Introduction
Large capital-intensive projects require substantial – and mostly risky – investments in the acquisition and subsequent operation and maintenance of new organisational assets.
Of paramount importance is the systematic and comprehensive evaluation of potential investments, and the development of detailed cash-flow analyses to determine as accurately as possible, the expected returns to the organisation under varying conditions of uncertainty over the expected productive life of the project.
This requires the development of a sound, realistic, and carefully structured cash-flow projections, reflecting both the initial capital expenditures required for the acquisition of the asset, as well as the operational expenditures required for successful operation and maintenance of the asset over its anticipated productive life.
World-wide an alarming number of large capital projects fail to meet the overrun their planned budgets, failing to realize both the financial and strategic goals of the organisation – the very reason for their being undertaken in the first place - often with sizable increases in capital and operational expenditures, and with substantial financial losses to the organisation.
In the majority of cases, this is the inevitable consequence of failing to apply the tools and techniques of modern financial project evaluation, financial planning, capital management and cash flow analysis when considering investment into new capital projects.
Who should attend?
This workshop is designed for programme and project professionals, project leaders, project engineers, cost engineers, and other senior project control and business services professionals who are responsible for or involved in evaluating projects and managing cash flow on projects.
Organisational Impact
- The organisation’s investments in large capital-intensive projects will be safeguarded from the pitfalls that have caused substantial financial losses to many organisations due to inadequate project appraisal and financial risk mitigation strategies
- Proper cash-flow and sensitivity analyses will enable the organisation to forecast and control potential future conditions that might jeopardize the chances of project success, thereby maximizing the organisation’s return on the capital invested in projects
- The emphasis given to financial evaluation in this seminar will empower staff to focus on achievement of the organisation’s overall strategic objectives rather than viewing projects in isolation
Personal Impact
- Participants will enhance their understanding of the time value of money, as well as learn how to use the basic tools of financial engineering such as Net Present Value, Internal Rate of Return, and Annual Worth calculations
- Participants will learn how to evaluate and compare various alternative solutions over differing time horizons
- Detailed explanations of the tools and techniques to determine and continuously monitor project feasibility, will enable participants to select projects with the best capital investment potential
- Participants will learn how to plan, structure and manage cash flows on their projects – the single most important forecasting and control element leading to project success
Competencies Emphasized
This will provide you with a proven set of methods, processes, tools and techniques to:
- Perform detailed financial evaluations of potential capital projects to ensure project success
- Understand and apply the principles and methods of modern financial engineering
- Protect the investment of the organisation in capital-intensive assets
- Apply discounted cash flow analysis to project evaluations
- Perform Present and Annual Value calculations
- Determine the Internal Required Rate of Return of the project as the basis for sensitivity analyses to establish the risk exposure to the organisation
- Evaluate and rank various project alternatives using tools such as NPV, IRR, BCR, Equivalent Annual Value/Cost
- Use qualitative and quantitative methods to assess the exposure of the project to particular risks in real and measurable terms
- Apply the concept of Expected Monetary Value to develop adequate contingency levels
- Apply the concepts of sensitivity analysis and simulation to understand the full range of exposure of the project due to risk and uncertainty
- Develop a comprehensive spreadsheet model (Excel) of project cash flow projections and requirements
This brand new workshop will significantly enhance the skills and knowledge of delegates and improve their ability to develop a detailed cash-flow forecast for their projects as a sound base for project cost control and cash flow management during project execution.
This comprehensive programme consists of two parts:
Part one explores the tools used for the detailed financial analyses and evaluation of capital projects to ensure a satisfactory return on the investment to shareholders, exploration companies, and government. This section is based primarily on so-called deterministic methods, and will familiarise delegates with the most common tools used in engineering economics.
Part two introduces typical probabilistic methods and models used to account for risk and uncertainty – core elements of all oil and gas projects. Cash-flow models based on deterministic methods are then updated to reflect the true range of possible financial outcomes due to the elements of risk and uncertainty. This allows for realistic decision-making before investing in capital-intensive projects.
Training Methodology
Delegates will develop advanced financial analysis and cash flow management skills through formal and interactive learning methods. The programme includes individual exercises, team projects, applicable case studies, group discussions and video material that will bring to life the skills acquired throughout the course.
