decision modelling & feasibility study

8/3/2019 Decision Modelling & Feasibility Study

1/119

Egyptian Electricity Holding Company(EEHC)

Strategic Planning Sector

Economical Studies Department


2/119

Case Study & Cost Benefit Analysis

Presentation

in

Prepared by

Eng. Mohamed Rashad Mojahed


3/119

COST-BENEFIT ANALYSIS:

It determines the expected benefits andsavings from a candidate system andcompare them with costs.

CostCost Benefit AnalysisBenefit Analysis

It is a systematic process for calculating

and comparing benefits and costs of aninvestment.

In other Word


4/119

Will the project generate adequate cash flow and profits?

Will the project withstand the risks it will encounter?

Will the project remain viable in the long-term?

Will the project meet the goals of the founders?

It helps in answering the following questions :



5/119


Steps of Cost-Benefit Analysis

collect enoughdata about

elements ofcosts andBenefits of

project

Predict a cashflow for

costs&Benefits overthe Project life

time

Select adiscount rate

and CalculateNPV & IRR of

the project

Make asensitivity

analysis

1 2 3 4


6/119

Types of Costs Benefit Analysis

Financial Cost-Benefit

Analysis

Economical Cost-Benefit

Analysis



7/119

It looks at the project fromthe point of view of theimplementing agency.

It looks at a project fromthe point of view of the

entire country (society).

It determine the ability to

meet its financialobligations and to finance

future investments.

It measures the effects ofthe project on the

economy as a whole.

It is based on the Market

prices.

It is based on the Real prices.

Financial Cost-Benefit

Analysis:

Economical Cost-Benefit

Analysis:



8/119

Cost-Benefit Analysis forA combined cycle power plant

the feasibility study for the CCGT containsmost of the assumptions and steps which

can be used and applied to any other type ofpower plants (thermal Hydro wind

solar).

Why the CCGT ?



9/119

A General Description for CCGT:


10/119

Capital CostCapital Cost

Items of Cost Benefit AnalysisItems of Cost Benefit Analysis

Operation and maintenance costsOperation and maintenance costs

Fuel costsFuel costs

Project RevenuesProject Revenues

Cash Flow net incomeCash Flow net income

Income StatementIncome Statement


11/119



12/119


-It is the costs of equipments andmaterials that will be used in theconstruction process of the power

plant.

Components of Capital Cost

Direct CostsComponents

Un certaintycomponents


13/119


-It is costs which can be traced directly to aspecific object like:

Direct Costs component:

Land.Buildings.Construction materials.Equipments.Steam Turbines

Gas TurbinesSwitch yardsTransformers


14/119

Risk & Un certainty Components


It is the probability that an returnof an investment actual will be

different than expected.

Positive Way Wrong Way

Increase In Profit

Reduction In Costs

Decrease In Profit

Increase In Costs


15/119



Causes of Risk & Un certainty:

Increasing in the prices of raw materialsThe lapsing of deadlines for construction of anew operating facility.

The change of a political systemNatural disasters


16/119


Risk & Un certainty ComponentsThere are some values and components which can betaken into consideration during the estimating of thetotal capital cost of the project to reduce the levels of

uncertainty and eliminate economic risk as much aspossible.

WorkingCapital

PhysicalContingency

PriceContingency


17/119



Working Capital:

It is a financial metric which represents operating liquidity

(liquid money) available to a business, Along with fixedassets such as plant and equipment.

In other word

Working capital is an amount of liquid money which is

adequate to cover costs of operation of the power plantduring its starting operation period in case of the powerplant does not gained profit during that period.

It equals to (60) day of operation and maintenance costs

in addition to (30) day of fuel costs.


18/119



Physical Contingency

The estimated costs of the additional real resources

expected to be required

Price Contingency

It is considered against changes in relative prices of

project inputs due to general inflation and changes inthe value of monetary units .


19/119



Financial Cost Benefit Analysis:

All Uncertainty components:

Working Capital

Physical contingency

Price Contingency)

are added to the Direct Costs of the Capital cost.


