Project Financing – Valuations Approach

Discounted Cash Flow Approaches (DCF)

Measure of
No Formula Why it is Important?
Viability

✓ NPV > = 0 : Viable; NPV < 0 : Nonviable

Rt – Net cash flow
Net Present ✓ NPV is useful when comparing projects similar size of
1 i – Discount rate
Value (NPV) different sectors. However correct estimation of cost of
T – No of time periods
capital is a challenge in NPV estimation

Ct – Net cash inflow during the period ✓ Simplest way to calculate any project viability and no
Internal Rate dependence to calculate the cost of capital
C0 – Total initial investment costs
2 of Return
t – No. of time periods ✓ Not applicable for mutually explosive projects and
(IRR)
IRR – Internal rate of return different terms of project is not considered by IRR method

FVCF – FV of Positive cash ✓ Positive cashflows are reinvested at reinvestment rate

flows discounted and the present value of negative cash flows discounted
Modified
at the reinvestment rate at the financing rate
Internal Rate
3 PVCF – PV of negative
of Return ✓ MIRR provides a more realistic picture of the return on the
cash flows discounted
(MIRR) investment project relative to the standard IRR. The MIRR
at the financing rate
n – the number of periods is commonly lower than the IRR

✓ PI greater than 1 is deemed as a good investment, with

higher values corresponding to more attractive projects
Profitability NPV + Initial Investment
4 Profitability Index (PI) = ✓ PI doesn’t measure the value of a business. It only shows
Index (PI) Initial Investment
the company's ability to generate profits from
investments
Abhinav Sengupta | MBA in Energy & Infrastructure & B.Tech in Mining & Executive Diploma in Business Valuation | Email : abhinavsengupta85@gmail.com | Phone : +919016047552
 Project Financing – Valuations Approach

Non-Discounted Cash Flow Approaches

Measure of
No Formula Why it is Important?
Viability

✓ Payback period is simple to use and easy to understand and

Payback Initial Investment useful in case of compare an uncertain investment
1 Payback Period =
Period Cash Flow Per Year ✓ Payback periods ignores the time value of money and
neglects project return on investment as well as profitability

✓ It considered the time value of money while calculating the

Discounted Payback Period = A + B/C payback period and determines the actual risk of the project
(A) = Year before Discounted Payback period occurs ✓ The calculation for discounted payback period can get
Discounted
(B) = Cumulative Discounted Cash flow in year before complex if there are multiple negative cash flows during an
2 Payback
recovery investment period
Period
(C) = Discounted cash flow in year after recovery ✓ It does not consider the project that can last longer than the
payback period. It ignores all the calculations beyond the
discounted payback period

✓ It gives a clear picture of the profitability of a project as It

considers the earnings after tax and depreciation. This is a
Accounting vital factor in the appraisal of an investment proposal
Average Annual Profit
3 Rate of Return Accounting Rate of Return =
(ARR) Initial Investment ✓ On the other hand, It consider the external factors which are
also affecting the profitability of the project. A fair rate of
return can not be determined based on ARR

Abhinav Sengupta | MBA in Energy & Infrastructure & B.Tech in Mining & Executive Diploma in Business Valuation | Email : abhinavsengupta85@gmail.com | Phone : +919016047552