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8/12/2019 Basics of Financial and Economic Analysis
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BIDNUPP Building, Pakistan Atomic Energy Commission,Islamabad
Farzana Naqvi
Applied Systems Analysis DivisionPakistan Atomic Energy Commission
16 April 2013
Basics of Financial and Economic Analysis
First Training Course under 4Q HRD Programme of PAEC
15-19 April 2013
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Applied Systems Analysis Division
Need for Economic Analysis (EA)
To indentify Project Portfolio that ensuresBest Allocation of Resources
2
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Applied Systems Analysis Division
The problem is that:
The resources are limited but our desires areunlimited
We need to find out the most efficient use of theseresources
Current developments have resulted inoverexploitation of these resources
We need to minimize the Burden of Development
Why do We Need Such Analyses?
Sustainable Development
3
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Applied Systems Analysis Division
Example of Resources for an Energy System
Natural resources (coal, oil,
gas, hydro, wind, solar..)
Depletable
Renewable
Human resources(Engineering/Procurement/Construction, Management..)
Man-made
Capital stock (Machinery &Equipments..)
Environment (Air, Water,Land,.)
4
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Applied Systems Analysis Division6
Social and Economic Perspective
Identification of
Technology Choices
Assessment of
Natural Resources
Assessment ofElectricity andWater needs
Analysis ofElectricity andWater supply
Financial andother resourcerequirements
EnvironmentalBurdens andmitigation
Exogenous AssumptionsRegional trade of
electricity and fuels
Sustainable supply strategy
Social and Economic Perspective
Identification of
Technology Choices
Assessment of
Natural Resources
Assessment of
Needs
Analysis of
Supply
Options
Financial and
other resource
requirements
Environmental
Burdens and
mitigation
Exogenous AssumptionsRegional trade of
Components of Sustainable Development Plan
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Applied Systems Analysis Division
Economic Analysis for Project Portfolio
Comparison of Levelized
Generation Cost
Optimization model for
Least-cost Expansion
Plan (MESSAGE, WASP)
OR
7
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Applied Systems Analysis Division
Electricity Installed Capacity in 2011-12
8
MW Shares
Hydel 6,716 28.4%
Gas/Oil 15,985 67.5%
Coal 150 0.6%
Nuclear 787 3.3%
Wind 50 0.2%
Total 23,688 100.0%
Source: i) State of Industry Report 2012, National Electric Power Regulatory Authority.
ii) Power System Statistics 2011-12, 37thEdition, National Transmission and
Despatch Company.
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Applied Systems Analysis Division
Electricity Generation Mix in Pakistan
9
Nuclear4.9%
Hydro29.1%
Gas29.4%
Oil36.2%
Others
0.4%
2011-12
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Where
I = Investment cost
M = Operation and Maintenance cost
F= Fuel cost
E = Electricity generated
r = Discount rate
t = Time from year 1 to n
n = Economic life of supply project
Levelized Electricity Generation Cost
10
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Applied Systems Analysis Division
MESSAGE
OUTPUT
MESSAGE
INPUT
Energy system
structure (including
vintage of plant and
equipment)
Base year energy
flows and prices
Energy demand
projections (MAED)
Technology and
resource options &their techno-economic
performance
Technical and
policy constraints
0
100
200
300
400
500
600
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026
TWh
biomass
geoth
hydro
nuclear
gas
diesel
fuel oil
coal
Primary and final energy mix
Emissions and waste
Resource use
Build Schedule for infrastructure
Import dependence
Investment requirements
11
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Applied Systems Analysis Division
Financial analysis
To assess Profitability of a business entity e.g., a
company, corporation
Comparison with its previous years
Comparison with other entities
To select an investment project in:
Public sector
Private sector
12
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Applied Systems Analysis Division
Need for FA of an Investment Project
To establish profitabilityof an IdentifiedInvestment project under certain termsand conditions for financing it
13
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Applied Systems Analysis Division
Financial Analysis for Appraisal of an Investment Project
Analysis to assess if
Income from the project over its operational life,will be sufficient to:
cover all costs and
bring back the initial investment with some
return
14
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Applied Systems Analysis Division15
Financial Analysis for Project Appraisal
The financial analysis is carried out
considering:
Conditions in the financial sector
Market conditions
Fiscal policy of the government
Risk factors
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Applied Systems Analysis Division16
Three major components of Financial Analysis (FA)
Funds required to buildFinancial plan
Cash-flow during
operation
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Applied Systems Analysis Division
Some main questions to start FA for Project Appraisal
What will be the capital cost to build the project?
