ADVANCED FUNCTIONS (EXCEL)

Transcription

1 ADVANCED FUNCTIONS (EXCEL)

2 Agenda Introduction and Context in Advanced Functions for Modeling Models with Advanced formulas and tools Modeling Using Named Ranges Revenue Matching (Index Match) Credit Transition Analysis (Array Functions and Lookups) Portfolio Analysis (SumProduct) Generating Scenarios (Offset function) Building Flexible & Growing Models (Offset, Index) Consolidating revenues from different sheets (Indirect) Valuation of Startup in e-commerce (Goal Seek) Synergy Modeling (Solver) Deferred Taxes and Loss Carried Forward (Max, Min)

3 Named Ranges as Methodology for Modeling P&L Information for a company is given Create a model, using Named Ranges Use Par-Modeling-Named-Ranges

4 Define Named Ranges for various items Just like we can define names for individual cells, we can define ranges Numbers for all the years can be calculated at one shot: Ctrl + Enter

5 Define all named ranges Define Range Names for all important line Items

6 Case: Selecting the relevant Revenue Revenue figures for GE are given with the following details Quarter wise Product wise Region wise The arrangement of the data cannot be changed The management might need to select a particular revenue figure Use Par-Rev-Matching

7 Define Names for Ranges and Match Define Range Names Use the Match function to Get the position of Mont, Region and Division

8 Use Index to Get the relevant Value

9 Case: Credit Rating for Your Bond Portfolio Your Portfolio For all the bonds, the following information is provided Starting ratings at the beginning of year 1 Probability of transitioning to other rating at the end of year 1 You have invested in a portfolio What is the probability that these bonds would be rated BBB+ of below at the end of Year 2? Rating Transition Matrix Use Par-Credit- Rating-Transition

10 Use Matrix Multiplication to get to n Year Default Transition Matrix To start with create the 2 year transition matrix - If A is the rating transition matrix for 1 year, A2 would be the transition matrix for 2 years For Matrix Multiplication, use CTRL + SHIFT + ENTER

11 A^2 gives the two year Transition Matrix

12 Use Vlookup or a combination of Index and Match to look for relevant Prob

13 Case: Portfolio Analysis Alice is a trader in the Indian Market and has entered in the trades indicated below: Analysis is required for: Use Par-Stock-Portfolio

14 Using Sumproduct SumProduct Multiplies corresponding cells in two cells. It can act on conditions as well

15 Using Sumproduct with a condition -- Indicates conditions in SumProduct

16 Case: Creating Flexible Models for Scenarios Company DeltaTheta is planning for business plan for board presentation The management believes that it is living in uncertain times Presenting just one scenario to the management would not make sense They want to present various cases (based on the economic conditions to the board Product A Growth Product B Growth COGS as % of Tax Rate Sales Best Case Scenario 40% 50% 30% 28% Moderate Case Scenario 20% 30% 40% 30% Worst Case Scenario 5% 10% 50% 32% A flexible model needs to be created, With a single switch the board should be able to change the scenario and see the results Use Par-Scenarios

17 Using Offset function to select a scenario Use the offset function to choose the relevant scenario Model can be linked to the selected scenario numbers

18 Case on Flexible Model Generation Most of the models that we have created, require the number of years of the model to be pre-known. If the model creation needs flexibility The number of years of cash generation is not known before hand A Real estate Project is undertaken: The asset bought at USD 1000 Mio The years of operations can be 4 or 5 or 6 Post that the project is sold Use Par-Flexi-Model-IRR

19 Creating a flexible NPV, IRR model using Offset Offset function in excel returns a reference to a range that is offset a number of rows and columns from another range or cell Offset(range, rows, columns, height, width) Range is the starting range from which the offset will be applied Rows is the number of rows to apply as the offset to the range Columns is the number of columns to apply as the offset to the range Height is the number of rows that you want the returned range to be Width is the number of columns that you want the returned range to be Offset function can be used to generate dynamic ranges in the NPV and the IRR function Offset function used to create dynamic range Count function to count the number of years of ops

20 Creating a flexible NPV, IRR model using Index Dynamic Range can be created using the Index Function

21 Case: Consolidating Revenues Pattern in Sheet Names (Dmonth: For example, Djan, Dfeb, etc) Need to consolidate the revenues in a single sheet Use Par-Consolidate-Indirect

