Assignment 1: Project Finance Case Study (Individual)

Assignment 1: Project Finance Case Study (Individual)

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BUSM4417 Assignment 1

COURSE NAME: Project Financial Management & AppraisalTEST TITLE: Project Finance Case Study (Individual)WEIGHTING: 40%DATE: (Week 9)

Aim

This assignment is an opportunity for you to reflect on and integrate the materials covered through a simplified case. The materials covered include the characteristics of project finance and how a typical project finance proposal can be evaluated.

Objectives

Upon successful completion of this assessment you will be able to:

Understand the characteristics and structure of project finance

Determine the key components to be included in the cash flows for the evaluation of project finance

Develop a project cash flows using spreadsheet to determine the financial feasibility of a project

Evaluate project feasibility and provide justifications

Brief

ABC Pty Ltd intends to form a special purpose vehicle (SPV) in Australia. This will involve building new water treatment facilities. ABC Pty Ltd intends to undertake the development of the proposed water treatment facilities through a project financing approach. The constructed facilities will be used as the business solution in providing clean water to the local community. The following are some of the in-principle agreements with the various parties after much negotiation:

The project is to be developed using a BOT arrangement where WaterSolution will finance and build, operate and transfer the facilities back to the state government at the end of 20 years.

There are three off-take agreements:

to sell CallWater Pty Ltd 450,000 cubic litre of treated water per day at a price of $0.025 per cubic litre. This agreement will expire at the end of 20 years. The contract allows for the price to increase by 7% per annum.

to sell APWater Limited 550,000 cubic litre of treated water per day at a fixed price of $0.020 per cubic litre. This agreement will expire at the end of 20 years. The contract allows for the price to increase by 10% per annum.

to sell Nuwater Pty Ltd 600,000 cubic litre of treated water per day at a fixed price of $0.030 per cubic litre. This agreement will expire at end of 20 years. The contract allows for the price to increase by 5% per annum.

The capital expenditure (include construction cost plus all relevant professional fees, insurance) is estimated at $85,000,000 incurred at year 0

WaterSolution has an agreement to buy untreated water from DirtyWater Ltd at a price of $0.012 per cubic litre. The price of untreated water will increase by 3% per annum.

The annual operation cost (starting from year 1) is estimated to be as follows:

a. Management fees $350,000 per annum with an increase of 10% per annum

b. Maintenance works $600,000 per annum with an increase of 10% per annum

c. Insurance cost $150,000 per annum with an increase of 5% per annum

d. Miscellaneous cost is fixed at $100,000 per annum

Also assume the following:

Current interest-free rate (based on Government bond) is 3.5%

ABC Pty Ltds beta is estimated to be 0.9 (based on the ratio of the standard deviation of the firms return to the standard deviation of the stock market return)

Expected market return of the water industry where ABC Pty Ltd's main business lies, is 15%

WaterSolution will borrow 75% of the capital expenditure from a consortium of banks at a cost of 12%. The repayment will start immediately in Year 1 and should be repaid fully in year 20. The remaining 25% is raised through equity.

Assume construction completed in year 0 and operation begin immediately in year 1

Assume there is no tax involved

Prepare a report to the Board of ABC Pty Ltd. In your report, you should include (but not limited to):

Calculation of the Project IRR

Calculation of the Equity IRR

Calculation of the DSCR

Calculation of Expected Return on Equity using CAPM

Calculation of the WACC

Recommendation to the Board on whether the project go ahead using project finance scheme? Give your reasons and justifications.

Support the report with reference to relevant formulae, charts and tables. Ensure that the report looks professional and is in line with the RMIT Report writing format (see below). Word length excluding references should be around 2,000 words

Section Content

Title page Title states the purpose of the reportDetails of the person(s) for whom the report was preparedDetails of the person(s) for who prepared the report (student name and ID) Due date

Table of contents Shows the sections of the reportCreated automatically if headings are formatted in the correct heading styles

Executive summary/abstract Gives a summary of the whole reportOutlines the purpose, the approach adopted, findings, main conclusions and recommendations (the reader/audience can easily identify what, how, why) Written last, on its own page

Introduction Outlines purpose, context, background rationale Identifies the existing situationProvide an outline structure of the report

Approach This section describes the methodology/approach to achieve the project objective. Explain what economic parameters were used and calculated in order to achieve the project objective/s. Also, outlines how the parameters were analysed.

