Mobility Engineering - Finance and Management of Infrastructure Investments

Full exam

Activity Immediate Predecessor Duration (Weeks) Duration Reduction (Crashing) Total Crashing Cost (€) A - 3 1 28 000 € B - 6 3 6 000 € C A 4 2 42 000 € D A 3 2 40 000€ E D 4 3 75 000€ F D 2 1 11 000 € G E,F 2 1 32 000 € H B,C,G 2 - - Exercise 1 The following project is assigned. Identify the critical path. Consider the possibility to crash the activities as shown in the following table. Identify the optimal solution according to a crashing programme . A penalty of 30 000€ for each week of delay is applied in case the project is not concluded before week 8. At the end of each step of the crashing algorithm write which is the margin gained and the critical path/s. 3 7 4 C 8 12 5 0 6 6 B 6 12 6 3 6 3 D 3 6 0 6 10 4 E 6 10 0 6 8 2 F 8 10 2 The critical path is A -D -E-G -H. The project duration is 14 weeks. Solution 0 3 3 A 0 3 0 10 12 2 G 10 12 0 12 14 2 H 12 14 0 Exercise 1 The following project is assigned. Identify the critical path. Consider the possibility to crash the activities as shown in the following table. Identify the optimal solution according to a crashing programme . A penalty of 30 000€ for each week of delay is applied in case the project is not concluded before week 8. At the end of each step of the crashing algorithm write which is the margin gained and the critical path/s. Activity Immediate Predecessor Duration (Weeks) Duration Reduction (Crashing ) Total Crashing Cost (€) Unitary Crashing Cost A - 3 1 28 000 € 28 000€ B - 6 3 6 000 € 2 000€ C A 4 2 42 000 € 21 000€ D A 3 2 40 000€ 20 000€ E D 4 3 75 000€ 25 000€ F D 2 1 11 000 € 11 000€ G E,F 2 1 32 000 € 32 000€ H B,C,G 2 - - Crash D, as it is the most convenient activity. Indeed, A is less convenient, E is not economically convenient, as crashing it by 3 weeks would produce a project duration reduction of only two weeks (and crashing costs (75 000€) would overcome the benefit (60 000€)). Moreover, G has a unitary crashing cost which is higher than the penalty, while H cannot be crashed. Other activities are not in the critical path. Solution 3 7 4 C 6 10 3 0 6 6 B 4 10 4 3 4 1 D 3 6 0 4 8 4 E 4 8 0 4 6 2 F 6 8 2 The critical path is A -D -E-G -H. The project duration is 12 weeks. Benefit = 60 000 – 40 0000 = 20 000€ 0 3 3 A 0 3 0 8 10 2 G 8 10 0 10 12 2 H 10 12 0 Now it is convenient to crash E and F. The saving is equal to 90 000 – 75 000€ -11 000 = 4 000€ Critical Paths: A -D -E-G -H A -C-H A -D -F-G -H Solution 3 7 4 C 3 7 0 0 6 6 B 1 7 1 3 4 1 D 3 4 0 4 5 1 E 4 5 0 4 5 1 F 4 5 0 0 3 3 A 0 3 0 5 7 2 G 5 7 0 7 9 2 H 7 9 0 Crash A (which is in common across all critical paths), as it is the most convenient activity. Overall the additional profit is equal to 30 000 – 28 000 = 2000€. Crashing C is not feasible as it should be crashed with other activities, but it is not economically convenient. Crashing B+C is not enough as the overall project duration would not be reduced. Critical Paths: A -C-H A -D -E-G -H A -D -F-G -H B-H Solution 2 6 4 C 2 6 0 0 6 6 B 0 6 0 2 3 1 D 2 3 0 3 4 1 E 3 4 0 3 4 1 F 3 4 0 0 2 2 A 0 2 0 4 6 2 G 4 6 0 6 8 2 H 0 8 0 Solution Activity Expected Costs ( €) Real Costs ( €) BCWP criteria (milestones) POC A 24 000 € 20 000 € 20 -80 All Milestones completed B 52 000 € 40 000 € 0-100 All Milestones completed C 40 000 € 30 000 € 0-50 -100 Second Milestone Completed (50%) D 35 000 € 15 000 € 20 -80 First Milestone completed E 20 000 € 5 000 € 20 -80 First Milestone completed F 30 000 € 25 000€ 0-100 All Milestones completed G 20 000 € - 20 -80 H 40 000€ - 0-50 -100 The following additional information is provided: • Considering the budget information contained in the following table, compute the project performances (no crashing is considered). Consider that Time Now = 7 (week) and that it was planned that at time 5 the BCWS had the same value that BCWP has at time now. • Compute the estimate at completion in case of Structural Error and Contingent Error. NO Crashing is Considered Solution ➢ BCWS = 24 000 + 52 000 + 40 000 + 35 000 + 20 000*1/4 + 30 000*1/2 = 171 000€ ➢ ACWP = 20 000 + 40 000 + 30 000 + 15 000 + 5 000 + 25 000 = 135 000€ ➢ BCWP = 24 000 + 52 000 + 40 000*0.5 + 0.2*35 000 + 0.2*20 000 + 30 000 = 137 000€ ➢ CV = BCWP – ACWP = 137 000 – 135 000 = 2 000€ (cost efficiency) ➢ SV(€) = BCWP – BCWS = 137 000 – 171 000 = -34 000€ (behind schedule) ➢ SV(t) = Earned Schedule – Time Now = 5 – 7 = -2 (behind schedule) ➢ CPI = BCWP/ACWP = 137 000/135 000 = 1.015 ➢ SPI = BCWP/BCWS = 137 000/171 000 = 0.801 Contingent Error ➢ EAC(t) = Project Duration – SV t= 14 – (-2) = 16 ➢ EAC(€) = BAC – CV = 261 000 – (2 000) = 259 000€ ➢ BAC = 24 000 + 52 000 + 40 000 + 35 000 + 20 000 + 30 000 + 20 000 + 40 000 = 261 000€ Structural Error ➢ EAC(t) = Time Now + ART = 7 + 11.23 = 18.23 ➢ ART = BRT/SPI = 9/0.801 = 11.23 ➢ BRT = Project Duration – Earned Schedule = 14 – 5 = 9 ➢ EAC(€) = ACWP + ACWR = 135 000 + 122 189 = 257 189€ ➢ ACWR = BCWR/CPI = 124 000/1.015 = 122 189€ ➢ BCWR = BAC – BCWP = 261 000 – 137 000 = 124 000€ Theoretical Questions 1 ➢ Based on the information in the following table, compute the annual value of the Commitment Fee in Year 0, Year 1, Year 2 and Year 3 (6 Points). Year 0 Year 1 Year 2 Year 3 Total Senior Debt Drawdown 50,000.00 € 40,000.00 € 40,000.00 € 30,000.00 € 160,000.00 € Commitment Fee Rate 5% 5% 5% 5% Commitment Fee ???? ???? ???? ???? Theoretical Questions 2 ➢ Provide a definition of corporate and project finance and discuss how they can be used to finance an infrastructure project, highlighting the main differences of the two approaches (6 Points). Theoretical Questions 3 ➢ Based on the information in the following table, compute the Weighted Average Cost of Capital (WACC) for the considered company. Moreover, describe 3 different types of debt financial instruments (6 Points).Item Value Total Assets 1,000,000.00 € Equity 100,000.00 € Non Financial Debt 300,000.00 € Tax Rate 30.00% Financial Expenses 45,000.00 € Ke 10.54% WACC ???? Theoretical Questions 1: Solution ➢ Based on the information in the following table, compute the annual value of the Commitment Fee in Year 0, Year 1, Year 2 and Year 3 (6 Points). ��������������� ����������� ���� �������� ������ = ��������������� ����������� ���� �������� ������−1 + ����������� ���� �������� ������ ������ ��������������� ����������� ���� �������� ������ = ����� ����������� ���� �������� − ��������������� ����������� ���� �������� ������ ��������������� � �� ������ = ������ ��������������� ����������� ���� �������� ������ ∗ ��������������� � �� ���� ������Year 0 Year 1 Year 2 Year 3 Senior Debt Drawdown 50,000.00 € 40,000.00 € 40,000.00 € 30,000.00 € Cumulative Senior Debt Drawdown 50,000.00 € 90,000.00 € 130,000.00 € 160,000.00 € Unused Cumulative Senior Debt Drawdown 110,000.00 € 70,000.00 € 30,000.00 € 0.00 € Commitment Fee Rate 5% 5% 5% 5% Total Commitment Fee 5,500.00 € 3,500.00 € 1,500.00 € 0.00 € 10,500.00 € Theoretical Questions 2: Solution ➢ Provide a definition of corporate and project finance and discuss how they can be used to finance an infrastructure project, highlighting the main differences (6 Points). Corporate finance is the traditional form of private infrastructure finance. This is a balance sheet form of financing in which companies that plan, build and operate infrastructure issue shares on the market, or borrow funds through capital markets and/or intermediaries to finance projects.. Project finance represents the off -balance sheet financing of a standalone, clearly demarcated economic unit (Weber and Alfen , 2010) in which lending arrangements are based solely on the cash flows generated by the project.. Theoretical Questions 2: Solution • Projects financed off -balance sheet • Company who proposes the project is financially and legally distinct from the Special Purpose Vehicle (SPV) • The SPV collects financial resources from investors and cash -flows from the project • No Recourse financing : only the assets of the SPV and the CFs represent the collateral available to lenders • Contractual agreements with (sometimes many) counterparts Theoretical Questions 2: Solution From the “sponsor” perspective a new investment incorporated in the existing balance sheet structure can : • Affect the risk of the firm • Impact on the existing cash -flows • Influence the overall cost of debt ..,while project finance can : • Isolate the cost of funding of the new project • Maintain the original balance sheet structure of the sponsor company • Reduce the contamination risk across projects From the “creditors” perspective, project finance can : • Facilitate monitoring of the project • Enhance control on the generated cash -flows (avoidance of CFs sharing) Theoretical Questions 2: Solution Company/Firm Balance sheet Infrastructure/ project facility SPV To finance To finance Creates a dedicated entity Uses resources of its PROJECT FINANCE CORPORATE FINANCE Theoretical Questions 3: Solution ➢ Based on the information in the