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BUSM4417 Assignment 1
COURSE NAME: Project Financial Management & Appraisal
TEST TITLE: Project Finance Case Study (Individual)
DATE: (Week 9)
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.
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
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 Ltd’s beta is estimated to be 0.9 (based on the ratio of the standard deviation of the firm’s 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
|Title page||Title – states the purpose of the report|
Details of the person(s) for whom the report was prepared
Details of the person(s) for who prepared the report (student name and ID) Due date
|Table of contents||Shows the sections of the report|
Created automatically if headings are formatted in the correct heading styles
|Executive summary/abstract||Gives a summary of the whole report|
Outlines the purpose, the approach adopted, findings, main conclusions and recommendations (the reader/audience can easily identify what, how, why) Written last, on it’s own page
|Introduction||Outlines purpose, context, background rationale Identifies the existing situation|
Provide 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.|
(maybe combined with discussion)
|Presents findings of the research in paragraphs|
Facts only – no interpretation
Can 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|
(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.)|
|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||20 to >17.0 Pts Very Good logically integrated key economic parameters and performed correctly the necessary calculations with well-presented tables in the project evaluations 17 to >15.0 Pts Good provided all key economic parameters and performed correctly the necessary calculations in the project evaluations 15 to >11.0 Pts Fairly Good provided some information on key economic parameters but performed very few calculations correctly 11 to >8.0 Pts Fair Provided some information on key economic parameters but performed very few calculations correctly 8 to >0 Pts Poor Provided no information and calculations of key economic parameters needed||20 pts|
|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||30 to >26.0 Pts 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 26 to >22.0 Pts 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 22 to >16.0 Pts 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 16 to >12.0 Pts Fair identified some key factors to be included in the operating cash flow analysis and performed some calculations correctly 12 to >0 Pts Poor failed to include the key relevant factors into the operating cash flow analysis and performed very few calculations correctly||30 pts|
|This criterion is linked to a learning outcomeRecommendation and Justification Determine the feasibility of the project and provide appropriate recommendation/s with justifications||30 to >26.0 Pts Very Good succinctly explained and comprehensively described possible recommendations to evaluate the project finance initiative using appropriate data summarised in appropriate tables and figures 26 to >22.0 Pts Good explained and described recommendations to evaluate the project finance initiative with appropriate data neatly summarised in appropriate tables and figures 22 to >16.0 Pts Fairly Good described the recommendation to evaluate the project finance initiative with data from the calculations to support the recommendations 16 to >12.0 Pts Fair described some recommendation without explanation in the evaluation of the project finance initiative 12 to >0 Pts Poor provided no recommendations and provided no information to support the recommendations||30 pts|
|This criterion is linked to a learning outcomeReport Writing Structure, Technique, Argument construction||20 to >17.0 Pts 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 17 to >15.0 Pts Good very competent report format and flow within & between sections; very good grammar, syntax and referencing; majority of claims well supported by evidence 15 to >11.0 Pts Fairly Good competent report format and flow within & between sections; good grammar, syntax and referencing; clear logic of assumptions, claims and evidence 11 to >8.0 Pts Fair satisfactory report format and flow within sections; limited grammatical and syntax and referencing errors; satisfactory logic of assumptions and claims 8 to >0 Pts Poor unsatisfactory report format and flow between sections; unacceptable grammar, syntax and referencing; lack of logical development of argument||20 pts|
|Total points: 100|
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