20/119



Economical Cost Benefit Analysis:

Physical Contingency & Working Capital

Price contingency

They are not added to the direct capital costs of thepower plant.

Physical contingency represent expected real costs so itis added to the direct capital costs of the power plant


21/119

Operation & Maintenance costsOperation & Maintenance costs


22/119

It includes costs of all various services required to assurethat the power plant will perform the functions it was

designed and constructed for.

Operations and maintenance are combined into thecommon term O&M because a facility cannot operate atpeak efficiency without being maintained; therefore the

two are discussed as one.

Definition:

Operation & Maintenance CostsOperation & Maintenance Costs


23/119


Variable O&M Fixed O&M

Types of Operation & MaintenanceCosts


24/119

Variable operation & maintenance costsThese costs, defined as $/MWh, which refers to the theoperations and maintenance costs which changes accordingto the changing in the production level of the electrical

energy by one unit.

Example:

Minor unplanned maintenance.

Periodic maintenance costs.

Water treatment chemicals.



25/119

Fixed operation & maintenance cost

These costs, defined as $/kW/year, this type of costs is afixed costs which do not change with changing in theproduction level of electrical energy.

Example:

Plant manager's office & employee salaries.

Technical support costs.



26/119




27/119

This column represents the total installed capacity

(MW) of the power plant, which assumed in theideal case to be fixed over the project life time


Total Energy generated per year (GWH)= Total installed capacity (MW) * number of hours per

year * capacity factor (%)

Column (D)

Column (E)

This column represents the total energy generated

(GWH) from the power plant at specific capacityfactor



28/119


Fixed O&M costs (million $)= Fixed O&M costs ($/KW/yr) * Total installed

capacity (MW) / 1000

The Value of Fixed O&M costs ($/KW/yr) year2013 is the escalated value of Fixed O&M costs($/KW/yr) at the base year 2009 (With escalation

Rate 3%).

Column (F)

Note 1: (For Year 2013)

This column represents the Fixed O&M costs for

each year over the project life time in (million $).



29/119


Note 2:

An escalation Rate (3%) has been taken intoconsideration in calculating the values of Fixed O&Mcosts Over the project life time.



30/119


Column (G)

Variable O&M costs (million $)= Variable O&M costs ($/GWh)

* Total generated energy (GWh)

This column represents the Variable O&M

costs for each year over the project life timein (million $).

The Value of Variable O&M costs ($/Mwh)year 2013 is the escalated value of VariableO&M costs ($/KWh) at the base year 2009

(With escalation Rate 3%).




31/119

Maintenance & Operating ExpensesMaintenance & Operating Expenses


Note 2:

An escalation Rate (3%) has been taken into

consideration in calculating the values ofFixed O&M costs Over the project life time.

Every 5 years, the cost of periodic

maintenance is added to the Variable O&Mcosts, but with taking into consideration anescalation rate (3%) in the cost of theperiodic maintenance from the base year(2009) to the year of calculation.

Note 3:



32/119


Note 4:

It will be no periodic maintenance costsadded in the 25th year of commissioning,because it will be total rehabilitation in the 2gas turbines at that year.



33/119


Column (H)

This column represent the Total O&Mcosts (million $) costs for each yearover the project life time in (million $).

Total O&M costs (million $)

+ Variable O&M costs (million $)

= Fixed O&M costs (million $)



34/119


The financial cost Benefit analysis uses the market pricesfor representing both values of Fixed & Variable O&Mcosts

So, that market prices are needed to be converted to itsrelative real prices to be suitable for the Economical costBenefit analysis which can be done by using the following

assumptions.



35/119


According to the definition of :

It is the wages and salaries of the all workers in thepower plant.

Fixed O&M costs

The economic costs benefit analysis assumes that theworkers of the power plant are not treated by the same

way and the skilled worker is different from the unskilledworkers and they both different from the administrators



36/119


The values of the Fixed O&M Cost ($/KW) is divided

into 3 unequal components:skilled workers (60 % of total fixed O&M cost)

unskilled workers (30 % of total fixed O&M cost)

Administrators (10 % of total fixed O&M cost)

SoSo



37/119


Account Ratio:

It is a relative magnitude which used in converting themarket prices of a goods or services to its the real prices.