22 Find the Name of the Sheet and Use Indirect Function to Generate Reference Use the Pattern in the Sheet name and the columns to generate the Names and Reference names Use the Indirect function to generate the actual reference to the sheet and the Range

23 Find the Sales Number and Clean Use Index and Indirect to find the relevant Sales Use Iferror to remove the errors

24 Get the Consolidated Revenues

25 Case on Goal in Valuation FK Mart is a startup in the e-commerce space and is looking for a valuation of USD 10 Mio in the next Year. The CEO had a meeting with the VCs and the following direction emerged from the discussion VCs are very bullish on the space You have no revenues right now It is difficult to enter into this space. But if you can penetrate the market, it would be great! Typically VCs ready to give a valuation of 10x the revenues The CEO had a discussion with the SEM guy We need to buy traffic A typical conversion rate in our space is 5% We are selling at an average price of USD 300 I think if we can get sufficient footfalls on our site, it would get the job done I have also found that if we send targeted ads on google, we can convert 0.5% of the impressions to be clicked Google charges a bomb: USD 0.85 per click! CEO has to meet the board to get an approval for the funds to get the ad budget How many impressions are needed? What should be the budget for the advertisements? Use Par-Valuation-ecom-Startup

26 Getting the Basic Model in Place Based on the Assumptions, generate the complete model We need to get the valuation to USD 10 Mio

27 Goal Seek to the Goal Goal Seek to the relevant Goal

28 Case on Synergy We have two product offerings: FRM Material In the form of books Detailed material with 300+ pages Requires huge upfront cost Printing cost is low as it is plain vanilla printing VisualizeFRM Innovative charts Summarized material Upfront cost is lower Printing cost is high There is a synergy in the two products If 1 unit of FRM Material is sold, the cost of VisualizeFRM goes down by 1 unit and vice versa What would be the breakeven point of sales? How many units need to be sold so that product wise also, they breakeven? Use Par-Solver-Synergy

29 Formulating the Problem Revenue = Price x Vol Variable Cost (VFRM) = Cost (VFRM) x Units (VFRM) Synergy Benefit x Units (FRM Mat) Total cost = Fixed Cost + Var. Cost Profit = Rev - Costs

30 Optimizing for Break Even Point Activate Solver Update with Objective Function and Variables

31 Problems and Constraints Overall Breakeven, but not productwise Add constraints of individual product breakeven

32 Deferred Tax and Loss Carried Forward Deferred Taxes are created due to differences in method of calculation of depreciation for book accounting and for income tax accounting For example, Straight Line Method (SLM) is used for calculating book profit while Written Down Value (WDV) / Double Depreciation Method (DDM) is adopted for calculating taxable income, leading to creation of deferred tax assets in the initial years Carry Forward Losses are created if a company can enjoy benefit of netting off historical losses against future taxable incomes Both these concepts can be incorporated into an integrated financial model using simple steps as shown in the following slides Use Par-Loss Carry Forward

33 Deferred Tax and Loss Carried Forward We begin by inputting assumptions on Asset Value and Asset Life, and calculate the PBT as per book accounting Next, we calculate net blocks as per book accounting, by calculating the year-wise depreciation as per SLM Finally, we calculate net blocks as per income tax accounting, by calculating the year-wise depreciation as per DDM /WDV We input the assumptions on Asset Value, Asset Life and Tax Rates We calculate the Net Block as per book accounting using Depreciation as per SLM We then calculate the Net Block as per Income Tax using depreciation as per DDM

34 Deferred Tax and Loss Carried Forward We calculate the taxable income which is equal to higher of 0 and PBT arrived at, using depreciation as per DDM Then, we calculate the unabsorbed loss which is equal to absolute value of any negative PBT arrived at, using depreciation as per DDM We calculate the amount of carried forward loss to be utilized this year, by taking the minimum of that year s taxable income and last year s cumulative loss carried forward We add Depreciation as per books and deduct Depreciation as per Income Tax to PBT as per books Taxable Income is higher of 0 or the value calculated above We calculate Unabsorbed loss as absolute value of any negative PBT arrived as per Income Tax, wherever applicable Cumulative Losses from previous years are netted off against any current year profits to the extent possible

