Interviewer:   You have the near impossible task of convincing me the world needs to re-learn microeconomic investment decision-making techniques because of your work on the subject matter.

Author:   Thanks for the opportunity to convince you.

Interviewer:   Won’t business professionals need to conclude their investment evaluation techniques could be dramatically improved with your work?

Author:   Yes, they will.

Interviewer:   Really. If I wasn’t intrigued before, I am now. You need to try and help me understand how dramatically improving investment evaluations is possible. I sometimes dabble in investment opportunities myself.

Author:   First we’ll prescribe a comprehensive benchmark to act as a guideline around answering investment opportunities. The benchmark begins to layout a universal methodology to answer investment opportunities. Along the way, we’ll unify the traditional investment tools as validation of the benchmark.

Interviewer:   Are you telling me there is one investment benchmark to apply to all investment opportunities? How can that be? It seems every industry has its own peculiarities that create uniqueness to that industry. Are you saying, “Yes, there is diversity in how investments are evaluated presently but I’m going to unite these approaches under a single investment benchmark”? Do tell.

Author:  Yes, that’s what I’m saying! I’m uniting investment evaluation approaches under a core investment methodology. I’m beginning with an investment benchmark. Let’s start fundamentally with the four predominant investment categories.

Interviewer:  The four what? Never heard of them.

Author:   Investment opportunities are predominantly asked and answered within four investment categories. I refer to the four investment categories as

A) Equity Return,

B) Initial Investment Cost,

C) Operating Performance/EBITDA and

D) Asset Salvage Sale Price. Categories A, B, C & D. There are numerous names to refer to the four categories. I’ve tried to use as a common a name as possible.

Interviewer:  Yeah. Ok. The idea of asking and answering investment opportunities within four investment categories takes a little time to get my head around but I can see it at an extremely high level.

Author:  Good. The investment benchmark states, “For a single set of investment assumptions, given any three of the four investment categories as assumptions, one should be able to calculate the fourth as an investment opportunity answer”.

Interviewer:  What’s the big deal? How is this an investment benchmark? It sounds too simple. It doesn’t seem unique enough to be a benchmark but it does seem to make logical sense.

Author:  Yes, it does make logical sense. It is very unique because, until I developed algorithms to answer investment opportunities the benchmark could not be achieved.

Interviewer:  You mean it can’t be done today? Surely, you’re joking.

Author:  No, I’m serious.

Interviewer:  How can that be? I guess I don’t specifically remember seeing it anywhere. Maybe I never really thought that much about it until now. So, if I got on the Internet and searched, are you telling me I can’t find where given all but one investment assumption I can repeatedly calculate the missing assumption within a single assumption set?

Author:  Correct.

Interviewer:  What if I went out and got the most recent textbook or podcast on finance or microeconomic investment decision-making, would I find it in there?

Author:  No, you wouldn’t.

Interviewer:  Wow. My head is starting to hurt. Hey, I’m surprised it can’t be done today because it looks so obvious but I’m not seeing why it’s so important.

Author:  Answering investment opportunities achieving this benchmark can use financial statements to convey investment opportunity equity return.

Interviewer:  So, no one can repeatedly take any three investment category assumptions and produce the fourth? And now you’re saying because of this no one can prove-out an investment opportunity’s equity return?

Author:  Yes, that’s right.

Interviewer:  Hmmm . . . Ok, sure. I guess that’s why capital budgeting has IRR hurdle rates, they can’t prove-out an investment opportunity’s equity return when analyzing capital investment opportunities. So, your benchmark and investment methodology covers only capital budgeting?

Author:  No, as I said earlier, the investment methodology is universal; it is applicable to any investment opportunity. The reciprocal transitions among the four investment categories exhibit the methodology’s universal nature.

Interviewer:  Yeah . . . you know, now that I’ve thought about it for a while, I don’t ever remember seeing investment opportunity equity return proven-out. So, for all investment opportunities, no one can prove-out an investment opportunity’s equity return, and now you can with your recent work?

Author:  Yes, reciprocal transitioning among investment categories is an investment benchmark I named Solve/Assumption Synchronicity (SAS). SAS answered investment opportunities enable financial statements that prove-out an investment opportunity’s equity return.

Interviewer:  Would a business college professor be impressed to see an investment opportunity’s equity return demonstrated in financial statements?

Author:  Awestruck.

Interviewer:  What’s the current benchmark this SAS thing replaces?

Author:  If traditional IRR and NPV outcomes give you conflicting results, choose NPV.

Interviewer:  That’s it.

Author:  Yes.

Interviewer:  Just curious, why NPV?

Author:  No one can say for sure.

Interviewer:  Really. That doesn’t sound like much of an investment benchmark. So, you’re telling me that today there really is no benchmark guiding investment opportunity evaluations? I guess, after thinking about it for a while, I really can’t think of one.

Author:  Well, we have the Discounted-Cash-Flow (DCF) concept of “a future dollar is valued at a discount to a dollar today”. DCF goes along with the general definition of the time-value-of-money.

