Course Description

 

Large capital-intensive projects require substantial – and often risky – investments in the acquisition and subsequent operation and maintenance of new organizational assets.

Of paramount importance is the systematic and comprehensive appraisal of potential alternatives, and the development of detailed cash-flow analyses to determine as accurately as possible, the expected returns to the organization under varying conditions of uncertainty over the expected productive life of the project.

This requires the development of a sound, realistic, and carefully structured financing plan, reflecting both the initial capital expenditures required for the acquisition of the asset, as well as the operational expenditures required for successful operation and maintenance of the asset over its anticipated productive life.

World-wide an alarming number of large capital projects fail to meet the overrun their planned budgets, failing to realize both the financial and strategic goals of the organization – the very reason for their being undertaken in the first place - often with sizable increases in capital and operational expenditures, and with substantial financial losses to the organization.

 

Course Objective

 

This 5-day workshop will provide you with a proven set of methods, processes, tools and techniques to:

Perform detailed appraisals of potential capital projects to ensure project success

Understand and apply the principles and methods of modern financial engineering

Protect the investment of the organization in capital-intensive assets Apply discounted cash flow analysis to project evaluations

Perform Present and Annual Value calculations

Determine the Internal Required Rate of Return of the project as the basis for sensitivity analyses to establish the risk exposure to the organization

Evaluate and rank various project alternatives using tools such as NPV, IRR, BCR, and Equivalent Annual Value/Cost

Develop a comprehensive spreadsheet model (Excel) of project cash flow projections and requirements

Prepare a detailed and realistic Financing Plan

Determine the borrowing capacity of the organization in terms of the anticipated project

Manage project cash flows

 

Who Should attend?

 

This workshop is designed for program and project professionals, project leaders, project engineers, cost engineers, and other middle - senior project control and business services professionals who are responsible for or involved in securing project financing and managing cash flow on projects.

Course Outline

 

Day One

Fundamentals of Asset-Based Financial Engineering

Introduction to Project Financing

Project Financing versus Direct Financing

Analysis of Project Viability

Risk and uncertainty

Implications of Risk for Project Financing

Aligning Projects with Corporate Strategy

Security arrangements

Legal structures

Basic Tools for Economic Appraisal

Simple Project Payback Period

Time Value of Money

Simple and Compound Interest

Nominal and Effective Interest Rates

Appraisal Methods – Discounted Cash Flow Projections

Net Present Value Analysis (NPV)

Internal Rate of Return Analysis (IRR)

Comparing NPV and IRR Analyses

Interpolation and Non-linearity

Time Equivalence

Comparing Projects with Equal Lives

Comparing Projects with Unequal Lives

Day Two

Project Risk Exposure and the Cost of Capital

Rate of Return Computations (IRR)

Determining the Internal Rate of Return (IRR)

IRR for a Single Project

IRR for a Single Project Using Present Worth

IRR for a Single Project Using Annual Worth

Incremental Analysis

Mutually Exclusive Projects

Using IRR to Analyze Options with Different Lives

Benefit-Cost Ratio (BCR)

Costs, Benefits, and Non-benefits

Estimating the Benefit-Cost Ratio for a Single Project

Comparing Mutually Exclusive Projects Using Incremental Benefit-Cost Ratios

Cost of Capital Computations

Estimating the Cost of Capital for a Project

The Cost of Debt Capital

The Cost of Equity Capital

Weighted Average Cost of Capital (WACC)

Financial Gearing (Structuring)

Capital Asset Pricing Model (CAPM)

Determining the Project Risk Beta

Cost of Capital with All-Equity Financing

Day Three

Financial Modeling and Project Evaluation

Preparing Cash Flow Projections

Accounting Years and Tax Years

Incremental Costs and Benefits

Working Capital Requirements and Operating Costs

Forecasting Cash Flows

How to Deal with Inflation

How to Deal with Uncertainty and Risk

Risk Premiums

Pessimistic and Optimistic Forecasts

Decision Tree Analysis

Opportunity Costs and Sunk Costs

Determining the Economic Life of a Project

Quantifying the Effects of Inflation

Effects of Inflation on Working Capital

Effects of Inflation on Taxation

Effects of Inflation of Cost of Capital

Estimating Future Rates of Inflation

Variable Inflation Rates over the Life of the Project

Relevant Cash Flows over Differing Time Horizons

Depreciation:

Straight-Line Method

Declining Balance Method

Depreciation versus Amortization

Interest, Insurance and Tax Costs

Taxation

Corporation Tax Rates

Taxable Profit

Capital Allowances

Tax Payments

Incorporating Tax in Cash Flow Models

Assessing the Terminal (Salvage) Value of a Project

Perpetuity (Annuity) Method

Price/Earnings Ratio Method

Book Value Method

Cash Flows for a Replacement Project

Preparing Projected Financial Statements

Sensitivity Analysis

Day Four

Project Ranking and Comparison of Alternative Solutions

Equivalent Annual Worth (Value) Computations

Pattern of Capital Recovery

Including Salvage Value

Evaluating a Single Project

The Comparison Process

Equal Life Projects

Lease or Buy

Projects with Different Lives

Replacement Analysis

Reasons for replacement analysis

Factors to be considered in replacement analysis

Determining the economic life of a new asset

Determining the economic life of an existing asset

Comparisons in which the economic life of the new and the existing asset differs

Retirement without replacement (Abandonment)

Day Five

Preparing the Financial Plan

Project Financing

Long-term Financing

Tax Considerations

Estimating the Borrowing Capacity of a Project

Loan Repayment Parameters

Borrowing Capacity: Full Drawdown

Borrowing Capacity: Periodic Draw-downs

Owner Financing Using Bonds