35 Deferred Tax and Loss Carried Forward Cumulative Loss Carried Forward is calculated as Cumulative Unabsorbed Loss minus Cumulatively Utilized Loss Then, Taxable Income is calculated as Taxable Income minus any Carried Forward Loss to be Utilized that year Finally, Actual Tax Paid is calculated as % Tax Rate multiplied by Actual Taxable Income Cumulative Loss Carried Forward is Cumulative Unabsorbed Loss minus Cumulatively Utilized Loss Carried Forward Actual Taxable Income is Taxable Income earlier calculated minus any portion of Loss Carried Forward to be Utilized this year Actual Tax Paid is Effective Tax Rate multiplied by Actual Taxable Income

36 Showing results to users again require creation of dashboards and charts. Building flexibility requires advanced excel features Flexibility in showing results Dashboards Macros can also be used to build flexibility in the output format as well

37 Automation of repetitive tasks in applications Using a Robot Training a Robot Most applications would require the task to be done for multiple iterations For example formatting charts, etc. For simple routine tasks, Macros can be recorded and used

38 Automation of repetitive tasks in applications Programmatically performing routine tasks in applications Most applications would require the task to be done for multiple iterations VBE can be used to programmatically perform routine tasks repetitively for complex calculations

39 Agenda Introduction to Macros & Advanced Application Building in Excel Introduction and context Key Concepts in Macros Macros as recorded Robots! Designing application to gather user data Implementing user forms in Excel Macros Linking forms to excel cells Building flexible Charts in Excel Understanding VBA Understanding the relevant language constructs Advanced Financial Applications Breaking circular loops Monte Carlo Simulation Advanced Scenario Generation Gathering Online Price Data Optional (Invoking Solver, Binomial Trees, Excel2PPT Debugging VBA code

40 What are Macros? Macros are like Robots!! Create Graphical User Interface (GUI) Automate Routine Tasks by Recording Automate Routine Tasks by Programming A macro is a set of computer instructions A mini-computer program Activated by an event That tells the computer what to do

41 Steps in Using Macros Train the Robot Use the Robot Retrain Reuse The Robot is as good as you have trained it! Typically the first level of Macro can be created by Recording the macro A little bit of understanding of VB can help improve the usability multi-fold

42 Enabling the Use of Macros

43 Setting the right security Level Macros are dangerous snippets of code and can be built with malicious intent Macros need to be enabled for the application to run properly

44 Introducing the VBA Environment Code Window Run and Control Commands Project Explorer Use Alt + F11 to get the window

45 Agenda Introduction to Macros & Advanced Application Building in Excel Introduction and context Key Concepts in Macros Macros as recorded Robots! Designing application to gather user data Implementing user forms in Excel Macros Linking forms to excel cells Building flexible Charts in Excel Understanding VBA Understanding the relevant language constructs Advanced Financial Applications Breaking circular loops Monte Carlo Simulation Advanced Scenario Generation Gathering Online Price Data Optional (Invoking Solver, Binomial Trees, Excel2PPT Debugging VBA code

46 Training the Robot Recording a Macro Name the macro Shortcut key - fill in a letter in the available space Allows you to run the macro by holding down the CTRL key and pressing the chosen letter on the keyboard Description Description of the macro Remember to Stop the recording!

47 Using the Robot Using Macros Use the Run Macro or shortcut key assigned to run the macro Use CopyMe-MacroRecording.xlsm

48 Your first Recorded Macro

49 So what s inside the Macro? Use Alt + F11 to see what Excel writes inside

50 If we had used relative references? Relative Referencing works like cell referencing without $

51 So what s in the code now? Internally uses the offset function

52 Simple Example - Automatically format charts in Excel Unformatted default chart in Excel Format it once and record for further use Use Chart-Recording-Macro

53 Create a New Macro FormatChart Create a new macro Record the steps performed to update the chart as per the standards required

54 Record all steps in the macro Record all steps performed to change the formatting and stop the recording

55 Select the new chart to be formatted and run Select the new chart that has to be formatted Run the macro

56 The macro would automatically make the formatting consistent With a single keystroke you can format your charts For example B, CTRL + q is the key

57 Automatically generated Macros are not very robust Even small changes in the expected step would cause the macro to throw errors Need to understand the code Slight modifications in the code can make the macros much more robust

