Professional Documents
Culture Documents
Greg Crabtree
Greg.crabtree@crbcpa.net
256-704-0620
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“Most people miss opportunity because
it wears overalls and looks like work”
– Thomas Edison
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Simple Numbers… Straight Talk… Big Profits
4 Keys to Unlock Your Business Potential
• Your data is lying! - Why how you deal with Owner's compensation
is distorting your data
• Profit matters more than you think – How to set the right profit targets
for your business
• Labor Productivity drives you profit engine – How do measure it and
improve it
• 4 Forces of cash flow – Get the priorities right to set your business on
a solid foundation
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Next Level
• How to maximize labor productivity by
communication performance expectations
• Reporting – Rhythm, Data & Priorities Simplified
• Three Sources of Capital – Which is Right for You?
• Economic Value - what is your business really
worth to you?
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Two Challenges For You
• You get
– a salary for what you do and
– a return on what you own
• Why Your Net Income is lying!
• Be a More Demanding Employee
– What does your industry say you’re
worth?
• Be a More Demanding Shareholder
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Three examples
Company 1 Company 2 Company 3
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Three examples - Continued
Company 1 Company 2 Company 3
Revenue $1,000,000 $1,000,000 $1,000,000
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Sweat Equity
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Multi-Shareholder Companies
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Gregism
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Got Investors?
Communication is Key
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Transitioning Out Of Your
Business
• Business owner taking a part-time
role
• Creating a baseline
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The Bottom Line
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Gregism
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What is Profit?
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Exhibit 2.1 - Gross Profit Examples
Construction Services
Company Company
Operating expenses:
Facilities 150,000 150,000
Marketing 75,000 75,000
Salaries (management and admin) 750,000 750,000
Payroll taxes and benefits 100,000 100,000
Other operating expenses 150,000 150,000
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Exhibit 2.1 - Gross Profit Examples
Construction Services
Company Company
Operating expenses:
Facilities 150,000 150,000
Marketing 75,000 75,000
Salaries (management and admin) 750,000 750,000
Payroll taxes and benefits 100,000 100,000
Other operating expenses 150,000 150,000
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Cash Flow versus Profit 5%
$200,000
$150,000
$100,000
Cash
$50,000
Net
$-
Income
Months 1 6 11 16 21 26 31 36 41 46 51 56
$(50,000)
$(100,000)
$(150,000)
$(200,000)
$(250,000)
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Cash Flow versus Profit 10%
$400,000
$300,000
$200,000
$100,000 Cash
Net
Income
$-
Months 1 6 11 16 21 26 31 36 41 46 51 56
$(100,000)
$(200,000)
$(300,000)
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Cash Flow versus Profit 15%
$600,000
$500,000
$400,000
$300,000
$200,000
Cash
$100,000 Net
Income
$-
Months 1 6 11 16 21 26 31 36 41 46 51 56
$(100,000)
$(200,000)
$(300,000)
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Cash Flow versus Profit Recap
$500,000
$400,000
$300,000
$200,000
Cash - 5%
Cash - 15%
$-
Months 1 6 11 16 21 26 31 36 41 46 51 56 61 66 71
$(100,000)
$(200,000)
$(300,000)
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Ups and Downs of Operating Cash
Flow
Net Income Versus Cash Flow Net income Operating cash flow
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0
2008-04
2008-06
2008-08
2008-10
2008-12
2009-02
2009-04
2009-06
2009-08
2009-10
2009-12
2010-02
2010-04
2010-06
2010-08
2010-10
2010-12
($200,000)
($400,000)
($600,000)
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#1 Key Performance Indicator
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Gregism
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From Start-Up to $5 Million
• Eight Functional Areas (from Gazelles.com):
1. CEO 5. Technology
2. Sales 6. Finance
3. Marketing 7. Customer Service
4. Operations 8. Human Resources
MythBuster
The vast majority of businesses that survive are
profitable by the time they reach $1 Million
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The Black Hole For Businesses
• Between $1 million and $5 million of
revenue is referred to as “The Black Hole”
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Gregism
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Most Challenging Level of Profitability
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How Much Capital is Enough
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Surviving The Black Hole
Company A
$5,000,000
$4,000,000
$3,000,000 Revenue
$2,000,000 Net
income
$1,000,000 Equity
$-
20X1 20X2 20X3 20X4 20X5 20X6 20X7
$(1,000,000)
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Surviving the Black Hole
Company B
$6,000,000
$5,000,000
Revenue
$4,000,000
Net income
$3,000,000
Distributions
$2,000,000
Equity
$1,000,000
$-
20X1 20X2 20X3 20X4 20X5
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Labor Productivity is the Key to
Profitability
• Salary Cap concept
• NFL (Football) Team Example
• Real life examples of change after
introduction to the Salary Cap
concept
• Million Dollar Makeover
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Plugging in Your Salary Cap Number
Revenue $1,000,000
Salaries ????
