Project financing evaluation

Project financing evaluation tài liệu, giáo án, bài giảng , luận văn, luận án, đồ án, bài tập lớn về tất cả các lĩnh vực...

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1.040/1.401

Project Management

Spring 2007 Project Financing & Evaluation

Dr SangHyun Lee

lsh@mit.edu

Department of Civil and Environmental Engineering

Massachusetts Institute of Technology

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 STELLAR access: to be announced

 AS1 Survey due by tonight 12 pm

 TP1 and AS2 are out

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AS 2: Student Presentation

 10 minute presentation followed by 5 minute discussion

 1 or 2 presentations from Feb 20 to Mar 19

 Topics

 Size of project is not important!

 Project main figures

 Main managerial aspects

 Project management practices

 Problems, strengths, weaknesses, risks

 Your learning

 Volunteers for next week?

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 STELLAR access: to be announced

 AS1 Survey due by tonight 12 pm

 TP1 and AS2 are out

 Pictures will be taken before you leave

 Who we are

 Don’t memorize course content Understand it.

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Session Objective

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Project Management Phase

FEASIBILITY PLANNING DESIGN DEVELOPMENT CLOSEOUT OPERATIONS

Financing & Evaluation

Risk

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Context: Feasibility Phases

 Project Concept

 Land Purchase & Sale Review

 Evaluation (scope, size, etc.)

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Lecture 2 - References

More details on:

 Hendrickson PM for Construction on-line textbook

 Chapter 7

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Financing – Gross Cashflows

OWNER

investment ($10,000,000) ($20,000,000)

operation incomes $2,000,000 $4,000,000 $6,000,000 $6,000,000 $6,000,000 $6,000,000 $6,000,000 owner cashflow $0 ($10,000,000) ($20,000,000) $2,000,000 $4,000,000 $6,000,000 $6,000,000 $6,000,000 $6,000,000 $6,000,000

owner cum cashflow $0 ($10,000,000) ($30,000,000) ($28,000,000) ($24,000,000) ($18,000,000) ($12,000,000) ($6,000,000) $0 $6,000,000

CONTRACTOR

costs ($4,000,000) ($7,000,000) ($14,000,000) $0 $0 $0 $0 $0 $0 $0 revenues $0 $10,000,000 $20,000,000 $0 $0 $0 $0 $0 $0 $0 contractor cashflow ($4,000,000) $3,000,000 $6,000,000 $0 $0 $0 $0 $0 $0 $0

contractor cum cashflow ($4,000,000) ($1,000,000) $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000

Owner investment = contractor revenue

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OWNER

investment ($10,000,000) ($20,000,000)

CONTRACTOR

Design/Preliminary Construction

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OWNER

investment ($10,000,000) ($20,000,000)

CONTRACTOR

• Early expenditure

• Takes time to get revenue

Design/Preliminary Construction

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Project Financing

Aims to bridge this gap in the most beneficial way!

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Critical Role of Financing

 Makes projects possible

 Has major impact on

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How Does Owner Finance a Project?

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Public Financing

 Sources of funds

 Capital grants subsidies

 International subsidized loans

 Social benefits important justification

 Benefits to region, quality of life, unemployment relief, etc.

 Important consideration: exemption from taxes

 Public owners face restrictions (e.g bonding caps)

 Major motivation for public/private partnerships

often standardized

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Private Financing

 Major mechanisms

 Equity

 Stock Issuance (e.g in capital markets)

 Debt

 Because higher costs and risks, require higher returns

 MARR varies per firm, often high (e.g 20%)

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Private Owners w/Collateral Facility

Distinct Financing Periods

 Short-term construction loan

 Risky (and hence expensive!)

 Borrowed so owner can pay for construction (cost)

 Typically facility is collateral

 Pays for operations and Construction financing debts

 Typically much lower interest

 Loans often negotiated as a package

time

construction w/o tangible

operation w/ tangible

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“Project” Financing

 Investment is paid back from the project profit rather than the general assets or creditworthiness of the project owners

 For larger projects due to fixed cost to establish

 Small projects not much benefit

 Investment in project through special purpose corporations

 Often joint venture between several parties

 Need capacity for independent operation

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 Often some compromise between contractor and owner

 Architect certifies progress

 Agreed-upon payments

 Often must cover deficit during construction

 Can be many months before payment received

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S-curve Work

Man-hours

months

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Expense & Payment

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Contractor Financing II

 Owner keeps an eye out for

 Front-end loaded bids (discounting)

 Unbalanced bids

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Contractor Financing II

 Owner keeps an eye out for

 Front-end loaded bids (discounting)

 Unbalanced bids

 Contractors frequently borrow from

 Banks (Need to demonstrate low risk)

 Interaction with owners

 Some owners may assist in funding

 Sometimes assist owners in funding!

