Corporate Finance Slides on Capital Budgeting

UNIVERSITY OF CAPE COAST
Cape Coast, Ghana
Capital Budgeting
Session 1

CAPE COAST - GHANA Project Valuation and Investment Appraisal
The session would discuss issues in the following areas:
 Project specifications in project valuation
 Fixed capital investment for project
 Working capital investment for the project
 Risk and Returns on a project
 Project Appraisal Techniques
 Net present value
 Discounted payback period
 Internal rate of return
 Profitability index

PROJECT INVESTMENT APPRAISAL
 Financial Analysis provides us with the tools that aid us in analysing and
evaluating the financial outcome of our decision in terms of their benefits
and costs.
 In cases involving investment, we want to know if the project is
economically viable in order to proceed. In effect, we compare the net
benefit of proceeding with the project against the consequences (good or
bad) of not proceeding.
3

PROJECT COSTS AND BENEFITS
 Any project, however simple or complex, involves costs and benefits.
 At the beginning of a project an investment is usually required
 As soon as the project gets into its operating phase, some function, such as
producing a product or performing a service, that has tangible or intangible
costs and benefits will be performed.
 If the system is producing an end item, such as a factory producing motor
vehicles, then the revenue received by selling the produced items is the
benefit obtained.
4

COSTS AND BENEFITS ANALYSIS
 The benefits or costs are not always given directly in monetary terms but
they can be converted to monetary terms for comparison purposes.
 Costs and benefits may occur at different points of time during the life of
the project.
 In most cases, the lifetime worth, that is the lifetime aggregate of all the
costs and benefits, taking into account the time of their occurrence, is used
to compare different projects and to decide which alternative to choose.
5

PROJECTS AND TIME VALUE OF MONEY
 Money can have different values at different times. This is because money
can be used to earn more money between the different instances of time
 Usually, money today is worth more than money on the near future due to
the effect of inflation.
 Since the interest rate is the more identifiable and accepted measure of the
earning power of money, it is usually accepted as the time value of money
and indication of its earning power.
6

PROJECT COST APPRAISAL TECHNIQUES
 The tools for project cost evaluation are divided into two;
 (a) Non Discounted Cash Flow Methods
Pay back period method(PBP)
 (b) Discounted Cash Flow Methods
Net present value (NPV)
Internal rate of return (IRR)
Profitability index (PI) or Benefit –Cost Ratio
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7

NON DISCOUNTED CF METHOD
 1. Payback Period Method
 The number of years it takes the firm to recoup its initial outlay. Two
approaches
(a) Equal annual cash inflows
PBP= net cash outflow (net investment)
annual net cash inflows
Eg. Suppose a firm is considering project A that requires a net
investment of GHC500 million and is expected to generate 6
years of net cash inflows of GHC 125million a year. What is the
payback period?
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8

CONT’D
Solution
payback period= GHC500000000
GHC125000000
=4 Years.
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9

PAYBACK PERIOD WITH UNEVEN CASHFLOW
10
YEAR CARS D@10% DFCF MOTORS D@10% DFCF
TRICYCL
E D@10% DFCF
0 2600 3200 8100
1 1000 0.909 909 0 0.909 0 2000 0.909 1818
2 2000 0.826 1652 2000 0.826 1652 2000 0.826 1652
3 6000 0.751 4506 8000 0.751 6008 20000 0.751 15020
7067 7660 18490

DISCOUNTED PAYBACK PERIOD(PBP)
DF@10%
Y A DF(A) B DF(B) C DF(c)
0 (2600) - (3200) - (8100) -
1 1000 1000(.9090)
=909
0 0(.909)=0 2000 2000(.909)
=1818
2 2000 2000(.826)
= 1652
2000 2000(.826)
= 1652
2000 2000(.826)
=1652
3 6000 6000(.751)
=4506
8000 8000(.751)
=6008
20000 20000(.751)=15
020