Who will provide investment funds during theconstruction period?
What will be the terms and conditions for taking
those funds and for repayment of those funds ?
What is the expected cash-inflow from the project
during its operational life?
Will the cash-inflow be sufficient to cover:
i) the operating cost andii) repayment to the project financers?
What will be the rate of return to the project
owner?
17
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Applied Systems Analysis Division18
Capital and other expenditure during construction
Overnight Cost
Escalation duringconstruction
Interest DuringConstruction (IDC)
Other financing costs
Contingencies
Initial working capital
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Applied Systems Analysis Division19
Major components of financial sector of a country
Financialsector
Stock
market Bonds
market
Banking
system
Commercial
banksInsurance
companies
Investment
funds
Other financial
institutions
Capital market
Central
banking
Export-import
Banks
World financial sector
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Applied Systems Analysis Division
Two basic components of financing
Equity; funds provided by the project owner
Debt; all types of loans/bonds taken by the projectowner
Equity
20
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Applied Systems Analysis Division21
Major terms and conditions for financing
Interest rate/return onequity
Repayment period
Repayment method
Grace period
Capitalization ofinterest duringconstruction
Fees such asmanagement fee
Insurance coverage
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Applied Systems Analysis Division22
Market conditions
Market structure
Regulated Open competition
Monopoly
Cartel
Number of clients
Quantity to be sold to different clients
Price structure
Time of receivable ...
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Applied Systems Analysis Division23
Cash-flow during operation
Operation cost
Debt service
Taxes, fees...
...
Sales to different
clients
Other sources of
income
Cash outflow
Cash inflow
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Applied Systems Analysis Division24
Operation costs and Debt Service
Operation Cost
Fuel costs O&M Costs
Fixed
Variable
Others
Debt Service
Repayment of Loan
Interest payment
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Applied Systems Analysis Division25
Methodology
A set of accounting statements on
Cash inflow/outflow statement Income and expenditure (Profit and
loss statement)
Balance Sheet
A set of indicators derived from thesestatements
Project risk and sensitivity analysis
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Applied Systems Analysis Division
NPV= (BnCn) / (1 + r)n
n26
Year (n)Cost ( C )
Million Rs.
Benefit (B)
Million Rs
NetBenefitsMillion Rs
Discount
Factor (r)
NetBenefits
Discountedat 10%
-1 40 - -40 1.100 -44.00
0 110 40 -70 1.000 -70.00
1 10 40 30 0.909 27.27
2 10 40 30 0.826 24.79
3 10 40 30 0.751 22.54
4 - 70 70 0.683 47.81
Net Present Value (Million Rs): 8.41
Cost and Benefit Statement
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Applied Systems Analysis Division
Time Value of Money
Future Value (FV) of a Present Value (PV)
0 1 2 3 4 5
100 ?
FV1 100 1 0 10 110 .
? 100
0 1 2 3 4 5
Present Value (PV) of a Future Value (FV)
PV0= 100 / (1+0.01) = 90.91
27
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Applied Systems Analysis Division
Time Value of Money
Future Value (FV) of a Present Value (PV)
1
1
N
N
N
N
FV PV i
FVPV
i
Present Value (PV) of a Future Value (FV)
What is i ?
