Financial Analysis Flashcards by Aoife Langdon

Why is a financial analysis needed

To assess the financial impact of proposed capital expenditure
Part of business case
Building block in appraisal process

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What is an economic appraisal

Looks at social impact of proposal

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What does a financial analysis do

Considers direct financial impacts and affordability by assessing value of net cash flow from project implementation

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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

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Projects under 1 million

Simplified cash flow analysis by sponsoring agency and do gross impact analysis

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Projects over 1 million

Sponsoring agency does detailed discounted cash flow analysis and gross impact calculation and incremental impact calculation

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Significant income or funding projects

Exchequer cash flow analysis with gross and incremental impact calculations

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Main difference with financial and economic analysis

Economic Used by public sector and shadow prices included

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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

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Exclusions for financial analysis of projects under 1m

Cost savings don’t count as benefit and reduction
Sunk costs - money already spent
Depreciation

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What is optimism bias

People overestimate the likelihood of positive events

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4 steps to manage practical application of financial analysis

1- accounting for optimism bias
2- include contingency cost
3-risk assessment
4- sensitivity tests

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What’s the first step in a financial analysis in projects over 1m

Identify a Counter factual ie do nothing- do minimum

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Second thing in FA of projects over 1m

Calculate gross and incremental cash flows

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What do you need for a bottom up benchmarking

Existing design

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What do you need for top down benchmarking

Compare Components of existing projects

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What is residual value

Future value if good after depreciation

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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

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Who sets the financial discount rate

National development finance agency

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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