Interviewer:  Yeah, but those aren’t really investment benchmarks.

Author:  I’ll show you a SAS benchmark example but first we need to assign traditional investment evaluation tools to the four investment categories.

Interviewer:  Why do we need to do that?

Author:  Traditional investment evaluation tools are all fundamentally sound. Their specific mechanics are correct. That is not a matter of contention. It’s just they are not being used in the proper context. The traditional tools are just that, tools - not investment methodologies. We’ll show how the Solve/Assumption Synchronicity benchmark actually unifies the traditional tools as compared to how IRR and NPV are used as competing choices today. Traditional tool unification validates the SAS benchmark.

Interviewer:  Ok, whatever. That all sounds a little too theoretical. Let’s get back to assigning tools to categories and looking at some examples.

Author:  Ok. The investment categories and their four assigned traditional tools are A) Equity Return: IRR( ), B) Initial Cost: NPV( ), C) Operating Performance/EBITDA: PMT( ) and D) Salvage Sale Price: FV( ).

Interviewer: Wait a minute. OK. I get A) Equity Return and IRR( ). I get B) Initial Cost and NPV( ). The first two are relatively easy. Even D) Salvage Sale Price and FV( ) makes some sense but, what the heck is going on with C) Operating Performance/EBITDA and PMT( )? That’s a new one I just don’t get.

Author:  Yes, associating EBITDA with PMT( ) seems a little out-of-the-norm at first.

Interviewer:  Yeah, I’d say.

Author:  A little closer examination shows the two are very similar. Let’s break down EBITDA and PMT into their bare essence. EBITDA provides operating performance to address an asset’s influences. EBITDA’s add-backs define EBITDA as an asset’s return ‘on’ and return ‘of’ capital. Here is the ‘E’B’I’T’D’A’ listing: Earnings are return ‘on’ equity earnings; the Before points to the four add-backs, Interest expense add-back is simply return ‘on’ asset debt; due to equity return and income taxes being directly linked, equity return ‘on’ must be ‘grossed-up’ through the income Tax add-back; and finally, Depreciation and Amortization represent an asset’s return “of”. What few people recognize is EBITDA’s income statement is sandwiched by two bookend Balance Sheets. EBITDA is a Balance Sheets asset’s return ‘on’ and ‘of’ capital. We don’t see entire Balance Sheets because, until now, they’ve been impossible to accurately portray. To fully finish the EBITDA return ‘on’ and return ‘of’ depiction, I upgrade EBITDA’s definition to exclude all asset influences, not just the standard EBITDA add-back items. I refer to the upgraded EBITDA as Pre-Asset Operating Performance (PaOp).

An electronic spreadsheet’s PMT( ) function represents similar EBITDA properties for a given principal amount. The PMT( ) function generates a combined return ‘on’ and return ‘of’ for its principal amount. Substituting the PMT( )’s principal amount with EBITDA’s assets is a powerful link in unifying the traditional tools within the investment categories. The EBITDA/PMT( ) link helps recruit multiple EBITDAs into the realm of the time-value-of-money. The EBITDA/PMT( ) link enables operating performance reciprocal transitions and establishes Solve/Assumption Synchronicity as a defining investment benchmark.

Interviewer:  This EBITDA/PMT( ) stuff is all a little bizarre but I guess I can eventually absorb it all. You mentioned something about some examples earlier. Can we get to those now? It might help me grasp things a little better and maybe make my head stop hurting.

Author:  Sure. Schedule 1 does a good job of demonstrating the Solve/Assumption Synchronicity benchmark.

Interviewer:  OK. Let me look at Schedule 1. Is there anything you would like to point out?

Author:  Yes, the first four lines of Schedule 1 represent a side-by-side comparison between Solve/Assumption Synchronicity (SAS) and the traditional tools (Cash). The first four lines are the IRR, NPV, PMT and FV traditional tool calculations we just talked about. There are eight columns (A1 through D2) for the four investment categories. Each investment category column has both a Solve/Assumption Synchronicity (SAS) focus and traditional combined cash (Cash) focus.

It’s important to observe the four Solve/Assumption Synchronicity columns (A1, B1, C1 and D1) are all identical. The four identical columns demonstrate the four IRR, NPV, PMT and FV tools are unified around a single assumption set. It’s also important to point-out the four traditional combined cash columns (A2, B2, C2 and D2) are not identical. The traditional combined cash columns are not unified. The validating strength of the SAS investment evaluation benchmark is its reciprocal nature being demonstrated with well-known traditional tools in columns (A1, B1, C1 and D1).

Interviewer:  So, this is the Solve/Assumption Synchronicity benchmark applied to a deferred up-side investment opportunity. Wow. The SAS and Cash differences are significant – 30% versus 85% equity return, Line [1] and $500 versus $923 Initial Cost, Line [2]. Tell me, in a nutshell what’s going on here?

