Financing Cleaner
Production and Energy
Efficiency Projects
Presentation of the Energy Efficiency Guide for Industry in Asia
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Hello!
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Participant introductions

What type of organization do you work for?



What are your job responsibilities and areas of
expertise?


e.g., industry, government, other
if from industry, which sector and what size
e.g., management, accounting, finance, engineering, production,
environmental
What is your investment perspective?

e.g., developer of investment proposals, one who funds
investment proposals
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Workshop overview
9.00
Lecture
 Waste and Cleaner
Production
 Cost identification
and estimation
Workshop exercise
 Risks of waste
12.30
LUNCH BREAK
 Cost identification for
waste
 Cost estimation for
waste
14.00
 Capital budgeting
and project
profitability
 Calculating cash flow
and simple payback
 Calculating NPV
16.30
 Project funding
 What the bank will
consider
10.30
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WASTE AND
CLEANER
PRODUCTION
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Waste and Cleaner Production
What is waste?
•
“Anything that
leaves the company
not as product!”
•
It costs money…
and…
•
it can be prevented!
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Waste and Cleaner Production
Waste takes many forms
Air Emissions
Materials,
Energy,
Water,
Products,
By-Products
Labour,
Capital
Solid Waste Waste Energy, Wastewater
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Waste and Cleaner Production
Exercise 1 (10 min)
Write down the risks associated with waste from the
perspective of:
•
Management of a company
•
Government
•
Investors
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Waste and Cleaner Production
The “Cost of Waste Iceberg”
THE HIDDEN COST
OF WASTE
Adapted from: Bierma, TJ., F.L. Waterstaraat, and J. Ostrosky. 1998. “Chapter 13: Shared Savings and
Environmental Management Accounting,” from The Green Bottom Line. Greenleaf Publishing:England.
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Waste and Cleaner Production
The costs of waste ink at
Southwire Company
•
The average disposal cost of a drum of hazardous
waste ink was estimated as $50
•
Upon closer inspection, the true cost was discovered
to be $1300 per drum:
•
•
•
•
•
$819
$369
$50
$47
$16
lost raw materials (ink, thinner)
corporate waste management activities
disposal
internal waste handling activities
hazardous waste tax
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Waste and Cleaner Production
Dilute & disperse
Cleaner
Production
Pollution
Prevention
Sustainable
Development
Recycling
Pollution
Control
Complexity of Environmental Issue
Dispersion
1960
1980
1990
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Waste and Cleaner Production
“End of Pipe” treatment
Cleaner
Production
Pollution
Prevention
Sustainable
Development
Recycling
Treatment
Complexity of Environmental Issue
Dispersion
1960
1980
1990
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Waste and Cleaner Production
Off site recycling
Cleaner
Production
Pollution
Prevention
Sustainable
Development
Recycling
Pollution
Control
Complexity of Environmental Issue
Dispersion
1960
1980
1990
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Waste and Cleaner Production
Prevention
Cleaner
Production
Pollution
Prevention
Sustainable
Development
Recycling
Pollution
Control
Complexity of Environmental Issue
Dispersion
1960
1980
1990
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Waste and Cleaner Production
CP definition
•
Integrated, preventative, continuous strategy
•
Products, production processes or services
•
Reduce risks to humans and environment
•
and increase profits!
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or waste minimization, pollution prevention, eco-efficiency…
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Waste and Cleaner Production
CP benefits: reduced risk!
Reduced material use
and waste
Reduced costs &
increased profits
Increased
productivity
Reduced liability
risks
Enhanced
reputation
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Waste and Cleaner Production
CP strategies
Prevention of waste
generation:
- Good housekeeping
- Input substitution
- Better process control
- Equipment modification
- Technology change
- On-site recovery/reuse
- Production of useful by-product
- Product modification
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Waste and Cleaner Production
CP versus End of pipe
COST
ENVIRONMENTAL
PERFORMANCE
End of pipe
Treatment
COST
ENVIRONMENTAL
PERFORMANCE
Cleaner
Production
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Waste and Cleaner Production
Cleaner Production and EMS
REPORT
ACT
CHECK
PLAN
CP
DO
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Waste and Cleaner Production
CP Methodology
Step 1
Get
organized
Step 2
Analyze
processes
Step 3
Identify
CP options
Step 4
Carry out
feasibility
analysis
Step 5
Implement
and measure
results
Step 6
Integrate in
business
processes
At what steps do you need cost data?
