2. Financial Management for
Projects and Companies
Cairo, October 2022 2 by : Fawzy Harraz
Financial Management
for Projects and Companies
Financial Management
for Projects and Companies
Financial Management
for Projects and Companies
3. Networking First;
Who are We?
Instructor
Fawzy Harraz
1) B.Sc. Marine Engineering and Naval Architecture
2) Chartered Engineer from UK Engineering Council.
3) Member of Institute Of Marine Engineering, Science and Technology
4) Member of the AACE
Forty years diversified experience in engineering, asset development, project
management, project controls (cost engineering, planning and scheduling,
risk management), value assurance and operations planning. Main business
areas include offshore/onshore upstream O&G facilities, midstream
Hydrocarbon Projects (Refineries, and NGL) and downstream petrochemical
plants, Power Plants and Infrastructures. Experience with both green field
and brown fields projects and plant TAR management.
Cairo, October 2022 3 by : Fawzy Harraz
Financial Management
for Projects and Companies
4. Cairo, Aug. 2014 4 by : Fawzy Harraz
Introduction
Administrative Processes
Safety/Escape Process
Getting known to each other
Use of the Manuals and handout notes.
Occasional challenges and Q&A’s
Cairo, October 2022 4 by : Fawzy Harraz
Financial Management
for Projects and Companies
5. Cairo, Aug. 2014 5 by : Fawzy Harraz
Cost Management Overview
Course Mission
1. Value driven !
2. Interactive dialogue
3. Flexible to Participant specific needs
4. Pragmatic (Modern trends addressed)
5. Industry driven.
6. Just a start !!!.
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Financial Management
for Projects and Companies
6. The Mission; Why we are Here
Financial Management of Projects/Companies
Mission Statement
1. Understand basics of Economics (NPV, DCF, costs,
revenues and profits)
2. Applying these to investment proposals
3. Applying optimum pricing to ensure winning and
delivering profitable projects
4. Proper planning and cost estimation of Projects.
5. Validating the profitability of the proposed project.
6. Putting the right Contract terms and conditions for a
winning project/business.
7. Ensuring proper fair flow of cash into the Project
8. Continued close look and care to potential risks and
required mitigation methods.
Cairo, October 2022 6 by : Fawzy Harraz
Financial Management
for Projects and Companies
7. The Mission; Why we are Here
Financial Management of Projects/Companies
Mission Statement ‘cont’
9. Continued performance monitoring of the project and
taking recovery actions as/when needed.
10. Documenting and sharing lessons at Project closeout.
11. Wrap up values of the Course and plan a way forward
and career path.
Cairo, October 2022 7 by : Fawzy Harraz
Financial Management
for Projects and Companies
8. The Mission; Why we are Here
Next slides show how we get there;
the Course Content
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Financial Management
for Projects and Companies
9. Course Outline
Module 1 - Fundamentals of Finance
1. Time value of money
2. Discounted cash flows
3. Direct vs. indirect costs
4. Fixed, variable and semi-variable costs
5. Break-even analysis
Module 2 - Contract Profitability - Pricing
1. Pricing strategy and tactics
2. Profit planning
3. Cost estimating (under Module 5 Agenda)
4. Cost-based pricing
5. Market-based pricing
6. Value-based pricing
Cairo, October 2022 9 by : Fawzy Harraz
Financial Management
for Projects and Companies
10. Course Outline
Module 3 - Asset Management
1. Cash
2. Timing of cash flows
3. Inventory
4. Equipment
5. Revenue recognition
6. Financing arrangement
Module 4 - Key Financial Management issues
1. Managing Risks
2. Scenario and Sensitivity Management
3. Earned Value Analysis (EVA)
4. Variance Analysis
5. Contract Terms and Conditions
6. INCOTERMS (INternational COmmercial TERMS)
Cairo, October 2022 10 by : Fawzy Harraz
Financial Management
for Projects and Companies
11. Course Outline
Module 5 - Cost Estimating - What Works Best
1. Cost estimating
2. Planning and scheduling
3. Making sense of historical data
4. Experience curves
5. Relationship between cost estimating and pricing.
6. Using Excel® to analyses historical data
Cairo, October 2022 11 by : Fawzy Harraz
Financial Management
for Projects and Companies
13. Project Model
Throughout the Course we will be applying Financial Concepts
to a specific project Model. Two cases will be considered:
a) The Company is a Contractor.
The Project basic Data:
1. Project Sale price 500 MM $
2. Project Cost 400 MM $
3. Terms of Payment
• Advance payment 10% of the Lump sum
• Progress payment based on physical progress
(VoWD)
• Fixed costs paid on level of effort
• Payment 30 days from invoicing
• Variation settled and paid before start
4. Performance guarantee bond 10% to be released 1 year
from Provisional acceptance.
Cairo, October 2022 13 by : Fawzy Harraz
Financial Management
for Projects and Companies
14. Project Model ‘cont’
b) The Company is an Owner.
