cost.
2.3 Variable Operating Costs 27
Table 2.10: Shared per-unit variable costs.
Item Annual Pct. of total

Electricity cost, per kWh $0.0112 14.69%
Filling cost $0.0131 17.18%
Maintenance cost $0.0019 2.53%
Label cost $0.05 65.60%
Total per-unit common cost $0.0762
Fig. 2.3: Common costs per bottle.

28 2 Cost Modeling
2.3.2 Electricity (variable rate)
Electricity cost was held constant at $0.0112 per kilowatt-hour, per [8]. Per guidance, the difference
between these quoted rates and the historical rates at the candidate plant sites are sufficiently
similar as to make no meaningful difference to the profitability of the operation. The rates quoted
in [8] are therefore referenced more as a baseline.
2.3.3 Fluids cost
Per [30], the water rate for the candidate plant sites is $4.50 per 1,000 gallons, or $0.000035 per fluid
ounce. The water cost is insignificant, and does not meaningfully affect the profit of the operation.
The cost of ethanol, however, is a different matter. Based on prices quoted at the time of this
writing, the cost of ethanol was held constant at 1.65pergallon, or0.0129 per fluid ounce.
The degreaser formulation uses bisphenol-A as the solution base for the ethanol. Data from
sixteen exporters were used to estimate the cost per fluid ounce of bisphenol-A, the results of which
are given in Table 2.11 with data from [33]. The specific gravity of bisphenol-A (1.2, or 1,200 kg/m3 )
was used to convert export kilogram data to fluid ounces. The minimum price of $0.04 per fluid
ounce was found to occur for all order quantities above 16,000 kg (3,522 gallons); this provides a
strong basis for purchase negotiations with a domestic bisphenol supplier, or possible justification
to import the desired quantities of bisphenol from sources in [33]. Since the cost of the bisphenol is
modeled as a stochastic variable, the cost of the degreaser is also stochastic, although the degreaser
was the only product for which a probabilistic cost variation was necessary. Note that the use of
a triangular distribution may unjustly penalize the cost of the bisphenol, as the majority of the
data set were in the $0.04 per fluid ounce range (presumably due to the aforementioned quantity
discount); however, it is likely that domestic bisphenol prices will be higher, and thus the potential
“unfairness” of the triangular distribution used was conservatively allowed to remain.
The fluid costs were factored into the product total costs, which are detailed in Sec. 3.4.
Table 2.11: Bisphenol-A import data.
Source Qty., kgs Qty., fl.oz. USD / fl.oz.

1 32,000 901,707 $0.04
2 1 28 $0.32
3 405,000 11,412,225 $0.04
4 200 5,636 $0.58
5 30,000 845,350 $0.04
6 405,000 11,412,225 $0.04
7 250 7,045 $0.34
8 16,000 450,853 $0.04
9 30,000 845,350 $0.04
10 16,000 450,853 $0.04
11 31,000 873,528 $0.04
12 150,000 4,226,750 $0.04
13 16,000 450,853 $0.04
14 8,000 225,427 $0.04
15 16,000 450,853 $0.04
16 16,000 450,853 $0.04
Min $0.04
Mean $0.11
Max $0.58
30 2 Cost Modeling
2.3.4 Bottle costs
Bottle quotes were obtained from overseas suppliers for the 12, 32, and 128 oz. sizes. The cost per
bottle was assumed to be triangularly distributed based on the compiled data. Drum costs were
given per guidance as $12 for thirty-gallon drums, $20 for fifty-gallon drums, and $75 for 275-gallon
totes; drum and tote costs were held constant, whereas 12, 32, and 128 oz. bottle costs were allowed
to vary stochastically. Bottle costs are given in Tables 2.12 – 2.14.
Table 2.12: 12-oz. bottle cost data.
Source Price, ea.

1 $0.15
2 $0.10
3 $0.14
4 $0.10
5 $0.15
6 $0.08
7 $0.15
8 $0.13
9 $0.19
10 $0.12
11 $0.15
12 $0.20
13 $0.20
14 $0.12
15 $0.13
16 $0.06
17 $0.16
18 $0.16
Min $0.06
Mean $0.14
Max $0.20
Source Price, ea.

1 $0.30
2 $0.60
3 $0.01
4 $0.50
5 $0.50
6 $0.80
7 $0.50
8 $0.50
Min $0.01
Mean $0.50
Max $0.80
Source Price, ea.

1 $0.59
2 $0.66
3 $0.71
4 $0.75
5 $0.50
6 $0.50
7 $0.45
8 $0.70
9 $0.75
10 $0.50
11 $0.40
12 $0.25
13 $0.75
14 $0.43
15 $0.50
16 $0.65
17 $0.65
18 $0.75
Min $0.25
Mean $0.58
Max $0.75
32 2 Cost Modeling
2.3.5 Box costs
Box costs were prescribed per guidance, and box costs per unit were assigned based on the total
number of units filled per box. Only the 12 oz., 32 oz., and 128 oz. products are shipped in boxes,
and thus only these are able to absorb box costs. Per-unit box costs are given in Table 2.15.
Table 2.15: Box costs per unit.
Item Price, ea. Bottles Cost/bottle

12 oz. $0.90 32 $0.03
32 oz. $0.90 12 $0.08
128 oz. $0.90 4 $0.23
2.3.6 Packing tape costs
Thirty-seven quotes for packing tape were obtained, although per guidance only tapes of 2 in.
(±0.125 in.) width and 1.9 mil thickness were examined. Only the 12 oz., 32 oz, and gallon (128
oz.) products are shipped in boxes, which are in turn closed and secured via packing tape; therefore,
only products sold in these sizes can absorb packing tape costs. To estimate the per-unit cost of
packing tape, a standard 13x13x13 in. box was assumed. The packing tape was assumed to extend
25% of the box height down each side after securing the top and bottom flaps. For the standard
13x13x13 in. box, this equates to a total of 39 in. of tape used per box. Mean packing tape costs
per unit are given in Table 2.16; as with other shipping-related costs, the 32 oz. bottle was used as
a baseline to calculate costs assigned to each unit, and the per-unit costs of other sizes were scaled
accordingly.
Table 2.16: Packing tape cost per unit.
Item Cost/bottle
12 oz. $0.0084
32 oz. $0.0167
128 oz. $0.0005
2.3.7 Pallet costs
Thirty-one quotes were obtained for obtained for pallets of new wood, plastic, pressed wood, and
recycled wood construction. These quotes were used to obtain a distribution of pallet cost per square
inch of area footprint, from which the estimated cost of a 48x48 in. pallet could be obtained. This
approach was used due to the variances discovered in cost for a 48x48 in. pallet; by utilizing the
sampled data set, normality of price distribution could be assumed per the central limit theorem,
and the enterprise values obtained via Monte Carlo simulation could be confined to a tighter spread.
The cost per bottle was obtained by pallet cost by the total number of bottles that could be bundled
to the pallet without exceeding the 48x48x48 in. form factor. As with most packing and shipping
costs, the 32 oz. bottle was used as a baseline, and the per-bottle pallet cost was scaled according
to the total number of units able to be secured to a pallet. Mean pallet costs per unit are given in
Table xxx.
Table 2.17: Mean pallet cost data.
Container size No. per pallet Cost per unit

12 oz. 2,200 $0.01
32 oz. 768 $0.05
128 oz. 256 $0.11
30 gal. 4 $7.13
50 gal. 4 $7.13
275 gal. 1 $28.54
@Risk function (32 oz.) =RiskTriang(0.03,0.04,0.07)
2.3.8 Wrapping costs
Forty-six types of stretch wrap were examined, including blown and cast varieties, to obtain a
distribution of costs for wrapping bundled units for shipping. The cost of stretch wrap is assigned
to each individual unit based on the assumption that all pallets will be shipped as a 48x48x48 in.
bundled unit. The stretch wraps examined have a mean width of 15 in., thus requiring three “wrap
widths” to cover one side of the shipped bundle. Assuming that each pallet receives two layers of
stretch wrap (viz. two “wrap-arounds”), the total amount of stretch wrap per shipped bundle is
L = 4(48) (Wwrap ) (Waround ) (2.6)

where Wwrap is the number of wrap widths needed to cover each face of the shipped unit and Waround
is the number of layers of “wrap-arounds” used per shipped unit. Substituting known values, a total
of 1,152 in. of stretch wrap is needed per shipped unit. Stretch wrap costs were modeled as triangular
distributions, and per-unit costs were calculated using the 32 oz. bottle baseline of twelve bottles
per box; per-unit costs of other sizes were scaled from this baseline, based on the number of bottles
(or drums) that could fit on a standard 48x48 in. pallet. Note that for drums and totes, the use
of stretch wrap may not be ideal, primarily due to the differences in dynamics between several
small boxes and large, heavy containers (sloshing becoming an issue for the latter), as well as the
attendant differences in tensile strength requirements to secure them; in those instances, the use
34 2 Cost Modeling
of steel strapping may be a more robust and economical approach to securing the shipped units to
their pallets. Mean wrapping costs per unit are given in Table 2.18.
Table 2.18: Mean wrap cost data.
Container size Mean cost per unit