CONT’D
PBP= y + I-X = 2 + 2600-2561 = 2+
n 4506

DISCOUNTED CF
Net Present Value (NPV)
The difference between the discounted cash flows and the internal cash out flow.
NPV ∑DCIF – Initial Outlays
or
05/06/2024
13
0
3
3
2
2
1
1
)
1
(
...
)
1
(
)
1
(
)
1
(
I
k
CF
k
CF
k
CF
k
CF
NPV n
n











CONT’D
 Decision Rule
 (a) Accept projects with positive NPV
 (b) reject projects with negative NPV
 FOR two projects accept those with higher NPV
 Example:
From the following data, advise management as to which of the two
projects should be selected using NPV.
05/06/2024
14

CONT’D
YEAR PROJECT A PROJECT B
GHC’000 GHC ‘000
1 12500 5000
2 12500 10000
3 12500 15000
4 12500 15000
5 12500 25000
6 12500 30000 05/06/2024
15
Net cashflow after tax

CONT’D
• Initial investment (Io) is GHC50 million for each project. Assume Cost
of capital of 14%.
Solution
PROJECT A
Annuity of Net cash flow=GHC12500(3.889)
=48612.50
less: Initial outlay =50000
NPV (1387.50)
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16

YEAR
0
CASH OUTLAY
GHC’000
50000
Net cash inflow
GHC‘000
-
D.F(14%)
1
P.V. GHC’000
(50000)
1 - 50000 .877 4385
2 - 10000 .769 7690
3 - 15000 .675 10125
4 - 15000 .592 8880
5 - 25000 .519 12975
6 - 30000 .456 13680
NPV 7735 05/06/2024
17
Illustration cont

CONT’D
Since project B gives a positive NPV it should
be accepted.
05/06/2024
18

PROFITABILITY INDEX(PI) OR COST BENEFIT RATIO
 PV of cash inflows divided by initial outlay
 Accept project with PI of > 1
 PI =PV of future cash inflow = 57,735,000
initial investment 50,000,000
=1.1547

INTERNAL RATE OF RETURN(IRR)
 IRR is the discount rate that make NPV be zero
 RULE: accept project if , IRR> RR or cost of capital.
 if IRR > RR or cost of capital it means more value than the cost of
debt (say)would be obtained ,so we proceed to the project.
 For two different projects, accept the one with higher IRR.

EXAMPLE
 Cosmos Energy is considering an exploration project in the Volta
Basin. Using the data below, and the IRR method, advice
management.
 Assume cost of capital of 12.8%.
Years 0 1 2 3
Est
Project
CFs
-$350000 $16000 $16000 $466000

SOLUTION
 
3
2
1
3
2
1
)
128
.
1
(
466000
)
128
.
1
(
16000
)
128
.
1
(
16000
350000
%
8
.
12
)
1
(
466000
)
1
(
16000
)
1
(
16000
350000















NPV
r
Assume
r
r
r
NPV
NPV = 1441
l
l
h r
r
r
RangeNPVs
LDR
NPV
IRR 

 )
(
(
)
(

CONT’D
 NPV is positive; therefore IRR must be > 12.8%
Assume r = 13%
 NPV= -$35000+16000/(1.13)+16000/(1.13)^2 +466000/(1.13)^3
=-$350
NPV is negative; therefore IRR must be < 13%

CONT’D
The project must be accepted since the IRR is greater than the cost of capital.
 
