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General Motors (NYSE: GM) presented a 117-page plan for "viability" last night. But after looking at it, I concluded that it was "crafted" to increase the odds of getting the $30 billion loan it now claims it needs to survive. As Mark Twain said, "There are three kinds of lies: lies, damn lies, and statistics." And GM's viability plan is the third kind. Why? Its sales forecasts are way too optimistic.
Yesterday, I spoke with a class I'm teaching about Net Present Value (NPV), which is supposed to be the basis of GM's plan for viability. In simple terms, an investment has a positive NPV if it pays back the up-front money plus interest and some profit within a reasonable period of time. I pointed out that since the NPV calculation is based on projecting the future, it is almost always wrong. Therefore, the forecaster has an obligation to state his or her assumptions explicitly and to re-calculate the NPV with different ones -- I recommend a sensitivity analysis with a 10% cut in base case assumptions.
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