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Finance Lecture # 5

Finance Lecture # 5. Jan H. Jansen E-mail: jan.jansen@han.nl. Wind energy. Minor Wind Energy Project Management. Programme. Plan of Action. How to plan the financial part?. What should be in the financial chapter?. Plan the financial chapter. Planning of the financial chapter

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Finance Lecture # 5

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  1. Finance Lecture # 5 Jan H. Jansen E-mail: jan.jansen@han.nl

  2. Wind energy

  3. Minor Wind Energy Project Management

  4. Programme

  5. Plan of Action How to plan the financial part? What should be in the financial chapter?

  6. Plan the financial chapter • Planning of the financial chapter • Data & Assumptions • Cash Outflow • Cash Inflow • Calculations • Financial criteria: IRR, NPV, ROI, BET & DSCR • Friday morning in period 2 consultancy • Yellow Hurricane (09.00 – 09.20) • Blue Energy (09.30 – 09.50) • Green Air (10.10 – 10.30) • Red Viventorum (10.30 – 10.50) • Black Offshore(11.10 – 11.30)

  7. Structure Excel model

  8. Recap lecture # 4

  9. Project Structure Source : Project Finance, Yescombe

  10. Ring-fenced project Source : Project Finance, Yescombe

  11. Project Risks

  12. Lecture 5Risk & ReturnDOSIT Methodology

  13. Investment Decisions

  14. Investment Equipment Building R&D Environment Sustainability Staff / HR Maintenance Operating costs Funds Equity Loans Investment trade off (I)

  15. Cash Outflows Equipment Building R&D Environment Sustainability Staff / HR Maintenance Operating costs Cash Inflows Sales Lower costs Investment trade off (II)

  16. Components Capital Budget Model • Investment (Year 0) • Economic Life of the Investment • Years 1 - n • Interest Rate: i = r + π + σ • r = real interest rate • π = inflation • σ = risk (project risk mark-up) • Annual Cash Flows (During economic life) • Expenses • Revenues

  17. Decision Criteria • Pay Back Period (PBP) • Return On Investments (ROI) • Break Even Time (BET) • Net Present Value (NPV) • Profitability Index • Internal Rate of Return (IRR) • Debt Service Coverage Ratio(DSCR)

  18. Weighted average cost of capital (kWACC) Cost of equity (ke) with the Cost of debt (kd) in proportion to the relative weight of each in the firm’s optimal long-term financial structure: kWACC = ke* E+ kd * (1-t) *D V = E + D V V

  19. Capital asset pricing model (CAPM) CAPM defines the cost of equity (ke) for a firm as : ke = krf + βj * (km – krf) krf= interest rate on risk-free bonds km = expected (required) rate of return on equity βj = firm’s systematic risk coefficient risk free premium

  20. WACC CALCULATOR ™ for GE Source: http://thatswacc.com/index.php

  21. WACC CALCULATOR ™ for GE Source: http://thatswacc.com/index.php

  22. Example (Excel)

  23. DOSIT Model Model developed by: • TNO (Applied Research in Science) • Research Chair of TQMinON • Prof. Gerard Berendsen • Source: • Duurzaaminnoveren met de DOSIT-methodiek, G. Berendsen cs, Sigma Kluwermanagement, June 2006 • http://www.han.nl/onderzoek/kennismaken/ontwikkelen-van-excellente-organisaties/lectoraat/tqm-in-organisatienetwerken/publicaties/_attachments/kip_c2-11_20duurzaam_20innoveren_20met_20de_20dosit_20methodiek.pdf

  24. Dutch Duurzaam Ondernemen Selectie Innovatieve Technologie DOSIT English Sustainable Entrepreneurial Selection Innovative Technology SESIT DOSIT Model

  25. Why DOSIT? Hot topics in business are: • Innovation • Product innovation • Innovation of processes • Sustainability / CSR • Stewardship / Managership / Bailiff (UK) (Dutch: Rentmeesterschap) • Investments

  26. Innovation: • Products • Process Sustainability Investing

  27. Sustainability & Entrepreneurship in SME’s • Company meets the requirements from the government and keeps in mind future requirements • Company fulfils its social and cultural role in society • Company plays in an effective way its role in the huge changes in society & economic development for the mid and long term

  28. Sustainability & Entrepreneurship in SME’s • The product, the way the product is used and will be used • The production process (including resources) • The way the product is introduced on the market

  29. Basic assumptions: DOSIT model • Focus as a company on a limited number of activities connected to sustainability • Intrinsic motivation of staff concerning change in general and sustainability in specific • Communication in the company concerning sustainability: Top Down & Bottom Up • ‘Quick and dirty job’ in SME’s, staff wants to see immediately results • Aspects of sustainability have influence on the continuity of the company • Sound financial base is important for the continuity of the company

  30. Profit People Planet

  31. Stages in the DOSIT methodology • Preparation • Choice of priorities in the areas of Key Success Factors • Selection of possible Innovations • Final choices of Innovations • Implementation of Innovations

  32. Elements of the DOSIT model • Supply Chain & Value Chain • Raw materials • Components • Business development • Logistic Processes (I >T > O) • Production • Packaging • Warehousing & Distribution • Product & Market Development • Product Use / Reversed Logistics

  33. DOSIT Matrix (Overview Priorities)

  34. Constraints in the process of sustainable innovation • ROI requirement (bottom line) • Requirements clients • How do process interfere in the chain? • Feasibility (in a technical way) • Connection with future developments & ambitions of the company • What is target for the degree of sustainability • How much will be the impact of the innovation (paradigm shift?)

  35. DOSIT Method: Excel tool

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