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COST
IDENTIFICAITON
AND ESTIMATION
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Cost identification and estimation
Step 2: Analyse processes
•
Prepare process flow charts
•
Collect baseline data and observations
•
Material balance: determine true waste!
•
Assign costs to materials, energy and waste
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Cost identification and estimation
Case study: the PLC Company
• A mid-sized manufacturer of food packaging
materials
• Major manufacturing steps are Printing,
Laminating, and Slitting
• Waste management includes incineration and
wastewater treatment
• Cleaner Production has reduced volume of solid
scrap and the annual cost of waste
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Cost identification and estimation
Materials flow chart at PLS Company
plastic film, aluminium film, adhesive
solvent air
emissions
solvent air
emissions
INVENTORY
PRINTING
film
film
SLITTING
product
plastic film, ink
printed
printed
laminated
LAMINATION
Solid scrap
Solid scrap
Solid scrap
Liquid waste
ink
to waste
management
to waste
management
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Cost identification and estimation
Materials flow chart at PLS Company
air
emissions
fresh water
fuel and fuel
additive
INCINERATOR
ash
Waste water treatment
air
chemicals
emissions
Cleaner
water to
a nearby
stream
WASTEWATER TREATMENT
liquid ink
sludge
waste from
printing step
OFF-SITE
LANDFILL
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Cost identification and estimation
Materials Balance
•
•
•
•
Physical analogy to financial balance sheet
Compares all material inputs and outputs
Identifies sources of waste and data gaps
Provides basis for cost evaluation
INPUTS
MANUFACTURING
PROCESS
PRODUCT
NON-PRODUCT
OUTPUT (WASTE)
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Cost identification and estimation
Other tools
• Walk-through & interviews
• Cost checklists (generic & sector/process specific) –
see handout C2
• Activity Based Costing (ABC), costs are allocated from
overhead accounts
– To processes, products, or projects that actually generate costs
– Based on activities with a direct relationship to cost generation
• Check accounting records
• External expertise for less tangible costs, e.g.
– Insurance sector— liability estimation
– Marketing firms— value of company image
– Environmental agencies — estimates of current and future
regulatory compliance costs
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Cost identification and estimation
To quantify or not to quantify?
• How do you know if a relevant cost or savings is
quantitatively significant before you go ahead
and quantify it?
You don’t.
• Try to do at least a rough, first-cut estimate of all
quantifiable costs — then decide whether or not
refining the estimate is worth the effort.
Do a balancing act!
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Cost identification and estimation
Exercise 2 (10 min)
List costs of waste management at
PLS Company
(There are three categories of costs:
• The cost of manufacturing inputs
• The cost of waste management
• Less tangible costs)
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Cost identification and estimation
Costs of waste at the PLS Company
The total cost of waste due to the
generation of solid scrap during print runs
was estimated to be US$213,000 per
year, including:
• Cost of lost direct manufacturing inputs (e.g,
plastic film, ink, energy, labour)
• Cost of waste management (e.g., incinerator
operation, wastewater treatment plant operation,
final waste disposal)
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Cost identification and estimation
Problematic accounting practices?
Various costs at a facility might be...
– “Hidden” in the accounting records
– Misallocated from overhead accounts
– Classified as fixed when they are really
variable, or semi-variable
– Not found in the accounting records at all
– (Can you think of others?)
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“Hidden” costs of lost raw materials
Manufacture of plastic rear panels for automobiles
(as % of input materials)
Material loss per
the accounting
records
2%
Actual
material
loss
52%
Adapted from: Rooney, Charles. “Economics of Pollution Prevention:
How Waste Reduction Pays.” Pollution Prevention Review.Summer 1993.
