Financing Feasibility Analysis - Presentation

8/4/2019 Financing Feasibility Analysis - Presentation

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Financial FeasibilityFinancial Feasibility

AnalysisAnalysis

Energizing Cleaner ProductionEnergizing Cleaner Production

Management CourseManagement Course


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Session Agenda:Session Agenda:

Introduction

Cash Flow

Profitability Indicators

1. Simple Payback

2. Return on Investment (ROI)3. Net Present Value (NPV)

4. Internal Rate of Return (IRR)


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task a: Meeting with top management1

task b: Form a Team and inform staff1

task c: Pre1 -assessment to collect general information

task d: Select focus areas1

task e: Prepare assessment proposal for top management approval1

Step : Planning and Organization1

task a: Staff meeting and training1

task b: Prepare1 focus area flow charts

task c: Walkthrough of focus areas1

task d: Quantify inputs and outputs and costs to establish a ba1 seline

task e: Quantify losses through a material and energy balance1

Step : Assessment1

task a: Determine causes of losses1

task b: Identify possible options1

task c: Screen options for feasibility analysis1

Step : Identification of Options1

task a: Technical, economic and environmental evaluation of opt1 ions

task b: Rank feasible options for implementation1

task c: Prepare implementation and monitoring proposal for top1

management approval

task a: Implement options and monitor results1

task b: Evaluation meeting with top management1

Step : Implementation and Monitoring of Options1

task a: Prepare proposal to continue with energy efficiency for1 top

management approval

Step : Continuous Improvement1

Step : Feasibility Analysis of Options1

task a: Meeting with top management1

task b: Form a Team and inform staff1

task c: Pre1 -assessment to collect general information

task d: Select focus areas1

task e: Prepare assessment proposal for top management approval1

Step : Planning and Organization1

task a: Staff meeting and training1

task b: Prepare1 focus area flow charts

task c: Walkthrough of focus areas1

task d: Quantify inputs and outputs and costs to establish a ba1 seline

task e: Quantify losses through a material and energy balance1

Step : Assessment1

task a: Determine causes of losses1

task b: Identify possible options1

task c: Screen options for feasibility analysis1

Step : Identification of Options1

task a: Technical, economic and environmental evaluation of opt1 ions

task b: Rank feasible options for implementation1

task c: Prepare implementation and monitoring proposal for top1

management approval

task a: Implement options and monitor results1

task b: Evaluation meeting with top management1

Step : Implementation and Monitoring of Options1

task a: Prepare proposal to continue with energy efficiency for1 top

management approval

Step : Continuous Improvement1

Step : Feasibility Analysis of Options1

But firstBut first

In what step(s)In what step(s)of theof the

methodologymethodology

is financialis financial

feasibilityfeasibility

analysisanalysisrelevant?relevant?


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IntroductionIntroduction

Step 4 Feasibility AnalysisStep 4 Feasibility Analysis

ProjectSelection

Technical

Environmental

FinancialOther- Regulatory- Organizational

- Health/safety- Community

Companys priority


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Questions Management Will AskQuestions Management Will Ask

1. Is the project profitable? Initial investment costs

Annual operating costs and savings

Cost of operating inputs Cost of waste management

Less tangible costs

Revenues

2. Determine availability of internalinvestment funds for bigger projects

3. Obtain external financing for

remaining projects


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Capital Budgeting ProcessCapital Budgeting Process

Process by which organisation decides:

Which investment projects are Needed

Possible

Special focus on projects that requiresignificant up-front capital investment

How to allocate available capitalbetween different projects

If additional capital is needed


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Capital Budgeting PracticesCapital 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 largercapital investments than smaller companies

Some industry sectors require more capitalinvestment than others

Vary from country to country


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Typical Project Types and CostsTypical Project Types and Costs

Maintenance Maintain existing equipment and operations

Improvement Modify existing equipment, processes, and

management and information systems toimprove efficiency, reduce costs, increasecapacity, improve product quality, etc.

Replacement Replace outdated, worn-out, or damaged

equipment or outdated/inefficient managementand information systems


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Cash FlowCash Flow

Cash Flow ConceptCash Flow Concept

Common management planning tool

Distinguishes between Costs: cash outflows

Revenues/savings: cash inflows


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Cash FlowCash Flow

Types of Cash FlowTypes of Cash Flow

One-time

Annual

Other

Inflow

Equipment

salvage value

Operatingrevenues

& savings

Working capital

Outflow

Initial

investment cost

Operating costs& taxes

Working capital


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Cash FlowCash Flow

Costs and SavingsCosts and Savings

Initial investment costs purchase of the camera system, delivery,

installation, start-up

Annual operating costs (and savings)

