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PROJECT FINANCING AND APPRAISAL

Dr A. P. Dash Power Management Institute NTPC

OVERVIEW OF BALANCE SHEET


LIABILITIES
EQUITY SHARE CAPITAL +RESERVES LOAN FUNDS CURRENT CURRENT LIABILITIES LIABILITIES

ASSETS
FIXED ASSETS GROSS BLOCK LESS ACC DEP NET BLOCK

INVESTMENTS CURRENT ASSETS LOANS & ADVANCES

Goal Of The Firm Goal of firm

STAKEHOLDER WEALTH MAXIMISATION

Creating The Firm Goal of firm

EQUITY

DEBT

ASSETS

Building Up The Firm Goal of firm

ASSETS

SALES

Building Up The Firm Goal of firm

INTEREST

ASSETS

SALES

EARNINGS

Building Up The Firm Goal of firm

INTEREST

ASSETS

SALES

EARNINGS

DIVIDEND

The Key Links Goal of firm

INTEREST

*A T/O

*NPM

ASSETS

SALES

EARNINGS
*Payout

DIVIDEND

Dividend Policy And The Re-investment Rate: The Critical Factor Goal of firm

INTEREST

*AT/O

*NPM

ASSETS

SALES

EARNINGS
*payout

DIVIDEND At what rate???

Moving From The Static To Dynamic Goal of firm INTEREST1 INTEREST2 INTEREST3 INTERESTn

*AT/O

*NPM

ASSETS

SALES

EARNINGS
*payout

DIVIDEND1 DIVIDEND2

At what cost???

DIVIDEND3 DIVIDENDn

Nature of Risks
Development Period Risks
Approvals / Clearances- non availability Unreasonable Contract Terms Erosion of Project Economics Communities, R&R issues in case of Hydro Environmental

Nature of Risks
Construction Period Risks
Timely Completion Cost Over run Transit Damage Force Majeure Technical Performance

Nature of Risks
Operating Period Risks
Output Shortfall Off take Shortfall Price below Forecast Fuel Short Supply Fuel Price Escalation Inflation Currency Convertibility/Exchange Rate Risk Interest Rates Nationalisation Change in Laws

Risk Profile
Development Period Construction Period Operation Period

Risk

Financial Closure

Time in Years

Framework & Context


Govt./ Regulator Clearances/ LA Finance Lender PPA Developer EPC Contract Buyer

Licenses

Fuel Supplier

FSA

O&M Company

O&M Contract

EPC Company

Two Sides of a Project


Financing Side Loan 0 Rs 1000 /Investment Side Invest 0 Rs 1000 /-

Pay Rs 1150 /-

Return Rs 1200 /-

Cost of Funds :

Rate of Return : 1000 = 1200 /( 1 + r ) r = 20 %

1000 = 1150 /( 1 + k )
k = 15 %

Cash Flow Stream


0 1 2 3 4 5

TIME SCALE

-1,00,000

30,000

20,000

20,000

40,000

30,000

STEPS : Separate Investment side from Finance Side, for, finance side is the hurdle rate. Synthesize all the points and arrive at judgmental assessment.

Net Present value ( NPV)


Years Investment / Cash Flow, Rs -1,00,000 20,000 30,000 40,000 40,000 30,000 10 % Rs 18180 24780 30040 27320 18630 COST OF CAPITAL 12 % Rs (0.893) (0.797) (0.712) (0.636) (0.567) 17860 23910 28480 25440 17010 112700
-100000

14 % Rs 17540 23070 27000 23680 15570 106890


-100000

0 1 2 3 4 5

(0.909) (0.826) (0.751) (0.683) (0.621)

(0.877) (0.769) (0.675) (0.592) (0.519)

Present Value 118950 Present Investment -100000 NPV +18950

+12700

+6890

Value Additivity Principle : NPV ( A&B) = NPV(A) + NPV ( B)

Sources of Profitability ( + NPV)


# Economics of Scale
* Volume of Business * Low Margin - High Turnover

# Product Differentiation # Cost Advantage # Marketting Reach # Technical Edge # Govt. Policy

RETURN ON INVESTMENT [ ROI]


Earning (EBIT)

Sales

Sales

Total Investment
Permanent Investment + Working Capital

Sales Cost of Sales

Factory Cost + Selling Expenditure + Transportation Expenditure + Admn. Expenditure

Inventories + Accounts receivables + Cash + Marketable securities

HOW TO TAKE A DECISION


# Estimate Cost and Benefit

# Assess Risk and Inflation


# Establish Discounting Rate

# Apply a suitable investment criteria


# Go behind the numbers # Evaluate the proposal from the strategic point of view

QUALITATIVE INFLUENCES
# Sponsorships

# Superstition # Political consideration

# Intuition

LOOKING AHEAD

NTPC