12 oz. $0.0014
32 oz. $0.0023
128 oz. $0.0086
30 gal. $0.55
50 gal. $0.55
275 gal. $2.20
2.3.9 Shipping costs
Per guidance, shipping costs were assumed to be $200 for a pallet of up to 2,000 lbs. For all products
except the 275-gallon totes, this assumption was valid, as the total number of units shipped per
pallet (at 48x48x48 in. form factor) would not exceed the 2,000 lb. weight limit; some variance in
this limit was allowed for the 128-oz. products (Table 2.19), based on guidance and past experience
with local truckload and LTL couriers. For the 275-gallon totes, twenty quotes were obtained from
freight carriers in order to calculate a cost per pound shipping rate; the results of these quotes
are given in Table 2.20. As the shipping cost of the 275-gallon totes is treated as stochastic, the
randomness passes through to the enterprise value accordingly.
Table 2.19: Shipping costs per unit.
Container size Weight, lbs. No. per pallet Ship weight, lbs. Ship cost per unit
12 oz. 0.7819 2,200 1,721 $0.09
32 oz. 2.085 768 1,601 $0.26
128 oz. 8.340 256 2,135 $0.78
30 gal. 250.2 4 1,001 $50.00
50 gal. 417.0 4 1,668 $50.00
275 gal. 2,294 1 2,294 $951.78
Degreaser 2.09 768 1,601 $0.26
Disinfectant 2.09 768 1,601 $0.26
Table 2.20: LTL cost data.
Ship price Weight, lbs. Cost per pound

$411.39 2,135 $0.19
$463.77 2,135 $0.22
$636.42 2,135 $0.30
$729.59 2,135 $0.34
$750.02 2,135 $0.35
$788.26 2,135 $0.37
$799.64 2,135 $0.37
$860.36 2,135 $0.40
$884.67 2,135 $0.41
$950.48 2,135 $0.45
$977.73 2,135 $0.46
$980.85 2,135 $0.46
$984.35 2,135 $0.46
$984.51 2,135 $0.46
$1,016.26 2,135 $0.48
$1,085.79 2,135 $0.51
$1,170.32 2,135 $0.55
$1,223.03 2,135 $0.57
$1,240.50 2,135 $0.58
$1,333.07 2,135 $0.62
Min $0.19
Mean $0.43
Max $0.62
36 2 Cost Modeling
2.3.10 Maintenance costs
Maintenance costs were estimated based on the following assumptions:

• Maintenance technicians per repair operation: 2
• Maintenance technician hourly rate: $50
• Mean time between overhaul (MTBO), all machines: 1,000 hrs.
• Repair downtime per machine: 40 hrs.
The maintenance technician salary was assumed based on the 90th percentile salary of an aviation
maintenance technician ($76,660 annually, or $36.86 hourly [1]) plus an assumed surcharge for rush
response to service calls. This salary assumption is not unfounded, since aviation and industrial
technologies share numerous characteristics: namely, the rapid and coordinated motion of many
tightly-toleranced moving parts operating in a high-cycle environment, with operating limits con-
strained by stress corrosion cracking and fatigue failure modes. The MTBO was calculated on a
total production capacity basis, based on the mean fill rate of a 32 oz. bottle:
M T BObottles = (M T BOhrs. ) (BP H) (2.7)

Repair costs were then assigned on a per-bottle basis for the 32 oz. bottle, and scaled appropriately
for the other product offerings. The repair cost assigned to each of the product offerings is detailed
in Table 2.21.
Table 2.21: Repair costs.
Item Value
MTBO, bottles 2,076,309
Repair cost per machine $4,000
Repair cost per bottle, 12 oz. $0.0007
Repair cost per bottle, 30 gal. $0.23
2.3.11 Refill costs
The cost to refill the OTR tanker was assumed fixed at $1,500 per trip from the off-site facility
to the production facility. Note that this “refill cost” is not inclusive of the cost of the denatured
ethanol, but rather the cost incurred by physically moving the OTR tanker from the production
facility to the off-site facility (where it is filled with Vtanker gallons of denatured ethanol) and back
to the production facility. The refill cost per product is detailed in Table 2.22. The cost of the
ethanol itself is detailed in Sec. 2.3.3.
Table 2.22: Refill cost by product.
Product Refill cost per unit

General-purpose cleaner, 12 oz. spray bottle $0.0012
General-purpose cleaner, 32 oz. spray bottle $0.0031
General-purpose cleaner, 128 oz. (gallon) jug $0.0125
Low-temperature (-40 ◦ F) cleaner, 30 gal. drum $2.63
Low-temperature (-40 ◦ F) cleaner, 50 gal. drum $4.38
Low-temperature (-40 ◦ F) cleaner, 275 gal. tote $24.09
Ultra low-temperature (-50 ◦ F) cleaner, 30 gal. drum $2.99
Ultra low-temperature (-50 ◦ F) cleaner, 50 gal. drum $4.99
Ultra low-temperature (-50 ◦ F) cleaner, 275 gal. tote $27.43
Disinfectant, 12 oz. spray bottle $0.02
Degreaser, 12 oz. spray bottle 0.0012
2.3.12 Total variable cost per bottle
The total manufacturing costs per bottle are presented in Tables 2.23 – 2.33 and Figs. 2.4 – 2.14.
Note that some costs for the 32 oz. baseline are presented previously and are not repeated here,
and that rounding errors in the tables are not accounted for. These costs were classified as fluid
costs (cost of product, cost of filling, plus per-unit cost of refilling the OTR tanker), hardware
costs (including bottle and machine maintenance), or shipping costs (label, box, pallet, etc.). For
most of the products, the cost of the container (bottle or drum) represented a large percentage
of the total cost of production; for drum- and tote-sized products, the fluid costs represented a
large percentage of the production costs, although the container costs were not significantly lower.
The minimization of container costs therefore represents a priority for future cost reduction efforts.
Maintenance costs per bottle were negligible across all cases examined, and may be better assigned
as variable overhead rather than as a per-unit cost.
38 2 Cost Modeling
Table 2.23: 12 oz. general purpose cleaner variable costs.
Category Cost Value Pct. of total

Fluid Product $0.0074 3.00%
Fluid Filling $0.0049 1.98%
Fluid Tanker refill $0.0012 0.47%
Hardware Maintenance $0.0007 0.29%
Hardware Bottle $0.1327 53.55%
Shipping Label $0.0500 20.17%
Shipping Box $0.0281 11.35%
Shipping Tape $0.0084 3.38%
Shipping Pallet $0.0130 5.23%
Shipping Wrap $0.0014 0.58%
Total cost per unit $0.2479


Table 2.26: -40 ◦ F cleaner variable costs, 30 gal. drum.

Hardware Drum $12.00 29.99%

Table 2.28: -40 ◦ F cleaner variable costs, 275 gal. tote.

40 2 Cost Modeling


Table 2.31: -50 ◦ F cleaner variable costs, 275 gal. tote.

Table 2.32: Degreaser variable costs.

Table 2.33: Disinfectant variable costs.

42 2 Cost Modeling
Fig. 2.4: 12 oz. general purpose cleaner variable costs.


44 2 Cost Modeling

Fig. 2.7: -40 ◦ F cleaner variable costs, 30 gal. drum.

46 2 Cost Modeling

Fig. 2.9: -40 ◦ F cleaner variable costs, 275 gal. tote.

48 2 Cost Modeling


50 2 Cost Modeling
Fig. 2.12: -50 ◦ F cleaner variable costs, 275 gal. tote.

Fig. 2.13: Degreaser variable costs.

52 2 Cost Modeling
Fig. 2.14: Disinfectant variable costs.

