Energy Project Evaluation
RES Course ESP606
Goal: To build up knowledge to so that
participants will be able to assess if a given
project in a real life industry will be profitable,
i.e. economically sustainable, or not
21 March 2016
Course Overview
1
Energy Project Evaluation
Course Overview
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1.
2.
3.
4.
5.
6.
7.
8.
Profitability Theory and Measures
Investment Analysis
Operations Planning
Business Plans
Balance Sheet and Financial Ratios
Cash Flow Analysis and Profitability
Sensitivity Analysis
Real Life Case Assignment
21 March 2016
Course Overview
2
Course Motto: Plan before act!
21 March 2016
Course Overview
3
1. Profitability Theory and
Measures, objectives

This optional module is a classical shortcourse in standard Economic Analysis. After
this part the participants should understand
concepts like Net Present Value and Internal
Rate of Return and be able to apply them to
measure profitability of given cash flow
series. This module can be skipped by those
who have an economics background, like
bankers and investors
21 March 2016
Course Overview
4
1. Profitability Theory and
Measures, content
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Cost Concepts (variable, fixed, sunk,
opportunity, ...)
The Concept of Interest and Value of
Time
Profitability Measures: PBP, NPV, IRR,
B/C Ratio
Comparison of investment alternatives
21 March 2016
Course Overview
5
Cash Flow Series
300.0
200.0
100.0
0.0
2005
2007
2009
2011
2013
2015
-100.0
-200.0
Total Cash Flow & Capital
-300.0
-400.0
Net Cash Flow & Equity
-500.0
21 March 2016
Course Overview
6
Try to see the big picture!
21 March 2016
Course Overview
7
2. Investment analysis,
objectives

After this module the participants are able to
estimate the cost of initial investments,
including contingencies and working capital
requirement, and set up project financing
with equity and loans. Also, they will learn
how to calculate repayments and interests of
loans. Depreciation will be addressed and
annuity of capital costs will be calculated.
21 March 2016
Course Overview
8
2. Investment analysis,
content
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Estimating Investment Costs
Working Capital Requirement
Project Financing, Equity and Loans
Sources of Financing (where and how
to attract funding)
Calculating loans
Depreciation
21 March 2016
Course Overview
9
Every small link is important!
21 March 2016
Course Overview
10
Initial Costs Estimates
Case Study Example
Traditional Method
estimating contingencies:
Most likely
Buildings:
estimate
Land, roads etc
20 MUSD
Water wells & ditches
5
"
Farm house & Store
20
"
Contingencies
5
"
Buildings Total:
50
"
Equipment:
Construct ponds
Tanks
Pumps & pipes
Feeding Equipment
Contingencies
Equipment Total:
Other Investment:
Consultation
Design
Contingencies
Other Inv. Total:
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130
10
15
25
20
200
"
"
"
"
"
"
10
35
5
50
"
Course Overview
"
"
11
2005
2006
2007
2008
2009
2010
1
2
3
4
5
50.0
200.0
50.0
300.0
48.0
170.0
40.0
258.0
46.0
140.0
30.0
216.0
44.0
110.0
20.0
174.0
42.0
80.0
10.0
132.0
40.0
50.0
0.0
90.0
0.0
2.0
30.0
10.0
42.0
2.0
30.0
10.0
42.0
2.0
30.0
10.0
42.0
2.0
30.0
10.0
42.0
2.0
30.0
10.0
42.0
0.0
311.5
37.4
51.9
259.6
37.4
51.9
207.7
31.2
51.9
155.8
24.9
51.9
103.8
18.7
Investment and Financing
Investment:
Buildings
Equipment
Other
Booked Value
Depreciation:
Depreciation Buildings 4%
Depreciation Equipm. 15%
Depreciation Other
20%
Total Depreciation
Financing:
Equity
Loans
30%
70%
Repayment
6
Principal
Interest
12%
Loan Managem. Fees 2%
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445
133.5
311.5
311.5
0.0
6.2
Course Overview
12
Are all expenses necessary?
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Course Overview
13
3. Operations Planning,
objectives