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“Hidden” costs of lost raw materials
at the PLS company
• The PLS accounting records show:
• The amount of raw materials used
• The amount of final product shipped
• But the records do not show:
• The amount of solid scrap waste generated
• The amount of any other lost raw materials
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Cost identification and estimation
Direct costs vs. indirect costs
Direct costs
Indirect costs
• can be easily traced to
a unit of product (e.g.,
direct materials, direct
labour)
• assigned directly to the
process, product, or
project responsible for
generating the cost
• cannot be traced as easily
to a unit of product (e.g.,
facility energy use,
insurance, maintenance,
waste treatment)
• assigned to facility, division,
or company overhead
accounts (varies per
company)
• Often ‘hidden’
• Often include environmental
costs!!!
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Indirect Environmental Management
Costs “hidden” in an overhead account
Product Manufacturing Cost Statement
Variable Costs
Raw Materials
Intermediates
Additives
Utilities
Direct Labour
Packaging
Wastewater
Treatment
$2.27/lb.
$0.87/lb. $0.41/lb. $0.96/lb.
$11.32/lb. $10.31/lb. $9.14/lb.
$0.04/kW-h $0.07/kW-h
$27.40/hr $31.43/hr.
$0.60/pkg. $0.57/pkg
$0.01/gal.
Fixed Costs
Fixed Costs
Supervisor
Supervisor
Fixed Labour
Depreciation
Fixed Labour
Divisional Overhead
General Services &
Depreciation
Administration
Divisional Overhead
General Services &
Total Variable Cost
Total Fixed Cost
Administration
Total Manufacturing Cost
• legal expenses
• environmentally
driven R&D
• permitting time and
fees
• environmental
training
$4,600
$57,800
$1,227
$13,662
$1,294
Total Cost
Source: Green Ledgers: Case Studies in Corporate Environmental Accounting. World Resources
Institute. May 1995.
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Survey of industry accountants
in the US
Findings:
– Environmental management costs
(such as waste handling, treatment,
and disposal) predominantly assigned
to overhead accounts
– Even energy and water costs
(manufacturing inputs) are usually
assigned to overhead accounts
Source: Environmental Capital Budgeting Survey . Tellus Institute, for U.S. EPA, June 1995
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Cost identification and estimation
Exercise 3 (10 min)
Calculate the aluminium and plastic
film loss during the slitting step of the
process:
• Amount in km / year
• Costs in $ / year
(Hint: virgin material input = finished product + waste scrap)
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Cost identification and estimation
Problematic accounting practices?
Various costs at a facility might be...
– “Hidden” in the accounting records
– Misallocated from overhead accounts
– Classified as fixed when they are really
variable, or semi-variable
– Not found in the accounting records at all
– (Can you think of others?)
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Cost identification and estimation
Cost allocation
Costs initially assigned to overhead
accounts are usually allocated back to
processes, products, or projects using
an allocation basis such as
–
–
–
–
–
Quantity of raw materials used
Production volume
Machine hours
Labour hours
Floor space
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Cost identification and estimation
Cost allocation
Allocated from
overhead
Printing
• Solid scrap waste
• Treatment and
disposal costs
Laminating
Slitting
How would you
allocate?
On the basis of:
• # of set-up runs?
• raw materials use?
• machine hours?
• amount of scrap?
• some other basis?
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Cost identification and estimation
Problematic accounting practices?
Various costs at a facility might be...
– “Hidden” in the accounting records
– Misallocated from overhead accounts
– Classified as fixed when they are really
variable, or semi-variable
– Not found in the accounting records at all
– (Can you think of others?)
