Completed notes of the course

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1 INVESTMENT EVALUATION IN THE ENERGY SECTOR Introduction: The financial analysis carried out according to the discounted cash flow (DCF) methods was, and still is, widely applied in the valuation of investments of very different nature. DCF methods are valuation methods of an investment opportunity which use fu ture cash flow projections and discount them to arrive at a present value estimate. Discounted cash flow methodologies include many indicators, which are mainly based on the estimation of positive cash flows (the revenues generated) and negative ones (costs characterizing investment). The activity of i nvestment evaluation follows a financial perspective, for which the relevance stays in the specific moment in which the cash flow enters or exits during the life time of the investment. Furthermore, the discounted procedure is taken into account due to the fact that an investment has a useful life of many years and the possession of money has a specific aim, for this reason we cannot directly manage cash flows related to different years and as a consequence we need to discount them for making a comparison with cash flows belonging to different years. DCF methodologies can have two perspective: 1) UNLEVERED DCF (=project perspective) : Its aim is to analyze the economic viability of an investment without focusing on one specific player. In this case the flow under analysis includes all cash flows to the investment capital (including a company’s debt and equity). 2) LEVERED DCF (=shareholders perspective): In this case the analysis assumes one specific point of view, which is the one of the investors (shareholders) of a company. As we can see in the following picture: The set of players involved is different among the two cases. On the left the reference system…