 BOT

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 Agreed upon in contract

 Often structure proposed by owner

 Should be checked by owner (fair-cost estimate)

 Often based on “Masterformat” Cost Breakdown Structure (Owner standard CBS)

 Certified by third party (Architect/engineer)

Contractor Financing III

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computing taxable income

 Others

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Develop or Not Develop

 Is any individual project worthwhile?

 Given a list of feasible projects, which one is the best?

 How does each project rank compared to the others on the list?

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Project Evaluation Example:

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Quantitative Method

 Profitability

 Create value for the company

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TOTAL EQUIVAL $

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Quantitative Method

 Profitability

 Create value for the company

 Opportunity Cost

 Time Value of Money

 Investment relative to best-case scenario

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Money Is Not Everything

 Social Benefits

 Hospital

 School

 Highway built into a remote village

 Intangible Benefits (E.g, operating and competitive necessity)

 New warehouse

 New cafeteria New cafeteria

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Basic Compounding

 Suppose we invest $x in a bank offering interest rate i

 If interest is compounded annually, asset will be worth

 $x(1+i) after 1 year

 $x(1+i) 2 after 2 years

 $x(1+i) 3 after 3 years ….

 $x(1+i) n after n years

$x

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Time Value of Money

 If we assume

 That money can always be invested in the bank (or

some other reliable source) now to gain a return with interest later

 That as rational actors, we never make an investment which we know to offer less money than we could get in the bank

 Then

 Money in the present can be thought as of “equal

worth” to a larger amount of money in the future

 Money in the future can be thought of as having an

equal worth to a lesser “present value” of money

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Equivalence of Present Values

between any cash flows with the same present value – they have

“equal worth”

other with no extra expense

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 STELLAR access:

http://stellar.mit.edu/S/course/1/sp07/1.040/

 Next Tuesday Recitation: Skyscraper Part I

 Please set up an appointment to discuss your AS2 if you choose emerging technologies (MF preferred)

 Office: 1-174

 TA (50%) for our class

 Send your resume (or brief your experience) by this Sunday

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Time Value of Money: Revisit

 If we assume

 That money can always be invested in the bank (or

some other reliable source) now to gain a return with interest later

 That as rational actors, we never make an investment which we know to offer less money than we could get in the bank

 Then

 Money in the present can be thought as of “equal

worth” to a larger amount of money in the future

 Money in the future can be thought of as having an

equal worth to a lesser “present value” of money

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Present Value (Revenue)

 How is it that some future revenue r at time t has a “present value”?

 Answer: Given that we are sure that we will be gaining revenue r at time t,

we can take and spend an immediate loan from the bank

 We choose size of this loan l so that at time t, the total size of the loan (including accrued interest) is r

 The loan l is the present value of r

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Future to Present Revenue

x

t

-x

t PV(x)

0 I’ll pay this back to the bank later

I can borrow this from the bank now

t PV(x)

If I know this is coming…

The net result is that I can convert a sure x at time t

into a (smaller) PV(x) now!

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Present Value (Cost)

 How is it that some future cost c at time t has a “present value”?

 Answer: Given that we are sure that we will bear cost c at time t, we immediately deposit a sum of money x into the bank yielding a known return

 We choose size of deposit x so that at time t, the total size of the investment (including accrued interest) is c

 We can then pay off c at time t by retrieving this money from the bank

 The size of the deposit (immediate cost) x is the present value of c.

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Future to Present Cost

x

t PV(x)

I retrieve this back from the bank later

I can deposit this in the bank now

If I know this cost is coming…

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 Because we can flexibly switch from one such value to another without cost,

we can view these values as equivalent

FV

t v

v’

0

PV

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 Because we can flexibly switch from one such value to another without cost,

we can view these values as equivalent

FV

t v

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 Difference between PV (v) and FV ( =v(1+i) t ) depends on i and t.

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 Difference between PV (v) and FV ( =v(1+i) t ) depends on i and t.

