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Cash Flow Analysis - Example
ens t v ty na ys s
Comparing Alternatives Questions
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Typically utilized to determine the financial merits ofcapital investments
Book Analysis
Conducted for tax purposes, contained in annualreport
Life Cycle Analysis
ssessmen o e env ronmen a mpac o a pro ecfrom cradle to grave Uses ISO 14,000 standards todetermine.
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Inputs Outputs
Capital Costs
Direct Expenses
Indirect Expenses
Product Flowstreams
Payback Period(PBP)
Product Price Forecasts
Depreciation
c ua a ue ro(AVP)
Present Value Profit(PVP)
MODEL
ro uc ax a es
Profit Tax Rates
Working and Net Interests
Discounted Rate of Return(DCFRR)
PEEPBetahat
GEMPACK
Discount Rate
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Capital Costs
str ute over per o
Direct Expenses Power, fuel, catalysts, chemicals, patents, licensing, royalties, machine
overhauls, turnarounds Escalate cost X percentage per year. 3-4% is a good start
Indirect Expenses
10% of Capital cost, 20-25% of Direct expenses, ,
control, marketing, R&D, Kleptocratic costs
Product Flowstreams Methane, NGLs, Sulfur, CO2, Power,
us or re a y, urnaroun s, p anne s Product Price Forecasts
Good Luck Best if originates from the operating company, www.eia.doe.gov for
domestic projects.
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Energy Information Administration Yearly Average Crude
Oil Price - WTI @ Cushing
70
50
60
l
?3040USD/b
0
10
1985 1990 1995 2000 2005 2010
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Payback Period
The amount of time it takes to recoup the original CapitalExpenditure
Simplest of indicators, very important in high risk areas
Non discounted after tax profit
Commonly used as a preliminary analysis of profitability, can bemisleading in long-life projects
Present Value Profit (PVP) Discounted after tax profit
Discount rate is industry and company specific: 5-15%
Discounted Cash Flow Rate of Return (DCFRR) % return on all capital investments after sufficient profit has been
made to recover capital invested so , or a e o e urn
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A
.
As Sales, Product Rates * Product FlowATE Total Expenses, All direct and indirect expenses, capital costs
ACI= As- ATE, Cash Income
AIT Income Tax, Annual Cash Income * Tax Rate, Plus Ad Valoremaxes
ANCI= ACI- AIT, Net Cash Income, Also Annual Cash FlowACF When the cumulativeANCI from each year is equal to zero, that is the
Payback Period
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, When the cumulativeANCI from each year is equal to zero, that is the Payback Period
Start with the Cash Flow Inputs
CapitalCost
DirectExpense
IndirectExpense Depreciation
Flow-stream Price
$k $k $k $k bbl/year $/bbl
2008 ($2,500) ($250)
2009 ($2,500) ($250)
2010 ($75) ($19) ($1,000) 80000 $80
2011 ($77) ($19) ($1,000) 80000 $84
2012 ($80) ($20) ($1,000) 80000 $88
2013 ($82) ($20) ($1,000) 80000 $93
2014 ($84) ($21) ($1,000) 80000 $97
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, Calculate the Sales, Total Expenses, Cash Income, Income Tax and the Net Cash
ncome as ow
The year to year cumulative cash flow is calculated. The payback period becomesapparent ~3.1 years
Calculate the Actual Value Profit: = $15,351n
n
NCI
AS
ATE
ACI
AIT
ANCI
ACF
Cum ANCI
ACF
0
$k $k $k $k $k $k
2008 ($2,750) ($2,750) ($1,018) ($1,733) ($1,733)
2009 ($2,750) ($2,750) ($1,018) ($1,733) ($3,465)
2010 $6,400 ($1,094) $5,306 $1,963 $3,343 ($122)
2011 $6,720 ($1,097) $5,623 $2,081 $3,543 $3,421
2012 $7,056 ($1,099) $5,957 $2,204 $3,753 $7,173
2013 $7,409 ($1,102) $6,306 $2,333 $3,973 $11,146
2014 $7,779 ($1,106) $6,674 $2,469 $4,204 $15,351
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, To consider the Time Value of the project, we look at the Net Present Value (NPV),
t e va ue o t e pro ect n to ay s o ars .
Calculate a discount factor (fd), to decrease the contribution of future cash flows tothe project value. Multiply this by the cash flows to determine the Discounted CashFlows.
ANCI
ACF
fd
ADCF
-nidf
)1(
1
2008 ($1,733) 1.00 ($1,733)
2009 ($1,733) 0.89 ($1,547)
Where i is the discountrate (12% in this case)and
, . ,
2011 $3,543 0.71 $2,522
2012 $3,753 0.64 $2,385
n is the years after projectimplementation (year-2008)
n, . ,
2014 $4,204 0.51 $2,130677,8$
0
)( NPVnDCFA
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How robust is the project to changes in the primary variables?
Capital Cost Typical Screening Capital Cost estimates have an uncertainty of + 20-
40% or more
Project Schedule The largest cash flows typically take place in the EPC phase. Project
schedules can
Clearly there are are opportunities for the price to change the economicindicators.
It is imperative that the stability of the economics be challenged.
For our project, we chose Capital Cost and Product Price and test theeffect on DCFRR
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.
80
60
%)
40
DCFRR
Base
0
20
3500 4000 4500 5000 5500 6000 6500
Capital Cost (M$)
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.
80
60
%)
40
DCFRR
Base
Lower
0
20
3500 4000 4500 5000 5500 6000 6500
Capital Cost (M$)
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.
80
60
%)
40
DCFRR Base
Lower
U er
0
20
3500 4000 4500 5000 5500 6000 6500
Capital Cost (M$)
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.
80
60
%)
40
DCFRR Base
Lower
U er
0
20
3500 4000 4500 5000 5500 6000 6500
Capital Cost (M$)
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Ranking Method
Rank based on economic indicators of the projects
Useful for generating a project priority seriatim
Aggregate Method Assumes the delta between the current alternative and the next
best alternative is invested in a reserve at the minimumallowable rate of return
Useful for com arin ver different ro ects with lar e ca ital costdeltas
Incremental Method Determine economics based on cash flow deltas between
pro ec s Start with lowest price alternative and develop indicators, comparewith next higher capital cost alternatives, keeping the current bestchoice until all alternatives are exhausted
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