Calculation of Project and Equity NPV

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Permalink Reply by Sachidanand (Sacha) Singh on March 10, 2010 at 10:32pm

I assume you have developed income statements adn balance sheets for all teh years you are covering.

Project NPV / IRR : EBIT*(1-T) + adjustments for non-cash items on income statements such as depreciation, amortisations, deferred taxes etc and cash items not considered on income statements such as changes in working capital, investments etc.

Equity NPV / IRR: From the cash flows determined above, deduct all items that relate to debt-holders; that would be interest payments, debt repayments, lease rentals (capital leases - even operational leases if it is projected that these leases are practically for full economic lives of assets) etc.

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Permalink Reply by Nitin Goel on March 11, 2010 at 6:28am

Hi Karuna,
As rightly said by Sacha.
by the way for which airport you are evluating?
Thanks
Nitin

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Permalink Reply by Karuna Singh on March 11, 2010 at 6:59am

Thanks for this Sacha...the only problem I am facing for calculating project NPV by this method is how to consider the effect of MAT on EBIT.
btw m preparing a financial model for a greenfield airport in maharashtra.
There is one more issue in my modeling...since it is a start up, there are huge cash holes in the initial years, for which m assuming to get cash calls from equity shareholders. m also assuming that whaterver PAT is left, is distributed as dividends. I this case how do i treat this in my BS?

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Permalink Reply by Sachidanand (Sacha) Singh on March 11, 2010 at 10:56am

Yes that would complicate the things a bit. In this case, instead of starting from EBIT you start from net income (PAT). Do all the adjustments (you would do as if you start from EBIT) and then deduct T*D*Kd every year.T is the tax rate - it will change in your case from MAT to corp tax after a few years - take the tax rate as applicable in each year. D is the average debt for the year and Kd is the cost of debt. After subtracting T*D*Kd you would get the same quantity as you would have got if you had started from EBIT.

What does the project say about funding? If it is only a mix of straight debt and equity then perhaps you cannot show equity infusion in future because it would mean all debts getting used up in the initial round but promoters not bringing in proportionate amount up front. Many creditors would say that they would maintain a certain debt equity ratio and the promoters will have to bring in proportionate funds. In that case cash requirement in subsequent years will come from a mix of debt and equity. If on the other hands the requirements in subsequent years are on account of operating losses and not on account of additional asset creation, the promoters will have to bring in additional equity / quasi equity.

I am sure your must have considered a water fall arrangement, so common in project finance. Usually you have to create a debt servicing reserve (may be I am not getting the name correct) where you have to park enough funds to meet next 6 months / 1 year debt servicing. Dividends are allowed only after this reserve gets fully funded.

In case you need, I have only recently added a small post to my blog on tackling valuation issues when debt ratio changes from year to year (WACC will change every year). You may like to take a look here. On this forum too I have uploaded an excel file named A very Crude Example that tackles circularity in project valuation when debt equity ratio keeps on changing - using FCF and WACC as done traditionally. You can check there too.

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Permalink Reply by Karuna Singh on March 12, 2010 at 3:51am

the requirements are on account of debt servicing. now one thing here...if i asssume whatever cash holes you have on accoutn of debt servicing is financed by govt through O&M Viability Gap Funding, how has tht to be treated. Obviously this is not a capital grant and will not be taken to BS. But i am not sure of how exactly this will be treated in the accounts. Is this considered as revenue item and be reflected in P&L or does it have to be a pure cash item?

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