58 Agenda Introduction to Macros & Advanced Application Building in Excel Introduction and context Key Concepts in Macros Macros as recorded Robots! Designing application to gather user data Implementing user forms in Excel Macros Linking forms to excel cells Building flexible Charts in Excel Understanding VBA Understanding the relevant language constructs Advanced Financial Applications Breaking circular loops Monte Carlo Simulation Advanced Scenario Generation Gathering Online Price Data Optional (Invoking Solver, Binomial Trees, Excel2PPT Debugging VBA code

59 Form Controls and Active X controls ActiveX Controls Form Controls Toolbar Control Toolbox Forms Macro code In the code module for In any standard VBA module storage the Sheet Macro name Corresponds to the control name (e.g., CommandButton1_Clic k) Any name you specify. Correspond to... UserForm controls Dialog Sheet controls Customization Extensive, using the Properties box Minimal Respond to events Yes Click or Change events only Inserting Design Mode Normal Assigning No Arbitrary Macro Macros Can be assigned Macros can be assigned

60 Creating a Model for CAPM Using Form Controls To Select: Right Click! Limitation: A +ve # To Link to a cell To Covert to %age Use CAPM-GUI

61 Playing with the changes A Linear Transformation to generate desired output Custom Format Different Controls can be used for different user inputs Link to the cell

62 Formatting the Scroll Bars Select all scroll bars by click and ctrl key

63 Linking the Model Based on the User Inputs, Generate the return Expectation

64 Creating Flexible Charts Create the Chart Based on the Data Use Q_FlexiChart

65 Create Decision controls and link to cells

66 Linking Data to decision If the appropriate series is selected, show the ratio, else hide Change linkage to new block

67 Agenda Introduction to Macros & Advanced Application Building in Excel Introduction and context Key Concepts in Macros Macros as recorded Robots! Designing application to gather user data Implementing user forms in Excel Macros Linking forms to excel cells Building flexible Charts in Excel Understanding VBA Understanding the relevant language constructs Advanced Financial Applications Breaking circular loops Monte Carlo Simulation Advanced Scenario Generation Gathering Online Price Data Optional (Invoking Solver, Binomial Trees, Excel2PPT Debugging VBA code

68 Basics of VBA Introduction to Sub and Function VBA procedure Set of instructions given to the Robot to execute Perform tasks such as calculating equations, analyzing data, communicating with excel/ databases, etc. Block structured as a Sub or Function Constructed from statements Declaration (Robot s memory) Assignment statements (What is put in that memory) Execution (What actions to perform) Procedures are typed and stored in a Module/ worksheet Functions/ Sub are run line by line from beginning to end VBA has two types of procedures Sub (A subroutine, which performs a small task for you!) Function procedures (It performs some tasks and returns a value to you)

69 Basics of VBA Introduction to Variables Variables are like buckets Hold content for you The contents of the variables can change Actually variables are areas allocated by the computer memory to hold data Each variable has a Name Type In VBA to Declare a new variable (Dim is the keyword) Dim mypassword As String Dim firstnum As Integer Dim alargenumber As Double Variables can be used to store data mypassword = whatever firstnum = 10 etc

70 Basics of VBA First Input Output Display message boxes in a MS Excel worksheet MsgBox(Prompt, Style Value,Title) Different options on style to show the number of buttons Use Name-Echo

71 Basics of VBA Reading from Sheet Simple Syntax Variable = Cells(i, j) Variable = Range( Name ) Use Name-Echo

72 Basics of VBA Looping functions in VBA For repetitive work, VBA has looping functions Much more powerful than direct formulas For-Next loop Use Function-Randbetween

73 Basics of VBA Calling Excel Functions in VBA Syntax Application.worksheetfunction.Whatever function

74 Basics of VBA Objects VBA object is a thing (just like English Object and has Functions Properties Data For example, Excel Worksheet Cells Ranges font Command button Range Object Range( myname ) Square brackets [] like this: [A10] refers to Range( A1 ) Can refer to a list:range(myarray) refers to whatever address is stored in myarray variable. The address to the range can be formed on the fly as well Use Function-Randbetween

75 Agenda Introduction to Macros & Advanced Application Building in Excel Introduction and context Key Concepts in Macros Macros as recorded Robots! Designing application to gather user data Implementing user forms in Excel Macros Linking forms to excel cells Building flexible Charts in Excel Understanding VBA Understanding the relevant language constructs Advanced Financial Applications Breaking circular loops Monte Carlo Simulation Advanced Scenario Generation Gathering Online Price Data Optional (Invoking Solver, Binomial Trees, Excel2PPT Debugging VBA code