Here the participants are trained to plan
operations over a planning horizon of
5-10 years, i.e. estimate sales and
prices of products, and do a detailed
breakdown of all operating expenses. A
case study will be used here as an
example.
21 March 2016
Course Overview
14
3. Operations Planning,
content
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Revenue Estimates, products and prices
Variable Operating Costs
Fixed Operating Costs
Specific for the Case Study
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Course Overview
15
Operational Costs Estimates
Case Study Example
Variable Costs:
Raw Materials
Labour Cost
Transportation
Variable Cost Total
1.4 KUSD/ton
1.2
"
0.4
"
3
"
Fixed Costs:
Maintenance
Housing
Management
Sales
Fixed Costs Total
5 MUSD/year
3
"
9
"
3
"
20
"
Break Even Analysis:
Future Sales Price
Net Profit Contribution
15 KUSD/ton
12
"
Break Even Quantity
21 March 2016
Course Overview
1.7 Ktons/year
16
Using models is like using
glasses to see things better!
21 March 2016
Course Overview
17
4. Business plan, objectives

To train participants in setting up a
simple business plan including a
planned operations statement based on
the operations planning, and including
calculations of taxes and duties. In this
module, the participants will do a draft
of business plan for the case study
21 March 2016
Course Overview
18
4. Business plan, content
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Operating Statement Framework
Income Tax Calculation
Dividend Payments
Writing a Business Plan Report
21 March 2016
Course Overview
19
2005
2006
2007
2008
2009
2010
0.0
0.0
5.0
6.0
30.0
10.0
12.0
120.0
15.0
14.0
210.0
20.0
15.0
300.0
20.0
15.0
300.0
0.0
0.0
0.0
0.0
60.0
20.0
0.0
-50.0
30.0
20.0
0.0
70.0
45.0
20.0
0.0
145.0
60.0
20.0
0.0
220.0
60.0
20.0
0.0
220.0
0.0
0.0
45.0
42.0
-47.0
42.0
28.0
42.0
103.0
42.0
178.0
42.0
178.0
6.2
-6.2
37.4
-84.4
37.4
-9.4
31.2
71.9
24.9
153.1
18.7
159.3
-6.2
0.0
0.0
0.0
-6.2
0.0
-6.2
-90.6 -100.0
0.0
0.0
0.0
0.0
0.0
0.0
-9.4
-84.4
0.0
0.0
-9.4
-84.4
-28.1
0.0
0.0
0.0
71.9
21.6
50.3
0.0
124.9
22.5
0.0
130.6
39.2
91.4
0.0
159.3
28.7
0.0
130.6
39.2
91.4
Operations Statement
Sales
Price
Revenue
Variable Cost
Fixed Cost
Diverse Taxes
Operating Surplus
3
20
0%
Inventory Movement
Depreciation
Operating Gain/Loss
Interest
Profit before Tax
Loss Transfer
Taxable Profit
Income Tax
Net Worth Tax
Profit after Tax
Dividend
Net Profit/Loss
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0
18%
0%
30%
Course Overview
20
We have built a great model!
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Course Overview
21
5. Balance sheet, objectives