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Plugging in Your Salary Cap Number
Revenue $1,000,000
Salaries ????
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Plugging in Your Salary Cap Number
Revenue $1,000,000
Salaries ????
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Plugging in Your Salary Cap Number
Revenue $1,000,000
Salaries $500,000
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Getting to 15% Pre-Tax Profit
Revenue 450,000.00
Labor Effciency:
Direct Labor (GP/DL) $3.56
Sales Labor (CM/SL) $6.57
Management Labor (CM/ML) $3.07
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Step #1
Original 10%
Labor Effciency:
Direct Labor (GP/DL) $3.56 $3.89
Sales Labor (CM/SL) $6.57 $7.43
Management Labor (CM/ML) $3.07 $3.47
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Step #1 Step #2
Original 10% 15%
Labor Effciency:
Direct Labor (GP/DL) $3.56 $3.89 $4.22
Sales Labor (CM/SL) $6.57 $7.43 $8.29
Management Labor (CM/ML) $3.07 $3.47 $3.87
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Step #1 Step #2 Step #3
Original 10% 15% back to 10%
Labor Effciency:
Direct Labor (GP/DL) $3.56 $3.89 $4.22 $3.86
Sales Labor (CM/SL) $6.57 $7.43 $8.29 $6.50
Management Labor (CM/ML) $3.07 $3.47 $3.87 $3.38
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Step #1 Step #2 Step #3 Step #4
Original 10% 15% back to 10% Back to 15%
Labor Effciency:
Direct Labor (GP/DL) $3.56 $3.89 $4.22 $3.86 $4.25
Sales Labor (CM/SL) $6.57 $7.43 $8.29 $6.50 $7.38
Management Labor (CM/ML) $3.07 $3.47 $3.87 $3.38 $3.84
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-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
2009-12
2010-01
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2010-02
2010-03
2010-04
2010-05
2010-06
2010-07
2010-08
2010-09
2010-10
2010-11
2010-12
2011-01
2011-02
2011-03
2011-04
2011-05
2011-06
Actual
2011-07
2011-08
2011-09
2011-10
2011-11
2011-12
R12 Labor efficiency
2012-01
2012-02
2012-03
Forecast
2012-04
2012-05
2012-06
2012-07
2012-08
2012-09
2012-10
2012-11
2012-12
0.00%
5.00%
-5.00%
10.00%
15.00%
20.00%
25.00%
-10.00%
%
Net
LER
LER
Direct
Admin
Income
Total LER
Price Increase Chart
Your present Gross Profit
20% 25% 30% 35% 40% 45% 50% 55% 60%
Increase your price by: To produce the same profit, you can decrease sales volume (units) by:
2% 9.1% 7.4% 6.3% 5.4% 4.8% 4.3% 3.8% 3.5% 3.2%
4% 16.7% 13.8% 11.8% 10.3% 9.1% 8.2% 7.4% 6.8% 6.3%
6% 23.1% 19.4% 16.7% 14.6% 13.0% 11.8% 10.7% 9.8% 9.1%
8% 28.6% 24.2% 21.1% 18.6% 16.7% 15.1% 13.8% 12.7% 11.8%
10% 33.3% 28.6% 25.0% 22.2% 20.0% 18.2% 16.7% 15.4% 14.3%
12% 37.5% 32.4% 28.6% 25.5% 23.1% 21.1% 19.4% 17.9% 16.7%
14% 41.2% 35.9% 31.8% 28.6% 25.9% 23.7% 21.9% 20.3% 18.9%
16% 44.4% 39.0% 34.8% 31.4% 28.6% 26.2% 24.2% 22.5% 21.1%
18% 47.4% 41.9% 37.5% 34.0% 31.0% 28.6% 26.5% 24.7% 23.1%
20% 50.0% 44.4% 40.0% 36.4% 33.3% 30.8% 28.6% 26.7% 25.0%
25% 55.6% 50.0% 45.5% 41.7% 38.5% 35.7% 33.3% 31.3% 29.4%
30% 60.0% 54.5% 50.0% 46.2% 42.9% 40.0% 37.5% 35.3% 33.3%
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Price Decrease Chart
Your present Gross Profit
Reduce your price by: To produce the same profit, you must increase sales volume (units) by:
10% 100.0% 66.7% 50.0% 40.0% 33.3% 28.6% 25.0% 22.2% 20.0%
12% 150.0% 92.3% 66.7% 52.2% 42.9% 36.4% 31.6% 27.9% 25.0%
14% 233.3% 127.3% 87.5% 66.7% 53.8% 45.2% 38.9% 34.1% 30.4%
16% 400.0% 177.8% 114.3% 84.2% 66.7% 55.2% 47.1% 41.0% 36.4%
18% 900.0% 257.1% 150.0% 105.9% 81.8% 66.7% 56.3% 48.6% 42.9%
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Where Did the Cash Go?
Beginning Cash $100,000