= (Real price / Market price)

skilled workers (account ratio = 2 or 4)unskilled workers (account ratio = 1)

Administrators (account ratio = 1)

Multiply each component in its relative appropriateaccount ratio.



38/119


Variable O&M costs

To convert the Variable O&M costs ($/MWH) to its realprices it is multiplied in its a relative account ratio.

Account ratio For Variable O&M Costs = 0.97 %

It represents the incremental operations and maintenance

costs incurred upon increasing the level of production byone unit.



39/119




40/119


This column represents the total installed capacity

(MW) of the power plant, which assumed in theideal case to be fixed over the project life time

Total Energy generated per year (GWH)= Total installed capacity (MW) * number of hours

per year * capacity factor (%)

Column (D)

Column (F)

This column represents the total energy generated

(GWH) from the power plant at specific capacityfactor



41/119

Column (G, H, I, J& K)

Those 5 columns represent thecalculation of the Fixed O&M

costs in the Economical CostBenefit analysis.




42/119


Column (G)

This column represents the share of theskilled workers costs (M$) which equal to(60%) from the total Fixed O&M costs overthe project life time.

= Fixed O&M costs at year 2013 ($/KW) * 60% * totalCapacity (MW)* 60 %

The costs of the skilled workers at year 2013 (M$)



43/119


Note 1: (For Year 2013)The Value of Fixed O&M costs ($/KW/yr)year 2013 is the escalated value of FixedO&M costs ($/KW/yr) at the base year 2009(With escalation Rate 3%).

Note 2:

The costs of the Skilled Workers in theeconomical cost benefit analysis is consideredto be fixed in all years over the power plantlife time and equal to the costs of the skilled

workers at the year of commission.



44/119


Column (H)

This column represents the account ration (2)

which is required to convert the salaries andwages of the Skilled Workers from its marketvalues to its relative real values.



45/119


Column (I)

This column represents the share ofthe unskilled workers costs (M$)which equal to (30%) from the totalFixed O&M costs over the project lifetime.

The costs of the unskilled workers at year2013

=Fixed O&M costs at year 2013 ($/KW)*total Capacity (MW)* 30%



46/119


Note 2:

The costs of the Un Skilled Workers in theeconomical cost benefit analysis is consideredto be fixed in all years over the power plantlife time and equal to the costs of the Unskilled workers at the year of commission

and that is for


The Value of Fixed O&M costs ($/KW/yr)

year 2013 is the escalated value of FixedO&M costs ($/KW/yr) at the base year 2009(With escalation Rate 3%).



47/119


Note 3:

The account ratio of the for the conversion of costs of the

Unskilled workers from its market prices to its realprices is assumed to be (1)



48/119


Column (J)

This column represents the share of the

administrator costs (M$) which equal to(10%) from the total Fixed O&M costsover the project life time.

The costs of the administrator at year 2013

=Fixed O&M costs at year 2013 ($/KW)* totalCapacity (MW)* 10%



49/119

Economical Cost Benefit Analysis:Note 1: (For Year 2013)

The Value of Fixed O&M costs($/KW/yr) year 2013 is the escalated

value of Fixed O&M costs ($/KW/yr)at the base year 2009 (With escalationRate 3%).Note 2:

The costs of the administrators in theeconomical cost benefit analysis isconsidered to be fixed in all years over thepower plant life time and equal to the costsof the administrators at the year of

commission.



50/119


Note 3:

The account ratio of the for the conversion of costs of the

Unskilled workers from its market prices to its realprices is assumed to be (1)



51/119

Column (M)

This column represents the total

economical Fixed O&M costs.


= [Skilled workers costs (M$) * account ratioof Skilled workers costs (%)]

+ Un Skilled workers costs (M$)

+ administrators Costs (M$)



52/119


Column (L&M)

Those 2 columns represent the

calculation of the Variable O&M costsin the Economical Cost Benefitanalysis.



