The assignment: recommend what to investigate, not just whether a deal is positive
A fictional software company needs a new capability. It can build internally, buy another business or partner with a provider. You receive year-zero investments and four years of incremental cash flows for each option. Your deliverables are a comparable NPV model, a timing sensitivity and a decision memo naming the evidence most likely to change the recommendation.
The case uses a stipulated 10% annual discount rate. Year-zero spending occurs now; later cash flows occur at each year-end. Inputs include the exercise’s operating costs, tax, working capital and capital spending, exclude financing and assume no terminal value. All figures are invented. These choices define the comparison; they are not a valuation of a real company.
GitLab’s acquisition process provides a first-party example of technical, financial and integration diligence around a transaction. This project focuses on one smaller analytical task within that broader kind of decision: understand how the proposed economics compare with alternatives before treating a transaction as the answer.
Data and worked inputs
Sources[1]
Discount each year on the same basis
Compute NPV as the sum of each cash flow divided by (1 + rate) raised to its year index. Year zero is not discounted. Do not discount the initial investment as though it occurs a year later, and do not treat nominal cash-flow sums as comparable present values.
| Option | Year-zero outlay | NPV |
|---|---|---|
| Build | $6,000,000 | $2,073,219.04 |
| Buy, including integration | $11,000,000 | $1,110,853.08 |
| Partner | $1,000,000 | $4,358,923.57 |
The build option invests $6 million now and has later cash flows of zero, $2 million, $4 million and $5 million. Its NPV is about $2.0732 million. The buy option spends $11 million now, split into a $9 million purchase and $2 million integration cost, followed by $1.5 million, $3.5 million, $5 million and $6 million. Its NPV is about $1.1109 million.
The partnership invests $1 million now and returns $1 million, $1.5 million, $2 million and $2.5 million in the modeled years. Its NPV is about $4.3589 million. The comparison favors partnering under the supplied cash flows. That does not establish that the options truly deliver the same capability, control or durability; those strategic assumptions still need investigation.
A delay changes value even when no cash flow disappears
Shift every positive buy cash flow one year later, while keeping the year-zero purchase and integration spending unchanged. Retain the final cash flow in year five. Dropping it because your original worksheet ends at year four would combine a timing change with a shortened horizon.
The present value of buy’s operating cash flows falls from about $12.1109 million to $11.0099 million. After the same $11 million initial outlay, NPV falls to about $9,866.44. The nominal future cash-flow sum is unchanged; the loss of present value comes from waiting longer under the stipulated discount rate.
This sensitivity excludes any extra cost caused by delay. If integration consumes additional people or spending, model that separately. It also assumes all future cash flows shift together. A more detailed plan might delay some benefits while leaving others unchanged. State what the scenario changes instead of attaching a generic risk haircut to every number.
A useful acquisition price depends on the alternative you give up
At the base-case buy operating cash-flow value, what purchase price makes buying equal to building? Subtract integration spending and the build option’s NPV from the $12.1109 million operating present value. The answer is about $8.0376 million, below the proposed $9 million purchase price.
But building is not the best supplied alternative. To match the partnership’s $4.3589 million NPV, the maximum comparable purchase price falls to about $5.7519 million, holding all other assumptions fixed. This is an opportunity-cost result, not a market valuation or a negotiation recommendation for a real target.
A model that asks only whether buying has positive NPV may accept a deal that is inferior to the available partner option. Before using the price ceiling, test whether the partnership really provides comparable capability and whether its cash flows capture dependence, renewal terms and the required internal work. The correct outside option is the best realistic alternative, not automatically the lowest initial outlay.
Change the forecast without quietly changing the cost base
Scaling buy’s positive incremental cash flows down by 20% produces NPV of approximately −$1.3113 million. Scaling them up by 20% produces about $3.5330 million. The initial purchase and integration outlay stay fixed in this sensitivity. Even the stronger-flow case remains below the partnership’s base-case NPV.
These are scenarios, not probabilities. Do not average them into an expected value unless you justify scenario weights. Also do not call the scaling “20% lower revenue”: the file contains net incremental cash flows, not a revenue model. A change in revenue could have a different effect depending on margins, taxes and investment needs.
Choose one assumption to investigate next. For example, the partnership may not provide the reliability or long-term control implied by the cash flows, while acquisition benefits may require a difficult migration. Write which evidence would change a specific model input. “We need more diligence” is less useful than a question tied to a value difference.
A strategy memo that acknowledges the preferred option’s weakness
The model’s winner should not end the analysis. State the favored comparison and the strongest reason the comparison might be incomplete.
Original fictional build-buy-partner memo
Build a model whose timing assumptions are visible
Put each option in rows and years zero through five in columns. Show the discount factors, cash flows and present values separately. Keep the discount rate and purchase/integration inputs in labeled cells instead of burying them inside formulas. A blank year is not always a zero; require complete year coverage or explain the missing period.
Test the model at a zero discount rate, where present value should equal the nominal sum. Then test the one-year delay while preserving the final-year cash flow. Check that purchase price plus integration equals the buy year-zero outlay. These simple controls catch common errors without pretending to validate the commercial forecasts.
A spreadsheet model and the supplied Python reference are alternative ways to inspect the same assumptions. You do not need both for a portfolio. Choose the one you can explain, then add a thoughtful extension such as a bounded integration-cost scenario or a comparison that restores a missing capability cost in the partnership option.
Data and worked inputs
Explain opportunity cost in a corporate-development interview
A strong project description is: “Modeled a synthetic build-buy-partner decision from year-specific cash flows; tested integration delay and derived acquisition price ceilings against alternative strategies.” It is not transaction experience, investment performance or a completed diligence engagement.
Be ready to explain why a positive NPV was not enough and why the one-year delay did not delete the final cash flow. Another useful follow-up is what a terminal value would do. You would need a reasoned assumption about cash flows beyond the modeled horizon and should apply comparable treatment across options, not add it only to make the acquisition win.
For a strategy application, lead with the business choice and outside option. For a finance application, lead with timing, cash-flow scope and sensitivity. In both cases, the value of the sample is a clear conditional recommendation rather than an aggressively precise answer detached from its assumptions.