Net income $125,000
????????? ??????
????????? ??????
????????? ??????
????????? ??????
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Where Did the Cash Go?
Beginning Cash $100,000
Net income $125,000
????????? ??????
????????? ??????
????????? ??????
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Where Did the Cash Go?
Beginning Cash $100,000
Net income $125,000
????????? ??????
????????? ??????
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Where Did the Cash Go?
Beginning Cash $100,000
Net income $125,000
????????? ??????
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Where Did the Cash Go?
Beginning Cash $100,000
Net income $125,000
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Gregism
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Cash Flow Revealed – How It Should
Be
Beginning Cash $100,000
Net income $125,000
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4 Forces of Cash Flow
Prioritized In Order:
• Taxes
• Repay debt
• Build Working Capital (Core Capital
Target)
• Dividends (Distributions)
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#1 Force of Cash Flow
Taxes
• Before you spend, put aside $$ for
Taxes, avoid the tax day “surprise”
• Cash versus Accrual
• Timing is Key
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#2 Force of Cash Flow
Debt
• Line of Credit:
Should be reduced to $0 for 30
consecutive days in a 12 month period
No “Evergreen” Loans
• Long-Term Debt:
Repayment of Debt only with after tax
profits
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#3 Force of Cash Flow
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#4 Force of Cash Flow
Distributions of Profits
• Safely Removing Cash when it will not
hurt the stability or growth of the
business
• Know the difference between
• “tax” distributions
• “profit” distributions
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Managing your Salary Cap
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The Salary Economy
• The market ultimately determines wages for
output
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Using Salary Survey’s
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Just Say No to COLA’s
• No to Cost of Living Adjustments
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Communicating Employee Level Business Strategy
Five Critical Areas of Employee Evaluations
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Communicating Employee Level Business Strategy
Five Critical Areas of Employee Evaluations
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Communicating Employee Level Business Strategy
Five Critical Areas of Employee Evaluations
• External Customer
– Without customers, we do not eat!
– Everybody will interface with the customer at
some point, are you prepared?
– Know how to turn customer challenges into
opportunities without just giving money or
account credit
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Communicating Employee Level Business Strategy
Five Critical Areas of Employee Evaluations
• Productivity
– How Productive are you?
– Do you find a way to get things done everyday
that need to be done?
– Do you require a deadline to be productive?
– Is working more your only method of being
more productive?
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Communicating Employee Level Business Strategy
Five Critical Areas of Employee Evaluations
• Profitability
– For what you produce, are you being paid what
the market says that productivity is worth?
– Production or Admin, can I hire the same talent
in the market for substantially less pay?