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Cost identification and estimation
Fixed vs. variable costs
• Fixed Costs - do not vary with production level or
other factors
• e.g., equipment depreciation, labour
• Variable Costs - do (or can) vary with production
level or other factors
• e.g., raw materials use, energy use
• A cost considered “fixed” at one firm may be
considered “variable” at another firm
Cleaner Production aims to reduce variable
costs
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Cost identification and estimation
Fixed vs. variable costs (cont.)
• Incinerator operating costs at PLS
include:
•
•
•
•
Fuel, fuel additive
Operating labour
Trucking ash to landfill
Equipment depreciation costs
• PLS views these waste treatment costs
as essentially fixed costs — do you
agree?
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Cost identification and estimation
Problematic accounting practices?
Various costs at a facility might be...
– “Hidden” in the accounting records
– Misallocated from overhead accounts
– Classified as fixed when they are really
variable, or semi-variable
– Not found in the accounting records at all
– (Can you think of others?)
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Cost identification and estimation
Costs missing from accounting records
• Future costs
• Future variable costs, e.g., landfill fees
• Future fixed costs, e.g., future depreciation costs of
new waste treatment equipment
• Less tangible costs
• Lost profit from reduced production throughput
• Managing impact of waste on reputation
Remember: future fixed costs are not fixed yet!
Cleaner Production now can reduce the size & cost of treatment
equipment that you may have to purchase in the future
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Cost identification and estimation
So where do we get out data from?
CEO
Board
Production
Accounting
& Finance
Research &
Development
Legal
Purchasing
Materials Control
Inventory
Operations
Quality Control
Shipping
Maintenance
Engineering
Sales &
Marketing
Environment,
Health, &
Safety
Checklist: Cleaner Production investment data sources© UNEP
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Cleaner Production at PLS Company
PLS implemented two CP projects to reduce
the cost of waste in the printing step
• an on-site scrap recycling project to reduce
waste from start-up runs
• a quality control camera project to reduce waste
from errors during full-job runs
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Scrap recycling project
• PLS decided to start using solid scrap material for
print job start-up runs, rather than using virgin
plastic film
• This would reduce the use of raw materials and
the rate of solid scrap generation
• Since this project did not require any cash outlay,
PLS was able to implement it right away
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Quality control (QC) camera project
• PLS decided to purchase and install a
3 - camera system to monitor quality
control of the print jobs as they actually
occur
• Allows the operators to detect print
errors earlier and halt the operations
before too much solid scrap is
generated
• The quality control camera system costs
US$105,000 to acquire and install
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CAPITAL BUDGETING
AND PROJECT
PROFITABILITY
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Capital budgeting and project profitability
Step 4: Feasibility analysis
Technical
Regulatory
Project
Selection
Today’s Focus
Financial
Organisational
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Capital budgeting and project profitability
Financial feasibility analysis
1. Is the project profitable?
• Initial investment costs
• Annual operating costs and savings
–
–
–
–
The cost of operating inputs
The cost of waste management
Less tangible costs
Revenues
2. Determine availability of internal investment funds
for bigger projects
3. Obtain external financing for remaining projects
–
–
Private sector
Government sector
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Capital budgeting and project profitability
Capital budgeting
The process by which an organisation:
• Decides which investment projects are needed &
possible, with a special focus on projects that
require significant up-front investment (i.e., capital)
• Decides how to allocate available capital between
different projects
• Decides if additional capital is needed
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Capital budgeting and project profitability
Capital budgeting practices
• Capital budgeting practices vary widely from company
to company
– Larger companies tend to have more formal practices than
smaller companies
– Larger companies tend to make more and larger capital
investments than smaller companies
– Some industry sectors require more capital investment than
others
• Capital budgeting practices may also vary from
country to country
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Capital budgeting and project profitability
Typical project types and purpose
• Maintenance
– Maintain existing equipment and operations
• Improvement
– Modify existing equipment, processes, and management
and information systems to improve efficiency, reduce costs,
increase capacity, improve product quality, etc.