76 IDC: Breaking Circular Loops Because of circular dependencies, the sheet can enter into inconsistent state Use Q_IDC

77 IDC: Basic Algorithm The Copy & Paste Special has to be repeated again and again. This can be achieved by Recording

78 IDC: Recording the Macro Has to be done Intelligently to be used later

79 IDC: Macro by Recording The Macro is able to copy and paste special the values once

80 IDC: Editing (with for loop) for the desired results For Loop to run it multiple times

81 Monte Carlo Simulation (MCS) There is a fair amount of uncertainty and risk involved with estimating the future value of figures or amounts due to the wide variety of potential outcomes. Monte Carlo simulation (MCS) is one technique that helps to reduce the uncertainty involved in estimating future outcomes. MCS can be applied to complex, non-linear models or used to evaluate the accuracy and performance of other models. risk management, portfolio management, pricing derivatives, strategic planning, project planning, cost modeling and other fields. Technique that converts uncertainties in input variables of a model into probability distributions Combining the distributions and randomly selecting values from them, it recalculates the simulated model many times and brings out the probability of the output.

82 MCS: Frequently Used Distributions for MC Normal/Gaussian Distribution where the mean and the standard deviation are given and the mean represents the most probable value of the variable. It is symmetrical around the mean and is not bounded Lognormal Distribution Appropriate for a variable ranging from zero to infinity, with positive skewness and with normally distributed natural logarithm Triangular Distribution With fixed minimum and maximum values. It is bounded by the minimum and maximum values and can be either symmetrical (the most probable value = mean = median) or asymmetrical. Uniform Distribution Contrast to the triangular distribution, the likelihood of occurrence of the values between the minimum and maximum is the same. Exponential Distribution Used to illustrate the time between independent occurrences, provided the rate of occurrences is known.

83 MCS: Probabilistic Growth in Price and Volume Assumptions Initial Price and Volume of Material Sold Mean Growth and the Std Deviations Generating the Probability Distribution of Price and Volume Growth Rand() Generates Uniform Random Normsinv() to generate in normal form Use the probabilistic price and volume to project the revenues Use Q_MCS

84 MCS: Implementing Monte Carlo Simulation The process of projecting revenues is to be repeated n number of times. This can be achieved with the help of a Macro 1. Variable Declaration 2. Emptying the Vars & Cells 3. For Loop to run the simulation n times 4. Calculating Average

85 MCS: Interpreting the Output The Progress Bar Implemented with Rept() formula

86 Agenda Introduction to Macros & Advanced Application Building in Excel Introduction and context Key Concepts in Macros Macros as recorded Robots! Designing application to gather user data Implementing user forms in Excel Macros Linking forms to excel cells Building flexible Charts in Excel Understanding VBA Understanding the relevant language constructs Advanced Financial Applications Breaking circular loops Monte Carlo Simulation Advanced Scenario Generation Gathering Online Price Data Optional (Invoking Solver, Binomial Trees, Excel2PPT Debugging VBA code

87 Debugging VBA Code Breakpoint to Pause the Running Robot Full Toolbox in VBE to debug the Code

88 Debugging VBA Code Highlight Indicates Paused Robot Tooltip Indicates Current Value

89 Debugging VBA Code Add Watch to keep observing the Variable

90 Project Finance (Excel)

91 Agenda Key Concepts in Project Finance Modeling Understanding Project Finance Quarterly to Yearly Revenue Conversion using Date functions Interest During Construction (IDC) Cash Flow Waterfall

92 Characteristics of Project Finance Project Finance is the financing of often long-term, industrial projects Increasingly those which provide public services or infrastructure Based upon complex financial and contractual structures commonly involving many legal entities Project Finance debt is often termed as "non-recourse" Typically secured by the project assets and the core project contracts The cash flows from the project Come only after the project is fully complete (takes more than a single financial year for completion) are usually the sole means of repayment of the borrowed funds Separate Entity and SPV Status Risk of the transaction is generally measured by the creditworthiness of the project itself rather than that of its owners (Sponsors). Two main types of Project Financing Greenfield a fresh start Brownfield expansion of an existing project

