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The Color of Money – Part I

February 27, 2012

Q:

While we have a preference for the mastery displayed by your team and your inherently safer process and fluids, it is difficult for us to settle on Novinium as our sole vendor, because another vendor’s price may be lower. Can you help me understand your value?

A:
I’ll bet that you thought my tagline, “It’s easy to be green™” focuses upon the environmental benefits of using Earth-friendly cable rejuvenation technology. It’s easy to be green, while you are saving some green! That’s money that you earn when you employ superior technology.

We can provide a lower price by lowering the quality of the products and services we deliver to more closely match those of the two-decade-old approach, but we will not compromise on safety. For example, we will not use flammable fluids. But hey, there is no need to compromise safety or performance. The value of the longer post-injection reliable life and the longer warranty periods enjoyed by the patented Novinium processes and fluids can be calculated. Let’s consider two general cases.

In the first case, compare the 20-year life expectancy, warranted by the other guys, versus the 25 years enjoyed by the Improved Unsustained Pressure Rejuvenation (iUPR) process together with Ultrinium™ 732 fluid. At first glance 25-year life extension suggests a 25% increase in value, but there are the matters of the time value of money, regulated rates of return on capital, and distortions caused by the tax code. In the graph nearby I show the difference in net present value (NPV) between the two choices as a function of the post-injection reliable life. The actual value waxes and wanes depending upon the life of the cable, but for the most common case, where the life meets the expectations, iUPR enjoys more than a 10% value advantage. For other cases the value may be higher or lower, but it is generally positive.


In the second case, compare the 20-year life expectancy, warranted by the other guys, versus the 40 years guaranteed by the Sustained Pressure Rejuvenation (SPR) process together with Ultrinium™ 732 fluid. Doubling the life extension does not double the value, because of the aforementioned time value of money, regulated rates of return, and tax code considerations. In the second graph I show the difference in net present value (NPV) between the two choices as a function of the post-injection reliable life. The actual value varies depending upon the life of the cable, but for the most common case, where the life meets the expectations, SPR has about a 16% value advantage. For other cases the value may be higher or lower, but it is always positive. For cases where the post-injection life is greater than 3 years, but the cable fails within the warranty period, the SPR/Ultrinium 732 fluid combination provides up to a 32% value advantage.


In subsequent posts, I will explain each of the factors that influence this dispassionate economic analysis. You may request a copy of the MS Excel worksheet to adjust the parameters of the model to calculate a unique incremental value of using state-of-the-art technology.

Future Post Scope
The Color of Money – Part II Depreciation
The Color of Money – Part III Discounting
The Color of Money – Part IV Assumptions