Chapter 3
Valuation Methodology
The enterprise value of the multi-product cleaner line was calculated using the income method of
discounted cash flows (DCF). This approach is justified despite the newness of the venture, since
the typical criteria of high-growth companies (such as short market history and dynamic financials)
given in open literature, such as [4], do not apply in this case: the enterprise may be a new venture,
but it is a part of an established preexisting entity entering a new market. Alternative valuation
methods (such as scenario-based DCF or discounted economic profit valuation, a la [22]) are left as
a future work item to compare and contrast with the methods presented herein.
3.1 Hurdle and Terminal Growth Rates

The hurdle rate directly influences the discount factors used in valuation; as such, some discussion of
its derivation and selection is warranted. Typically, the hurdle rate is taken as the weighted-average
cost of capital (WACC), and this method is used herein. Because the venture is privately funded,
using the capital asset pricing model (CAPM) approach to calculate WACC directly, as would be
convention, is meaningless: as the venture under consideration has no publicly-traded shares, there
is no regression beta to use to calculate the cost of equity. The venture creates cleaning products that
service a number of specific industries. Logically, the venture should, over time, come to resemble
preexisting companies that service these same industries. Therefore, the cost of equity, ke , and cost
of debt, kd , of these preexisting companies can be used as a basis for estimating the hurdle rate for
the venture.
The capital structure data for the proxy firms were gathered from [5]; these are presented in
Table 3.1. Estimating the D/E ratio for the venture is somewhat problematic, because although the
venture is to be funded purely through equity during its inception, its long-term capital structure
is unknown; for purposes of calculating hurdle rate, the venture’s long-term D/E was calculated to
be 0.41, based on the normal distribution of D/E among the proxy firms. Furthermore, although
the marginal tax rate of the venture is assumed, its actual effective tax rate is also unknown,
since the venture operates independently of, but is not assumed to exist as a separate legal entity
from, the rest of the business. While a marginal tax rate of 35% was assumed throughout all
calculations, unlevering proxy betas and re-levering a venture beta is somewhat arbitrary; re-levering
54 3 Valuation Methodology
the unlevered proxy beta using the venture’s assumed marginal tax rate and D/E results in β = 1.09,
which is not significantly different from the proxy firms’ mean beta of 1.11, and certainly within
0.5-sigma of the proxy firms’ distribution of beta. Convention is therefore somewhat ignored for the
sake of simplicity and expediency. Using a Monte Carlo simulation, the venture’s mean WACC was
calculated to be 6.95%, with a standard deviation of 1.30%. These results were used to calculate
the enterprise value presented in Chapter 4. A tornado graph of WACC sensitivities is given in
Fig. 3.1. As seen, ke had the greatest influence on WACC, with variations in E% (Dataset 3) and
kd (Dataset 5) exhibiting secondary influence.
The terminal growth rate, g, represents another major assumption used in the DCF analysis.
Although terminal growth rates must be constrained by some macroeconomic metric (typically
national or global GDP, lest the venture under consideration grow to become more valuable than
the entire world’s economy), assuming a high terminal growth rate will create an unrealistically
high terminal value for the enterprise. As the venture is intended to operate in a mature and well-
established industry, a high g would be inappropriate at any rate. For the present analysis, terminal
growth rate is conservatively assumed to be 0.25%.
3.1 Hurdle and Terminal Growth Rates 55
Table 3.1: Proxy firm data.
Industry name # Firms β ke E% kd D% Tax Rate

Auto & truck 18 1.20 8.99% 40.31% 4.20% 59.69% 8.15%
Auto parts 62 1.04 8.19% 77.94% 4.50% 22.06% 7.71%
Chemical, basic 38 1.20 8.99% 70.78% 4.50% 29.22% 9.76%
Chemical, diversified 7 2.03 13.17% 78.63% 5.25% 21.37% 11.66%
Chemical, specialty 99 1.11 8.57% 77.52% 4.50% 22.48% 9.64%
Healthcare products 251 0.94 7.71% 85.41% 5.25% 14.59% 4.79%
Healthcare facilities 35 1.18 8.89% 36.16% 4.50% 63.84% 10.57%
Household products 131 1.00 7.98% 82.63% 4.50% 17.37% 7.35%
Packaging & container 25 0.74 6.69% 66.57% 4.20% 33.43% 22.37%
Retail, automotive 25 1.01 8.05% 56.83% 4.50% 43.17% 19.04%
Retail, building supply 8 0.86 7.28% 84.85% 4.50% 15.15% 15.36%
Retail, distributors 92 1.15 8.74% 68.69% 4.50% 31.31% 14.20%
Retail, general 18 1.05 8.25% 76.25% 4.50% 23.75% 22.96%
Retail, online 61 1.18 8.91% 89.76% 4.50% 10.24% 7.57%
Retail, specialty lines 106 1.11 8.56% 65.26% 4.50% 34.64% 22.01%
Mean beta 1.1197
Std. dev. of beta 0.2885
Mean ke 8.60%
Std. dev. of ke 1.43%
Mean kd 4.56%
Std. dev. of kd 0.30%
Mean E% 70.51%
Std. dev. of E% 15.75%
Mean βUL 0.8206
Mean βL 1.0925
@Risk function, ke =RiskNormal(0.0860,0.0143)
@Risk function, E% =RiskNormal(0.7051,0.1575)
@Risk function, kd =RiskNormal(0.0456,0.0030)
Fig. 3.1: Tornado diagram of WACC.

3.3 Customer Build 57
3.2 Company Assumptions for DCF Valuation

Several assumptions were made regarding the company structure and operating modalities, which
were held constant throughout the projection period. Among these were:
• Required cash as percentage of sales: 5.00%
• Days sales receivables: 40.00
• Percent receivables collectible: 85.00%
• Inventory turns 9.30
• Days payables: 30.00
• Dividend payout ratio: 0.00%
From the information above and presented in Sec. 3.1, the following parameters are calculated:
• Days inventory: 39.25
• D%: 0.29
• E%: 0.71
The DCF valuation is then calculated as normal.
3.3 Customer Build

The term “customer build” is used to denote not only forecasted demand (along with attendant
conversion, re-conversion, and churn rates), but also the expected number of customers (and hence
revenue, as detailed in Sec. 3.4) per year. Three elements comprised the customer build effort: sales
channel mix optimization, product mix optimization, and the customer base forecast. These are
detailed below.
3.3.1 Marketing channel optimization
Marketing dollars must directly trace to sales dollars if the venture is to be successful. For that
to occur, leads must first be generated. It is generally accepted that various marketing channels
have varying levels of lead generation efficiency, and thus it is logical to minimize the average cost
per lead (CPL). Marketing data from [20] were used to calculate a weighted-average CPL using
statistical lead generation data for ten marketing channels, as shown in Table 3.2. Wholesale CPL
was found to be a random variable; for the present work, it was assumed that wholesale CPL varied
uniformly from $6.00 to $10.00 per lead, based on available data. A more refined estimation of
wholesale CPL is left as a future work item.
A nonlinear generalized reduced gradient optimization was performed to calculate a weighted-
average CPL for projection purposes; the mechanics of GRG nonlinear optimization are presented
in [19] and are not repeated here. The optimal mix of marketing channels, given available CPL data,
is shown in Table 3.2, with the majority of the marketing effort (76.50% of the marketing budget)
allocated to display and CRM efforts. Webinars and retargeting advertisements were optimized to
each receive 10.00% of the marketing budget. The mean weighted average CPL was calculated to
be $5.29, which was varied stochastically (due to the uniform distribution of the wholesale CPL)
for projection purposes.
Note that these are CPL data from only one source, which itself presents data from several
other sources; therefore, CPL figures presented herein are metadata at best. A more thorough
effort into researching CPL by channel will likely yield different results. Note also that the weighted
average CPL treats all marketing channels as equally effective in generating leads, and thus the CPL
optimization is purely a cost function. This is not realistic, as it is understood that given marketing
channels are more effective at generating long-term customer loyalty than others (based on customer
type, average order size, typical industry sales cycle, etc.), as well as different amounts of dollars per
purchase. A complete, in-depth analysis of marketing channels (and their effects on the long-term
financial performance of a venture) is necessary to overcome the shortfalls of these assumptions, but
such analysis is beyond the scope of the present work. As a first estimate, all marketing channels
are assumed equally effective, “all customers are created equal,” and conversion/reconversion of
customers is treated probabilistically from year to year in the forecasts.
Table 3.2: Marketing lead generation matrix.
Channel CPL Channel %