Author:  Schedule 1, Line 10 starts the second page support for the amounts on the first page. If you look at Lines [13], [20], [27] and [34] for the four investment categories, you will see the traditional tools operating on a traditional combined cash flow. If you look at Lines [16], [23], [30] and [37] you will see the same traditional tool techniques operating on SAS’s Synchronized Equity Flow. For SAS, the traditional combined cash flow is a starting point and is subsequently transitioned into the Synchronized Equity Flow. The Secondary Flow and Debt Lines are the same period one through period-five amounts for all four investment categories.

Interviewer:  Yes, I see that on Lines [14] and [15]. I kind of see how the Debt piece might come into play but what’s going on with this Secondary Flow thing?

Author:  The balancing Secondary Flow is a recent discovery. Secondary Flow balances an investment opportunity with the outside world each investment period. Secondary Flow is the mortar that binds all the individual Financial Statement pieces together. Secondary Flow is an internal financing/investment vehicle not of the asset but of the investment opportunity. Secondary Flow is found in the Balance Sheet,Income Statement and Changes in Cash Flow. Secondary Flow can be cash, short-term investments or short-term financing. Secondary Flow warrants its own return rate assumption within an investment opportunity.

Interviewer:  Ugh; more stuff to have to think about.

Author:  The ability to transition between a traditional combined cash flow, Line [13] to the Synchronized Equity Flow, Line [16] requires the newly discovered methodology’s intricate algorithms.

Interviewer:  Yeah, something funky is definitely going on here.

Author:  Have you ever paused and reflected about discounting a combined cash flow?

Interviewer:  You mean like the one on Line [13]? No. Why would I pause and reflect about a cash flow?

Author:  Well, you’re discounting a varying combined stream of cash flows containing, as it turns out, three different discount rates, Debt, Secondary Flow and Equity.

Interviewer:  So?

Author:  Discounting varying combined cash flow containing three different discount rates ignores a time-value axiom.

Interviewer:  Ignored axiom? What kind of axiom is ignored? Now, not only is my head hurting, I’m starting to get dizzy.

Author:  Years ago, investment opportunities, generally, had much flatter operating performances. These flatter operating performances didn’t greatly distort things for a combined cash flow containing multiple discount rates. However today, many investment opportunities now contain a degree of deferred up-side operating performance. The outcome of discounting deferred up-side combined cash flows containing multiple discount rates is problematic.

Interviewer:  If “problematic” is what I think it is, you’ve gone too far. Are you are trying to tell me people who discount a combined cash flow containing multiple discount rates generate incorrect outcomes?

Author:  No, not if each period’s operating cash flow is all flat.

Interviewer:  Well, how often are they all flat?

Author:  Almost never.

Interviewer:  One of us is either insane or about to go insane. Are you telling me with a straight face that almost every traditional IRR and NPV investment evaluation is something less than correct and the more deferred up-side the investment opportunity has, the more wrong the traditional IRR and NPV outcomes are? Surely, you’ve missed represented how things really are?

Author:   No, I’m spot on. The entirety of Schedule 1 does well to describe the situation. The numbers speak for themselves. SAS Lines [1] through [4], Columns A1, B1, C1 and D1 are identical and Cash Columns A2, B2, C2 and D2 are not. If you still have questions drill down into the referenced support. Column A support is on Lines [10] through [17], Column B support is on Lines [18] through [24], Column C support is on Lines [25] through [31] and Column D support is on Lines [32] through [37]. Lines [10] through [37] formulas are specifically documented on Lines [39] through [46]. The difference between the SAS and Cash columns is the SAS columns differentiate between the three cash flows and the Cash columns don’t. This cash flow differentiation explains how the investment opportunity methodology solves a serious IRR and NPV shortcoming.

Interviewer:  I don’t think IRR and NPV have serious shortcomings. No one else thinks so either. What supposed IRR and NPV shortcoming are you talking about?

Author:  A traditional IRR or NPV solved investment opportunity can’t prove-out an investment opportunity’s equity return.

Interviewer:  So, how does not being able to prove-out an investment opportunity’s equity return make the current way of doing investment evaluations wrong?

Author:  Answering an investment opportunity with SAS allows the ability to prove-out and then convey the investment opportunity’s equity return, even if it has deferred up-side operating performance. The new investment methodology and the traditional cash techniques don’t produce the same investment answers. Not producing the same investment answers creates a need to choose between the two approaches. SAS benchmark-based answers are correct and the traditional tool technique answers are something less than correct, as demonstrated in Schedule 1.

Interviewer:  Can we take a break?

Author:  Sure. When we come back we can talk about an interface between an investment opportunity and the investment opportunity owner and how the interface conveys the Internal Equity Return measure.

Interviewer: More new stuff? What is an Internal Equity Return measure?

Author: It’s nothing too complicated. We’ll find out more in the second Interview.

Interviewer:   Is my head going to hurt in the second Interview like it does in the first Interview?

Author:  Probably.