ANNUITIES & DISCOUNTED CASH FLOW RATE OF RETURN

ANNUITY EQUATIONS  ARE USED TO EVALUATE DIFFERENT OPTIONS FOR FINANCING PROJECTS  THE BASE PROJECT FOR THIS CLASS ASSUMES THAT THE PROJECT IS 100% FUNDED BY THE COMPANY FROM AVAILABLE FUNDS. 100% EQUITY  DEBT FUNDING - MORE TYPICAL FUNDING IS ON THE ORDER OF 20% - 40% EQUITY WITH THE REMAINDER AS DEBT 60% - 80%.

EXAMPLE OF ANNUITY CALCUATIONS

ANNUITY EXAMPLE

RESULTS OF EXAMPLE  THE RANGE OF VALUES FOR THE REGULAR PAYMENTS IS $798,950 TO $1,247,033 PER YEAR  THE LOWEST PAYMENT VALUES OCCUR WHEN THE NOTE IS PAID OVER THE LONGEST PERIOD OF TIME  THIS IS ALSO ASSOCIATED WITH THE HIGHEST INTEREST RATE

RESULTS OF EXAMPLE  THE RANGE OF THE PRESENT WORTH VALUES IS FROM $8,860,759 TO $8,905,852  THE LOWEST PRESENT WORTH OCCURS WHEN THE LOAN COSTS (POINTS) ARE MINIMIZED  THIS IS ALSO ASSOCIATED WITH THE LOWEST INTEREST RATE AND SHORTEST TERM  SO THE BEST OPTION IS THE ONE THAT HAS THE LOWEST PRESENT WORTH VALUE

PRESENT WORTH ANALYSIS  PRESENT WORTH VALUE  THIS IS NET PRESENT WORTH OF ALL THE PAYMENTS THAT WILL BE MADE TO COMPLETE THIS LOAN  THIS METHOD PROVIDES AN OBJECTIVE BASIS OF COMPARISON EVEN THOUGH THE TERMS, INTEREST RATES AND LOAD COSTS ALL VARY.  THIS IS ONE VARIATION OF THE DISCOUNTED CASH FLOW RATE OF RETURN (DCRR)

FORMAL DCRR  SEE PAGE 328 FOR REFERENCE  FORMAL VERSION OF CALCULATES THE DCRR INTEREST RATE THAT WOULD YIELD A NET PRESENT WORTH OF $0 FOR A PROJECT OVER A SPECIFIED LIFETIME  SOMETIMES CALLED INTERNAL RATE OF RETURN, INTEREST RATE OF RETURN, INVESTOR’S RATE OF RETURN

INVESTMENT PERIOD (DCRR)  FOR THIS CALCULATION, AN INVESTMENT IS MADE IN A FACILITY OVER A SPECIFIED CONSTRUCTION TIME PERIOD  THESE VALUES START AT YEAR ZERO  THEY ARE EXPRESSED IN CURRENT (CONSTANT VALUE) DOLLARS FOR EACH YEAR  THEY ARE CONSIDERED NEGATIVE VALUES BECAUSE THEY ARE EXPENDITURES

PROFIT PERIOD (DCRR)  THE RETURN IS CALCULATED FROM THE PROFIT EARNED DURING OPERATIONS  THESE VALUES START IN THE FIRST YEAR AFTER CONSTRUCTION  THEY ARE EXPRESSED IN CURRENT DOLLARS, OVER THE LIFE OF THE FACILITY  THESE ARE CONSIDERED POSITIVE VALUES BECAUSE THEY REPRESENT NET PROFITS

DCRR CALCULATION  BOTH THE INVESTMENT AND THE PROFIT RETURN ARE DISCOUNTED BACK TO A COMMON TIME AT YEAR ZERO FOR THE OVERALL PERIOD j WHICH IS THE SUM OF THE CONSTRUCTION AND OPERATION PERIODS  FOR EACH YEAR THE CALCULATION COULD BE BASED ON THE FORMULA

DCRR INTEREST CALCULATION DCRR INTEREST CALCULATION  THE DCRR IS THE VALUE OF i WHEN  WHERE j IS THE LIFETIME OF THE PROJECT

DCRR EXAMPLE

DCRR EXAMPLE CALCULATION

DCRR TRIAL & ERROR

DCRR EXAMPLE RESULTS

ANALYSIS OF DCRR RESULTS  THE RESULTS INDICATE A DCRR OF 11.85%  IN THEORY, IF THE PLANT WERE 100% FINANCED, A LOAN AT A RATE OF 11.85% COULD BE PAID BACK OVER THE LIFE OF THE PROJECT

DCRR APPLICATION  THE EXAMPLE CAN BE USED TO DEMONSTRATE THE ADVANTAGES OF DEBT FINANCING  THE CALCULATION CAN BE REPEATED WITH AN ASSUMPTION OF 25% EQUITY FINANCING AND REDUCING THE PROFIT EACH YEAR TO ACCOUNT FOR INTEREST PAYMENTS  THE RESULT SHOWS THE DCRR INCREASES TO 30% FOR THE DEBT FUNDING APPROACH

COMPARISON OF ALTERNATES  THE RESULTS OF THE REVISED DCRR CALCULATION SHOW THAT A PROJECT THAT HAS 100% FUNDING MIGHT HAVE A RELATIVELY SMALL DIFFERENCE ABOVE CURRENT INTEREST RATES AND NOT BE ATTRACTIVE  THE SAME PROJECT WITH DEBT FUNDING MAY HAVE A RETURN COMFORTABLY ABOVE THE CURRENT INTEREST RATES

OTHER COMPARISONS  THE SIGNIFICANT VALUE TO THIS TYPE OF CALCULATION IS BASED ON OBJECTIVE COMPARISON OF VARIOUS TYPES OF PROJECTS AND/OR VARIOUS CONFIGURATIONS OF ONE PROJECT  INDEPENDENT OF PROJECT LIFE  INDEPENDENT OF CURRENT INTEREST RATES