In some topics, the case of Oil and Gas Operator in the
business of Methanol and downstream process will be
used in the discussions in Life Cycle Costing (LCC),
economics scenarios and sensitivities.
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Financial Management
for Projects and Companies
15. Time value of money
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Financial Management
for Projects and Companies
16. Time Sooner the Payment
The better the business
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Financial Management
for Projects and Companies
17. Time value of money
1. The time value of money (TVM) means that money
available at the present time is worth more than the
same sum in the future due to its potential earning
capacity, inflation..
2. This core principle of finance is that, provided money
can earn interest, any amount of money is worth more
the sooner it is received.
3. TVM is also referred to as present discounted value.
For example, money deposited into a savings
account earns a certain interest rate and is therefore said
to be growing or compounding in value.
Cairo, October 2022 17 by : Fawzy Harraz
Financial Management
for Projects and Companies
18. Importance of Time value of money
1. Can save company from insolvency/bankruptcy Or
vice verse (cause Co. to go into insolvency)
2. Can improve annual profits Or vice verse (reduce)
3. Enable Company to catch business opportunities Or
vice verse (lose business opportunities).
4. Impact Company reputation positively or negatively.
Cairo, October 2022 18 by : Fawzy Harraz
Financial Management
for Projects and Companies
19. Importance of Time value of money ‘cont’
Example:
If you have the option to choose between receiving
$10,000 now versus $10,000 in two years, you will
definitely go for the first option.
Despite the equal value, at time of payment, receiving the
$10,000 today has more value than receiving it in the
future due to the opportunity costs of waiting.
Such opportunity costs could include the potential gain
on interest if that money is received today and held in a
savings account for two years.
Cairo, October 2022 19 by : Fawzy Harraz
Financial Management
for Projects and Companies
20. Time value of money
Basic TVM Formula
In general, the fundamental TVM formula is:
FV = PV x [ 1 + (i / n) ] (n x t)
Where:
FV = Future value of the “money of the day”
PV = Present value (money of the day)
i = interest rate
n = number of compounding periods per year
t = number of years
Cairo, October 2022 20 by : Fawzy Harraz
Financial Management
for Projects and Companies
21. Time value of money TVM
Example on TVM
If $10,000 is invested for one year at 10% interest.
The future value of that money is:
FV = $10,000 x (1 + (10% / 1) ^ (1 x 1) = $11,000
The formula can also be rearranged to find the
value of the future sum in present day dollars. For
example, the value of $5,000 one year from today,
compounded at 7% interest, is:
PV = $5,000 / (1 + (7% / 1) ^ (1 x 1) = $4,673
This is the discounted current value for a future
amount. See the next Topic “Discounted Cashflow”
Cairo, October 2022 21 by : Fawzy Harraz
Financial Management
for Projects and Companies
22. Time value of money
Effect of Compounding Periods on Future Value
The number of compounding periods effects TVM. For
$10,000 example above, if we compound quarterly,
monthly or daily, the future value calculations are:
Quarterly Compounding:
FV = $10,000 x (1 + (10% / 4) ^ (4 x 1) = $11,038
Monthly Compounding:
FV = $10,000 x (1 + (10% / 12) ^ (12 x 1) = $11,047
Daily Compounding:
FV = $10,000 x (1 + (10% / 365) ^ (365 x 1) = $11,052
TVM depends on interest rate, period and also on number
of compounding times each year.
Cairo, October 2022 22 by : Fawzy Harraz
Financial Management
for Projects and Companies
25. Cairo, October 2022 25 by : Fawzy Harraz
Real Life Project Example
Cashflow curve
1. The numbers in the graph are ‘Money of the Day’
2. Although the end value is numerically 100 MM $, its
real value “today’ is less than 100 MM $. Time Value
impact gives different value less than 100 $.
3. The discount in the ‘Money of the Day’ when paid in
future depends on:
a. Interest rates
b. Compounding periods
c. The distribution of the money (installments) along
the curve
Financial Management
for Projects and Companies
26. Discounted cash flow DCF
Cairo, October 2022 26 by : Fawzy Harraz
Financial Management
for Projects and Companies
27. Discounted cash flow DCF
Discounted cash flow (DCF) analysis is a method of
valuing a project, company or asset using the concepts
of the time value of money.
DCF is used to estimate the value of an investment
based on its future cash flows,
Cairo, October 2022 27 by : Fawzy Harraz
Financial Management
for Projects and Companies
28. Discounted cash flow DCF
DCF calculates present value of expected future cash
flows using a discount rate to decide on a potential
Project, Contract or investment.
If the value calculated through DCF is higher than the
current cost of the investment, the opportunity should
be considered. DCF is calculated as follows:
DCF= CF1/(1+r)+CF2/(1+r)2+CF3/(1+r)3…+CFn/(1+r)n
• CF = Cash Flow
• r = discount rate.
• The discount rate is normally taken as the WACC
(Weighted Average Cost of Capital); slides 34 ..36.