53/119

Column (L)

This column represents the Variable O&M

costs in its real prices (M$) over the powerplant life time.

Variable O&M costs (million $)

= Variable O&M costs ($/MWh) * Total generatedenergy (GWh) / 1000




54/119



The Value of Variable O&M costs ($/KW/yr)

year 2013 is the escalated value of VariableO&M costs ($/KW/yr) at the base year 2009(With escalation Rate 3%).

Note 2:

The costs of the Variable O&M costs in theeconomical cost benefit analysis is consideredto be fixed in all years over the power plant lifetime and equal to the costs of the VariableO&M costs at the year of commission.



55/119

Every 5 years, the cost of periodic

maintenance is added to the Variable O&Mcosts, except for the year of the totalrehabilitation of the 2 gas turbines.

Note 3:

Note 4:The costs of the periodic maintenance,which added every 5 years, is considered tobe constant over the power plant life time.




56/119


Column (M)

This column represents the account ration

(0.97) which is required to convert the VariableO&M costs from its market values to itsrelative real values.



57/119

Column (N)

This column represents the total Variable

O&M costs in its real values.

= [Variable O&M costs (M$) * account ratio ofVariable O&M costs (%)]




58/119


Column (O)

This column represents the total O&M costs (M$) for each

year over the project period life time.

= Total Fixed O&M costs (M$) + Total Variable O&Mcosts (M$)



59/119

Fuel CostsFuel Costs


60/119


It is the costs related to the fuelconsumption process which is requiredfor the generation of electrical energyfrom the power plant.

Required items for fuel costs calculation:

Power plant heat rate

Fuel calorific value (Heat content)

Fuel Price ($/MMBTU)


61/119


It is the total amount of heat energy needed by all unitsin the power plant to produce one unit of electricalenergy. (BTU/KWh)

Power plant heat rate

The combined cycle power plant consists of 2 gas

turbines and 1 steam turbine.

How to calculate the total heat rate for a combinedcycle power plant ?

The fuel consumption occurs in the 2 gas turbines, wherethe steam turbine depends on the hot exhausted gas fromthe gas turbine in generating the electrical energy.


62/119


Assume the heat rate of one gas turbine is(1000 BTU/KWH).

The amount of heat energy needed by the gas

turbine is (1000 BTU) to produce one (KWH) ofelectrical energy

Total power plant heat rate 1000 BTU/KWH

One gas turbine heat rate 1000 BTU/KWH

It means that

So, if the power plant works with this gas turbine only

Then,


63/119


Total power plant heat rate 1000 BTU/KWH


I

f the power plant works with 2 gas turbines ,where the heatrate of each one is (1000 /KWH)

So,

Two gas turbine heat rate 2 * 1000 BTU/ 2 KWH

Two gas turbine heat rate 1000 BTU/KWH

Then,


64/119



when the power plant works with 2 gas turbines and onesteam turbine ,where the steam turbine does not consumesany additional amount of fuel but it depends on the exhaustedgas from the 2 gas turbines to generate electrical energy.

So,

Two gas turbine heat rate 1000 BTU/KWH

2 gas turbine & 1 steam turbine heat rate 2* 1000 BTU/ 3 KWH

2 gas turbine & 1 steam turbine heat rate (2/3)*1000 BTU/KWH


65/119

Total power plant heat rate 666.6 BTU/KWH


It means that,

Total power plant heat rate (2/3) * 1000 BTU/KWH

The total amount of heat energy needed by the

combined cycle power plant is (666.6 BTU) toproduce one (KWH) of electrical energy

Then,


66/119


Fuel calorific value (Heat content)

The calories or the thermal units contained in one unitof fuel and released when that fuel is burned. (BTU/m3)

The combined cycle power plant it can work with 2 types offuel:

(Natural Gas) as the main type of fuel.

(Solar) as the secondary fuel type in case ofunavailability of natural gas .