Display / CRM $5.00 76.50%
Search ads $10.00 0.50%
Referrals $20.00 0.50%
Webinars $5.00 10.00%
Social media ads $10.00 0.50%
Email $10.00 0.50%
Retargeting ads $5.00 10.00%
Social media $15.00 0.50%
SEO $20.00 0.50%
Wholesale $8.00 0.50%
@Risk function, Wholesale CPL =RiskUniform(6.00,10.00)
@Risk CPL (mean) $13.97
Weighted average CPL $5.29
3.3.2 Product mix optimization
The product mix optimization focuses on maximizing the total profit of a hypothetical production
run constrained by a fixed number of machines and output per hour. The product mix is then
optimized with the constraint that all production output must equal 100% of total available machine
up time; the results of this optimization are presented in Table 3.3. Note that this method assumes
that supply and demand are “symmetric,” viz. that customer demand for each product perfectly
matches the supply that can be produced. In truth, demand by product type is unknown, as only
aggregate-level cleaning product data are available in the open literature, and thus forecasting
efforts are constrained. Furthermore, demand for two products (the −40 ◦ F and −50 ◦ F cleaners)
is unknowable, as these are intended to operate at lower temperatures than what is currently
commercially available. Given a sufficiently large pool of customers, these details are unlikely to
be of significance, since the optimized output of 477,741 gallons of ethanol per year represents
approximately 0.0044% of the total yearly ethanol used in the United States ([18], [25]). The bias
toward the general-purpose cleaner is also justified by historical usage data, which show that all-
purpose cleaners tend to sell more units annually than the next four highest-selling cleaning products
(toilet bowl cleaners, nonabrasive cleaners, drain cleaners, and spray disinfectants) combined [31].
Note that the optimized product mix in Table 3.3 is relative, and is assumed to scale linearly as
the number of filling machines (and attendant labeling machines) increases or decreases.
Table 3.3: Optimized product mix.
Product Percentage
12 oz. general purpose 88.23%
−40 ◦ F, 30 gal. 1.18%
−40 ◦ F, 50 gal. 1.18%
−40 ◦ F, 275 gal. 1.18%
−50 ◦ F, 30 gal. 1.18%
−50 ◦ F, 50 gal. 1.18%
−50 ◦ F, 275 gal. 1.18%
Degreaser 1.18%
Disinfectant 1.18%
Total ethanol per year, gal. 477,741
3.3.3 Customer base forecast
The customer base, as a function of time, is a function of four factors: leads generated, new-customer
conversion rate, repeat customer conversion rate, and churn. Leads generated is treated purely as
a function of marketing budget and weighted-average CPL, and total number of customers is a
function of number of leads and conversion rate:
Marketing budget
nleads =
CPL (3.1)
ncustomers = (nleads ) (conversion rate)
Conversion rates for new leads are prescribed stochastically based on previous experience selling
cleaning supplies; per guidance, the mean new-lead conversion rate is given per the “Rule of Aces”
(viz. four conversions per fifty-two leads, or 7.692%), with a standard deviation of 0.5%. The
customer re-conversion rate (viz. previous customers who buy again in the future) was treated
as a triangular distribution based on data from [28], with bounds of 60% and 70% and a most-likely
re-conversion rate of 65%. Churn rate (the rate at which previous customers cease purchases) is
industry-specific, and as the venture under consideration is intended to sell to multiple industries,
churn must be treated probabilistically. Churn rates for several U. S. industries were obtained from
[32] for 2017, and the churn rate for the venture under consideration was assumed to be uniformly
distributed between 16% and 27%.
The forecasted number of customers per year is therefore a function of year-start customers
plus the total number of new customers added and previous customers re-converted, less the churn.
The year-end number of customers for year xi becomes the year-start number of customers for year
xi+1 . The projected customer base for the enterprise is given in Table 3.4, with stochastic quantities
shaded.
Table 3.4: Customer forecast; stochastic quantities shaded, mean values shown.
Projection Period Year

Item
1 2 3 4 5 6 7 8
Marketing budget $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
Cost per lead $5.29 $5.29 $5.29 $5.29 $5.29 $5.29 $5.29 $5.29
New-lead conversion 7.692% 7.692% 7.692% 7.692% 7.692% 7.692% 7.692% 7.692%
Re-conversion 65.00% 65.00% 65.00% 65.00% 65.00% 65.00% 65.00% 65.00%
Churn 21.50% 21.50% 21.50% 21.50% 21.50% 21.50% 21.50% 21.50%
Customers start 1 1,142 3,026 6,135 11,264 19,728 33,692 56,733
Customers added 1,454 1,454 1,454 1,454 1,454 1,454 1,454 1,454
Less: churn -313 -313 -313 -313 -313 -313 -313 -313
Re-conversion 743 1,967 3,988 7,322 12,823 21,900 36,877
Year-end customers 1,142 3,026 6,135 11,264 19,728 33,692 56,733 94,751
3.4 Projected Income Statement 63
3.4 Projected Income Statement

3.4.1 Product sales mix
The sales forecast begins with projections of annual expenditures on cleaning products. From [31],
ten years of historical data on cleaning supplies expenditures were gathered, and then projected
linearly to 2026 at a CAGR of 5.20%, which is well within the CAGR projections researched
in the open literature and presented in Chapter 1. These projections are shown in Fig. 3.2. The
estimated market capture of any given year within the projection period is assumed to be a uniformly
distributed random variable between 10% and 25%. Note that this distribution is an educated
guess at best, and refinement of the projection period (and hence, the valuation of the venture) is
recommended once operations have commenced.
The projected quantities of each unit sold for a given year is then the minimum of one of two
quantities:
• The projected annual expenditure multiplied by the percent-optimized maximum number of a

given product produced in that year
• The projected annual expenditure multiplied by the stochastic market capture, multiplied by
the product of the net year-end customers and the percent-optimized maximum number of a
given product produced in that year
Mathematically, the sales volume for a given year is the minimum of either
Dexpenditure (%product ) (Qmax ) (3.2)

or
Dexpenditure (%market capture ) (ncustomers ) (%product ) (Qmax ) (3.3)

where Dexpenditure is the maximum annual dollar amount spent per household unit, %product is
the optimized percentage of total production devoted to a given product, ncustomers is the number
of year-end net customers, and Qmax is the maximum quantity of a given product that can be
produced in a given year. Thus, the projected sales amount is always the minimum of what can be
produced and what can be sold. Note that this approach assumes symmetry of supply and demand
(viz. that the projected demand will be identical to the optimized production mix), with the same
aforementioned rationale and limitations applying here.
Table 3.5: Projected product sales mix by year; stochastic quantities shaded, mean values shown.

