Project economics, development and financing

Keep operating performance, project cash flow and investor cash flow separate. Accounting profit includes non-cash items such as depreciation. Cash collection can occur later than recognised revenue. A useful model therefore bridges receipts, cash operating costs, maintenance, tax, working capital and reserves before identifying the cash available for debt service. The actual loan agreement governs its covenant definition; a teaching formula is not a contractual determination.

Our original five-year exercise uses nominal A$ million throughout. Pay 30 at time zero, funded by 20 of debt and 10 of equity. Year-end cash receipts are 12, 13, 14, 15 and 16; operating costs are 4, 4.2, 4.4, 4.6 and 4.8; maintenance is 1 each year. Add a decommissioning payment of 2 in year five and assume no residual asset value. Taxes, working-capital movements, financing fees and additional reserves are excluded, not assumed immaterial in a real project.

Under this deliberately simplified boundary, pre-financing project cash and cash available for debt service are 7, 7.8, 8.6, 9.4 and 8.2. Do not subtract principal or interest when calculating this unlevered series. Investor cash is a different series, after debt service. Rebuild all three views from the downloadable rows instead of entering the published answers as model inputs.

Net present value adds cash flows at a common valuation date: NPV = CF0 + Σ CFt/(1+r)^t. CF0 is negative for the initial investment. With a hypothetical 8% project discount rate, the exercise's five year-end project cash flows produce NPV of approximately +A$2.486 million. Spreadsheet check: NPV(8%, year-1:year-5 cash) + time-zero cash. Including time-zero cash inside that NPV range would incorrectly defer the investment by one period.

Use consistent nominal or real cash flows and discount rates, consistent tax treatment and a declared timing convention. An 8% nominal rate and 2% inflation imply a real rate of 1.08/1.02 − 1, approximately 5.88%, not an exact 6%. For irregular dates, use a date-based approach and check its day-count convention. The rates in this lesson are invented to teach mechanics, not recommended Australian financing assumptions.

A positive NPV is conditional on inputs, not a guarantee. Specify the analysis horizon, residual value and end-of-life liabilities. IRR can be ambiguous when cash-flow signs change more than once; payback ignores later cash and, in its simple form, discounting. Always inspect the cash-flow schedule and alternatives rather than replacing judgement with one metric. Do not deduct debt service from project cash and then treat that result as an unlevered valuation.

Assume equal principal repayments of A$4 million at each year end and a hypothetical 5% interest rate on opening debt. Opening balances are 20, 16, 12, 8 and 4; interest is 1, 0.8, 0.6, 0.4 and 0.2. Total debt service is therefore 5, 4.8, 4.6, 4.4 and 4.2. Check that principal repayments sum to the original 20 and closing debt is zero. Equal principal does not mean equal total debt service.

DSCR divides cash available for debt service by principal plus interest for the same period. Here the annual ratios are 1.40, 1.625, approximately 1.870, 2.136 and 1.952; the minimum is 1.40. A high average would not remove a weak first year. SAM's documentation is a useful model-method reference, but its particular reserve and financial-model conventions are not a substitute for an Australian financing term sheet.

After debt service, the exercise leaves equity cash of 2, 3, 4, 5 and 4. Against 10 invested initially, a separate hypothetical 12% equity discount rate gives NPV of approximately +A$2.472 million. These project and equity NPVs answer different questions and must not be added together. Real financing review also needs covenants, reserve requirements, repayment timing, refinancing exposure and limits on distributions.

• System Advisor Model — debt and equity metrics

Reduce each year's receipts by 20% while holding all costs and the debt schedule fixed. Project cash becomes 4.6, 5.2, 5.8, 6.4 and 5.0. At 8%, NPV becomes approximately −A$8.571 million; the minimum DSCR falls to 0.92 in year one. Relative to an assumed 1.20 covenant for this exercise only, that is a forecast breach. It calls for review of liquidity and contractual remedies, not an unsupported conclusion about legal default.

Test timing separately: keep the 30 initial investment at time zero and move all five project cash receipts-and-costs one year later. Add a zero cash year before the original series. NPV falls to approximately +A$0.079 million. This isolates the time-value effect; it is not a full construction-delay case because additional costs, financing carry, contract penalties and debt rescheduling have not been modelled.

Make a scenario table showing changed inputs, project NPV, minimum DSCR and required action. One-factor sensitivities reveal exposure, but interacting risks may be worse: low output, lower capture price and connection delays can occur together. A P90 annual energy estimate is an output exceedance statement for its specified period and assumptions; it does not automatically imply a 90% probability of positive NPV or covenant compliance. Avoid attaching probabilities to scenarios without a defensible method.

Submit a reproducible workbook plus a one-page recommendation, not a screenshot of a valuation. Separate input, calculation and output sheets. Show units, sign conventions, valuation date, source dates and every manual override. Include balance checks for debt and funding, cross-check NPV using discounted rows, and keep full precision in calculations while rounding only displayed results.

Your note should state the decision, base case, downside, alternatives and evidence still missing. For this exercise, compare proceeding unchanged with reducing initial cost, reshaping debt or deferring commitment pending stronger revenue evidence. Each option changes different cash flows and constraints; a lower first-year repayment might improve DSCR while increasing later exposure. No option is a valid recommendation until its terms are tested.

Transfer task: increase initial capex to 33, keep debt at 20, retain the original operating cash flows and use the same rates. Rebuild the funding bridge and both NPVs without copying the worked answer. Explain whether the base-case decision survives and name three real inputs you would obtain before investment approval. Ask a reviewer to check your workbook and challenge the recommendation. A correct quiz alone does not demonstrate independent analyst competence.