Cairo, October 2022 28 by : Fawzy Harraz
Financial Management
for Projects and Companies
29. Example on DCF
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Financial Management
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DCF=CF1/(1+r)+CF2/(1+r)2+….
Discount rate 12.0%
Year Annual CF 1+r (1+r)n DCF
Year 1 15 112% 112% 13.4
Year 2 15 112% 125% 12.0
Year 3 15 112% 140% 10.7
Year 4 15 112% 157% 9.5
Total cash inflow 45.6
Salvage value 12.0
Total project value 57.6
Original investment 50.0
Investment return 7.6
30. Discounted cash flow DCF
How Discounted Cash Flow (DCF) Works
1. DCF uses the time value of money i. e. a dollar today
is worth more than a dollar tomorrow.
2. On a 5% annual interest, $1.00 in a savings account
will be worth $1.05 in a year. Similarly, if a $1 payment
is delayed for a year, its present value is $.95 because
it missed the benefit of the saving account.
3. DCF analysis is a tool to confirm the fair stock value
prices published by analysts.
4. It considers many factors that affect a company,
including future sales growth and profit margins.
Cairo, October 2022 30 by : Fawzy Harraz
Financial Management
for Projects and Companies
31. Discounted cash flow DCF
How Discounted Cash Flow (DCF) Works ‘cont’
5. DCF can be very helpful for evaluating individual
investments or projects that we can control and
forecast with a reasonable amount of confidence.
6. DCF analysis also requires a discount rate that
accounts for the time value of money (risk-free rate)
Depending on the purpose of the investment, there
are different ways to find the correct discount rate.
Cairo, October 2022 31 by : Fawzy Harraz
Financial Management
for Projects and Companies
32. Discounted cash flow DCF
Alternative Investments
1. An investor can set a discount rate equal to the
return he expects from an alternative investment of
similar amount with a similar risk.
2. You can invest $500,000 in a new home that you can
sell in 10 years for $750,000. Alternatively, you could
invest $500,000 in a real estate investment bond
that is expected to return 10% annual for the next 10
years.
Cairo, October 2022 32 by : Fawzy Harraz
Financial Management
for Projects and Companies
33. Discounted cash flow DCF
Limitations of DCF Model:
1. When applied too broadly or with bad assumptions.
For example, the risk-free rate changes over time and
may change over the course of a project.
2. Changing cost of capital or expected salvage values
at the end of a project can also invalidate the analysis
once a project or investment has already started.
3. Applying DCF models to complicated projects, where
we cannot control, is also difficult or nearly
impossible.
Real life Example; Kashagan Project
Cairo, October 2022 33 by : Fawzy Harraz
Financial Management
for Projects and Companies
34. Discounted cash flow DCF
Summary
1. In order to conduct a DCF analysis, an investor must make
estimates about future cash flows and the ending value
(salvage) of the investment, equipment, or other assets.
2. The investor must also determine an appropriate discount
rate for the DCF model, which will vary depending on the
project under consideration. If we cannot assess the
future cash flows, or the project is very complex, DCF will
not have much value and alternative models should be
employed, such as pay-back period, Internal Rate of
Return IRR or NPV (net present value).
Cairo, October 2022 34 by : Fawzy Harraz
Financial Management
for Projects and Companies
35. Weighted Average Cost of Capital (WACC)
The WACC, is defined by the formula:
Cairo, October 2022 35 by : Fawzy Harraz
WACC = E/V * Re + D/V * Rd * (1 - Tc)
Re = Cost of equity
Rd = Cost of debt
E = Market value of the firm's equity
D = Market value of the firm's debt
V = E + D = Total market value of Company or
Project
E/V = Percentage of equity financing
D/V = Percentage of debt financing
Tc = Corporate tax rate
Financial Management
for Projects and Companies
36. Weighted Average Cost of Capital (WACC)
1. Example on WACC
Cairo, October 2022 36 by : Fawzy Harraz
Financial Management
for Projects and Companies
Assume that:
Cost of equity Re 9% Rate for Stockholders
Cost of Debt Rd 14% Rate for Indebtors
Market value of Company equity E 950
Market value of Company debt D 1,500
Total market value of Comp. V= (E+D) 2,450
%of equity financing E/V 39%
%of debt financing D/V 61%
Corporate tax rate Tc 0.20
WACC = (E/V * Re) + (D/V * Rd * (1 - Tc)) 10%
The smaller the better !! And vice verse
37. Weighted Average Cost of Capital (WACC)
1. When evaluating a project, we use (WACC) as a
discount rate. WACC is the average cost of capital.
2. If we can invest $50 Million in a project expected to
give $15 MM dollars a year for 4 years and a salvage
value of $12 MM. If the WACC is 12%, a DCF analysis
is shown next slide.
3. In this case, we should invest in the project because
the DCF analysis results $57.56 MM compared to
$50.0 MM initial investment.
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Financial Management
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