• Replacement
– Replace outdated, worn-out, or damaged equipment or
outdated/inefficient management and information systems
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Capital budgeting and project profitability
Typical project types and purpose (cont)
• Expansion
– e.g., obtain and install new process lines, initiate
new product lines
• Safety
– Make worker safety improvements
• Environmental
– e.g., reduce use of toxic materials, increase
recycling, reduce waste generation, install waste
treatment
• Others...
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Capital budgeting and project profitability
Cash Flow concept
The Cash Flow Concept is a common management
planning tool.
It distinguishes between:
(a) costs: cash outflows
(b) revenues/savings: cash inflows
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Capital budgeting and project profitability
Types of cash flow
One-time
Annual
Other
Outflow
Inflow
Initial
investment
cost
Equipment
salvage
value
Operating
costs &
taxes
Operating
revenues
& savings
Working
capital
Working
capital
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Capital budgeting and project profitability
Cash flow: costs and savings
• Initial investment costs
– purchase of the camera system, delivery, installation,
start-up
• Annual operating costs (and savings)
– Operating input — materials (plastic film, ink), energy,
labour
– Incineration — fuel, fuel additive, labour, ash to landfill
– Wastewater treatment — chemicals, electricity,
labour, sludge to landfill
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Capital budgeting and project profitability
Cash flow: working capital
Working Capital is: “the total value of goods and
money necessary to maintain project operations”
It includes items such as:
–
–
–
–
Raw materials inventory
Product inventory
Accounts payable/receivable
Cash-on-hand
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Capital budgeting and project profitability
Cash flow: salvage value
Salvage Value is the resale value of equipment or
other materials at the end of the project
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Capital budgeting and project profitability
Timing of cash flow
End of project:
Salvage Value
Annual Revenues/Savings
Year 1
Year 2
Year 3
TIME
Time zero:
Initial Investment
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Capital budgeting and project profitability
Cash flow: ‘incremental analysis’
• For many CP projects, you will need to do
an incremental analysis
– compare the CP cash flows to the “business
as usual” cash flows
– only the cash flows that change when you
improve the “business as usual” operations
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Capital budgeting and project profitability
Profitability indicators
Definition: “a single number that is calculated for
characterisation of project profitability in a
concise, understandable form.”
Common examples are:
• Simple Payback
• Return on Investment (ROI)
• Net Present Value (NPV)
• Internal Rate of Return (IRR)
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Capital budgeting and project profitability
Simple payback (payback period)
• Definition: the number of years it will take for
the project to recover the initial investments
• Usually used a rule of thumb for selecting
projects, e.g. payback must be < 3 years
Simple
Payback
(in years)
=
Investment
Cash Flow
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Capital budgeting and project profitability
Simple payback vs ROI
Simple Payback
=
(in years)
ROI (in %) =
Initial Investment
3 years
Year 1 Cash Flow
Year 1 Cash Flow
33%
Initial Investment
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Capital budgeting and project profitability
Exercise 4 (10 min)
Question 1: Calculate annual cash flows (use the cash flow
worksheet!) for the incinerator operation
Question 2: Calculate simple payback
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Capital budgeting and project profitability
Net Present Value (NPV)
Question:
If we were giving away money, would you rather have:
(A) $10,000 today, or
(B) $10,000 3 years
from now
Explain your answer...
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Capital budgeting and project profitability
Inflation
Money loses purchasing power over time as
product/service prices rise, so a dollar today can
buy more than a dollar next year.
inflation 5%
costs $1
now
costs $1.05
next year
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Capital budgeting and project profitability
Return on investment
A dollar that you invest today will bring you more than a
dollar next year — having the dollar now provides you
with an investment opportunity
Investing
$1 now
Investment
Gives you
$1.10 a year
from now
10 % interest, or
“return on investment”
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Capital budgeting and project profitability
PLS Company’s QC project
Initial
Investment
Cost
Business
As
Usual
The QC
Camera
Project
Annual
Operating
Costs
0
$ 2,933,204
$ 105,000
$ 2,894,741
(in US$)
Annual
Savings =
US$38,463
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Capital budgeting and project profitability
QUESTION
Is the annual savings of
$38,463 per year for 3 years
a sufficient return
on the initial investment of
$ 105,000?