Workshop Outline
Fundamentals of Financial Evaluation
Introduction to Financial Evaluation
- Typical Company Objectives
- Planning Capital Expenditures
- Uncertainty and Risk
- Deterministic Models of Cash Flow
Basic Tools for Financial Evaluation
- Simple Project Payback Period
- Time Value of Money
- Simple and Compound Interest
- Appraisal Methods – Discounted Cash Flow Projections
- Net Present Value Analysis (NPV)
- Time Equivalence
- Comparing Projects with Equal Lives
- Comparing Projects with Unequal Live
Project Risk Exposure and the Cost of Capital
Rate of Return Computations (IRR)
- Determining the Internal Rate of Return (IRR)
- IRR for a Single Project
- IRR for a Single Project Using Present Worth
- IRR for a Single Project Using Annual Worth
- Incremental Analysis
- Mutually Exclusive Projects
- Using IRR to Analyse Options with Different Lives
Benefit-Cost Ratio (BCR)
- Costs, Benefits, and Non-benefits
- Estimating the Benefit-Cost Ratio for a Single Project
- Comparing Mutually Exclusive Projects Using Incremental Benefit-Cost Ratios
Cost of Capital Computations
- Estimating the Cost of Capital for a Project
- The Cost of Debt Capital
- The Cost of Equity Capital
- Weighted Average Cost of Capital (WACC)
- Financial Gearing (Structuring)
- Capital Asset Pricing Model (CAPM)
Cash-Flow Modeling and Project Evaluation
Financial Modeling and Project Evaluation
- Preparing Cash Flow Projections
- Accounting Years and Tax Years
- Capital Expenditures (CAPEX)
- Operating Expenditures (OPEX)
- Incremental Costs and Benefits
- Working Capital Requirements
- Forecasting Cash Flows
- How to Deal with Inflation
- Opportunity Costs and Sunk Costs
- Determining the Economic Life of a Project
- Relevant Cash Flows over Differing Time Horizons
- Depreciation
- Tangible and Intangible Property
- Straight-Line Method
- Declining Balance Method
- Amortization and Depletion
- Interest, Insurance and Tax Costs
- Taxation
- Taxable Profit
- Capital Allowances
- Assessing the Terminal (Salvage) Value of a Project
Decision Analysis: Expected Value Concept
Financial Project Risk Analysis
- Overview of the Risk Management Process
- Detailed Risk Quantification and Prioritisation
- Probabilistic Methods
- Expected Monetary Value Concepts
- Risk Quantification and Expected Monetary Value
- Scenario Planning
- Best case scenario
- Base case scenario
- Worst case scenario
- Decisions Under Conditions of Uncertainty
- Multiple Option Decisions
Basic Probability Concepts
- Fundamental Probability Concepts
- Definition of probability
- Observations on the workings of probability
- Probability “rules”
- Addition rules
- Multiplication rules
- Detailed Risk Quantification and Prioritisation
- Mutually Exclusive, Independent Events
- Non-Mutually Exclusive, Independent Events
- Summary and Formulation of Equations
- Expanding the Data Set
- Probability Applications
Decision Analysis: Probabilistic Models
Sensitivity Analysis and Simulation
- Overview
- Simulation Process
- Defining the Variables
- Calculating EMV
- Detailed Example of Simulation
- Modifying the Cash flow Model
ABOUT YOUR EXPERT PRESENTER
Professor David Flynn holds degrees from a number of South African universities in the area of business, finance and accounting. He is currently employed both as a consultant and as an Associate Professor in the School of Management Studies at the University of Cape Town and a visiting professor at Rhodes Investec Business School.
He has served as an academic, being the Head of the School of Accounting which prepares chartered accountants. The School has a staff of over 70 academics and more than 3 000 registered students. During that time, he authored and co-authored a number of texts in the field of financial accounting and financial management. He also held a sabbatical academic position at the University of Windsor in Canada.
Following a career in academia, David served as Head of Research at Old Mutual Asset Managers, a company listed on the JSE and London Securities Exchanges, and also as Chief Operating Officer of an Investment company listed on the JSE Stock Exchange. More recently he works as an academic, an author, a practitioner and as a seminar presenter.
He travels widely in order to present seminars and has most recently served as a facilitator in Kuwait, Kuala Lumpur, Johannesburg, Manila, Shanghai and Sao Paulo.