This module is not absolutely necessary
for making profitability assessments,
however it gives the participants
valuable insight into how operating
statements, cash flows and banance
sheets are linked together.
Furthermore, it is the basis for
calculating financial ratios, like liquid
current ratio etc
21 March 2016
Course Overview
22
5. Balance sheet, content
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Assets, Current and Fixed
Current Liabilities (Short Term Debts)
Long Term Debt
Capital, Equity & Profit & Loss Balance
Financial Ratios (Profit / Capital Ratios,
Net and Liquid Current Ratios, Capital /
Equity Ratio, Capital / Debt and Capital
21 March 2016
Course Overview
23
2005
2006
2007
2008
2009
2010
138.8
0.0
0.0
138.8
300.0
438.8
52.9
7.5
45.0
105.4
258.0
363.4
6.6
30.0
45.0
81.6
216.0
297.6
48.3
52.5
45.0
145.8
174.0
319.8
149.6
75.0
45.0
269.6
132.0
401.6
237.4
75.0
45.0
357.4
90.0
447.4
Debts
Dividend Payable
Taxes Payable
Creditors
15%
Next Year Repayment
Current Liabilities
Long Term Loans
Total Debt
0.0
0.0
0.0
0.0
0.0
311.5
311.5
0.0
0.0
9.0
51.9
60.9
259.6
320.5
0.0
0.0
4.5
51.9
56.4
207.7
264.1
21.6
0.0
6.8
51.9
80.2
155.8
236.0
39.2
22.5
9.0
51.9
122.6
103.8
226.4
39.2
28.7
9.0
51.9
128.8
51.9
180.7
Equity
Profit & Loss Balance
Total Capital
133.5
-6.2
127.3
133.5 133.5
-90.6 -100.0
42.9
33.5
133.5
-49.7
83.8
133.5
41.7
175.2
133.5
133.2
266.7
438.8
363.4
319.8
401.6
447.4
Balance Sheet
Assets
Cash Account
Debtors
Stock
Current Assets
Fixed Assets
Total Assets
Debts and Capital
21 March 2016
0
25%
0
0
297.6
Course Overview
24
Sure your model is debugged?
21 March 2016
Course Overview
25
6. Cash flow Analysis,
objectives

To learn how to build up cash flow
plans on the basis of operating
statements and how to calculate
profitability. This module together with
modules 2-4, provides the basis for
profitability assessment. Profitability of
the case study will be calculated.
21 March 2016
Course Overview
26
6. Cash flow Analysis, content
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Difference between Cash Flow and
Operating Statement
Cash Flow from Operations
Source and Allocation of Funds
(optional)
Critical Cash Flow Ratios
Profitability Measures (NPV, IRR)
Graphical Representation
21 March 2016
Course Overview
27
2005
2006
2007
2008
2009
2010
Operating Surplus
Debtor Changes
Creditor Changes
Cash Flow before Tax
0.0
0.0
0.0
0.0
-50.0
-7.5
9.0
-48.5
70.0
-22.5
-4.5
43.0
145.0
-22.5
2.3
124.8
220.0
-22.5
2.3
199.8
220.0
0.0
0.0
220.0
Paid Taxes
Cash Flow after Tax
0.0
0.0
0.0
-48.5
0.0
43.0
0.0
124.8
0.0
199.8
22.5
197.5
6.2
0.0
-6.2
37.4
0.0
-85.9
37.4
51.9
-46.3
31.2
51.9
41.7
24.9
51.9
122.9
18.7
51.9
126.9
0.0
145.0
138.8
0.0
0.0
-85.9
0.0
0.0
-46.3
0.0
0.0
41.7
21.6
0.0
101.4
39.2
0.0
87.7
Cash Flow
Interest
Repayment
Net Cash Flow
Paid Dividend
Financing - Expenditure
Cash Movement
21 March 2016
Course Overview
28
2005
2006
2007
2008
2009
2010
Profitability Measurements
NPV and IRR of Total Cash Flow
43.0 124.8 199.8 197.5
0.0 -48.5
Cash Flow after Taxes
0.0
0.0
0.0
0.0
0.0
311.5
Loans
0.0
0.0
0.0
0.0
0.0
133.5
Equity
43.0 124.8 199.8 197.5
Total Cash Flow & Capital -445.0 -48.5
NPV Total Cash Flow 15% -387.0 -423.6 -395.4 -324.0 -224.7 -139.3
0.0% 0.0% 0.0% 0.0% 3.6%
IRR Total Cash Flow
NPV and IRR of Net Cash Flow
41.7 122.9 126.9
-6.2 -85.9 -46.3
Net Cash Flow
0.0
0.0
0.0
0.0
0.0
133.5
Equity
41.7 122.9 126.9
Net Cash Flow & Equity -139.7 -85.9 -46.3
NPV Net Cash Flow 15% -121.5 -186.4 -216.9 -193.1 -131.9 -77.1
0.0% 0.0% 0.0% 0.0% 1.9%
IRR Net Cash Flow
21 March 2016
Course Overview
29
Accumulated Net Present Value
200.0
100.0
0.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
-100.0
-200.0
-300.0
NPV Total Cash Flow 15%
-400.0
NPV Net Cash Flow 15%
-500.0
21 March 2016
Course Overview
30
Internal Rate of Return
30.0%
25.0%
IRR Total Cash Flow
IRR Net Cash Flow
20.0%
15.0%
10.0%
5.0%
0.0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
-5.0%
21 March 2016
Course Overview
31
Computer models are
powerful!
21 March 2016
Course Overview
32
7. Sensitivity analysis,
objectives