Item
1 2 3 4 5 6 7 8
Annual expenditure $158.94 $161.38 $163.11 $163.40 $165.36 $167.17 $167.26 $168.27
Market capture 17.50% 17.50% 17.50% 17.50% 17.50% 17.50% 17.50% 17.50%
12 oz. general purpose 28,036 75,410 154,505 284,188 503,681 869,654 1,465,113 2,461,625
32 oz. general purpose 374 4,274 8,756 16,105 16,594 16,594 16,594 16,594
128 oz. general purpose 1,589 4,148 4,148 4,148 4,148 4,148 4,148 4,148
−40 ◦ F, 30 gal. 83 83 83 83 83 83 83 83
−40 ◦ F, 50 gal. 138 138 138 138 138 138 138 138
−40 ◦ F, 275 gal. 15 15 15 15 15 15 15 15
−50 ◦ F, 30 gal. 83 83 83 83 83 83 83 83
−50 ◦ F, 50 gal. 138 138 138 138 138 138 138 138
−50 ◦ F, 275 gal. 15 15 15 15 15 15 15 15
Degreaser 15,888 42,735 87,559 161,051 285,439 492,838 830,289 1,395,075
Disinfectant 1,589 4,274 8,756 16,105 16,594 16,594 16,594 16,594
Total units 22,716 60,177 118,448 206,733 332,098 539,497 876,948 1,441,734
@Risk function, market capture =RiskUniform(0.10,0.25)
Fig. 3.2: Historical and forecasted expenditures per household unit at CAGR = 5.20%.
3.4.2 Sales commissions
Per guidance, the entirety of the outside sales effort is to consist solely of independent sales repre-
sentatives working on a straight-commission basis. The commission rate was held constant at 10%
of gross profit for all analyses.
3.4.3 Projected sales
The projected income statement is given in Table 3.7, with rounding errors ignored; note that the
cost of sales as presented only includes costs of the physical units, and fixed operating costs are
given as a separate line item. Marginal tax rate was assumed fixed at 35% for all projections. Details
regarding the use of MACRS depreciation schedules are given in Sec. ??. For the industrial-sized
drums and totes, a cleaning and preparatory charge is included in the sell price, as detailed in Table
3.6; total costs presented in Table 3.6 are inclusive of shipping costs. Pro forma financial data are
given in Table 3.8. Sell prices were calculated from total costs based on a fixed 40% gross profit
margin.
Table 3.6: Price matrix.
Product Sell price Clean/Prep Total Sell Total Cost Profit GP%
12 oz. general purpose $0.63 $0.63 $0.38 $0.25 39.94%
−40 ◦ F, 30 gal. $129.95 $20.00 $149.95 $90.02 $59.93 39.97$
−40 ◦ F, 50 gal. $155.86 $30.00 $185.86 $111.54 $74.31 39.98%
−40 ◦ F, 275 gal. $1,969.51 $100.00 $2,069.51 $1,243.51 $826.00 39.91%
−50 ◦ F, 30 gal. $134.20 $20.00 $154.20 $92.57 $61.63 39.97%
−50 ◦ F, 50 gal. $162.91 $30.00 $192.91 $115.79 $77.12 39.98%
−50 ◦ F, 275 gal. $2,008.32 $100.00 $2,108.32 $1,266.87 $841.45 39.91%
Degreaser $2.76 $2.76 $1.66 $1.09 39.67%
Disinfectant $1.95 $1.95 $1.19 $0.75 38.71%
Table 3.7: Projected income statement; quantities in thousands.

Item
1 2 3 4 5 6 7 8
Revenue $194.56 $285.41 $427.62 $656.20 $1,001.02 $1,573.12 $2,503.94 $4,061.85
Cost of sales $117.01 $171.86 $257.72 $395.75 $603.80 $948.96 $1,510.56 $2,450.51
EBITDA $77.55 $113.55 $169.90 $260.46 $397.23 $624.16 $993.38 $1,611.34
Annual fixed costs $322.19 $322.19 $322.19 $322.19 $322.19 $322.19 $322.19 $322.19
Sales commissions $7.75 $11.35 $16.99 $26.05 $39.72 $62.42 $99.34 $161.13
Depreciation $18.03 $16.86 $11.38 $7.73 $6.12 $5.08 $4.05 $2.02
Total OpEx $347.97 $350.40 $350.56 $355.97 $368.03 $389.68 $425.57 $485.35
EBIT $(270.42) $(236.85) $(180.66) $(95.51) $29.20 $234.47 $567.80 $1,126.00

Tax expense (shield) $(94.65) $(82.90) $(63.23) $(33.43) $10.22 $82.60 $198.73 $394.10
Net income (loss) $(174.77) $(153.95) $(117.43) $(62.08) $18.98 $152.41 $369.07 $731.90
Table 3.8: Pro forma financial data; quantities in thousands.

Item
1 2 3 4 5 6 7 8
Sales growth N/A 46.69% 49.83% 53.46% 52.55% 57.15% 59.17% 62.22%
Mean sales for projection period $1,337.97
Mean EBITDA for projection period $530.94
Mean EBT for projection period $146.75
Mean EAT for projection period $95.39
Fig. 3.3: Projected financials.

3.5 Projected Balance Sheet 69
3.5 Projected Balance Sheet

The projected balance sheet is shown in Table 3.11, incorporating the MACRS depreciation schedule
outlined in Ref. [17] and shown in Tables 3.9 and 3.10. For all tables in this section, rounding
errors are not taken into account, as the mathematical model contains the full values. Despite
incorporating the client-mandated constraint of avoiding long-term debt, it is immediately obvious
that the enterprise is incapable of operating past the projection period without summary increases
in short-term debt (assumed to be primarily notes payable).
Table 3.9: MACRS depreciation schedule. Depreciated switches to straight-line method in shaded
cells.
Class Life
Year
3-year 5-year 7-year 10-year 15-year 20-year
1 33.33% 20.00% 14.29% 10.00% 5.00% 3.75%
2 44.45% 32.00% 24.49% 18.00% 9.50% 7.22%
3 14.81% 19.20% 17.49% 14.40% 8.55% 6.68%
4 7.41% 11.52% 12.49% 11.52% 7.70% 6.18%
5 11.52% 8.93% 9.22% 6.93% 5.71%
6 5.76% 8.92% 7.37% 6.23% 5.29%
7 8.93% 6.55% 5.90% 4.89%
8 4.46% 6.55% 5.90% 4.52%
9 6.56% 5.91% 4.46%
10 6.55% 5.90% 4.46%
11 3.28% 5.91% 4.46%
12 5.90% 4.46%
13 5.91% 4.46%
14 5.90% 4.46%
15 5.91% 4.46%
16 2.95% 4.46%
17 4.46%
18 4.46%
19 4.46%
20 4.46%
Table 3.10: Projected depreciation. Quantities in thousands.
Depreciation Year
Item Class Life
Cost 1 2 3 4 5 6 7 8
Filling machines 1 $2.35 $2.35
Label machines 1 $1.46 $1.46
6,000-gal tank 7 $25.79 $3.40 $5.83 $4.16 $2.97 $2.12 $2.12 $2.12 $1.06
500-gal transfer tanks 7 $2.91 $0.42 $0.71 $0.51 $0.36 $0.26 $0.26 $0.26 0.13
Phase converter 1 $0.33 $0.33
UPC (initial) 1 $1.00 $1.00
Inventory software 1 $0.53 $0.53
Website 1 $1.00 $1.00
Computers & software 5 $3.00 $0.60 $0.96 $0.58 $0.35 $0.35 $0.17
Office equipment 7 $5.00 $0.71 $1.22 $0.87 $0.62 $0.45 $0.45 $0.45 $0.22
Shop equipment 7 $5.00 $0.71 $1.22 $0.87 $0.62 $0.45 $0.45 $0.45 $0.22
Stakebed truck 5 $15.00 $3.00 $4.80 $2.88 $1.73 $1.73 $0.86
Total depreciation: $18.03 $14.75 $9.88 $6.66 $5.31 $4.31 $3.28 $1.64
3.5 Projected Balance Sheet 71
Table 3.11: Projected balance sheet. Quantities in thousands.
Period
Assets
0 1 2 3 4 5 6 7 8
Req. cash $9.88 $14.67 $22.19 $34.53 $53.31 $84.49 $135.22 $215.79
Inventory $12.77 $18.99 $28.76 $44.77 $69.14 $109.58 $175.37 $279.90
A/R $18.40 $30.74 $46.51 $72.37 $111.74 $177.09 $283.41 $452.28
Total current $41.04 $64.40 $97.46 $151.67 $234.19 $371.16 $594.00 $947.96
Net PPE $76.26 $58.23 $41.34 $30.00 $22.26 $16.14 $11.07 $7.02 $5.00
Total assets $76.26 $99.28 $105.77 $127.46 $173.94 $250.34 $382.22 $601.02 $952.96
Liabilities
A/P $9.76 $14.52 $21.98 $34.22 $52.85 $83.76 $134.05 $213.95
Notes payable $189.03 $520.50 $981.88 $1,525.36 $2,075.31 $2,531.28 $2,722.62 $2,358.79
Total current $198.79 $535.02 $1,003.86 $1,559.59 $2,128.16 $2,615.04 $2,856.68 $2,572.74
LTD $– $– $– $– $– $– $– $–
Total liabilities $198.79 $535.02 $1,003.86 $1,559.59 $2,128.16 $2,615.04 $2,856.68 $2,572.74
Equity
Initial capital $76.26
Ret. earnings $(175.77) $(329.73) $(447.16) $(509.25) $(492.17) $(355.00) $(22.83) $635.87
Total equity $76.26 $(99.52) $(429.24) $(876.41) $(1,385.65) $(1,877.82) $(2,232.82) $(2,255.65) $(1,619.78)
Total L&E $76.26 $99.28 $105.77 $127.46 $173.94 $250.34 $382.22 $601.02 $952.96
3.6 Projected Payback Period