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Capital budgeting and project profitability
Time Value of Money (TVM)
• Money now is worth more than
money in the future because of:
a) inflation
b) investment opportunity
• The exact “time value” of your
money depends on the magnitude
of the:
a) rate of inflation and
b) rate of return on investment
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Capital budgeting and project profitability
Comparing cash flows from
different years
• Before you can compare cash flows from
different years, you need to convert them all to
their equivalent values in a single year
• It is easiest to convert all project cash flows to
their “present value” now, at the very beginning
of the project
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Capital budgeting and project profitability
Converting PLS cash flows to
“present value”
Annual Savings
= ??
= ??
= ??
$38,463
Year 1
Year 2
End of project
$38,463
Year 3
$38,463
TIME
Time zero:
Initial Investment = $105,000
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Capital budgeting and project profitability
Converting PLS cash flows to
“present value”
Discount rate:
• Converts future year cash flows to their present
value
• Incorporates:
– Desired return on investment
– Inflation
• Reverse of an interest rate calculation
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Capital budgeting and project profitability
Discount rate vs interest rate
Invested at an interest rate of 20%, how much will $10,000
now be worth after 3 years?
$10,000 x 1.20 x 1.20 x 1.20 = $17,280
At a discount rate of 20%, how much do I need to invest if I
want to have $17,280 in 3 years?
$17,280
1.20 x 1.20 x 1.20 = $10,000
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Capital budgeting and project profitability
Which discount rate?
• Equal to the required rate of return for the project
investment, which usually incorporate:
– A basic return - pure compensation for deferring
consumption
– Any ‘risk premium’ for that project’s risk
– Any expected fall in the value of money over time through
inflation
• At least cover the costs of raising the investment
financing from investors or lenders (i.e. the
company’s “cost of capital”)
• A single “Weighted Average Cost of Capital”
(WACC) characterises the sources and cost of
capital to the company as a whole.
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Capital budgeting and project profitability
Calculating ‘present value’
The value of the
cash flow in year n
Present Value = Future Valuen x (PV Factor)
The value of the
cash flow at
“Time Zero,” i.e.,
at project start-up
Present Value (PV) Factors have
been calculated for various
values of d (discount rate) and n
(number of years) and have been
tabulated for easy use.
(Also called discount factors)
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Capital budgeting and project profitability
The value of a future $1, NOW
Discount rate (d):
10%
20%
30%
40%
Years into future (n)
1
2
3
4
5
10
20
30
.9091
.8264
.7513
.6830
.6209
.3855
.1486
.0573
.8333 .7692 .7142
.6944 .5917 .5102
.5787 .4552 .3644
.4823 .3501 .2603
.4019 .2693 .1859
.1615 .0725 .0346
.0261 .0053 .0012
.0042 .0004 .0000
Present
value
factors
Handout: Table with discount rates
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Capital budgeting and project profitability
Net Present Value (NPV)
• Definition: the sum of the present values of
all of a project’s cash flows, both negative
(cash outflows) and positive (cash inflows)
• NPV characterises the present value of the
project to the company
– If NPV > 0, the project is profitable
– If NPV < 0, the project is not
• More reliable than Simple Payback or ROI as it
considers both the time value of money and all
future year cash flows!
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Capital budgeting and project profitability
Exercise 5 (5 min)
Year
Expected
Future Cash
Flows
0
- $105,000
???
- $???
1
+ $38,463
???
$???
2
+ $38,463
???
$???
3
+ $38,463
???
$???
*
PV
Factor
=
Present Value of
Cash Flows
(at time zero)
Sum = the project’s Net Present Value = $???
