Finance Lecture # 5 Jan H. Jansen E-mail: [email protected].
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Transcript of Finance Lecture # 5 Jan H. Jansen E-mail: [email protected].
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Wind energy
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Minor Wind Energy Project Management
Project
Finance
Law
Supply Chain Management
Construction
Mechanical Engineering
Energy
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Programme
Lecture Topic
1 Overview Energy Market
2 Annual Reports & Management Accounting
3 Management Accounting &Project Financials
4 Project Financials
5 Case study WEPM, DOSIT Methodology, Risk & Return
6 Case study WEPM (self study)
7 Case study WEPM & Annual Report, Business Model
8 Written Exam
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Plan of Action
How to plan the financial
part?What should be in the financial
chapter?
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Plan the financial chapter
• Planning of the financial chapter– Data & Assumptions– Cash Outflow– Cash Inflow– Calculations
• Financial criteria: IRR, NPV, ROI, BET & DSCR • Friday morning in period 2 consultancy
– Yellow Hurricane (09.00 – 09.20)– Blue Energy (09.30 – 09.50)– Green Air (10.10 – 10.30)– Red Viventorum (10.30 – 10.50)– Black Offshore(11.10 – 11.30)
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Structure Excel model
Assumptions
Data
Cash Outflows
Cash Inflows
Results
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Recap lecture # 4
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Project Structure
Project Company
Finance• Equity Investors• Lenders
Operator (O&M)
Government Support Agreement
Government Concession / License
Off taker(Power Distributer)
Input Supplier
Contractor (Construction)
Source : Project Finance, Yescombe
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Ring-fenced project
Project Company
Finance• Equity Investors• Lenders
Operator (O&M)
Government Support Agreement
Government Concession / License
Off taker(Power Distributer)
Input Supplier
Contractor (Construction)
Source : Project Finance, Yescombe
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Project Risks
Project Risks
Commercial Risks
Completion Risk Environmental risk
Operating Risk Revenue Risk
Input Supply Risk
Force majeure risk
Contract mismatch risk
Sponsor support Risk
Macroeconomic Risks
Inflation Risk
Interest Rate Risk
Exchange Rate Risk
Political Risks
Currency Convertibility
RiskTransfer Risk
Expropriation Risk
War & Civil Disturbance Risk
Change of Law Risk
Quasi-political Risks
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Lecture 5
Risk & Return
DOSIT Methodology
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Investment Decisions
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Investment trade off (I)
Investment• Equipment• Building• R&D• Environment
– Sustainability• Staff / HR• Maintenance• Operating costs
Funds• Equity• Loans
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Investment trade off (II)
Cash Outflows• Equipment• Building• R&D• Environment
– Sustainability• Staff / HR• Maintenance• Operating costs
Cash Inflows• Sales• Lower costs
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Components Capital Budget Model
• Investment (Year 0)• Economic Life of the Investment
– Years 1 - n• Interest Rate: i = r + π + σ
• r = real interest rate• π = inflation• σ = risk (project risk mark-up)
• Annual Cash Flows (During economic life)– Expenses– Revenues
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Decision Criteria
• Pay Back Period (PBP)• Return On Investments (ROI)• Break Even Time (BET)• Net Present Value (NPV)• Profitability Index• Internal Rate of Return (IRR)• Debt Service Coverage Ratio(DSCR)
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Weighted average cost of capital (kWACC)
Cost of equity (ke) with the Cost of debt (kd)
in proportion to the relative weight of each
in the firm’s optimal long-term financial
structure:
kWACC = ke * E + kd * (1-t) *D
V = E + D
V V
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Capital asset pricing model (CAPM)
CAPM defines the cost of equity (ke) for a
firm as :
ke = krf + βj * (km – krf)
krf = interest rate on risk-free bonds
km = expected (required) rate of return on
equity
βj = firm’s systematic risk coefficient
risk free premium
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WACC CALCULATOR ™ for GE
