Finance
Lecture # 5
Jan H. Jansen
E-mail:
jan.jansen@han.nl
Wind energy
Minor Wind Energy Project Management
Finance
Law
Energy
Project
Supply Chain
Management
Mechanical
Engineering
Construction
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
Plan of Action
What should be
in the financial
chapter?
How to plan
the financial
part?
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
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–
–
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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)
Structure Excel model
Cash
Outflows
Data
Assumptions
Cash
Inflows
Results
Recap lecture # 4
Project Structure
Finance
• Equity
Investors
• Lenders
Contractor
(Construction)
Operator
(O&M)
Project
Company
Government
Support
Agreement
Input Supplier
Off taker
(Power
Distributer)
Government
Concession /
License
Source : Project Finance, Yescombe
Ring-fenced project
Finance
• Equity
Investors
• Lenders
Contractor
(Construction)
Operator
(O&M)
Project
Company
Government
Support
Agreement
Input Supplier
Off taker
(Power
Distributer)
Government
Concession /
License
Source : Project Finance, Yescombe
Project Risks
Project Risks
Commercial
Risks
Macroeconomic
Risks
Political Risks
Inflation Risk
Currency
Convertibility
Risk
Transfer Risk
Revenue Risk
Interest Rate
Risk
Expropriation
Risk
War & Civil
Disturbance Risk
Input Supply
Risk
Force majeure
risk
Exchange Rate
Risk
Change of Law
Risk
Quasi-political
Risks
Contract
mismatch risk
Sponsor support
Risk
Completion Risk
Environmental
risk
Operating Risk
Lecture 5
Risk & Return
DOSIT Methodology
Investment Decisions
Investment trade off (I)
Investment
• Equipment
• Building
• R&D
• Environment
– Sustainability
• Staff / HR
• Maintenance
• Operating costs
Funds
• Equity
• Loans
Investment trade off (II)
Cash Outflows
• Equipment
• Building
• R&D
• Environment
– Sustainability
• Staff / HR
• Maintenance
• Operating costs
Cash Inflows
• Sales
• Lower costs
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
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)
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
V=E+D
V
Capital asset pricing model (CAPM)
CAPM defines the cost of equity (ke) for a
firm as :
risk free
premium
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
WACC CALCULATOR ™ for GE
CAPM Component
Calculated Value:
Beta:
1.85
Historical Market Return rm:
11.00%
Risk Free rate rf:
3.00%
Source: http://thatswacc.com/index.php
WACC CALCULATOR ™ for GE
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%
Source: http://thatswacc.com/index.php
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%
DOSIT Model
Model developed by:
– TNO (Applied Research in Science)
– Research Chair of TQMinON
• Prof. Gerard Berendsen
– Source:
• Duurzaam innoveren met de DOSITmethodiek, G. Berendsen cs, Sigma
Kluwermanagement, June 2006
•
http://www.han.nl/onderzoek/kennismaken/ontwikkelen-van-excellente-organisaties/lectoraat/tqm-inorganisatienetwerken/publicaties/_attachments/kip_c211_20duurzaam_20innoveren_20met_20de_20dosit_20methodiek.pdf
DOSIT Model
Dutch
•
•
•
•
•
Duurzaam
Ondernemen
Selectie
Innovatieve
Technologie
DOSIT
English
•
•
•
•
•
Sustainable
Entrepreneurial
Selection
Innovative
Technology
SESIT
Why DOSIT?
Hot topics in business are:
• Innovation
– Product innovation
– Innovation of processes
• Sustainability / CSR
– Stewardship / Managership / Bailiff (UK)
(Dutch: Rentmeesterschap)
• Investments
Innovation:
•Products
•Process
Sustainability
Investing
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
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
Basic assumptions: DOSIT model
I.
II.
III.
IV.
V.
VI.
Focus as a company on a limited number of
activities connected to sustainability
Intrinsic motivation of staff concerning change
in general and sustainability in specific
Communication in the company concerning
sustainability: Top Down & Bottom Up
‘Quick and dirty job’ in SME’s, staff wants to see
immediately results
Aspects of sustainability have influence on the
continuity of the company
Sound financial base is important for the
continuity of the company
Profit
People
Planet
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
Elements of the DOSIT model
•
•
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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
DOSIT Matrix (Overview Priorities)
Product Use / Reversed
Logistics
Product & Market Development
Warehousing & Distribution
Packaging
Production
Logistic Processes (ITO)
Business development
People
Components
Planet
Raw materials
↑
Profit
Supply Chain
& Value Chain ↑
Aspects ↓
Constraints in the process of sustainable innovation
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•
•
•
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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?)
DOSIT Method: Excel tool