Mobility Engineering - Finance and Management of Infrastructure Investments

Full exam

Section I – Q1 The following projects are assigned. For both project A and project B compute the following indicators: ▪ Net Present Value; ▪ Payback Time; ▪ Internal Rate of Return. With reference to each single indicator, please, discuss which investment is preferable and motivate the choice.Project A Year 1 Year 2 Year 3 Year 4 Discount Rate Revenues 0.00 € 100 000.00 € 110 000.00 € 70 000.00 € 3% Operating Costs 0.00 € 40 000.00 € 50 000.00 € 60 000.00 € Initial Investment 100 000.00 € Project B Year 1 Year 2 Year 3 Year 4 Discount Rate Revenues 0.00 € 100 000.00 € 130 000.00 € 350 000.00 € 3% Operating Costs 0.00 € 60 000.00 € 80 000.00 € 60 000.00 € Initial Investment -200 000.00 € Section I – Q1 (Solution: Financial Analysis) ▪ NPV: Project B is better since NPV B > NPV A. ▪ PBT: Project A is better since PBT A < PBT B. ▪ IRR: Project B is better since IRR B > IRR AProject A Year 1 Year 2 Year 3 Year 4 Discount Rate Revenues 0.00 € 100 000.00 € 110 000.00 € 70 000.00 € 3% Operating Costs 0.00 € 40 000.00 € 50 000.00 € 60 000.00 € Initial Investment 100 000.00 € CF A -100 000.00 € 60 000.00 € 60 000.00 € 10 000.00 € Discounted Cash Flows -97 087.38 € 56 555.75 € 54 908.50 € 8 884.87 € Cumulated Discounted Cash Flows -97 087.38 € -40 531.62 € 14 376.88 € 23 261.75 € NPV 23 261.75 € PBT year 3 IRR 0.180 Project B Year 1 Year 2 Year 3 Year 4 Discount Rate Revenues 0.00 € 100 000.00 € 130 000.00 € 350 000.00 € 3% Operating Costs 0.00 € 60 000.00 € 80 000.00 € 60 000.00 € Initial Investment 200 000.00 € CF A -200 000.00 € 40 000.00 € 50 000.00 € 290 000.00 € Discounted Cash Flows -194 174.76 € 37 703.84 € 45 757.08 € 257 661.24 € Cumulated Discounted Cash Flows -194 174.76 € -156 470.92 € -110 713.84 € 146 947.41 € NPV 146 947.41 € PBT year 4 IRR 0.280 Section I – Q1 (Solution: Financial Analysis) �� ������ = ������������� ������ − ������������������� ����� ������ − ���������������������� ��������������� ������ ��������������� ��� ℎ ����� ������ = �� ������ (1 + ������������� ���� )������ ��������� ��������������� ��� ℎ ����� ������ = ��������� ��������������� ��� ℎ ����� ������−1 + ��������������� ��� ℎ ����� ������ ��� = ෍ ������=1 4 ��������� ��������������� ��� ℎ ����� ������ Payback period = min � | ��� ≥ 0 0 = ��� = ෍ ������=1 ������ �� ������ (1 + ������������������ )������ Section I – Q2 Based on the following project information, please compute the Loan Life Cover Ratio (LLCR) for the project. Section I – Q2 (Solution) ��������������� ���ℎ ����� ������ = �� ������ (1 + ������������� ���� )������ ��������������� ���� �������������� ������ = ���� �������������� ������ (1 + ������������� ���� )������ ������������������� = σ ������=1 4 ��������������� ���ℎ ����� ������ σ ������=1 4 ��������������� ���� �������������� ������Project Information Year 1 Year 2 Year 3 Year 4 Discount Rate Cash Flow 50 000.00 € 60 000.00 € 65 000.00 € 70 000.00 € 3% Debt Repayment 20 000.00 € 25 000.00 € 30 000.00 € 33 000.00 € LLCR ???? Discounted Cash Flows 48 543.69 € 56 555.75 € 59 484.21 € 62 194.09 € Discounted Debt Repayment 19 417.48 € 23 564.90 € 27 454.25 € 29 320.07 € LLCR 2.27 Section II – Q3 The following project is assigned. Consider that Time Now = week 50. Select the correct answer(s): • The project is in delay but is efficient from a cost perspective. • ACWP > BCWP • BCWP < BCWS • BCWS = 54000€. • BCWP = 122500€. • None of other answers is correct. ID Duration Precedence Expected Costs (€) Real Costs ( €) BCWP criteria (milestones) Percentage of Completion A 18 / 25 000 € 35 000 € 0-100 All Milestones completed B 25 / 40 000 € 45 000 € 0-50 -100 Second Milestone Completed (50%) C 20 A, B 30 000 € 25 000 € 20 -80 First Milestone completed D 10 C 15 000 € 10 000 € 20 -80 First Milestone completed E 10 B 20 000 € - 0-100 F 20 D, E 30 000 € - 20 -80 Section II – Q3 (Solution) ACWP = 35000 + 45000 + 25000 + 10000 = 115000€ BCWS = 25000 + 40000 + 30000 + 15000 *5/10 + 20000 = 122500€ BCWP = 25000*1 + 40000*0.5 + 30000*0.2 + 15000*0.2 = 54000€ 0 18 18 A 7 25 7 25 45 20 C 25 45 0 0 25 25 B 0 25 0 45 55 10 D 45 55 0 25 35 10 E 45 55 20 55 75 20 F 55 75 0 Section II – Q3 (Solution) The following project is assigned. Consider that Time Now = week 50. Select the correct answer(s): • The project is in delay but is efficient from a cost perspective. FALSE: Since BCWP < BCWS the project is in a delay. Nonetheless, since BCWP < ACWP the project is cost inefficient. • ACWP > BCWP. TRUE: BCWP = 54000€, ACWP = 115000€. • BCWP < BCWS. TRUE: BCWP = 54000€, BCWS = 122500€. • BCWS = 54000€. FALSE: BCWS = 122500€. • BCWP = 122500€. FALSE: BCWP = 54000€. • None of other answers is correct. FALSE: Since answer 2 is correct. ID Duration Precedence Expected Costs (€) Real Costs ( €) BCWP criteria (milestones) Percentage of Completion A 18 / 25 000 € 35 000 € 0-100 All Milestones completed B 25 / 40 000 € 45 000 € 0-50 -100 Second Milestone Completed (50%) C 20 A, B 30 000 € 25 000 € 20 -80 First Milestone completed D 10 C 15 000 € 10 000 € 20 -80 First Milestone completed E 10 B 20 000 € - 0-100 F 20 D, E 30 