28
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Applied Systems Analysis Division29
Economic conditions
Inflation:A rise in prices caused
by decline in the purchasing power
of a currency
Discount rate/factor:
Opportunity Cost of Capital
Nominal Discount rate:
i) Compensation of Inflation
ii) Real return
iii) Compensation for risk
Nominal discount rate = [(1+ r)(1+f) ] -1
Where iis real discount rate
fis inflation rate
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Set of indicators
NPV: Net Present Value ofBenefits
IRR: Discount rate atwhich NPV of project iszero
Payback Period: Time(Years) required torecover the investmentmade on the project
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Applied Systems Analysis Division31
Criteria for Selection of Project
Private Sector: Project withmaximum NPV
Public Sector:
IRR > prevailing discount
rate On given terms and
conditions of financing, NPVis positive.
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Applied Systems Analysis Division32
ThankYou
Do You Need FA or EA or none?
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Applied Systems Analysis Division33
Major criteria of financial viability
Private sector projects
Rate of return on equity
Net present value of theequity
... ...
Expected /
negotiated /
market/regulated
prices
Public sector projects
Net present value of theinvestment
Payback
Break even
Regulated
prices(Cost plus)
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Applied Systems Analysis Division34
B / C = B / ( 1+ r )n/ C / ( 1+ r )n]n n
Value of discounted benefits = 40 + 36.36 + 33.06 + 30.05 + 47.81
= 187.28
Value of discounted costs = 44 + 110 + 9.09 + 8.26 + 7.51= 178.86
B / C ratio = 187.28 / 178.86
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Applied Systems Analysis Division35
1998 1999
Income/Expenditure Statement
Income of electricity sales 125.0 128.8
Other income 2.0 2.7
Cost of generating (other than fuel) 18.0 18.5
Fuel costs 50.0 52.0
Other expenses 8.0 7.0
Depreciation 25.0 25.0
Earning before interest and tax (EBIT) 26.0 29.0
Net interest 10.0 9.0
Tax paid 6.4 8.0
Net income 9.6 11.7
Preferred stock dividend (if any) - -
Earning of the common stock 9.6 12.0
Summary Pro forma financial statement for apower generating company
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Applied Systems Analysis Division36
Assets 1998 1999
Cash and short-term securities
5.5 5.0
Receivables 20.0 21.0
Inventories 15.0 16.0
Other currentassets 2.5 2.5
Total currentassets
43.0 44.5
Land, plant andequipment
554.0 544.0
Other long-term assets
20.0 40.0
Total assets 617.0 628.5
Equity/Liabilities 1998 1999
Debt due 10.0 10.0
Payable 100.0 95.0
Other currentliabilities
5.0 5.0
Total currentliabilities
115.0 110.0
Long-term debt 100.0 90.0
Other long-termliabilities
102.0 118.9
Preferred stock(if any)
- -
Shareholdersequity
300.0 309.6
Total liabilities 617.0 628.5
Balance Sheet
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Contents
Need for Financial Analysis (FA) and Economic
Analysis (EA) of Investment Projects Difference between FA and EA
Terminologies:
Inflation Escalation
Discount rate
Net Present Value (NPV)
Rate of Return (RoR) Cost-Benefit Ratio
Pay-back period
37
C i f NPP C t ith th C t f
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Applied Systems Analysis Division
Comparison of NPP Cost with the Cost ofAlternative Electricity Generation Options
8.85
19.15
11.68
9.96
12.04
14.70
0
5
10
15
20
Nuclear Oil (Furnace) Coal (Thar) Coal(Imported)
Gas(Imported)
Wind
Ce
nts/kWh
$10
0/barrel
UpfrontTarifffor
1000MWp
lant
UpfrontTarifffor
1000MWp
lant
$13/MBTU
UpfrontTariffbyNE
PRA
Notes: 1. Interest/discount rate of 10% used for NPP and Oil-based plants.
2. Upfront tariff offered by NEPRA for wind and coal based plants.
Hydro: 4.81 to 9.62 Cents/kWh
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