93 Characteristics of Project Finance Multiple parties involved Sponsors Contractors Suppliers Governments Global financiers, From inception of an idea to Financial Close, a Project Finance deal can take years to negotiate All about identifying risks, allocating them appropriately and ensuring that the responsible parties are adequately incentivized to manage their risks efficiently Construction time, costs & specification Operational cost, reliability Supply reliability, quality, cost Off-take volume, price Politicial environment, war, local hostility, currency inconvertibility Socio-environmental responsibilities

94 Risks & Mitigants Funding Risk Identification of sources for equity contribution. Stipulation for minimum upfront equity contribution. Disbursement only after financial tie-up for the project. Regulatory Risk All major statutory approvals including MoEF and forest clearance stipulated as a pre - disbursement condition Concession agreement is reviewed commercially and risks identified Suitable undertakings/guarantees are obtained from sponsors to negate any adverse affect of concession provisions Financing of projects on time-tested concession formats approved by the Planning Commission Land Acquisition Risk Minimum land acquisition stipulated as a pre-disbursement clause Projects in sensitive states avoided Land acquisition is the responsibility of Concession Authority Compensation is paid by the authority on account of any adverse delay Market Risk Independent consultant appointed by Lenders to conduct market potential/ traffic study Project funding is structured based on cashflow projections to ensure smooth Debt servicing

95 Risks & Mitigants Execution Risk Contracts for Civil works/procurement of equipment on a fixed time fixed price basis. Contracts to be finalized before any disbursement Reputation of EPC contractor considered Suitable provisions for Liquidated damages/ penalty are incorporated in contract documents. Technology Risk Projects based on proven technology are financed Recourse stipulated in case of emerging technologies Explicit Political Risks Most concession agreements / licenses have clear provisions classifying political risks into 2 categories: Direct Political and Indirect Political Mitigation mechanisms including compensation is specified in the agreement itself Implicit Political Risk Policy Risk: Change in policies towards infrastructure like tax sops, concession agreements, grant policies Revenue/Toll Rate Risk: Change in toll rates Regime Change Risk Change in Applicable Laws / Tax Laws Cross Border Governing Law Enforcement Risk Concession Agreements / Licenses govern all aspects of projects under a contract based system and governments honor signed contracts

96 Key Stakeholders SPONSORS INSURERS HOST GOVERNMENT EXPERTS PROFESSIONALS SPV LENDERS EPC CONTRACTOR GUARANTORS OPERATOR PURCHASER SUPPLIER

97 Contractual Arrangements to Mitigate Risk Parties Agreements Mitigation mechanisms Project Sponsors: Shareholders Agreement/Share Subscription Agreement, Sponsor Support Undertakings, Corporate Guarantees. They bear the risks of project design, construction, completion, operation, and maintenance and repayment to the lenders. The cost overrun risk is also borne by the sponsors. Customers Off-take Agreements When there are only a few potential customers for the project s output, revenue risk is likely to be transferred to those customers by means of a long-term sales contract. Contracts may include: take-or-pay clause, minimum throughput agreement, tolling contract etc. The risk of payments is mitigated through a proper payment security mechanism. Government/ Statutory Authorities Construction Contractors Concession/Implementation Agreements EPC Agreement When a government grants a concession to a project company, there will be a Concession Agreement that gives the company the right to build and operate the project facility. Concession agreement may require the government to construct supporting facilities such as access roads, contains non-compete condition etc. The risk of project construction is mitigated to the construction contractors by entering into a fixed time fixed price contract with them and the contract adequately providing for liquidated damages (penalties) in case of delay in construction.

98 Assumptions

99 Monthly Statements

100 Conditional Formatting Monthly & Yearly Statement Assumptions EPC Schedule

101 Yearly Statement

102 Concept of Interest During Construction (IDC) When an asset is developed, and there is a considerable period between the start of a project and its completion, the interest costs related to the construction are generally included in the cost of the asset, that is, the interest cost is capitalized The capitalization period ends when the asset is ready for use While modeling in excel, Interest During Construction (IDC) introduces a circular loop into the sheet due to the circular references explained below ( ) Equity and Grant commitments can be either a specific amount, or a certain percentage of the total project funds required (that is, a fixed percentage in the capital structure) Equity Project Specific Cost Items 1 Debt Amount is made equal to the Funding Gap Grant Debt Total Funding 2 Interest Expense is Calculated on Outstanding Debt 4 Interest Expense on Debt Raised (IDC) Total Project Cost 3 Total Project Cost includes Interest During Construction (IDC) Total Funding is made equal to Total Project Cost

