Cash flow before the investment decision
A five-year teaching project has positive base-case value, but lower receipts threaten debt coverage. All project inputs are invented; the exercise tests a funding decision rather than describing a real investment.
Permanent case linkYour task
Reconcile project value, investor cash and debt coverage; test revenue, delay and capex changes before recommending the next gate.
Your role
Analyst supporting an investment committee
Practice data & worked solution
Cash flow before the investment decision
Original synthetic five-year project, not an actual asset or investment recommendation. All amounts are nominal A$ million; operating cash flows occur at year end. Time-zero capex 30 is funded by debt 20 and equity 10. Equal annual principal repayments of 4; interest 5% of opening debt. Project discount rate 8%; equity discount rate 12%; both are hypothetical. No residual value. Taxes, working capital, financing fees and additional reserves excluded. Cash available for debt service equals pre-financing project cash in this simplified case only.
| Year | Capital expenditure AUD m | Cash receipts AUD m | Cash opex AUD m | Maintenance AUD m | Decommissioning AUD m | Debt draw AUD m | Opening debt AUD m | Interest AUD m | Principal AUD m |
|---|---|---|---|---|---|---|---|---|---|
| 0 | 30 | 0 | 0 | 0 | 0 | 20 | 0 | 0 | 0 |
| 1 | 0 | 12 | 4 | 1 | 0 | 0 | 20 | 1 | 4 |
| 2 | 0 | 13 | 4.2 | 1 | 0 | 0 | 16 | 0.8 | 4 |
| 3 | 0 | 14 | 4.4 | 1 | 0 | 0 | 12 | 0.6 | 4 |
| 4 | 0 | 15 | 4.6 | 1 | 0 | 0 | 8 | 0.4 | 4 |
| 5 | 0 | 16 | 4.8 | 1 | 2 | 0 | 4 | 0.2 | 4 |
Your analysis
- Rebuild project cash, debt balances, total debt service and equity cash. Calculate project NPV at 8%, equity NPV at 12% and minimum annual DSCR. Show the time-zero funding check.
- Reduce receipts by 20% with expenses and debt unchanged. Recalculate project NPV and minimum DSCR against an assumed 1.20 covenant. Separately, shift the base project operating cash flows one year later with no added costs; explain the limits of that timing test.
- Independent transfer: increase capex to 33, keep debt at 20 and operating cash unchanged. Recalculate funding and both NPVs. Submit a reproducible workbook and one-page recommendation with assumptions, alternatives, missing evidence and a decision gate.
Worked solution
Cash, debt and funding
Project cash is −30 at time zero, then 7, 7.8, 8.6, 9.4 and 8.2. Principal totals 20; closing debt is zero. Debt service is 5, 4.8, 4.6, 4.4 and 4.2. Equity cash is −10 initially, then 2, 3, 4, 5 and 4. Year-one DSCR is 7/5 = 1.40, the minimum. Confirm that receipts are cash in this exercise, not accounting revenue requiring a working-capital bridge.
Valuation and downside
At the stated rates, project NPV is about +A$2.486m and equity NPV +A$2.472m; do not add the two. With receipts 20% lower, project cash is 4.6, 5.2, 5.8, 6.4 and 5.0, NPV about −A$8.571m, and minimum DSCR 0.92. This is below the exercise's assumed 1.20 threshold; actual remedies depend on loan terms. Delaying only project operating cash one year gives NPV about +A$0.079m before extra delay costs or financing changes.
Transfer exercise and review
With capex 33 and debt 20, initial equity is 13. Since only time-zero spending changes, subtract 3 from each base NPV: project NPV about −A$0.514m and equity NPV about −A$0.528m. Operating DSCR is unchanged because operating cash and debt service are unchanged. A good recommendation explains why value deteriorates despite unchanged coverage, compares a feasible alternative and states what engineering, price, cost and contract evidence is missing.
Review your response
- Reconciliation: source rows, units, signs and timing are traceable; funding and debt balances close.
- Valuation: project and equity cash are separate, rates are consistent and time-zero spending is not discounted one period.
- Risk: downside NPV and minimum DSCR reconcile; hypothetical covenant and omitted costs are explicit.
- Judgement: the independent variant is rebuilt, not just quoted; a reviewer can reproduce the result and challenge the recommendation. Quiz performance alone is not competency evidence.
This checklist supports self-review. No tutor marking or independent credential is included.
Related topics 8
Sources & evidence
Original annual cash-flow dataset; declared discount rates and debt assumptions; CSIRO cost-method context and SAM debt-metric guidance
CSIRO GenCost methods and boundaries