Operating input materials, energy, labour

Incineration fuel, fuel additive, labour, ash to

landfill

Wastewater treatment chemicals, electricity,labour, sludge to landfill


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Cash FlowCash Flow

Working Capital and Salvage ValueWorking Capital and Salvage Value

Working capital: total value of goodsand money needed to maintainproject operations

Raw materials inventory Product inventory

Accounts payable/receivable

Cash-on-hand

Salvage Value: resale value ofequipment or other materials at theend of the project


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Cash FlowCash Flow

TimingTiming

Salvage Value

End of project:

Time zero:

Initial Investment

TIMEYear 1 Year 2 Year 3

Annual Revenues/Savings


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Cash FlowCash Flow

Incremental AnalysisIncremental Analysis

Needed for many CP or EE projects

Compares cash flow of implemented

options to the business as usualcash flow

Covers only the cash flows that change


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Profitability IndicatorsProfitability Indicators

Definition: a single number that iscalculated for characterisation ofproject profitability in a concise and

understandable form

Common indicators

1. Simple Payback2. Return on Investment (ROI)

3. Net Present Value (NPV)

4. Internal Rate of Return (IRR)


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1. Simple Payback1. Simple Payback

Definition: number of years it will takefor the project to recover the initialinvestments

Usually a rule of thumb for selectingprojects, e.g. payback must be < 3years

SimplePayback(in years)

Investment

Cash Flow

=


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2. Return on Investment2. Return on Investment

Simple Payback(in years)

Initial Investment

Year 1 Cash Flow=

ROI (in %) Year 1 Cash Flow

Initial Investment=

3 years

33%

Definition: the percentage of initialinvestment that is recovered each year


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Workshop ExerciseWorkshop Exercise

PLS Company: produces rolls ofPLS Company: produces rolls of

laminated filmlaminated film

INVENTORY

SLITTING

solvent airemissions

solvent airemissions

printed

laminated

filmplastic film, ink

plastic film, aluminium film, adhesive

PRINTING LAMINATION

Liquid wasteink

Solid scrap

to waste

management

to waste

management

Solid scrapSolid scrap

printed

film


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PLS Company installs QC CameraPLS Company installs QC Camera

Printing step

Printing errors cause high scrap rate

Quality Control (QC) 3-camera system Detect printing errors

Operators halt the operations before too muchsolid scrap is generated

QC camera system costs US$105,000

to purchase and install 40% reduced scrap and operating

costs


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Question 1: Calculate annual cash

flows using the cash flow worksheet

(15 min)

Question 2: Calculate simple payback

(5 min)


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3. Net Present Value3. Net Present Value

Money Loses its ValueMoney Loses its Value

Question:

If we were giving away money, would yourather have:

(A) $10,000 today, or(B) $10,000 3 years from now

Explain your answer...


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InflationInflation

Money loses purchasing power over timeas product/service prices rise, so a dollartoday can buy more than a dollar next

year

costs $1 costs $1.05

inflation 5%

nownow next yearnext year


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Return on InvestmentReturn on Investment

A dollar that you invest today will bringyou more than a dollar next year having the dollar now provides you with

an investment opportunity

10 % interest, orreturn on investment

Investing$1 now

InvestmentGives you

$1.10 a year

from now


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PLS Companys QC Camera ProjectPLS Companys QC Camera Project

InitialInvestment

Cost

AnnualOperating

Costs

BusinessAs

Usual Annual Savings=

US$38,463

Installingqualitycontrolcamera

00

$ 105,000$ 105,000

$ 2,933,204$ 2,933,204

$ 2,894,741$ 2,894,741

(in US$)


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QuestionQuestion

Is the annual savings of$38,463 per year for 3

years a sufficient returnon the initial investmentof $ 105,000?


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3. Net Present Value3. Net Present ValueTime Value of MoneyTime Value of Money

Money is worth more now than in thefuture because of

Inflation

Investment opportunity

Time value of money depends on

Rate of inflation Rate of return on investment


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3. Net Present Value3. Net Present ValueCash Flows from Different YearsCash Flows from Different Years

Before you can compare cash flowsfrom different years, you need toconvert them all to their equivalent

values in a single year

It is easiest to convert all project cash

flows to their present value now, atthe very beginning of the project

3 Net Present Value3 Net Present Value


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3. Net Present Value3. Net Present ValueConverting Cash Flows to PresentConverting Cash Flows to Present

ValueValue

End of project

Time zero:

Initial Investment = $105,000

TIMEYear 1 Year 2 Year 3

$38,463 $38,463 $38,463

= ??= ??= ??