%
96
.
12
%
8
.
12
128
.
13
.
350
1441
1441
)
(
(
)
(








IRR
IRR
r
r
r
RangeNPVs
LDR
NPV
IRR l
l
h

Cost Benefit Analysis
Decision making is about choices
• For an individual
– They might rely on intuition, a “gut feel” for the right choice. They decide
to do an analysis of the choices or it may be a combination of both of these.
• For a company
– Being concerned with the profit earning capacity and income flow, they
may
undertake a cashflow analysis or a full financial appraisal of the project.
25
MR.
DANIEL
AGYAPONG

 For the Government
Decision making for governments is much harder. Not only are they expected
to consider the profitability (or at least neutrality) of the costing but must also
include consideration of the social cost and benefits of their choices.
They are also expected to act within the political environment to satisfy the
political agenda set by the government of the day and finally, must also
comply with
environmental considerations.
26
MR. DANIEL AGYAPONG

What is Cost Benefit Analysis?
 CBA has been established primarily as a tool for use by
governments in making their social and economic decisions.
 CBA measures costs and benefits to the community of adopting
a particular course of action e.g. Constructing a dam, by-pass
etc.
 CBA is a decision making device for evaluating activities that
are not priced by the market.
27
MR. DANIEL AGYAPONG

 CBA attempts to simulate a market result in areas where the market does
not operate to establish prices
OR attempts to quantify and include in estimates of cost and benefits to
client but also to rest of community.
Other issues:
Is the project worthwhile financially?
• Is it the best option?
• Should it be undertaken at all?
28
MR. DANIEL AGYAPONG

Costs of a project can be divided into three areas (Seeley,1996,
p.470)
 Social cost: being the sum total of costs involved as the result of an
economic action
 Private costs: – Those that affect the decisions of the performers (i.e.
production costs including, labour, materials, lands and capital)
 External Costs: – Resulting from damage to buildings or decline of
property values through smoke emanating from a factory, etc.
29
MR. DANIEL AGYAPONG

Measurement Problems
 Difficulties encountered in measuring intangible cost such as foul
atmosphere or intangible benefits such as a peaceful neighbourhood.
 Assuming several other costs & benefits associated with the activities; and
estimating the costs and benefits involves.
 Affects by Market condition, state of economy etc.
 Uneven distribution of benefit to community.
31
MR. DANIEL AGYAPONG

Time Problems
 Tackling future time problems by discounting future costs and
benefits
 OR calculating the correct rate for future dollar value as well as
accounting for additional benefits and costs associated.
32
MR. DANIEL AGYAPONG

CBA unlikely to be a useful technique unless two main
conditions are met:
 investment must be sufficiently large or important to merit time and
cost of CBA.
 Social and other intangible costs and/or benefits must be
prospectively and sufficiently large for selection by cost-in-use
or investment appraisal to be invalid.
33
MR. DANIEL AGYAPONG

Method
 Identify all possible alternatives.
 Prepare table showing life of the project i.e. year to year basis.
 Establish Cost of project during the year including capital, operating and
maintenance costs, social and other tangible costs
 Establish total benefits to be obtained from project by way of sales of
goods and services including value of social benefits.
 Cost calculated at rate of interest such that NPV=Zero
 Ranking in order of [benefit-cost] or [benefit / cost]
34
MR. DANIEL AGYAPONG

Establishing a steel production plant in a port Community:
Costs (-)
 construction.
 pollution.
 devaluing house prices etc.
Benefits (+)
 employment
 increase port trade
 steel for local industry
35
MR. DANIEL AGYAPONG

Establishing a brick production plant in a community
 Identify the problem
 Identify the sectors affected:
– local authorities
– developer
– existing occupiers
– proposed occupiers
– local community
 Identify the costs and benefits
 Quantify the costs and benefits
 Summarise conclusion
36
MR. DANIEL AGYAPONG

 Example of Costs and Benefits of the dam Costs
 The dam is completed in five years at a cost of $200,000,000. Inflation in
the interim period is estimated to be 5%.
 Discounted to present value = 0.7352 x $0.2 billion
= $156,704,000
37
MR. DANIEL AGYAPONG

Benefit
 The dam will not start to provide benefits until the water is used for
irrigation and crop yields improve.
38
MR. DANIEL AGYAPONG