67/119




68/119



Column (D)

This column represents the total generatedenergy (GWh) from the power plant overthe project life time.


69/119

Column (E)

This column represents the total heat rate of

the power plant (BTU/KWh) over theproject life time.

Note 1:

The total heat rate of the power plantincreases over the project life time due toaging and depreciation.




70/119



Note 3:

The changing in the heat rate of the power

plant over project life time, can be providedfrom the manufacturer of the power plant orfrom a historical data for other combinedcycle power plants in the electrical grid.

Note 2:

After each 5 years, the total heat rate of thepower plant is reduces with small value due to

the periodic maintenance of the power plant.


71/119



Column (F&G)

This 2 columns represent the prices of(Natural gas) and (Solar) in ($/MMBTU)over the power plant life time.


72/119



In the Financial analysis the represented

fuel prices over the project life time isconsidered to be the fuel market prices,which can be taken according to:

Note:

An agreement between the ministry of

electricity and the fuel supplier

By making escalation in the first yearfuel price with suitable and realisticescalation rate.


73/119



Column (H)

This column represents the total fuel

costs of the power plant in (million $)over the project life time.

The total fuel costs (M$)

= The Natural gas costs (M$) +The Solar costs (M$)


74/119



Note:

The main fuel type (Natural gas) is considered to berepresenting 95% in the total fuel costs.The secondary fuel type (Solar) is considered to berepresenting 5% in the total fuel costs.


75/119



Then,

The Natural gas costs (M$)

=Energy Generated (MWh) * Power Plant Heat Rate(MMBTU/MWh)* Natural Gas Price ($/MMBTU)* 95%

The Solar costs (M$)

=Energy Generated (MWh) * Power Plant Heat Rate

(MMBTU/MWh)* Solar Price ($/MMBTU)* 5%

The total fuel costs (M$)

= The Natural gas costs (M$) + The Solar costs (M$)


76/119



The representing of fuel costs in the economical analysis forthe over the project life time is done by the same

methodology of representing the fuel costs in the financialanalysis.

except that,

In the economical analysis the fuel prices is entered in its

real prices.


77/119

Project RevenueProject Revenue

T

his part represents the revenues from selling theelectrical energy generated from the power plant inthe cash flow analysis.

jj


78/119



P j RP j R


79/119



Column (C)


generated energy (GWh) from thepower plant over the project lifetime.

P j t RP j t R


80/119



Column (D)

This column represents the market pricesfor selling the generated energy ($/KWh),which will be used by the company thatowns the power plant over the power plantlifetime.

P j t RP j t R


81/119



Column (D)

T

he Market prices for selling the electricalenergy can be chosen according to :

energy selling agreement of the ministryof electricity

by making escalation in the base yearselling price of the generating companywhich owns the power plant.

P j t RP j t R


82/119

The Market prices for selling the electricalenergy can be chosen according to :

An energy selling agreement set by thegenerating company which owns thepower plant.

By making escalation in the base year

selling price of the generating companywhich owns the power plant withasuitable escalation rate.



P j t RP j t R


83/119



Column (E)


revenue from the combined cyclepower plant (million $) which can becalculated by,

The total revenue (million $)

= Energy Generated (KWh)*average system price ($/Kwh)

P j t RP j t R


84/119



The economical cost benefit analysis uses the samecalculating methodology of the financial cost benefitanalysis, except that the selling prices is taken as: or the

Long run marginal cost of electrical energy

Export selling prices

The willingness to pay prices:

The Long run marginal cost of electricalenergy

T

he maximum amount of money a person would be willingto pay, in order to receive the required electrical energy.

I t t tI t t t


85/119

Income statementIncome statement

Income statement (also referred to as profit and loss

statement P&L), It indicates how

money received

from the sale ofthe electrical

energy

the revenues

money spent to

generateelectrical energy

the costs

transformed into

the result afterexpenses havebeen deductedfrom revenues

The net income



86/119





87/119



Column (C)

This column represents the revenues (million

$) from selling the energy generated fromthe combined cycle power plant.

