1. Finance Lecture # 5 Jan H. Jansen E-mail: jan.jansen@han.nl

2. Wind energy

3. Minor Wind Energy Project Management Project FinanceLaw Supply Chain Management Construction Mechanical Engineering Energy

4. Programme

5. Plan of Action How to plan the financial part? What should be in the financial chapter?

6. Plan the financial chapter Planning of the financial chapter –Data & Assumptions –Cash Outflow –Cash Inflow –Calculations Financial criteria: IRR, NPV, ROI, BET & DSCR Friday morning in period 2 consultancy –Yellow Hurricane (09.00 – 09.20) –Blue Energy (09.30 – 09.50) –Green Air (10.10 – 10.30) –Red Viventorum (10.30 – 10.50) –Black Offshore(11.10 – 11.30)

7. Structure Excel model Assumptions Data Cash Outflows Cash Inflows Result s

8. Recap lecture # 4

9. Project Structure Project Company Finance Equity Investors Lenders Operator (O&M) Government Support Agreement Government Concession / License Off taker (Power Distributer) Input Supplier Contractor (Construction) Source : Project Finance, Yescombe

10. Ring-fenced project Project Company Finance Equity Investors LendersLenders Operator (O&M) Government Support Agreement Government Concession / License Off taker (Power Distributer) Input Supplier Contractor (Construction) Source : Project Finance, Yescombe

11. Project Risks Commercial Risks Completion Risk Environmental risk Operating RiskRevenue Risk Input Supply Risk Force majeure risk Contract mismatch risk Sponsor support Risk Macroeconomic Risks Inflation Risk Interest Rate Risk Exchange Rate Risk Political Risks Currency Convertibility Risk Transfer Risk Expropriation Risk War & Civil Disturbance Risk Change of Law Risk Quasi-political Risks

12. Lecture 5 Risk & Return DOSIT Methodology

13. Investment Decisions

14. Investment trade off (I) Investment Equipment Building R&D Environment –Sustainability Staff / HR Maintenance Operating costs Funds Equity Loans

15. Investment trade off (II) Cash Outflows Equipment Building R&D Environment –Sustainability Staff / HR Maintenance Operating costs Cash Inflows Sales Lower costs

16. Components Capital Budget Model Investment (Year 0) Economic Life of the Investment –Years 1 - n Interest Rate: i = r + π + σ r = real interest rate π = inflation σ = risk (project risk mark-up) Annual Cash Flows (During economic life) –Expenses –Revenues

17. Decision Criteria Pay Back Period (PBP) Return On Investments (ROI) Break Even Time (BET) Net Present Value (NPV) Profitability Index Internal Rate of Return (IRR) Debt Service Coverage Ratio(DSCR)

18. Weighted average cost of capital (k WACC ) Cost of equity (k e ) with the Cost of debt (k d ) in proportion to the relative weight of each in the firm’s optimal long-term financial structure: k WACC = k e * E + k d * (1-t) *D V = E + D VV

19. Capital asset pricing model (CAPM) CAPM defines the cost of equity (k e ) for a firm as : k e = k rf + β j * (k m – k rf ) k rf = interest rate on risk-free bonds k m = expected (required) rate of return on equity β j = firm’s systematic risk coefficient risk free premium

20. WACC CALCULATOR ™ for GE Source: http://thatswacc.com/index.php

21. WACC CALCULATOR ™ for GE Source: http://thatswacc.com/index.php

22. Example (Excel) Data: Project β2 Risk free interest rate: Rf3% Cost of debt: Rd6% Historical Market Return: Rm11% Corporate taxe rate: t25% Debt : Assets70% Equity : Assets30% Results: Costs of Equity (CAPM): Ke19% WACC8,9%

23. DOSIT Model Model developed by: –TNO (Applied Research in Science) –Research Chair of TQMinON Prof. Gerard Berendsen –Source: Duurzaam innoveren met de DOSIT- methodiek, G. Berendsen cs, Sigma Kluwermanagement, June 2006 http://www.han.nl/onderzoek/kennismaken/ontwikkelen-van-excellente-organisaties/lectoraat/tqm-in- organisatienetwerken/publicaties/_attachments/kip_c2- 11_20duurzaam_20innoveren_20met_20de_20dosit_20methodiek.pdfhttp://www.han.nl/onderzoek/kennismaken/ontwikkelen-van-excellente-organisaties/lectoraat/tqm-in- organisatienetwerken/publicaties/_attachments/kip_c2- 11_20duurzaam_20innoveren_20met_20de_20dosit_20methodiek.pdf

24. DOSIT Model Dutch Duurzaam Ondernemen Selectie Innovatieve Technologie DOSIT English Sustainable Entrepreneurial Selection Innovative Technology SESIT

25. Why DOSIT? Hot topics in business are: Innovation –Product innovation –Innovation of processes Sustainability / CSR –Stewardship / Managership / Bailiff (UK) (Dutch: Rentmeesterschap) Investments

26. Sustainability Innovation: Products Process Investing

27. Sustainability & Entrepreneurship in SME’s Company meets the requirements from the government and keeps in mind future requirements Company fulfils its social and cultural role in society Company plays in an effective way its role in the huge changes in society & economic development for the mid and long term

28. Sustainability & Entrepreneurship in SME’s The product, the way the product is used and will be used The production process (including resources) The way the product is introduced on the market

29. Basic assumptions: DOSIT model I.Focus as a company on a limited number of activities connected to sustainability II.Intrinsic motivation of staff concerning change in general and sustainability in specific III.Communication in the company concerning sustainability: Top Down & Bottom Up IV.‘Quick and dirty job’ in SME’s, staff wants to see immediately results V.Aspects of sustainability have influence on the continuity of the company VI.Sound financial base is important for the continuity of the company

30. ProfitPeople Planet

31. Stages in the DOSIT methodology 1.Preparation 2.Choice of priorities in the areas of Key Success Factors 3.Selection of possible Innovations 4.Final choices of Innovations 5.Implementation of Innovations

32. Elements of the DOSIT model Supply Chain & Value Chain Raw materials Components Business development Logistic Processes (I >T > O) Production Packaging Warehousing & Distribution Product & Market Development Product Use / Reversed Logistics

33. DOSIT Matrix (Overview Priorities ) Supply Chain ↑ & Value Chain ↑ Raw materials Components Business development Logistic Processes (ITO) Production Packaging Warehousing & Distribution Product & Market Development Product Use / Reversed Logistics Aspects ↓ Planet People Profit

34. Constraints in the process of sustainable innovation ROI requirement (bottom line) Requirements clients How do process interfere in the chain? Feasibility (in a technical way) Connection with future developments & ambitions of the company What is target for the degree of sustainability How much will be the impact of the innovation (paradigm shift?)

35. DOSIT Method: Excel tool