CAPE COAST - GHANA TRY QUESTIONS
QUESTION 1
An appropriate project appraisal technique should be able discriminate among the different projects, steering us
towards the project that maximises owners’ wealth. An evaluation technique should consider all the future incremental
cash flows from the project; consider the time value of money; consider the risk associated with future cash flows; and
have an objective criterion by which to select a project. In view of these, discuss any five quantitative techniques you
will employ in evaluating a new product development project.
QUESTION 2
A car manufacturing company is setting up a new plant. When completed, the firm would be able to sell 1 million units
of cars in year 1, 2 million units in year 2, and 4 million units in each of year 3, 4 and 5. The price is 100 per unit in year
1, and increases by 10% a year. Factory building will cost GHS250 million, while equipment costs GHS350 million. The
factory building and equipment cost must be borne immediately. Management would also require GHS55 million in
working capital, and GHS35 million to maintain equipment in year 1. These two will go up 15% a year. At the end of year
5, equipment plus building can be sold for GHS80 million. The current cost of capital is averaged 24%. Advise
management whether the project should be carried out?

Advantages of the net present value
method
The net present value method of investment appraisal, being based on
discounted cash flows, takes account of the time value of money, which
is one of the key concepts in corporate finance. Net present value uses
cash flows rather than accounting profit, takes account of both the
amount and the timing of project cash flows, and takes account of all
relevant cash flows over the life of an investment project.
For all these reasons, net present value is the academically preferred
method of investment appraisal. In all cases where there are no
constraints on capital, the net present value decision rule offers sound
investment advice.

Disadvantages of the net present value method
It has been argued that net present value is conceptually difficult to understand, but
this is hardly a realistic criticism.
It has also been pointed out that it is difficult to estimate the values of the cash
inflows and outflows over the life of a project which are needed in order to calculate
its net present value, but this difficulty of forecasting future cash flows is a problem
of investment appraisal in general and not one that is specific to any particular
investment appraisal technique.
A more serious criticism is that it is only possible to accept all projects with a
positive NPV in a perfect capital market, since only in such a market is there no
restriction on the amount of finance available. In reality, capital is restricted or
rationed and this can limit the applicability of the NPV decision rule.

When calculating the NPV of an investment project, we tend to assume not only
that the company’s cost of capital is known, but also that it remains constant
over the life of the project. In practice, the cost of capital of a company may be
difficult to estimate and selecting an appropriate discount rate to use in
investment appraisal is also not straightforward .
The cost of capital is also likely to change over the life of the project, since it is
influenced by the dynamic economic environment within which companies
operate. However, if changes in the cost of capital can be forecast the net
present value method can accommodate them without difficulty

The internal rate of return method
If the cost of capital used to discount future cash flows is increased, the net
present value of an investment project with conventional cash flows will fall.
Eventually, as the cost of capital continues to increase, the NPV will become
zero, and then negative.
This is illustrated in Figure 6.1.
The internal rate of return (IRR) of an investment project is the cost of capital
or required rate of return which, when used to discount the cash flows of a
project, produces a net present value of zero. The internal rate of return
method of investment appraisal involves calculating the IRR of a project,
usually by linear interpolation, and then comparing it with a target rate of return
or hurdle rate. The internal rate of return decision rule is to accept all
independent investment projects with an IRR greater than the company’s cost
of capital or target rate of return.

A comparison of the NPV and IRR methods
There is no conflict between these two discounted cash flow methods
when a single investment project with conventional cash flows is
being evaluated.
In the following situations, however, the net present value method
may be preferred:
■ where mutually exclusive projects are being compared;
■ where the cash flows of a project are not conventional;
■ where the discount rate changes during the life of the project.