Column (D)

This column represents total O&M costs(million $).



88/119



Column (E)

This column represents total Fuel costs

(million $).

Column (F)

This column represents the depreciation

(million $) of the combined cycle powerplant.



89/119



Depreciation in the cost benefit analysis isconsidered as the allocation of the cost ofassets to the period in which the assets are

used.

Depreciation value of a fixed asset over theasset life time

=[T

otal capital cost of the fixed asset (million $)/ asset life time (years)]



90/119



The combined cycle power plant, consists of 2 gasturbines and one steam turbine, where the 2 gasturbines are replaced after 25 years from the year

of commissioning of the power plant, so thedepreciation can be calculated as,

For the first 25 years:

[CCGT capital cost (million $) with (IDC) gasturbines capital cost (million $) / 40] + [gasturbines capital cost (million $) / 25]



91/119



For the last 15 years:

[CCGT capital cost (million $) with (IDC)

gas turbines capital cost (million $) / 40] + [gasturbines capital cost (million $) / 15]

With taking into consideration that the gasturbines capital cost used for the last 15years is the escalated value of the gasturbines for 25 years from the base year.



92/119



Column (G)

This column represents the taxable income

(million $) over the project life time.Definition: It is the amount of income that is usedto calculate the power plant income tax due.

Taxable income (million $)

= Revenues O&M costs Fuel costs Depreciation

Taxable income is adjusted calculated after

adjustment by deducting all costs from the powerplant revenue.



93/119



Depreciation is assumed to be represented in the cash flowanalysis according to the concept of allocation of the cost ofassets to periods in which the assets are used

The annual depreciation values will be treated as an annualrequired amount of money deducted from the revenues overthe power plant lifetime to allocate adequate amount ofmoney equal to the capital cost of the power plant at the endof the power plant lifetime.

It means that



94/119



According to the following reasons

the taxes is applied to the income after adjusting costs from

revenues.

depreciation as the previous concept can not be treated asa pure revenue.

So,

The depreciation is deducted from the revenues tocalculate the taxable income.



95/119



Column (H)

This column represents the amount of taxes

required from the combined cycle powerplant for each year over the project life time.

Taxes (million $)

=Taxable income (million $) * tax rate (%)

Tax rate has been assumed to be (20%).



96/119



Column (I)

This column represents the net income from

the power plant for each year over theproject life time which can be calculated by,

Net Income (million $)

= Taxable Income Taxes



97/119





98/119



the economical cost benefit analysis is done from thecountry point of view, so the taxes is considered as asharing of resources and are not applied to the revenues

from selling the generated electrical energy from the powerplant.

Then, there is no requirement in the economical analysis tocalculate the annual values of depreciation or deduct it

annually from the revenues to estimate the taxable income,where the net income is calculated directly by,

Net Income (million$)

= Revenues O&M expenses Fuel expenses

Internal rate of returnInternal rate of return


99/119


T

he last sheet of the project includes the calculation of theNet Present Value (NPV) and the internal rate of return(IRR) of the net profit.

It is the discount rate which makes the net present valueof all cash flows (both positive and negative) from aparticular investment equal to zero.

Definition of (IRR)

So,

This part will represent all negative cash flow (costs)and positive cash flow (revenues) to calculate the powerplant (IRR).



100/119





101/119



This column represents the years of constructionand the years of operation of the power plant.

Column (B)



102/119



Column (C)

This column represents the payments of

capital costs during the constructionperiod (assumed to be 5 years) of thepower plant.

This column represents also the cost of

rehabilitation of the 2 gas turbine after 25years from the commissioning date of theproject.



103/119



Column (D)

This column represents the annualdepreciation values over the project lifetime, which calculated by the same wayused in the Income statement.

Column (E)

This column represents the net incomefrom the power plant which calculated inthe income statement after applying thetaxes to the taxable income.



104/119



Column (F)

This column represents the net profitover the power plant life time.

Net profit

=Net income + Depreciation Capital cost

The

IRR is calculated for the net profitof the power plant.



