Financial Analysis Flashcards
Why is a financial analysis needed
To assess the financial impact of proposed capital expenditure
Part of business case
Building block in appraisal process
What is an economic appraisal
Looks at social impact of proposal
What does a financial analysis do
Considers direct financial impacts and affordability by assessing value of net cash flow from project implementation
5 objectives of financial analysis
Estimate cash flow for different options
Assess funding sources
Assess impact of each action re cost
Examine return for different funding
Calculate performance indicators such as NPV and FIRR
Projects under 1 million
Simplified cash flow analysis by sponsoring agency and do gross impact analysis
Projects over 1 million
Sponsoring agency does detailed discounted cash flow analysis and gross impact calculation and incremental impact calculation
Significant income or funding projects
Exchequer cash flow analysis with gross and incremental impact calculations
Main difference with financial and economic analysis
Economic Used by public sector and shadow prices included
Steps for projects under 1m
Capex - capital expenditure DT
Opex - operating costs
Maintenance costs
Decommissioning costs
Tax
Revenue losses of existing projects
Income generated by project
Subsidies
Residual terminal value
Exclusions for financial analysis of projects under 1m
Cost savings don’t count as benefit and reduction
Sunk costs - money already spent
Depreciation
What is optimism bias
People overestimate the likelihood of positive events
4 steps to manage practical application of financial analysis
1- accounting for optimism bias
2- include contingency cost
3-risk assessment
4- sensitivity tests
What’s the first step in a financial analysis in projects over 1m
Identify a Counter factual ie do nothing- do minimum
Second thing in FA of projects over 1m
Calculate gross and incremental cash flows
What do you need for a bottom up benchmarking
Existing design
What do you need for top down benchmarking
Compare Components of existing projects
What is residual value
Future value if good after depreciation
What is a Monte Carlo analysis done in risk assessment of projects more than 1m
A model used to predict the probability of a variety of outcomes when potential for random variables is present
Who sets the financial discount rate
National development finance agency
Things to watch out for in FA
Double accounting
Include vat
Using incorrect discount rate
Mismatching real and nominal values
Behaviour bias
People make decisions which affect society
What are contingency costs
Unforeseen events
What is dead weight
Outcome that would’ve happened without intervention
What is decision gate
4 milestones to approving authority to progress refine or abandon proposals
Demand analysis
Assessment of forecast of use of a new asset informed by future demand and demographics
What is discounted cash flow analysis
Valuation method to estimate value of investment based on future cash flow
What is discounting
Allows benefits and costs from different time periods be compared by expressing value in present terms
What is displacement
Creation of new output in one area leads to loss of output in another
What is ECBR
Economic cost benefit ratio
Calculation is sum of present value of benefits divided by sum of present value of costs
What is economic net present value
Sum of discounts cash flows over appraisal period
What is economic payback period
EPP is the amount of time to recover an investment until it breaks even
What is economic rate of return
Discount rate over life of project at which costs and benefits are equal
Evaluation
The process of assessing an intervention to determine its efficiency and effectiveness in achieving an objective
EAP
External assurance process is for projects greater than 100 m has independent reviews on cost, risk and ability to deliver
What is financial benefit cost ratio
Shows relationship between costs and benefits of project in FA
FIRR
Financial internal rate of return is the discount rate at which costs and benefits ratio discounted over project lifecycle are equal
What is NPV
Net present value sum of total discounted financial benefits minus total discounted financial costs
What is MPAG
Major projects advisory group supports DPER in managing external assurance
Logic path model
Map out cause effect relationships between results and impacts
Medium term exchequer envelopes
Rolling multi annual capital allocations
Opportunity cost
Value of resource at its most productive alternative use
Non voted expenditure
Money paid out of central fund which has no annual reference in Dail
PPP
Public private partnership long term partnership between public sector and private company to deliver services not assets
Public spending code
Sets value for money requirements for capital expenditure projects
Proportionality
Complexity of appraisal should match project
Reference class forecasting
Method of estimating project costs which mitigates optimism bias based on actual outcomes of similar
Virement
Savings from one subhead to cover excess expenditure on another subhead
Strategic assessment report
First phase of lifecycle
Switching value
Required change in input to render project NOV neutral