Mutually exclusive projects
Consider two mutually exclusive projects, A and B, whose cash flows are given in
Table 6.8. The net present value decision rule recommends accepting Project B,
since it has the higher NPV at a cost of capital of 14 per cent. However, if the
projects are compared using internal rate of return, Project A is preferred as it has
the higher IRR. If the projects were independent so that both could be undertaken,
this conflict of preferences would not be relevant. Since the projects are mutually
exclusive, however, which should be accepted?
In all cases where this conflict occurs, the correct decision is to choose the project
with the higher NPV. This decision supports the primary corporate finance
objective of maximising shareholder wealth since selecting the project with the
highest NPV leads to the greatest increase in the value of the company. Although
Project A has the highest IRR, this is only a relative measure of return. NPV
measures the absolute increase in value of the company.

In order to illustrate the conflict between the two investment appraisal methods in
more detail, Table 6.9 shows the NPV of the two projects at different discount
rates and Figure 6.3 displays the same information in the form of a graph.
From Figure 6.3, it can be seen that the two projects, A and B, have project lines
with different slopes. For costs of capital greater than the IRR of the intersection
of the two project lines, which occurs at approximately 16 per cent, the two
methods give the same advice, which is to accept Project A. For costs of capital
less than the IRR of the intersection, the advice offered by the two methods is in
conflict and the net present value method is preferred.

Non-conventional cash flows
If an investment project has cash flows of different signs in successive
periods (e.g. a cash inflow followed by a cash outflow, followed by a
further cash inflow), it may have more than one internal rate of return.
Such cash flows are called non-conventional cash flows, and the
existence of multiple internal rates of return may result in incorrect
decisions being taken if the IRR decision rule is applied. The NPV
method has no difficulty in accommodating non-conventional cash flows,
as can be seen from Figure 6.4.

The non-conventional project in Figure 6.4 has two internal rates of return, at
IRR1 and IRR2. This kind of project is not unusual: for example, a mineral
extraction project, with heavy initial investment in land, plant and machinery
and significant environmental costs towards the end of the project life, might
have this kind of NPV profile. Using the internal rate of return method, which
IRR should be used to assess the project?
If the cost of capital is RA, the project would be accepted using the internal
rate of return method, since both IRR1 and IRR2 are greater than RA. If the net
present value method is used, however, it will be rejected, because at this
discount rate it has a negative NPV and would decrease shareholder wealth.
However, if the cost of capital used to assess the project is RB, it will be
accepted using the net present value method because at this discount rate it
has a positive NPV. The internal rate of return method cannot offer any clear
advice since RB is between IRR1 and IRR2.
In each case, the net present value method gives the correct investment
advice.

Changes in the discount rate
If there are changes in the cost of capital over the life of an investment project, the net present
value method can easily accommodate them. Consider the net present value expression
described earlier, with the symbols having the same meaning:

Consider the investment project in Table 6.10, where the discount
rate increases in year 3 from 10 per cent to 15 per cent. The
present value factor for year 3 is the present value factor for two
years at 10 per cent multiplied by the present value factor for one
year at 15 per cent. Using present value tables (see pages 450–1),
we have:
PVF10,2  PVF15,1  0.826  0.870  0.719
The NPV of the project is £1807 while the IRR is approximately
18.8 per cent. The IRR, however, cannot take into account the fact
that the discount rate in year 3 is different from that in years 1 and
2.

Reinvestment assumptions
The net present value method assumes that cash flows generated during
the life of the project can be reinvested elsewhere at a rate equal to the
cost of capital. This seems to be a sensible reinvestment assumption since
the cost of capital represents an opportunity cost, i.e. the best return that
could have been obtained on an alternative investment. The internal rate of
return method, however, assumes that cash flows generated during the life
of the project can be reinvested elsewhere at the internal rate of return.
The more the IRR exceeds the cost of capital, the less likely it is that such
alternative returns could be realised, and so the reinvestment assumption
underlying the internal rate of return method is a doubtful one. The
reinvestment assumption underlying the NPV method seems realistic.

