1 / 22

Financial Analysis Module

Financial Analysis Module. Financial Analysis. is concerned with determining the income that the project would generate for the project-operating entity ; and if there is no income, how to finance and sustain its operation (i.e., water supply and road projects). Economic Analysis.

vila
Download Presentation

Financial Analysis Module

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Financial Analysis Module

  2. Financial Analysis is concerned with determining the income that the project would generate for the project-operating entity; and if there is no income, how to finance and sustain its operation (i.e., water supply and road projects)

  3. Economic Analysis is directed towards establishing the net returns that the project would generate for the economy/society as a whole. Because of this, revenues, costs and profits (benefits) would tend to differ in the two analyses.

  4. Why financial analysis for public sector project? • To ensure financial sustainability - availability of funds to finance investment up to operation stage - projects with high economic returns may still fail when funds to finance its operation is not enough (water supply, irrigation, and public transport)

  5. Why financial analysis for public sector project? • To determine its financial profitability - gov’t. approaches a project like a private sector does, especially when privatization is considered - to estimate true value of a project - to know if project is profitable or not

  6. Weighted average cost of capital (WACC) • Cost of borrowing, for borrowed capital (i.e., interest rate of loan) • The yield of alternative opportunities, for equity capital (i.e., interest rate of savings, other investments)

  7. Weighted average cost of capital (WACC) Example: Total project cost – P200,000 Fund 1: (Loan-60%) - 120,000 Cost of capital (15%) Fund 2: (Equity-40%) - P80,000 Cost of capital (8%) WACC = (60%x15%)+(40%x8%) = (0.09)+(0.032) = 12.2%

  8. Weighted average cost of capital (WACC) Example: Total project cost – P 500,000 Fund 1: (Loan-50%) - P 250,000 Cost of capital (15%) Fund 2: (loan-40%) - P 200,000 Cost of capital (18%) Fund 3: (Equity-10%) - P 50,000 Cost of capital (10%) WACC = (50%x15%)+(40%x18%)+(10%x10%) = (0.075)+(0.072)+(0.01) = 15.7%

  9. Time Value of Money (TVM) The essence of this concept is that money received or consumed at a particular time has greater value than the same money received or consumed at some future time.

  10. Explanations/Reasons: • Normalpreference for present versus future consumption • Resources on hand may be invested during the intervening period to generate income or earn interest • Risk of uncertainty factor of the future

  11. Concept of Discounting is a process of translating future values into their present worth Ao = An x 1/(1+r)n , where Ao = present value of An An = expected amount at year n r = discount rate n = no. of years between year 0 and year n, i.e., discounting period

  12. Example: A revenue of P85 is expected 2 years from now.Assuming a discount rate (WACC) of 10 percent, the present value is: Ao = 85 x 1/(1+0.10)2 = 85 x 1/(1.21) = 85 (0.826) = 70.2

  13. Net Present Value (NPV) - the difference between the present values of project benefits and project costs nn NPV = ∑ bi /(1+r)i - ∑ ci /(1+r)i i= 0i=0 where bi= benefits in period i ci= costs in period i r = discount rate n= discounting period

  14. NPV Decision Rule: Accept projects with NPV greater than or equal to 0, and reject if otherwise. In case of competing projects, select the project with the highest NPV. NPV > or = 0

  15. Benefit-Cost Ratio (BCR) -theratio of the present value of gross benefits to the present value of gross costs: nn BCR = ∑ bi /(1+r)1 / ∑ ci /(1+r)1 i=0 i=0

  16. Benefit-Cost Ratio (BCR) Decision rule: - Accept projects with BCR greater orequal to 1; reject if otherwise. - In case of competing projects, select project with the highest BCR.

  17. Exercises: Compute and compare the BCR, NPV, and IRR using 15% discount factor and recommend the better project. • Project A YearCostsBenefits 1 1,700 900 2 200 800 3 200 700 4 200 600 5 200 500 • Project B 1 1,700 500 2 200 600 3 200 700 4 200 800 5 200 900

  18. Computations: (Project A) YearCostsBenefits DF (15%)PVcPVb 1 1,700 900 .870 1,479 783 2 200 800 .756 151 605 3 200 700 .658 132 461 4 200 600 .572 114 343 5 200 500 .497 99 249 Total = 1,975 2,441 NPV = PVb – PVc = 2,441 – 1,975 = P 466 BCR = PVb / PVc = 2,441/1,975 = 1.24

  19. Analysis: Project A NPV = PVb – PVc = 2,441 – 1,975 = P 466 Per rule, accept project with NPV greater than or equal to 0, reject if otherwise. In case of competing projects, select the one with the highest NPV. BCR = PVb / PVc = 2,441/1,975 = 1.24 Per rule, accept project with BCR greater than or equal to 1, reject if otherwise. In case of competing projects, select the one with the highest BCR.

  20. IRR Computations:) rb – r* = NPVb rb – ra NPVb – NPVa 60 – r* = - 53 60 – 15 -53 – 466 60 – r* = - 53 45 519 (519)(60- r*) = (-53) (45) 519(60) – 519r* = -2385 31,140 – 519r* = -2385 519r* = 31140 - 2385 519r* = 28755 r* = 28755/519 = 55%

  21. Computations: (Project B) YearCostsBenefits DF (15%)PVcPVb 1 1,700 500 .870 1,479 435 2 200 600 .756 151 453 3 200 700 .658 132 461 4 200 800 .572 114 458 5 200 900 .497 99 447 Total = 1,975 2,254 NPV = PVb – PVc = 2,254 – 1,975 = P 279 BCR = PVb / PVc = 2,254/1,975 = 1.14

  22. Exercises: Compute and compare the BCR and NPV using 15% discount factor and recommend the better project. • Project A YearCostsBenefitsBCR NPV 1 1,700 900 1.24 446 2 200 800 3 200 700 4 200 600 5 200 500 • Project B 1 1,700 500 1.14 279 2 200 600 3 200 700 4 200 800 5 200 900

More Related