Payback period and discounted payback period were both calculated to be in excess of eight years,
using the projected free cash flows. Payback figures are tabulated in Table 3.12, using the midyear
convention for discounting cash flows. This payback period exceeds the desired three-year window
for investment recuperation.
Table 3.12: Payback periods; quantities in thousands.
Year Period FCFF PV(FCFF) Cumul. FCFF Cumul. DCF

0 0.0 $(75.62) $(75.62) $(75.62) $(75.62)
1 0.5 $(206.59) $(199.76) $(282.21) $(275.38)
2 1.5 $(171.67) $(155.21) $(453.88) $(430.60)
3 2.5 $(141.62) $(119.72) $(595.50) $(550.32)
4 3.5 $(100.96) $(79.80) $(696.46) $(630.12)
5 4.5 $(39.67) $(29.32) $(736.13) $(659.44)
6 5.5 $55.11 $38.08 $(681.02) $(621.36)
7 6.5 $210.76 $136.18 $(470.26) $(485.18)
8 7.5 $466.93 $282.10 $(3.33) $(203.08)
Hurdle rate: 6.95%
Payback, years: >8
Discounted payback, years: >8
Chapter 4
Results and Discussion
The results of the DCF valuation and optimization are presented in this chapter, as well as the
results of the stress testing performed on the optimization effort. All simulations were performed
at 100,000 iterations unless otherwise specified, with the mean values of results being of primary
concern. Given the mature nature of the proposed enterprise, conventional valuation metrics for
startups (e.g. exit multiples, price-to-sales multiples) are not appropriate: the proposed enterprise
seeks to enter a highly competitive market space with a performance advantage that presents a
very low barrier to entry: the enterprise will therefore thrive or wither based purely on its ability
to generate free cash flows efficiently. Thus, the DCF approach to valuation is appropriate.
4.1 Projected Enterprise Value

The enterprise value was calculated by first calculating the net operating profit after tax (NOPAT,
equal to EBIT(1 − t)), adding back the depreciation for a given period, and subtracting capital
expenditures and change in net operating working capital for that period. The summation of these
parameters is the free cash flow to the firm (FCFF). Note that for the projection period, no ad-
ditional CAPEX was projected: only investments necessary to offset equipment depreciation (e.g.
repairs) was assumed to have occurred.
Prior to calculating the terminal value, the parameters of interest were normalized to a fixed
projection period. The normalized NOPAT was calculated by projecting the final-period NOPAT
by the terminal growth rate. Normalized net growth CAPEX was assumed to be the median of
projected net PP&E as a percentage of NOPAT for the projection period; similarly, the normalized
change in NOWC was assumed to be the median change in NOWC as a percentage of NOPAT for
the projection period. A present value factor was applied to the free cash flow of each period using
the previously-calculated WACC value of 6.95% as the discount rate. The DCF valuation results
are presented in Table 4.1 using the midyear convention. Note that because nearly all of the cash
flow drivers are stochastic, all of the values in Table 4.1 are also stochastic; the tabulated values
therefore represent the means of the simulation results. Rounding errors of the presented values are
ignored, as the complete model has the complete numerical values.
74 4 Results and Discussion
The 95% confidence interval for the enterprise value was [$0.60, $8.14] million, resulting in a
mean enterprise value of $3.96 million, with a standard deviation of $2.53 million. The probability
of a net-negative outcome was calculated to be 6.80%, indicating that there is a 6.80% chance of
the enterprise breaking even or losing money; note that the net-negative probability calculation
includes the terminal value of the enterprise, rather than just the free cash flow of the projection
period.
Marketing channel distribution was found to be the most significant variable affecting enterprise
value, as shown in Fig. 4.1, followed by the sell price per fluid ounce of product. The influence of
cost of equity on the enterprise value is notable, but not in and of itself noteworthy, as the influence
of ke on the terminal value of the Gordon growth model is well-understood. More informative is the
sensitivity of enterprise value to marketing distribution (viz. how much of the marketing budget
is allocated to each marketing channel) as well as the relationship between market capture and
product sales mix (viz. the efficacy of optimizing the marketing efforts across product line as a
function of demand and profitability).
4.1 Projected Enterprise Value 75
Table 4.1: Projected DCF enterprise value; quantities in thousands unless explicitly stated otherwise.
Mean values of stochastic variables shown.
Projections
Year 0 1 2 3 4 5 6 7 8
Item Period 0 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5
NOPAT $(175.77) $(153.94) $(117.43) $(62.08) $18.98 $152.41 $369.07 $731.90
Add: deprec. $18.03 $14.75 $9.88 $6.66 $5.35 $4.31 $3.28 $1.64
Less: CAPEX $(18.03) $(14.75) $(9.88) $(6.66) $(5.35) $(4.31) $(3.28) $(1.64)
Less: ∆NOWC $(31.28) $(18.60) $(25.60) $(41.97) $(63.90) $(106.05) $(172.55) $(275.06)
FCFF $(207.06) $(172.55) $(143.03) $(104.06) $(44.92) $(46.35) $196.52 $457.84
PV factor 1.0000 0.9670 0.9041 0.8454 0.7904 0.7391 0.6910 0.6461 0.6041
PV(FCFF) $75.65 $(200.22) $(156.01) $(120.91) $(82.25) $(33.20) $32.03 $126.98 $276.60
NOPAT Normalization $733.73
Growth CAPEX Normalization $(192.31)
∆NOWC Normalization $(93.06)
P
PV(FF), $M $(0.0813)
Terminal value, $M $6.692
PV(TV), $M $4.403
Enterprise value, $M $3.82–3.96
Fig. 4.1: Tornado graph of enterprise value.

4.2 Projected Optimized Enterprise Value 77
4.2 Projected Optimized Enterprise Value

The sensitivity of the enterprise value to marketing efforts justified a non-convex optimization of
the marketing budget and marketing efforts. The weighted-average CPL given in Ch. 3 was held
constant, and the annual marketing budget was varied from $50,000 to $1,000,000. The aforemen-
tioned product mix optimization (a maximization of available machine-hours) via nonlinear GRG
algorithm was also left unchanged. A budget constraint was imposed upon the optimization, equat-
ing to a “recipe” optimization (i.e. one in which variables can change independently) with a constant
allowable maximum.
The genetic algorithm is an evolutionary optimization approach that allows each solution to
“evolve” from a set of randomly-generated individual solutions to an optimized final solution via
mimicry of natural selection. Candidate solutions have properties that can be altered in each subse-
quent iteration, simulating evolutionary mutations. The solutions of each iteration (a “generation”)
are continually re-evaluated for fitness, in the present context taken to mean the properties that
maximize the objective function (viz. enterprise value). For each generation, a Monte Carlo simula-
tion of 100,000 sample paths was performed, using the sampling probability distribution functions
already discussed. Solutions with the highest individual fitness from the nth generation are used as
th
candidate solutions for the (n + 1) generation, with the algorithm terminating once a satisfactory
fitness level has been reached. For the present study, the fitness level was defined as a change in
enterprise value less than or equal to $1 from one generation to the next, indicating a change value
of less than 0.0001%.
The optimized mean enterprise value was calculated to be $5.10 million, an improvement of over
28% relative to the base enterprise value, with a 7.28% increase in volatility (standard deviation of
$2.71 million for the optimized solution vs. $2.526 million for the base solution). The 95% confidence
interval for the optimized enterprise value was calculated as [$0.03, $31.52] million. The negative
outcome probability for the optimized solution was found to be 3.00%, indicating that the optimized
solution reduces the risk of capital loss by over 50%; therefore, while the optimized structure has a
higher volatility, the variance is more asymmetric than the base case. This equated to an optimized
yearly mean marking budget of $250,000, with a standard deviation of $13,550.
Fig. 4.2: Tornado graph of optimized enterprise value.
4.3 Stress Testing

The results for optimized enterprise value are meaningless without stress testing of the appropriate
parameters. The optimized enterprise value with a 0.3-sigma knockdown was taken to be the baseline
for the stress test; if the proposed optimized enterprise value were sufficiently robust, the stressed
enterprise value should demonstrate little in the way of variance. Summary statistics of stress
testing are shown in Table 4.2 and shown in Figs. 4.3–4.7. Note that the histograms of the baseline
and stress-tested enterprise values are very similar, and although the stressed condition “squeezes”
the optimized enterprise value, there was no statistically significant change in enterprise value (cf.
Fig. 4.7, which shows virtually no change in mean enterprise value between the baseline and stressed
conditions, aside from some slight restructuring of outliers for the stressed case. The robustness of
the optimized structure is therefore considered adequate.
4.3 Stress Testing 79
Table 4.2: Stress test summary statistics.
Item Baseline Stressed

Mean, $M $4.23 $4.21
Min, $M $(1.25) $(1.24)
Max, $M $31.64 $31.12
Mode, $M $2.65 $2.65
Median, $M $3.82 $3.80
Std. Dev., $M $2.52 $2.50
Var 6.350 6.249
Kurtosis 9.141 8.99
Skewness 1.4798 1.4692
5%, $M $0.98 $0.99
95%, $M $8.88 $8.81
Fig. 4.3: Mean enterprise values.

