international center for environmental finance series b – course #3 determination of financial...
TRANSCRIPT
International Center For Environmental Finance
Series B – Course #3
Determination of Financial Feasibility
Determination of Financial Feasibility
• Is the project financially feasible? Can you pay for the project?
(one financing option)
• Which financing option is the best?
(more than one option)
Financial Feasibility Calculation
Cash Available for Debt Service (CADS) must exceed Annual Debt Service Payments.
Financial Feasibility Calculation
1. Calculate CADS.
2. Calculate project’s debt.
3. Calculate Annual Debt Service Payments (for each option).
4. Subtract Annual Debt Service Payments from CADS
Financial Feasibility Calculation
• If the Financial Feasibility Calculation is positive, the project is financially feasible.
• If the Financial Feasibility Calculation is negative, the project is not feasible.
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Illustration of Financially Feasible Project
AnnualDebtServicePayments
CADS
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Illustration of Financially Not Feasible Project
CADS
AnnualDebtServicePayments
Determination of Financial Feasibility
The ratio of CADS to Annual Debt Service is called the “Debt Service Coverage Ratio”
Determination of Financial Feasibility
• If the Debt Service Coverage Ratio is
>1.0, the project is feasible.
• If the Debt Service Coverage Ratio is
<1.0, the project is not feasible.
Determination of Financial Feasibility
If there is more than one project finance option, then the option with the highest debt service coverage ratio is the most feasible.
Financial Feasibility Calculation
1. Calculate CADS.
2. Calculate project’s debt.
3. Calculate Annual Debt Service Payments (for each option).
4. Subtract Annual Debt Service Payments from CADS
Financial Feasibility Calculation
Calculation of CADS
Calculation of CADS
Total Cash IncomeNon-recurring Cash Income*CADS
*Non-recurring cash income may be used to reduce total project cost
Financial Feasibility Calculation
Calculation of Project Debt
Calculation of Project Debt
Total Project Cost
Cash Contributions
Project Debt
Cash Contributions
• Savings.
• Non-recurring cash income*.
• Grants.
*Collected prior to debt issuance.
Financial Feasibility Calculations
Calculate Annual Debt Service Payments, using either:
1. The Level Payment Method
2. The Level Principal Payment Method, or
3. The Irregular Method
Financial Feasibility Calculations
CADS
Annual Debt Service Payments
(either + or - )
Financial Feasibility Calculation
• If the Financial Feasibility Calculation is positive, the project is financially feasible.
• If the Financial Feasibility Calculation is negative, the project is not feasible.
Determination of Financial Feasibility
What to do if project is not feasible ?
Determination of Financial Feasibility
If the financial feasibility calculation is negative, then you must:
1. Increase income, or,
2. Reduce project costs, or
3. Both.
Determination of Financial Feasibility
Increase Project Income
Increase Project Income
1. Adopt a consumption based tariff2. Replace general rate subsidies with
targeted rate subsidies3. Increase tariffs to the maximum extent
that is politically possible4. Improve billing and collection. 5. Reduce operating costs for labor,
energy, etc., to the greatest extent possible.
Determination of Financial Feasibility
Reduce Project Costs
Reduce Project Costs
1. Reduce size and scope of the project
2. Seek grants or additional cash contributions
3. Seek extended terms
4. Seek lower rates.
Determination of Financial Feasibility
Re-calculate financial feasibility using increased income and lower annual debt service payment.
Re-calculation of Financial Feasibility
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Old DebtService
New DebtService
OldIncome
NewIncome
Once Cash Available for Debt Service and Annual Debt Service Payments are Known, a Determination of Financial Feasibility for the Project can Readily be Made.