Ep3. Counting the barrels
Our thirsty group hunts for water in the desert in episode 1 and locates several prospects. They consult a shaman to rank their prospects in episode 2. A well is drilled and they find water! The tribe has secured their survival in the desert! But their story does not end there.
A year later, the tribe considers selling their water to neighbors. They turn to a worldly merchant for advice. He gives them some tips:
One: Get an estimate of how many buckets of water are in your reservoir
Two: Multiply the number of buckets with the current market price for water. This gives you your cash flow. Now account for annual inflation. This gives you your net present value (NPV) at any given future year.
Three: Estimate the cost of additional wells to produce those buckets of water (capital expenditure, CAPEX)
Divide your estimated NPV with CAPEX. This gives you your Value Investment Ratio (VIR).
Reference: Mike Albrecht, 2015
Next:
Having counted their chickens, how will they get it from the source to the market?