103 Incorporating IDC in a Project Financing Worksheet We begin by inputting the project cost assumptions and the equity and grant commitments during the period of construction Next, we put the formula for total project cost (as sum of all project cost elements, including IDC) Total Funding is made equal to the total project cost, by referencing it to corresponding cell Debt to be raised is calculated as the funding gap in the project, after factoring equity and grant commitments Total Project Cost includes Interest During Construction (IDC) Debt to be Raised is equal to the Funding Gap in Project Financing Total Project Fund is equal to the Project Cost Requirement

104 Incorporating IDC in a Project Financing Worksheet We calculate the equity and grant commitments during the years of construction from the assumptions Then, we calculate the total project cost which is the sum of all project cost elements and the Interest During Construction (IDC). Note that IDC cells are left blank at this point, as they are yet ot be calculated The Total Fund requirement is made equal to the Total Project Cost requirement Finally, the Debt to be Raised is made equal to the Funding Gap in that particular year Initially Promoter Equity is deployed in the debt equity ratio. Grant is infused only after Promoter Equity is fully deployed. Total Funding Requirement is made equal to Total Project Cost Each of the Project Cost Items are calculated from the cost assumptions Total Project Cost includes Interest During Construction (IDC)

105 Incorporating IDC in a Project Financing Worksheet The Interest During Construction (IDC) is calculated by multiplying interest rate on the outstanding debt component and fed to corresponding cost element in project cost schedule The sum of all the IDCs in each of the years of construction is then linked to the total IDC under Project Cost break-up. IDC is calculated and fed into corresponding row under project cost schedule Total IDC is made equal to sum of all IDC in each of the years of construction

106 Escrow Arrangement Escrow Arrangement During Construction / Operation Waterfall Mechanism Insurers Revenue Proceeds Claims Escrow Bank Sponsors Shortfall Escrow Mechanism is critical to the monitoring & enforcement functions of the lenders. All Cash Inflows and Outflows are through the Escrow A/c. Outflows are permitted under agreed appropriation of cash in the escrow account. All Reserves are maintained as subaccounts within the escrow account. Statutory bodies Taxes Fuel Expenses* *NA for Road projects Fuel Supplier O&M Contractor Lenders O & M Expenses Debt Servicing Contract Payments EPC Contractors DSRA/MMR Shortfall in DSR SPV Co. Balance Surplus Govt. Bodies

107 Charting with Excel modeling revenue recognition Percentage of completion method Used when project s cost and revenue can be reliably estimated Revenue, expense, and therefore profit, are recognized based on the percentage completed Case: An Infrastructure company has undertaken a project of completing a bridge, construction work for which is going to continue for the 5 years, and expected revenue earned at the end of five years is Rs. 1,000,000,000 The co. is expecting to build 10%, 25%, 25%, 25% and 15% in each of the years Completed contract method Revenue is recognized at the completion as a bullet Revenue Recognized Revenue Recognized Revenue Recognition (%age Completed) Year Revenue Recognition (Completed Contract) Year Create Excel Models and Graphs to gain expertise in formulas and graphs

108 Cash Distribution and Tranches ABC Investments and PQR Developers enter into a JV to develop and operate a project having the following characteristics Initial Investments: INR 50 Mn ABC Investment: INR 45 Mn PQR Investment: INR 5 Mn Project to be sold at the end of 5 th Year (Net Profit from Sale: INR 75 Mn) Cash Flow from Operations as shown in table Terms and Conditions from Tranching of operating income ABC will receive 5% non-cumulative preferred return on invested equity (Shortfall not carried over) After that, PQR will receive 5% non-cumulative preferred return on invested equity Remaining cash flow from operations to be split Terms and Conditions from Tranching of Sale of asset ABC to receive sufficient capital to earn a min IRR of 12% After that PQR receives its invested capital Remaining cash to be split 50-50

109 Total Cash generated in the project can be calculated

110 Cash Flow Tranches ABC cash generation is given a priority over PQR cash To ensure that ABC gets min IRR or 12%, goal seek can be used

111 Cash Flow Tranches Cash is distributed as per the schedule decided IRRs are as per the risk undertaken

112