Annual Savings

3 Net Present Value3 Net Present Value


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3. Net Present Value3. Net Present ValueConverting Cash Flows to PresentConverting Cash Flows to Present

ValueValue

Discount rate:

Converts future year cash flows totheir present value

Incorporates:

Desired return on investment

Inflation

Reverse of an interest rate calculation


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3. Net Present Value3. Net Present ValueDiscount Rate & Interest RateDiscount Rate & Interest Rate

Invested at an interest rate of 20%, how much will $10,000now 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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Which Discount Rate?Which Discount Rate?

Equal to the required rate of return for the projectinvestment, based on

A basic return - pure compensation for deferringconsumption

Any risk premium for that projects risk

Any expected fall in the value of money over timethrough inflation

At least cover the costs of raising the investment

financing from investors or lenders (i.e. the companyscost 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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Calculating Present ValueCalculating Present Value

Present Value = Future Valuen x (PV Factor)

Value of the cash flowin year n

Value of cash flowat Time Zero, i.e.

at project start-up

Present Value (PV) Factors ordiscount factors

For various values d (discountrate): 10%, 15%, 20%

For various years n (number ofyears)

Tables available


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3. Net Present Value3. Net Present ValueThe Value of a Future $1The Value of a Future $1

Discount rate (d): 10% 20% 30% 40%

Years into future (n)

1 .9091 .8333 .7692 .7142

2 .8264 .6944 .5917 .51023 .7513 .5787 .4552 .3644

4 .6830 .4823 .3501 .2603

5 .6209 .4019 .2693 .1859

10 .3855 .1615 .0725 .034620 .1486 .0261 .0053 .0012

30 .0573 .0042 .0004 .0000

Handout: Table with discount rates

Present

valuefactors


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Net Present Value (NPV)Net Present Value (NPV)

Definition: sum of present values of allprojects cash flows Negative (cash outflows) Positive (cash inflows)

Characterises the present value of theproject to the company If NPV > 0, the project is profitable If NPV < 0, the project is not

More reliable than Simple Payback orROI as it considers Time value of money

All future year cash flows


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3. Net Present Value3. Net Present ValueWorkshop Exercise (15 min)Workshop Exercise (15 min)

ExpectedFuture Cash

Flows

- $105,000

+ $38,463

+ $38,463

+ $38,463

PV

Factor

Present Value ofCash Flows

(at time zero)

- $???

$???

$???

$???

$???

Year

0

1

2

3

X =

???

???

???

???

Sum = projects Net Present Value =

Question 3: Calculate the NPV


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Question 4: compare the Simple Paybackand the NPV

3. Net Present Value3. Net Present ValueWorkshop Exercise (5 min)Workshop Exercise (5 min)


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3. Net Present Value3. Net Present ValueSensitivity AnalysisSensitivity Analysis

In business as usual scenario PLSCompany needs waste water treatmentplant 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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3. Net Present Value3. Net Present ValueWorkshop Exercise (answer B)Workshop Exercise (answer B)

ExpectedFuture Cash

Flows

- $105,000

+ $38,463

+ $38,463

+ $93,463+ $93,463

PVFactor

Present Value ofCash Flows(at time zero)

Year

0

1

2

3

X =

.8696

.7561

.6575

Sum = projects Net Present Value =

- $105,000

33,447

29,082

61.45261.452

-18,981-18,981


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4. Internal Rate of Return (IRR)4. Internal Rate of Return (IRR)

Definition: discount rate for which NPV= 0, over the project lifetime

Tells you exactly what discount ratemakes the project just barely profitable

Similar to NPV, considers

Time value of money

All future year cash flows


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Profitability Indicators SummaryProfitability Indicators Summary

Advantages Disadvantages

Easy to use Neglect TVM

Neglect out-year costs

Do not indicate projectsize

Considers TVM Needs firms discountrateIndicates project size

Considers TVM Requires iterationDoes not indicate

project size

Simple

Payback& ROI

NPV

IRR


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Financial FeasibilityFinancial Feasibility

Analysis of OptionsAnalysis of Options

Thank you for your attention!Thank you for your attention!


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This training session was prepared as part of the development and

delivery of the course Energizing Cleaner Production funded by

InWent, Internationale Weiterbildung und Entwicklung (Capacity

Building International, Germany)and carried out by the UnitedNations Environment Programme (UNEP)

The session is based on the presentation Financing Cleaner Production

and Energy Efficiency Projects from the Energy Efficiency Guide

for Industry in Asia developed as part of the GERIAP projectthatwas implemented by UNEP and funded by the Swedish International

Development Cooperation Agency (Sida).

www.energyefficiencyasia.org

The workshop exercise is taken from Profiting from Cleaner

Production, in Strategies and Mechanisms For Promoting Cleaner

Production Investments In Developing Countries, developed by

UNEP

AcknowledgementsAcknowledgements

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Financing Feasibility Analysis - Presentation

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