Page 50 - The Green Building Bottom Line The Real Cost of Sustainable Building

NARRATING VALUES, SHAPING VALUES, CREATING VALUE 29

Having considered how a company goes about shaping values, big questions still
remain: Can a company create added value by the values it creates? Does it pay? The
answer to both questions is yes. We now turn our attention to the business case itself.

Creating Value

It’s time to crunch some numbers. Since Melaver, Inc. is a privately held company and
there are sensitivities among shareholders about using our company’s data, we’ll cre-
ate a fictional company called Green, Inc., whose performance is not that dissimilar
from our company’s.
This is Green, Inc.’s profile:

■ It has twenty employees, with a payroll of around $2.4 million annually.
■ It has an asset base of $100 million, with 75 percent debt ($75 million) and 25
percent equity ($25 million).
■ It has gross revenues of $12 million, which yields a 12 percent return on the total
asset base ($100 million divided by $12 million).
■ It has net income after debt service of $3.75 million, which yields roughly a 15
percent return on the equity ($3.75 million divided by equity of $25 million).
■ The cost of capital (i.e., the interest paid on debt) is 7 percent.
■ The annual growth of the company’s assets tends to be around 7 percent after distri-
butions to shareholders.
■ The discount rate—the rate at which multiple year cash flow projections are dis-
counted back to Year 0—is 10 percent.

In Year 0, Green, Inc. decides to undergo a values-shaping process similar to the one
described in the previous section of this chapter. There is the cost of using a consultant
for the values-shaping process. Management calculates that 80 hours of consulting
time at $200 per hour is probably a good estimate, for a cost of $16,000. To have all
of its employees involved in this process will require about 4 percent of total company
time for the year. This means that 4 percent of projected net income will not materi-
alize because of the lost opportunity of devoting company time to this non-productive
endeavor. Lost opportunity of income amounts to $150,000 (which is 4 percent of the
15 percent of the equity of the portfolio, or 4% × 15% × $25,000,000 = $150,000). All
totaled, the cost of the values-shaping exercise in Year 0 is $166,000 ($150,000 +
$16,000).
In thinking about the costs of this project a little more carefully, senior management
also realizes that there is a carry-over effect in future years as a result of the original
lost opportunity for revenue. The reasoning is as follows. In Year 0, the staff devoted
some of its time to values shaping and, as such, did not devote this time to developing
a project that would have brought in an additional $150,000 in revenue. But that’s not
all. This lost revenue in Year 0 could have been reinvested in the company in future
years (Years 1 through 10), bringing with it additional growth of around 15 percent