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Capital budgeting and project profitability
Answer 1
Year
Expected
Future Cash
Flows
0
- $105,000
1
+ $38,463
.8696
33,447
2
+ $38,463
.7561
29,082
3
+ $38,463
.6575
25,289
*
PV
Factor
=
Present Value of
Cash Flows
(at time zero)
- $105,000
Sum = the project’s Net Present Value = -17,182
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Capital budgeting and project profitability
Sensitivity analysis
• In business as usual scenario PLS Company
needs waste water treatment plant in year 3:
$150,000 investment
• With QC project: $95,000
• Savings: $55,000
Also consider taxes!
– Pollution taxes / fees
– Tax deductions for equipment depreciation
– Tax deduction for “environmental projects”
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Capital budgeting and project profitability
Answer scenario 2
Year
Expected
Future Cash
Flows
0
- $105,000
1
+ $38,463
.8696
33,447
2
+ $38,463
.7561
29,082
3
+ $93,463
.6575
61,452
*
PV
Factor
=
Present Value of
Cash Flows
(at time zero)
- $105,000
Sum = the project’s Net Present Value = +18,981
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Capital budgeting and project profitability
Internal Rate of Return (IRR)
• Similar to NPV: considers both the time
value of money and all future year cash
flows
• IRR = the discount rate for which NPV =
0, over the project lifetime (calculated in
an iterative fashion)
• Tells you exactly what “discount rate”
makes the project just barely profitable
86
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Capital budgeting and project profitability
Profitability indicator summary
Advantages
Disadvantages
Simple
Payback
& ROI
Easy to use
Neglect TVM
Neglect out-year costs
Do not indicate project size
NPV
Considers TVM
Indicates project size
Needs firm’s discount rate
IRR
Considers TVM
Requires iteration
Does not indicate project size
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PROJECT
FUNDING
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Project funding
Options for project financing
• Internal funds
• Private sector:
1. Commercial banks
2. Development corporations
3. Equipment vendors & subsidiary finance
companies
4. Trade finance (suppliers and customers)
5. Equity
• Government sector
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Project funding
Internal funds
Internal funds can be generated from:
• Capital introduced by the owner
• Profits & cash flows generated by the
business and retained within it
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Project funding
Private sector financing
Private sector financing options include:
• Long-term loans to purchase fixed assets:
secured or unsecured
• Short-term loans (including lines of credits without
conditions on use)
• Leasing
• Equity (issue of shares/stock)
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Project funding
Capital from Government
National, state, local governments
• Grants
• Subsidies
• Government-managed development funds
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Project funding
Barriers & solutions
• Problem: the project is not considered to
be economically feasible
• Solution: Total Cost Assessment of project
• Problem: the firm is unable or unwilling to
issue more shares or to raise debt
• Solution: Leasing
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Project funding
Barriers & solutions (cont.)
• Problem: the firm does not yet have
contacts with commercial banks
• Solution: contact chamber of commerce
and/local accountants for assistance.
• Problem: the firm is in public ownership
and private sources of finance are not
accessible
• Solution: contact local national CP centre
for institutional assistance
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Project funding
Exercise 6 (10 min)
• What information will banks and credit
institutions ask for when evaluating PLS
Company’s application for funding for the
QC project?
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Project funding
Exercise 6: answers
• Business or enterprise
– Date established
– Location, short history, structure
– Names and biographies of owners
• Key management
– Age, experience and qualifications management
– Organisation chart showing responsibilities
• Market place
– Position locally, main competitors, description of
products / services
– Level of technology
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Project funding
Exercise 6: answers (cont.)
• Financial position and performance
– Current assets and liabilities
– Latest financial accounts, figures on debtors,
creditors and work in progress
– Inventories, other loans, bank balance
• Business plan
– Objectives to be met with the borrowed funds
– Expenditure budget and cash budget
• Funds required
– How much and when, in relation to business size
– Margin for error and change in circumstances
– Break-even for profitability and cash
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Project funding
Exercise 6: answers
• Structure of required finance
– Short, medium, long term needs
– Export finance requirements
• Available collateral
– Assets already pledged (collaterals) for other
loans)
– Assets available as collateral for this loan
• Repayment issues
– Starting date and overall plan
– Repayment plan
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Questions???
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