To learn how to analyse uncertainty
factors and their impact on project
outcome. After this module the
participants will be able to do risk
assessment in a simple way with
sensitivity calculations and scenario
analysis, and in a more advanced way
with Monte Carlo Simulations
21 March 2016
Course Overview
33
7. Sensitivity analysis, content

Impact Analysis


Scenario Analysis
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One uncertain factor changed at the time
Many uncertain factors changed at the time
Monte Carlo Simulation
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Random number generators
Probability distributions
Simulation tools (@Risk or Crystal Ball)
21 March 2016
Course Overview
34
Impact Analysis
60.0%
50.0%
IRR of Equity
40.0%
30.0%
20.0%
Price
10.0%
Sales
Equipment
-50%
-40%
-30%
-20%
0.0%
-10%
0%
10%
20%
30%
40%
50%
Deviation
21 March 2016
Course Overview
35
Scenario Summary
Changing Cells:
Equipment
Sales Quantity
Sales Price
Result Cells:
IRR_Total
IRR_Equity
21 March 2016
100%
100%
100%
90%
120%
130%
120%
90%
80%
19.2%
23.7%
33.4%
48.1%
9.5%
7.4%
Course Overview
36
Histogram for Risk Assessment
160
140
Frequency
120
100
80
60
40
20
5%
10
%
15
%
20
%
25
%
30
%
35
%
40
%
45
%
M
or
e
0%
0
IRR of Equity
21 March 2016
Course Overview
37
Pessimistic scenarios are more
common than optimistic!
21 March 2016
Course Overview
38
8. Real life exercise
assignment, objectives

The modular Excel model that was
developed by the participants in parts
2-6 will now be used to evaluate the
profitability of a real life project
preferably selected by the participants
themselves. This is considered very
important in order to ensure that what
was learned will stay
21 March 2016
Course Overview
39
8. Real life exercise
assignment, content





Data Collection, Assumptions and
Estimations
Adapting the Profitability Model to the
Assignment Case
Analysis of Results
Other views and considerations than
economical
Final Report
21 March 2016
Course Overview
40
Remember, there is more to
life than numbers!
21 March 2016
Course Overview
41
Course Form
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

Hands-on work in Excel gradually
building up a case study business plan
and a project evaluation model
The course will end with a report
describing a real life case assignment
Typical time span: 10 days
21 March 2016
Course Overview
42
Form of Assignment work


Assignment project work either
individually or in small groups of 3-4
participants.
The groups work independently
although the teachers will assist the
groups as needed
21 March 2016
Course Overview
43
Analysis of Results
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
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Graphical presentation of results
Sensitivity Analysis
Scenario Analysis
Simulations
Group discussion of results and
sensitivity analysis
21 March 2016
Course Overview
44
Final Report
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Writing final report:
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Background of the proposed project
Main assumptions and data
Main results and findings
Sensitivity analysis and scenarios
Discussion and conclusion
Appendices: Tables etc
Also group presentations
21 March 2016
Course Overview
45
Have we achieved anything?
21 March 2016
Course Overview
46