following table, compute the Weighted Average Cost of Capital (WACC) for the considered company. Moreover, describe 3 different types of debt financial instruments (6 Points). ������������������� ���� = ����� ����������� − ����������� − �������� ������������������� ���� �� = ������������������� �������� ������������������� ���� �������������� = �� ∗ � � + � ∗ 1 − ��� ���� + �� ∗ � � + �Item Value Total Assets 1,000,000.00 € Equity 100,000.00 € Non Financial Debt 300,000.00 € Tax Rate 30.00% Financial Expenses 45,000.00 € Ke 10.54% WACC ???? Solution Financial Debt 600,000.00 € D+E 700,000.00 € D/(D+E) 85.71% E/(E+D) 14.29% Kd 7.50% WACC 6.01% Theoretical Questions 3: Solution Project Bonds : Standardized instruments that finance individual stand -alone infrastructure projects (while straight corporate bonds bear the credit risks of the issuing entity as a whole and whose projects are diversified across a portfolio of assets) Potentially more risky because the risk of loss to credit holders is higher for any one specific project vs .a diversified portfolio of projects Issued by a project company SPV formed as a distinct legal entity and sold to either banks or, more frequently, to other bond investors .Can be issued in public markets, or placed privately Before GFC, popular credit enhancement was the monoline insurance provided by highly rated monoline institutions Project bonds are most often used during the operational phase of a project when the infrastructure starts to generate cash flows from revenues Bridge to bond financing : the bank will lend for a period shorter than the project life and the project company will refinance it, usually in the bond market, as soon as practicable Theoretical Questions 3: Solution Corporate Bonds : Standardized securities that can be issued in public markets or placed privately (traditionally placed to market by investment banks which act as underwriters ) May have several levels of seniority, most have fixed coupon rates and sometimes inflation -indexed payments Compared to loans, bonds usually have longer tenors, allowing borrowers to lock -in LT financing Instead of bearing the risks of an individual project (see project bond), corporate bonds bear the risk of the issuing (corporate) entity .Thus credit -worthiness is determined by the issuer’s overall ability to service the debt obligations, making them usually less risky than single project bonds Plain vanilla corporate bonds are very diffused in institutional investors portfolios (e .g.,pension funds and insurance companies) and in retail investors portfolios . They represent an alternative to lower - yielding government bonds . Concerns exist amongst market participants regarding liquidity (presence of OTC trades ..) Theoretical Questions 3: Solution Syndicated Loans :Originated by a lead underwriter (e .g.mandate lead arranger, MLA) bank or a consortium of banks, these loans are directly sold to investors (e .g., large institutional investors) through syndicated loan markets Can present a high level of customization, often have prepayment options and are more flexible than bonds . Typically used in the construction phase of the facility The amount of the loan is related to the liquidation value of the asset and to the project ability of generating cash flows to repay the debt Since loan syndicates have concentrated creditors as opposed to diffuse bond holders, debt restructuring can be cheaper and quicker (Sawant 2010 ) Attractive for investors who seek to diversify their existing fixed income exposures Liquidity is generally lower for syndicated loans compared to bonds Impact of Basel III → need for banks to better match stable LT funding and LT lending will potentially impact the way that projects are structured (probably increasing cost of project loans due to increased capital intensity) Theoretical Questions 3 : Solution • Green bonds : corporate bonds, project bonds, and sub -sovereign bonds that finance investment in green/clean infrastructure assets such as clean energy and climate change initiatives • Sukuk bonds : instruments that are structured to comply with Sharia law (not interest -bearing instruments, but still provide a mechanism to channel rents, changes in capital gains/losses, or income to investors in periodic payments) . The asset -backed feature of the Islamic financing make Sukuk well suited to infrastructure projects (e .g., the Islamic Development Bank supports sukuk bond issuances related to infrastructure assets) .