Fig. 4.4: 5th percentile enterprise values.

Fig. 4.5: 95th percentile enterprise values.

Fig. 4.6: Stress test histogram.

Fig. 4.7: Stress test box plot.

4.4 Projected Survival Score by Year

The survival scores for the proposed enterprise is shown in Table 4.3, calculated using the methods
presented in Refs. [2] and [3], as adjusted for private firms. The variables given in Table 4.3 are
defined as follows:
• X1 : working capital / total assets

• X2 : retained earnings / total assets
• X3 : EBIT / total assets
• X4 : equity / total liabilities
• X5 : sales / total assets
The resulting survival score is then
Z 0 = 0.717X1 + 0.847X2 + 3.107X3 + 0.420X4 + 0.998X5 (4.1)
Data from Refs. [2] and [3] show that the Z-score approach has been found to be 72% accurate in
predicting bankruptcy two years before the event and up to 90% accurate in predicting bankruptcy
one year prior to the event, with a Type II error (false negatives) on the order of 6%. While
ratio analysis is typically not considered the only adequate source of assessing a company’s risk of
insolvency, it is informative that the venture is unable to reach a positive survival score within five
years of its proposed launch, even ignoring the adverse effects of competition. The variables used
for the calculation of the private-firm Z-score have been demonstrated to be statistically significant
to the 0.001 level, and are thus considered appropriate for the present analysis.
Table 4.3: Projected survival scores by year.
Year X1 X2 X3 X4 X5 Z0
1 −1.59 −1.77 −2.72 −0.50 1.99 −9.327
2 −4.45 −3.12 −2.24 −0.80 2.77 −10.36
3 −7.11 −3.51 −1.42 −0.87 3.48 −9.366
4 −8.09 −2.93 −0.55 −0.89 3.97 −6.400
5 −7.57 −1.97 0.12 −0.88 4.26 −2.847
6 −5.87 −0.93 0.61 −0.85 4.42 0.9637
7 −3.76 −0.04 0.94 −0.79 4.50 4.363
8 −1.70 0.67 1.18 −0.63 4.53 7.269
4.5 Discussion 85
4.5 Discussion
While the projected financials suggest that the enterprise is theoretically capable of surviving, at
least on paper, the reality of over-reliance on short-term debt to fund operations is unsustainable.
The projected Z-scores of the enterprise are telling: the proposed venture is unlikely to survive
competition, or even operations, with the proposed strategy. The business retains a negative survival
score until the sixth year of operation, and does not escape Altman’s “zone of ignorance” (Z-score less
than 1.81) until the seventh year. Some common-sized financials (over the course of the projection
period) reinforce this notion:
• Return on equity: −53.00%
• Return on assets: 32.81%
• Operating profit: 10.97%
• EBITDA / sales: 39.70%
• Net income / sales: 7.13%
The Z-score results support the dismal financials. X1 , a measure of net liquid assets versus
total capitalization, never turns positive, suggesting that the venture as structured might never
be capable of reaching or maintaining liquidity. X2 , a measure of retained profitability, barely
climbs above zero in year 8, and this final result wasn’t even statistically significant (p = 0.96) in
simulations, suggesting that X2 climbed above zero as much by chance as by operational structure;
mathematically, this variable unfairly discriminates against younger firms, but this only corresponds
with reality: younger ventures are more likely to fail in their early years regardless of their structure.
X3 is a measure of the venture’s ability to productively deploy its assets regardless of tax or leverage
implications; despite generous assumptions in the capitalization and cost structure of the venture,
this variable never increases past the zone of ignorance. X4 is a measure of how far the venture’s
assets can decline in value before its liabilities exceed its assets and the venture reaches insolvency;
the near-constant value of X4 suggests that not only has the venture started off at a disadvantage,
but no amount of increasing sales will resolve the insolvency risk. The only positive note is X5 , which
starts positive and never once decreases in value throughout the projection period. Ordinarily, this
would be cause for celebration, as this variable measures the ability of a venture’s assets to generate
revenue; however, this variable alone cannot guarantee the survival of a firm, as no amount of
increasing sales is capable of offsetting illiquidity caused by poor operational design. As structured,
with the mandated constraints on debt financing and cost assumptions required by the client, this
venture is only capable of, quite literally, “growing broke.” The enterprise value projections and
discounting efforts, therefore, are at best merely an arithmetic exercise.
Much of the cause for these results is directly traceable to the mandated pricing structure.
It is correct to assume that cleaners are a commoditized product, and that as such price is a
discriminating factor for potential customers; it is not correct, however, to assume that the ideal
course of action is to implement a blanket 10% undercut of competitor prices. Not only does
this encourage a “race to the bottom” as per economic theory, but it neglects the advantage that
incumbent businesses have in terms of supply chain optimization and economies of scale. There is
a reason why the products of nationally-distributed brands are priced as seen at retailers, and it
is likely that few (if any) of these reasons are based solely on the desire to undercut the price of a
competitor. The more likely reason is that these incumbents have a mature and highly-optimized
supply chain and operational structure, directly influenced by, and developed in response to, market
dynamics and (perceived or real) market (in)efficiencies that have created a high degree of “tribal
knowledge” within the firm, which are not readily available in the open literature, and which have
directly shaped the evolution of the incumbent over years or decades. Therefore, while the merits
of aggressive pricing are well-understood, without an overall strategy to support it the practice of
aggressive pricing will only aggressively limit profitability.
One of the most critical assumptions requested in the present study, and perhaps the most
damning, is that of symmetrically optimized production: namely, that the optimal operational
structure (from a product cost standpoint) mirrors the demand structure of the market, from the
standpoint of cleaner type and product size: viz. “our ideal production structure is the customer’s
ideal demand.” This is acceptable from a mathematical standpoint, but aggressively increasing
growth does not guarantee survivability (as seen in the present analysis), and foregone profits
appear on no company’s income statement. The sole purpose of marketing is convey to customers a
sense of the company’s philosophy and place in the market; focusing solely on price asserts that the
company can financially outperform the incumbents... although it has been made obvious in this
report that it most certainly cannot. Actual, year-over-year analyses and projections of industry
demand are available from a variety of internationally-recognized sources; although the cost of
these reports is high (on the order of $2,000 – $5,000 per copy), the information they contain is
strategically relevant and should be pursued. Relevant industry conferences and expos, such as those
hosted by ISSA, are another source of invaluable information and data. These resources are acquired
at a cost, but the information provided would be necessary to refine the operational structure and
increase the likelihood of success.
The customer acquisition and churn assumptions made are all mathematically defensible and
traceable to larger-scale industry trends, but the most damning assumption necessitated by this
study is that of the “better mousetrap.” The proposed products outperform the incumbent offerings
in every conceivable metric, be it cleaning efficacy, operational capability (e.g. temperature range),
consumer safety, environmental sustainability, or in their applicability to a variety of cleaning needs.
The environmentally sustainable nature of the cleaning products alone merits a price premium
over the incumbent brands, and should be a key focus of the marketing effort. For no relevant
metric would the proposed products be found deficient, in any fashion, relative to the incumbent
offerings. Why, then, should they be underpriced? The question is not merely philosophical: absent
the prolonged development times and highly-specialized chemistry knowledge required to create and
test new formulations of active cleaning agents, the proposed products rely almost entirely on their
high concentrations of denatured alcohol to perform their intended function. Their performance is
based on a brute-force approach to the chemistry of cleaning: a broadsword rather than a scalpel.
Such an approach is valid (as demonstrated by testing), but inadvertently increases the product cost.
These increases do not appear relevant – the product cost is still greatly eclipsed by the containering
cost, for instance – but when producing (and, presumably, selling) several hundred thousand items
per year, a per-ounce cost of $0.01 vs. $0.001 makes a significant impact to profitability. The financial
results presented herein are the inevitable denouement.
Chapter 5
Conclusions and Recommendations
5.1 Summary of Present Work