The superiority of the net present value
method
We can now summarize the arguments in favour of the net present value
method of investment appraisal:
1 The NPV method gives correct advice about mutually exclusive projects.
2 The NPV method can accommodate non-conventional cash flows, when the
internal rate of return method may offer multiple solutions.
3 The reinvestment assumption underlying the NPV method is realistic, but
the reinvestment assumption underlying the internal rate of return method is
not.
4 The NPV method can easily incorporate changes in the discount rate,
whereas the internal rate of return method does not take these changes into
account.
For these reasons, the net present value method is held to be technically
superior to the internal rate of return method.

The discounted payback method
The payback method discussed in earlier can be modified by
discounting the project cash flows by the company’s cost of
capital in order to take account of the time value of money.
Consider the example given in Table 6.12, where a company with
a cost of capital of 15 per cent is evaluating an investment project.
The discounted payback period is approximately 3.5 years,
compared with an undiscounted payback period of approximately
2.2 years.
The discounted payback method has the same advantages and
disadvantages as before except that the shortcoming of failing to
account for the time value of money has been overcome.

CAPE COAST - GHANA
Sources of Project Finance
https://www.wallstreetprep.com/knowledge/sources-of-project-financing-2/
Other types: See the following sites:
https://brickstone.africa/project-financing-from-commercial-sources/
https://www.unescap.org/ttdw/ppp/ppp_primer/41_sources_of_project_finance.html

CAPE COAST - GHANA
 Types/forms of sources of project finance:
 Take-out Financing: Take-out financing is a method of providing finance for longer duration projects of
about 15 years by banks sanctioning medium-term loans for 5-7 years. After taking out the loan from banks, the
institution could offload them to another bank or keep it.
 Viability Gap Financing: Viability Gap Finance means a grant to support projects that are
economically justified but not financially viable. Such a grant under VGF is provided as a capital subsidy to attract
the private sector players to participate in PPP projects that are otherwise financially unviable. Projects may not be
commercially viable because of the long gestation period and small revenue flows in future.
 Crowd funding: It the practice of funding a project or venture by raising small amounts of money from a
large number of people, typically via the Internet. Crowdfunding is a form of crowdsourcing and alternative finance.
In 2015, over US$34 billion was raised worldwide by crowdfunding
 online donations: Online fundraising is a way for nonprofit organizations to raise money via the
internet. It usually involves an online donation page and can include mobile giving, peer-to-peer fundraising, and
more.

CAPE COAST - GHANA
 Factors to consider in determining suitable financing for a project:
 The amount required
 Purpose of which the capital is required
 The length of time of which the funds is required
 The size, status and ability of the business to borrow
 The business’ current level of gearing
 The business’s level of reserves and profit
 The cost of the source of finance
https://revision.co.zw/factors-consider-choosing-source-finance/

CAPE COAST - GHANA
 Short and Long term project financing instruments
Short Term Source of Finance
long Term Source of Finance
Duration Typically repayable within one
year or less.
Have a longer time span varying from 1 to
30 years.
Requirements Obtained to fund temporary
shortfall in the working
capital, repayment of current
liabilities etc.
Obtained to fund the purchase of PPE or
capital projects on a wide scale.
Collaterals Do not create a charge on the
assets of the firm.
Collaterals are the most primary condition
for the furnishing of long term finance.
Terms of loan Interest rates are unstable and
are vulnerable to inflationary
forces.
Interest rates are stable and the terms of
the loan offer flexibility such as
prepayment options, re-negotiation of
interests upon improvement in credit
rating etc.
Volume of funds Used to raise funds in limited
amount since they are
repayable in the near future.
A large volume of funds can be obtained.
However the same is restricted to the
nature of securities furnished, the credit
rating of borrower, etc.
Examples Overdraft, Credit Cards, Line
of Credit.
Leasing, Term Loans, Public Deposits,
Bonds.
https://efinancemanagement.com/sources-of-finance/long-term-finance