– Profitability encompasses productive days and
down days
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Communicating Employee Level Business Strategy
Five Critical Areas of Employee Evaluations
• Core Competencies
– Identify the 3 to 5 core competencies required
for each role
– Avoid the specialization trap
• Only have specialist when you can fully utilize their
skills or only pay when they work
• Try to add one or two key skill sets to keep specialists
connected to the rest of the work team
– The most profitable employees usually are the
ones who can do multiple roles or tasks
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Identify the top 3 to 5 skill sets
At our firm:
1. Prepare/Forecast Personal Tax Return
2. Prepare/Forecast Business Tax Return
3. Install, train and maintain accounting systems
4. Prepare reviewed financial statements
5. Create an integrated cash flow forecast model
with balance sheet, P&L and cash flow
What are the 3-5 skill sets in your industry for each
role in your business?
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Open Book Management
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Productivity from Every Dollar Spent
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Caution with Incentive Plans
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Three Sources of Capital
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Source # 1: Use your Own Money
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Source # 2: Other People’s Money
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Source # 3: Sweat Equity
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Reporting Rhythm
• Reports
– What Report?
– When to Look at Report?
– Why to Look at Report?
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Example of Reporting Rhythm
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Two-Week Cash Flow Cycles
1. General bills
2. Payroll
3. Payroll taxes
4. Rent
5. Payments for fixed-term notes
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Daily Polls and Weekly Reports
Weekly Reports
• Cost and Cash Flow Management
• Sales and Production
• Weekly labor efficiency
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Weekly Production and Labor Efficiency
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Monthly Numbers and the Rolling 12
• Every month ends a 12-month
accounting period, and I compare
those months and the 12-month
period side by side
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Exhibit 8.3: Rolling 12 P&L Sample
Cost of Goods Sold 289,000.00 315,000.00 320,000.00 320,000.00 315,000.00 322,000.00 320,000.00
Total Operating
Expenses 594,000.00 628,000.00 642,000.00 669,000.00 686,000.00 689,000.00 694,000.00
Net Operating Income (68,000.00) 7,000.00 8,000.00 19,000.00 (3,000.00) 74,000.00 106,000.00
as % to Revenue -8.34% 0.74% 0.82% 1.88% -0.30% 6.82% 9.46%
Profit target @ 10% 81,500.00 95,000.00 97,000.00 100,800.00 99,800.00 108,500.00 112,000.00
Above (below) target (149,500.00) (88,000.00) (89,000.00) (81,800.00) (102,800.00) (34,500.00) (6,000.00)
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Quick Tips about Quickbooks
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Cash Basis vs. Accrual Basis
• Understanding of accrual-basis
accounting methods is encouraged
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What is Your Business Worth?
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Exhibit 9.1: FMV Calcualtion - 10%
EBITDA History
20X1 20X2 20X3 20X4 20X5
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Exhibit 9.2: FMV Calculation - 10%
Valuation
Equity + last 3 years EBITDA
if 3 years are not available, take the average of the years available times 3
FMV before lack of control discount 376,000 600,400 737,760 957,360 1,124,400
Multiple of
EBITDA 4.69
Multiple of
Revenue 0.47
Payback term at
100% sale 7%
Tax 40%
Periods 14.34
Payment (3 year
after tax average) 158,400.00
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Look at the numbers
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Examples applying this concept
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Exhibit 9.4: 5 Year 50% Example - 10%
You can buy Half of the company from cash flows in 5 Years
Term in Years 5
Interest Rate 7%
Annual Payment $171,394.19
(Note: This assumes business is fully capitalized and does not need more Working Capital)
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Exhibit 7.2 - Sweat Equity Bonus Example
Bonus $50,000.00
Assumes base pay was $75,000
SS & Medicare (2,696.60) 5.39%
After 40%
Total Per share Discount
Annual Revenues $1,000,000.00
Equity $300,000.00
(core capital of $150,000 plus receivables of $150,000)
Business Value $750,000.00 $750,000.00 $450,000.00
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FMV Calcualtion - 15% Shareholder Example
EBITDA History
20X1 20X2 20X3 20X4 20X5
Equity at year end (assumes $50k to start) 207,500 432,500 467,300 596,550 682,750
Valuation
Value Calculation
Average NOI 157,500 222,750 use last 3 yrs use last 3 yrs use last 3 yrs
Internal sale value by year (after discounts) $43,520 $70,448 $78,291 $103,843 $119,728
External value by year (before discounts) $68,000 $110,075 $122,330 $162,255 $187,075
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