2 Investment Analysis Initial costs breakdown and estimates

2. Investment Analysis Initial costs breakdown and estimates, contingencies, working capital, project financing, equity, loans 9/25/2020 Investment Analysis 1

Overview n n n 2. 1 2. 2 2. 3 2. 4 2. 5 9/25/2020 Estimating Investment Costs Working Capital Requirement Project Financing Calculating Loans Depreciation & Booked Value Investment Analysis 2

Estimating Investment Costs n n n Investment breakdown, buildings, equipment, other Contingencies and uncertainties Three point estimation method: n n n optimistic most likely pessimistic 9/25/2020 Investment Analysis 3

Face the facts! 9/25/2020 Investment Analysis 4

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Three Point Estimate: a, m, b n n n n Assuming a Beta probability distribution Expected value of each item t = (a+4 m+b)/6 Variance of each item v = [(b-a)/6]^2 Expected Total T = Sum of Exp. values t Variance of Total V = Sum of Variances v Standard Dev. of Total S = sqrt(V) Upper/Lower Limits = T +/- Z*S Z = Confidence Coefficient 9/25/2020 Investment Analysis 6

Confidence Coefficients n Confidence Level Examples Coefficient Value 90% 95% 98% 99. 9% 9/25/2020 1. 28 1. 65 2. 05 3. 09 Investment Analysis 7

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Shall we slow down? 9/25/2020 Investment Analysis 9

Working Capital Requirement n n Inventory build-up Slow starting projects Other initial costs (Loan Management Fees etc) Cash Flow (debtors) 9/25/2020 Investment Analysis 10

Project Financing n n n Equity and other funding from shareholders Loans and other forms of financing from others Equity Ratio vs Loan Terms 9/25/2020 Investment Analysis 11

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Calculating Loans n n n Repayment schedules, loans interests Annuity loans, bullet loans, . . . Loan Management Fees 9/25/2020 Investment Analysis 13

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Depreciation & Booked Value n n n Depreciation Schemes Straight Line Depreciation Booked value of fixed assets 9/25/2020 Investment Analysis 16

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Are all expenses necessary? 9/25/2020 Investment Analysis 19