CAPE COAST - GHANA
 Financing
developmental
projects
Subsidies
Multinational
Development Banks
(MDBs)
Aids/grants
Public
Public
Partnership
Development Credit
Guarantee
Public
Financial
Institutions
e.g. EXIM
Bank
Charities,
Not for
Profit,
Faith-based
Regional and National
Financial Institutions
E.g. ECOWAS or EU
Bank
Public
Private
Partnership
https://www.brookings.edu/research/development-
finance-filling-todays-funding-gap/

CAPE COAST - GHANA Managing Project Cashflows and Financial Risks
• GROUP 1
• Causes of financial risk
• Project financial risk management
• GROUP 2
• Project cash flow management
• Project Liquidity management
• GROUP 3:
• Investing the project funds
• GROUP 4:
• Managing currency risks in international and domestic project financing
Duration: 20 minutes
In class Discussion: In groups of not more than THREE (3) persons each, discuss
the following and prepare a three slide presentation:

• Project Finance Risks:
• This is the tendency that project cashflows would vary from the budgeted funds for the project.
• Causes of project financial risk: running short of money (cash flow) being overly reliant on a single customer changes in
interest rates.
• Project financial risk management
• GROUP 2
• Project cash flow management
• Project Liquidity management
• GROUP 3:
• Investing the project funds
• GROUP 4:
• Managing currency risks in international and domestic project financing
Duration: 20 minutes

Risk in project finance
The direct financing of infrastructure and industrial projects typically includes the following risks:
In case the sponsor disagrees with the terms of the transaction, the financial institution providing the funds can gain control of the
project assets;
The project generally encounters challenging social and environmental issues because of its large and complex operations;
Halting of project operations can lead to legal complications, posing a direct financial risk, thereby threatening the success of the
project;
Furthermore, larger projects lead to exceeding budgets failing to set issues like:
o Delays in project delivery due to technical problems;
o Pre-exaggerated benefits not matching the larger strategy;
o Unavailability of financial resources;
o Multiple design reconstructions

Generic Project risk factors:
• Technological risk
• Natural disasters
• Cost overrun
• Delay in project execution;
• Credit risk;
• Cash-flow risk
• Financial market risk
• Political risks.
• Construction risk
• Operational risk
• Supply risk
• Offtake risk
• Repayment risk
• Currency risk
• Authorisations risk
• Dispute resolution risk
SOURCE: Choudhary, A. (2019); Fletcher, P & Pendleton, A (2014).

Risk management methods in project financing
It is essential that risk management is the foundation of all project engagement. Generally, the risk manager on site is
responsible for ensuring that risk management remains the focus. These are the steps:
Risk identification– risk identification refers to the refining and re-organisation of risk administration to transform the
project, both realistically and profitably. The generic risk factors include:
• Technological risk; Natural disasters; Cost overrun; Delay in project execution; Credit risk;
• Cash-flow risk; Financial market risk; Political risks.
Risk assessment – risk assessment involves re-allocation of risks to parties in the form of a risk matrix. This enables the
management to better understand the major risk elements of a large infrastructure.
Risk quantification – this signifies the mathematical calculation of risk measures. Risk quantification enables us to calculate
the expected loss of a loan.
SOURCE: Choudhary, A. (2019). What are Risk Management Techniques in Project Financing?

The main objectives of cash and liquidity management are to free up all the project's cash whilst minimising
processing costs, to make this liquidity available when and where it is required, and to make the most profitable
use of any cash surpluses and/or if there are cash deficits to minimise funding costs.
A liquidity management strategy means your project has a plan for meeting its short-term and immediate cash
obligations without experiencing significant losses. It means your project is managing its assets, including cash
to meet all liabilities, cover all expenses and maintain financial stability.
Liquidity risks can be managed through a multi-stage process that is based on developing proper governance
practices, defining and implementing a liquidity risk mandate, assigning management duties and
responsibilities, creating and implementing liquidity risk controls, and monitoring the liquidity risk profile

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