Source: http://thatswacc.com/index.php
CAPM Component Calculated Value:
Beta: 1.85
Historical Market Return rm: 11.00%
Risk Free rate rf: 3.00%
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WACC CALCULATOR ™ for GE
Source: http://thatswacc.com/index.php
Element From Financial Statements
WACC: 7.34%
Cost of Debt rD: 3.64%
Corporate Tax Rate TC: 7.39%
Total Debt D: 438,661,500,000
Total Equity E: 166,430,000,000
Total Firm Value V: 605,091,500,000
Cost of Equity rE: 17.80%
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Example (Excel)
Data:
Project β 2
Risk free interest rate: Rf 3%
Cost of debt: Rd 6%
Historical Market Return: Rm 11%
Corporate taxe rate: t 25%
Debt : Assets 70%
Equity : Assets 30%
Results:
Costs of Equity (CAPM): Ke 19%
WACC 8,9%
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DOSIT Model
Model developed by:
– TNO (Applied Research in Science)– Research Chair of TQMinON
• Prof. Gerard Berendsen– Source:
• Duurzaam innoveren met de DOSIT-methodiek, G. Berendsen cs, Sigma Kluwermanagement, June 2006
• http://www.han.nl/onderzoek/kennismaken/ontwikkelen-van-excellente-organisaties/lectoraat/tqm-in-organisatienetwerken/publicaties/_attachments/kip_c2-11_20duurzaam_20innoveren_20met_20de_20dosit_20methodiek.pdf
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DOSIT Model
Dutch
• Duurzaam• Ondernemen• Selectie• Innovatieve• Technologie
DOSIT
English
• Sustainable• Entrepreneurial• Selection• Innovative• Technology
SESIT
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Why DOSIT?
Hot topics in business are:
• Innovation– Product innovation– Innovation of processes
• Sustainability / CSR– Stewardship / Managership / Bailiff (UK)
(Dutch: Rentmeesterschap)• Investments
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SustainabilityInnovation:• Products• Process
Investing
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Sustainability & Entrepreneurship in SME’s
• Company meets the requirements from the government and keeps in mind future requirements
• Company fulfils its social and cultural role in society
• Company plays in an effective way its role in the huge changes in society & economic development for the mid and long term
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Sustainability & Entrepreneurship in SME’s
• The product, the way the product is used and will be used
• The production process (including resources) • The way the product is introduced on the market
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Basic assumptions: DOSIT model
I. Focus as a company on a limited number of activities connected to sustainability
II. Intrinsic motivation of staff concerning change in general and sustainability in specific
III. Communication in the company concerning sustainability: Top Down & Bottom Up
IV. ‘Quick and dirty job’ in SME’s, staff wants to see immediately results
V. Aspects of sustainability have influence on the continuity of the company
VI. Sound financial base is important for the continuity of the company
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Profit People
Planet
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Stages in the DOSIT methodology
1. Preparation
2. Choice of priorities in the areas of Key Success Factors
3. Selection of possible Innovations
4. Final choices of Innovations
5. Implementation of Innovations
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Elements of the DOSIT model
• Supply Chain & Value Chain • Raw materials• Components• Business development• Logistic Processes (I >T > O)• Production• Packaging• Warehousing & Distribution• Product & Market Development• Product Use / Reversed Logistics
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DOSIT Matrix (Overview Priorities)
Supply Chain
↑
& Value Chain ↑
Raw materials
Components
Business development
Logistic Processes (ITO)
Production
Packaging
Warehousing & Distribution
Product & Market Development
Product Use / Reversed Logistics
Aspects ↓
Planet
People
Profit
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Constraints in the process of sustainable innovation
• ROI requirement (bottom line)• Requirements clients• How do process interfere in the chain?• Feasibility (in a technical way)• Connection with future developments &
ambitions of the company• What is target for the degree of sustainability• How much will be the impact of the innovation
(paradigm shift?)
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DOSIT Method: Excel tool