This study examined the viability of developing a multi-product line of cleaning solutions targeted
at multiple segments within the industrial and personal cleaning fields. The products developed are
all-natural and environmentally sustainable, feature significantly lower possibility of skin irritation
for the user, and were found to outperform all currently-available alternatives. That said, the
likelihood of failure is extraordinarily high for the enterprise as structured, and undertaking the
venture is not recommended. Not only is the return on equity abysmal (on the order of −50%), but
the enterprise will six years of operations to increase its survival score to a level where profitability
is realistic. Much of these results are rooted in the simple fact that the products are artificially
and needlessly underpriced relative to the incumbents, despite having a significantly higher level of
performance for all relevant scientific and operational metrics. This is further compounded by the
artificial presupposition that an optimized internal operation is symmetric with market demand.
5.2 Recommendations for Future Work

Despite this report’s recommendation, the enterprise is not entirely without merit. There are several
action items that should be addressed and which will provide measurable and favorable improve-
ments to the probabilistic survival of the enterprise. These recommendations are detailed in the
following sections.
5.2.1 Acquisition of market research data
The present work was based on the assumption of operational and demand symmetry, and this
assumption was accepted without substantiation. Relevant business literature repeatedly decries this
practice, but the acquisition costs of professional market research reports was deemed prohibitive
for the present work. As such, said reports were not acquired. While plenty of data exist within
the open literature, the majority of these are summary data at best and metadata otherwise.
The level of detail necessary for a proper market analysis requires more than demography and
88 5 Conclusions and Recommendations
economic research: as the proposed products have, at the time of this writing, no direct substitute,
conjoint and LINMAP techniques would be necessary. Such studies would be subject to the typical
biases inherent to survey-based research, but said biases can be corrected during analysis and the
information provided would remain invaluable.
5.2.2 Formulation of strategy
The better-mousetrap assumption is valid for most new products, but in and of itself makes for
a poor cornerstone of corporate strategy. A price-focused approach is valid if the whole of the
corporate structure is geared to support it. Such is not the case here. A thorough application of
tools such as a strategy diamond or a Porter’s five forces analysis would work well in conjunction
with the aforementioned market research to better position the venture prior to launch.
5.2.3 Effectiveness of disinfectant formulations against quaternary ammonium

compounds
Quaternary ammonium compounds (QACs), often used in conjunction with phenols, are often used
as cleaning agents for removing organic matter. While QACs have widespread use as biocides, they
are also limited to soft water use whereas the formulations examined in the present study are not.
A use-case study should be conducted to assess the performance of the proposed compounds versus
QACs and QAC-phenol compounds based on the water hardness of the end-user geography. QACs
have previously been found to contaminate rivers during high-water incidents, posing a potential
risk to sensitive aquatic and non-target organisms [13]. The environmentally-friendly nature of the
compounds proposed in this study may have a lifecycle advantage against QACs if the proposed
compounds are able to outperform QACs in identical settings. It is recommended that an examina-
tion by an independent third-party laboratory be commissioned, to examine the biocide, fungicide,
et. al. properties of the proposed compounds versus a variety of high-end incumbent disinfectants.
5.2.4 Trade study of automated bottling machines
Mass production of items that are to compete primarily on price require a level of mathematical rigor
that the current proposed venture lacks. Specifically, the need to cut costs at the cent or fractional-
cent level can often influence both profitability and survival. Automated bottling machines (filler-
cappers), operating in the range of up to 40,000 bottles per hour, should be examined as a potential
alternative to the labor-intensive process originally specified. While these machines are far more
expensive, and were therefore excluded from the present analysis at the request of the client, their
high speed and high automation might still make them the better alternative. There is no reason
to assume that shop personnel must work full-time on filling orders to meet demand: if demand
could be met with high-speed automated machines in two hours instead of eight, there is no need
to operate a full shop crew. Given the financial performance of the proposed venture, this approach
may be found to be the more valid one.
The required labor assumption used herein was provided without substantiation, based on prior
experience with similar wholesale distribution models; however, there is a high degree of touch labor
and oversight that may not be required. In conjunction with the automated bottling machines, time-
and-motion studies should be performed to optimize the layout of the shop floor and minimize the
amount of physical work required by shop personnel. As previously stated, the market in which the
5.2 Recommendations for Future Work 89
proposed venture wishes to operate is highly competitive, and a high degree of efficiency is required
to sustain any level of profit. The proposed operational model is incapable of meeting the level of
efficiency required to be competitive.
5.2.5 Reclassification of expenses and restructuring of available data
Several financial constraints were requested that are not necessarily realistic. For instance, main-
tenance costs were amortized at the product level, rather than being considered variable overhead
(which would require data to which access was not available, in order to develop a statistically
relevant model of expected costs). Other items, such as cost per lead data and re-conversion and
churn rates, require a level of refinement that is not available in the open literature. As previously
mentioned, much of the free-access data are summary data or metadata, applicable at the industry
or sector level but not the operational level. Because of this, assumptions must be made that may
unfairly discount the venture’s likelihood of survival, or obfuscate potential sources of improved
efficiency and profitability.
5.2.6 Restructured analysis
The possibility of secondary products, either as standalone items or feedstock for other compounds,
was excluded from the current study. It is a well-known and often-quoted truism that the presence
of chemistry in any industrial process can lead to a multitude of revenue streams that are secondary
to the primary product. Time and resources limited the investigation of these possibilities, but it is
an interesting future work item nevertheless. Furthermore, while the DCF valuation methodology
presented herein did not present a favorable outcome once the survival score was taken into account,
the use of discounted economic profit (economic value added) or relevant comparables would present
a more complete picture. This would work particularly well with the effort to create a more enhanced
market understanding, and would certainly provide a higher-resolution assessment of the venture’s
likely survivability, or allow for a more informed outright restructuring of the venture if needed.
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Enterprise Valuation of A Multi-Product Industrial Cleaner Business

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Enterprise Valuation of A Multi-Product Industrial Cleaner Business

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Enterprise Valuation of a Multi-Product

Industrial Cleaner Business

A stochastic optimization approach

4 Results and Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

5 Conclusions and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

5.2.5 Reclassification of expenses and restructuring of available data . . . . . . . . . . . . 89

1.2 Overview of Markets

1.2.1 General-purpose cleaners

1.2.2 Surface disinfectants and hand sanitizers

1.3 Scope of Present Work

• General-purpose cleaner, 12 oz. spray bottle

• Ultra low-temperature (-50 ◦ F) cleaner, 50 gal. drum

2.1 Startup Costs

2.1.1 Filling machines

E = (P ) (tf ill ) (2.2)

Table 2.1: Filling machine data.

Table 2.2: Mean fill time by product.

Size Fill time, hrs.

2.1.2 Label machines

Table 2.3: Label machine data.

2.1.3 Over-the-road tanker

Table 2.4: OTR tanker data.

Tanker Price Capacity, gal. Price / gal.

2.1.4 Transfer tanks

Table 2.5: Transfer tank data.

Tank Price Capacity, gal. Price / gal.

2.1.5 Phase converter

Table 2.6: Phase converter data.

Item HP Price Price / HP

2.1.6 Inventory management software

Thirty-one subscription-priced, cloud-based inventory management software options were examined.

Table 2.7: Inventory management software data.

Software Level Price / mo.

2.1.7 Initial UPC setup

2.1.9 Computers & miscellaneous software

2.1.10 Office furniture & equipment

2.1.11 Shop furniture & equipment

2.1.12 Stakebed truck

2.1.13 Management reserve

2.1.14 Total startup costs

Item Value Pct. of total

Fig. 2.1: Startup cost.

2.2 Fixed Operating Costs

2.2.2 UPC renewal

2.2.3 Shop labor

2.2.4 Management salary

2.2.5 Electricity (fixed connection)

2.2.6 Shop lighting

2.2.7 Water (fixed meter)

2.2.9 Plant lease

2.2.11 Annual burn rate

Table 2.9: Annual fixed costs.

Category Item Annual Pct. of total

Fig. 2.2: Annual fixed costs.

2.3 Variable Operating Costs

2.3.1 Common costs per bottle

Table 2.10: Shared per-unit variable costs.

Item Annual Pct. of total

Fig. 2.3: Common costs per bottle.

2.3.2 Electricity (variable rate)

2.3.3 Fluids cost

Table 2.11: Bisphenol-A import data.