105/119



The economical cost benefit analysis uses the samemethodology of calculation that used in the financial costsbenefit analysis except that in the economical cost benefit

the annual depreciation is not calculated so the Net profit iscalculated by,

Net profit

=Net income Capital cost

Dept ServiceDept Service


106/119


It is the amount of money required to be paid ona loan in the form of principal & interestrepayments over a period of time.

principal repaymentsInterest expenses

Interests Duringconstruction


107/119



108/119

Interest During Construction:

It is the interests that accumulate during the constructionperiod on a loan that finances the construction process of abuilding or a project

pp

Example:

Let us assume a company needs to begin a new projectrequires (1500 million $) total capital cost.

The company will finance that project by taking a long

term loan from a specific Bank as installments throughoutthe construction period of the project (4 years)



109/119

pp

Payments & interest rate

Installments Interest rate

Year (1) 150 2.1%

Year (2) 400 3%

Year (3) 500 4.5%

Year (4) 450 1.5%

The Interest during Construction (IDC)= (150 * 2.1%) + (400 * 3%) + (500 * 4.5%) + (450 * 1.5%)= 3.15 + 12 + 22.5 + 6.75= 44.4 million $



110/119


Representation of Dept Service in the financial cost-benefitanalysis changes according to 3 Cases

Case 1 Case 2 Case 3

Un LeverageIRR Leverage

IRR Capitalization of

IDC

pp


111/119



112/119


(Case 2: leveraged IRR)

It is calculated, When the financing decisions are madeand it is decided to fund the project with some leverage(loans).

For this type ofIRR the cash flow stream reflects the

actual Capital Structure with all Dept Service components(principle repayments, interest expenses & interestsduring construction)

pp


113/119



114/119


(Case 3: Capitalization ofIDC)

pp

In this case the interests during construction (IDC) is

assumed to be added to the capital cost directly.

The

IDC is a cost for the project; which is calculated onlyfor the years of construction until the project begins to

generate revenue, and be able to service its debts.



115/119


In the economical cost benefit analysis the capital costs of theproject is considered to be provided as a loan from thecountry it self.

So even if that loan required dept services (interestrepayments, principle repayments or interests duringconstruction) it is not included in the economic analysis

This loan does not represent a use of resources like (fuelconsumption costs) but only a transfer of resources from thepayer to the payee (money inside the country).



116/119

It is the minimum return that a company must earnon an existing project to satisfy its creditors, owners,

and other providers of capital.

Weighted Average Cost of Capital (WACC)

Example: Let assume a capital cost of a project equals to(1500 Million $), which will be financed by a

group of loans from different banks.

Bank Name Loan (Million $)Bank (1) 400

Bank (2) 600

Bank (3) 500



117/119

Bank Name Loan (Million $)

Bank (1) 400

Bank (2) 600

Bank (3) 500


Bank NameShare of loan from

the capital cost

Bank (1) 26.6 %

Bank(2) 40 %

Bank(3) 33.4 %Share of the loan ofBank from the total

capital cost

=[Loan ofBank

/ Total Capital Cost] Share of the loan of [Bank 1 (400 M$)]from [the total capital cost (1500 M$)]

= [400 / 1500]

=26.6 %



118/119


Bank NameShare of loan from

the capital cost

Bank (1) 26.6 %

Bank(2) 40 %Bank(3) 33.4 %

Bank Name Interest

Bank (1) 3%

Bank(2) 5%

Bank(3) 4%

WACC = [Share of bank (1) * Interest of bank (1)] +

[Share of bank (2) * Interest of bank (2)] +

[Share of bank (2) * Interest of bank (2)]

WACC = [26.6 % * 3 %] + [40 % * 5 %] + [33.4 % + 4 %]

WACC = 4.1 %

Discount RateDiscount Rate


119/119


From the financial point of view the weightedaverage cost of capital (WACC) is the appropriate

discount rate that can be used in discounting thecash flow of the project.


In the economical cost-benefit analysis a realdiscount rate is used for the cash flow.

decision modelling & feasibility study

Documents