 Interest Rate

 Discount Rate (real change in value to a person or group)

 Discount Rate > Interest Rate

risks of a project (i.e., minimum standard of desirability)

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Choice of Discount Rate

r = rf + ri + rr Where:

r is the discount rate

rf the risk free interest rate Normally government bond

ri Rate of inflation It is measured by either by consumer price

index or GDP deflator

rr Risk factor consisting of market risk, industry risk, firm

specific risk and project risk

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Interest Formulas

 i = Effective interest rate per interest period (discount rate or MARR)

 A = Annuity (i.e., a series of payments of set size) at end-of-period

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Interest Formulas: Payment

 Factor that will make your present value future value in single payment

 (F/P, i, n) = (1 + i ) n

P

n 0

F

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 Single Payment Present Value Factor (P=F×Factor)

 Factor that will make your future value present value in single payment

 (P/F, i, n) = 1/ (1 + i ) n = 1/ (F/P, i, n)

P

n 0

F

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- Example

 If you wish to have $100,000 at the end of five years in an account that pays 12 percent annually, how much would you need to deposit now?

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- Example

 (P/F, 0.12, 5) or (F/P, 0.12, 5)?

P=?

n 0

F=$100,000

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- Example

 P = F×(P/F, 0.12, 5)

 P = 100,000 × (P/F, 0.12, 5)

 P = 100,000 × 0.5674 = $56,740

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Interest Formulas: Series

 Factor that will make your annuity value future value in series payment

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 Factor that will make your future value annuity value in series payment

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n

P

 Uniform Series Present Value Factor (P=A×Factor)

 (P/A, i, n) = [ (1 + i ) n -1 ] / [ i (1 + i ) n ]

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n

 (P/A, i, n) = [ (1 + i ) n -1 ] / [ i (1 + i ) n ]

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n

 (P/A, i, n) = [ (1 + i ) n -1 ] / [ i (1 + i ) n ]

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n

 (P/A, i, n) = [ (1 + i ) n -1 ] / [ i (1 + i ) n ]

Verify it!

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 Uniform Series Capital Recovery Factor (A=P×Factor)

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Equipment Example

 $ 20,000 equipment expected to last 5 years

 $ 4,000 salvage value

 Minimum attractive rate of return 15%

 What are the?

 A - Annual Equivalent

 P - Present Equivalent

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Equipment Example

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Net Present Value

 Suppose we had a collection (or stream, flow) of costs and

revenues in the future

 The net present value (NPV) is the sum of the present values for all of these costs and revenues

 Treat revenues as positive and costs as negative

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Calculation of Net Present Value

Total Revenue (R) (+) Various Costs (C) (-)

Calculate Gross Return

Calculate Net Return

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Net Present Value Decision Rule

 Accept a project which has 0 or positive NPV

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Project Evaluation Example Revisit: Which one is better?

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Drawing out the examples

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Or Using Interest Formulas

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Four Independent Projects

 The cash flow profiles of four independent projects are shown below Using a MARR of 20%, determine the acceptability of each of the projects on the basis of the net present value criterion for accepting independent projects

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Discount Rate in NPV

(opportunity cost)

profitable can be rejected If too low, the firm will accept projects that are too risky without proper compensation.

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Selection of Discount Rate: Example

 2 pieces of equipment: one needs a human operator (initial cost $10,000, annual $4,200 for labor); the second is fully automated (initial cost $18,000, annual #3,000 for power) n=10years.

 Is the additional $8,000 in the initial investment of the second equipment worthy the $1,200 annual savings? (discount rate: 5 or 10%)

Link

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Selection of Discount Rate: Example

 2 pieces of equipment: one needs a human operator (initial cost $10,000, annual $4,200 for labor); the second is fully automated (initial cost $18,000, annual #3,000 for power) n=10years.

 Is the additional $8,000 in the initial investment of the second equipment worthy the $1,200 annual savings? (discount rate: 5 or 10%)

 There is a critical value of i that changes the equipment choice (approximately 8.15%)

 Example: The US Federal Highway Administration promulgated a regulation in the early 1970s that the discount rate for all federally funded highways would be zero This was widely interpreted as a victory for the cement industry over asphalt industry Roads made of concrete cost significantly more than those of made of asphalt while requiring less maintenance and less replacement [Shtub et al., 1994] - Link

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