Results/Findings(maybe combined with discussion) Presents findings of the research in paragraphsFacts only no interpretationCan use graphic forms (e.g tables and graphs) with labels/captions Contains headings and sub-headings

Discussion Presents an interpretation, analyses and evaluation of the results Analyses results draws together different aspects of the findings, and relates them to other studies by referring to the literature

Conclusion(maybe combined with recommendations) A brief statement of what was found and its significance (no new information)

Recommendations Suggests suitable changes/solutions

Appendix Attachments of additional supporting information (e.g. raw data, surveys, questionnaires, detailed statistics, a glossary, etc.)

Rubic

Assignment 1

Assignment 1

Criteria Ratings Pts

This criterion is linked to a learning outcomeParameters for Evaluation

Determine and critically analyse the economic parameters to be used for the evaluation of the project 20to >17.0Pts

Very Good

logically integrated key economic parameters and performed correctly the necessary calculations with well-presented tables in the project evaluations 17to >15.0Pts

Good

provided all key economic parameters and performed correctly the necessary calculations in the project evaluations 15to >11.0Pts

Fairly Good

provided some information on key economic parameters but performed very few calculations correctly 11to >8.0Pts

Fair

Provided some information on key economic parameters but performed very few calculations correctly 8to >0Pts

Poor

Provided no information and calculations of key economic parameters needed

20pts

This criterion is linked to a learning outcomeProject Cash Flows

Develop the project cash flows and determine the project IRR, equity IRR and other parameters using a spreadsheet 30to >26.0Pts

Very Good

correctly identified and justified all the key factors to be included in the operating cash flow analysis performed all of the calculations correctly 26to >22.0Pts

Good

correctly identified and justified most of the key factors to be included in the operating cash flow analysis and performed most of the calculations correctly 22to >16.0Pts

Fairly Good

correctly identified most of the key factors to be included in the operating cash flow analysis and performed most of the calculations correctly 16to >12.0Pts

Fair

identified some key factors to be included in the operating cash flow analysis and performed some calculations correctly 12to >0Pts

Poor

failed to include the key relevant factors into the operating cash flow analysis and performed very few calculations correctly

30pts

This criterion is linked to a learning outcomeRecommendation and Justification

Determine the feasibility of the project and provide appropriate recommendation/s with justifications 30to >26.0Pts

Very Good

succinctly explained and comprehensively described possible recommendations to evaluate the project finance initiative using appropriate data summarised in appropriate tables and figures 26to >22.0Pts

Good

explained and described recommendations to evaluate the project finance initiative with appropriate data neatly summarised in appropriate tables and figures 22to >16.0Pts

Fairly Good

described the recommendation to evaluate the project finance initiative with data from the calculations to support the recommendations 16to >12.0Pts

Fair

described some recommendation without explanation in the evaluation of the project finance initiative 12to >0Pts

Poor

provided no recommendations and provided no information to support the recommendations

30pts

This criterion is linked to a learning outcomeReport Writing

Structure, Technique, Argument construction 20to >17.0Pts

Very Good

exceptional report format and flow between sections; excellent grammar, syntax and referencing; few errors; high standard of writing with well-developed complex argument and fully integrated graphical and textual submission 17to >15.0Pts

Good

very competent report format and flow within & between sections; very good grammar, syntax and referencing; majority of claims well supported by evidence 15to >11.0Pts

Fairly Good

competent report format and flow within & between sections; good grammar, syntax and referencing; clear logic of assumptions, claims and evidence 11to >8.0Pts

Fair

satisfactory report format and flow within sections; limited grammatical and syntax and referencing errors; satisfactory logic of assumptions and claims 8to >0Pts

Poor

unsatisfactory report format and flow between sections; unacceptable grammar, syntax and referencing; lack of logical development of argument

20pts

Total points:100