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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 .

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

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 /- 1 Return Rs 1200 /- 1 Cost of Funds : Rate of Return : 1000 = 1200 /( 1 + r ) r = 20 % 1000 = 1150 /( 1 + k ) k = 15 % .

000 30.000 20. finance side is the hurdle rate.00.000 STEPS : • Separate Investment side from Finance Side. . • Synthesize all the points and arrive at judgmental assessment.Cash Flow Stream 0 1 2 3 4 5 TIME SCALE -1. for.000 20.000 40.000 30.

675) (0.Net Present value ( NPV) Years Investment / Cash Flow. Rs -1.797) (0.000 10 % Rs 18180 24780 30040 27320 18630 COST OF CAPITAL 12 % Rs (0.893) (0.000 30.567) 17860 23910 28480 25440 17010 112700 -100000 14 % Rs 17540 23070 27000 23680 15570 106890 -100000 0 1 2 3 4 5 (0.621) (0.826) (0.000 20.000 40.519) Present Value 118950 Present Investment -100000 NPV +18950 +12700 +6890 Value – Additivity Principle : NPV ( A&B) = NPV(A) + NPV ( B) .592) (0.683) (0.909) (0.636) (0.000 30.000 40.769) (0.712) (0.00.751) (0.877) (0.

Policy .Sources of Profitability ( + NPV) # Economics of Scale * Volume of Business * Low Margin .High Turnover # Product Differentiation # Cost Advantage # Marketting Reach # Technical Edge # Govt.

RETURN ON INVESTMENT [ ROI] Earning (EBIT) Sales X 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 .