000 € - 20 -80 Section II – Q4 Consider the following financing structure applied to an infrastructure investment: • at time t0 the company receives a 1000€ loan with a cost of debt equal to 5%; • at time t3 (3 years later ) the company receives another line of credit of 2500€, but at a cost equal to 2.5%. Select the correct answer (s): • The capitalized value of the sum of the two contracts at time t5 assuming a linear law is 4865€ • The capitalized value of the sum of the two contracts at time t5 assuming a linear law is 4212.5€ • The capitalized value of the sum of the two contracts at time t5 assuming a linear law is 2787.5€ • The capitalized value of the sum of the two contracts at time t10 assuming a linear law is 4440€ • The capitalized value of the loan at time t10 assuming a linear law is 1500€ • None of other answers is correct Section II – Q4 (Solution) W(t5) = 1000*(1+0.05*(5 -0)) + 2500 *(1+0.025*(5 -3)) = 3875 € for the two contracts W(t10) = 1000*(1+0.05*(10 -0)) + 2500 *(1+0.025*(10 -3)) = 4437.5 € for the two contracts W(t10) = 1000*(1+0.05*(10 -0)) = 1500 for the loan Section II – Q4 Consider the following financing structure applied to an infrastructure investment: • at time t0 the company receives a 1000€ loan with a cost of debt equal to 5%; • at time t3 (3 years later ) the company receives another line of credit of 2500€, but at a cost equal to 2.5%. Select the correct answer (s): • The capitalized value of the sum of the two contracts at time t5 assuming a linear law is 4865€. FALSE, since the capitalized value of the sum of the two contracts at time t5 assuming a linear law is 3875. • The capitalized value of the sum of the two contracts at time t5 assuming a linear law is 4212.5€. FALSE, since the capitalized value of the sum of the two contracts at time t5 assuming a linear law is 3875. • The capitalized value of the sum of the two contracts at time t5 assuming a linear law is 2787.5€. FALSE, since the capitalized value of the sum of the two contracts at time t5 assuming a linear law is 3875. • The capitalized value of the sum of the two contracts at time t10 assuming a linear law is 4440€. FALSE, since the capitalized value of the sum of the two contracts at time t10 assuming a linear law is 4437.5. • The capitalized value of the loan at time t10 assuming a linear law is 1500€. TRUE. • None of other answers is correct . FALSE, since answer 5 is correct . Section II – Q5 With reference to the company financial information, please compute the Weighted Average Cost of Capital (WACC). Section II – Q5 (Solution) With reference to the company financial information, please compute the Weighted Average Cost of Capital (WACC). � = ������������������� ���� � = ���������� ����������� − ���������� ������������������������������������ �� = ������������������� �������� ������������������� ���� ��������� = �� ∗ � � + � ∗ 1 − ��� ���� + �� ∗ � � + �Company Financial Information Value Financial Debt 50 000.00 € Total Liabilities 100 000.00 € Total Assets 200 000.00 € Cost of Equity 0.09 Financial Expenses 2 500.00 € Tax Rate 0.30 WACC ???? Kd 0.05 Ke 0.09 D 50 000.00 € E 100 000.00 € Tax rate 0.30 WACC 0.0717 Section III – Q6 Provide a definition of a concession contract. Furthermore, discuss the main differences of a concession contract with respect to management service contracts and a build own operate contracts. Section III – Q6 (Solution) “Concession contracts are used by public authorities to deliver services or construct infrastructure. Concessions involve a contractual arrangement between a public authority and an economic operator (the concession holder). The latter provides services or carries out works and is remunerated by being permitted to exploit the work or service” (https://ec.europa.eu/growth/single -market/public -procurement/legal -rules -and -implementation/concession -contracts_it ) ➢ Concessions include different types of contracts such as leasing, franchising and BOT arrangements ➢ These types of contracts are characterized by the fact that the public retains the ultimate ownership of the assets and/or the right to supply, while it transfers for a period at least some part of the commercial risk of providing and/or operating the assets to a private concessionaire ➢ These characteristics distinguish concessions from : • management contracts, where the private sector is generally not asked to carry much, if any, commercial risk • build -own -operate (BOO) contracts, where governments relinquish ownership Public supply and operations Outsourcing Management Contracts Franchise Leasing ( affermage ) Build, Operate, Transfer (BOT) Build Own Operate (BOO) Divestiture by license Divestiture By Sale Private supply and operations Concessions Management and service contracts : typically applied for aspects ranging from technical assistance to full operation management .Management and service contracts feature the following characteristics : ➢ Usually they refer to a short period of time (2 to 5 years) ➢ The private counterpart is remunerated by fixed fees, while the public remains liable for the asset risks ➢ Incentive schema may induce the private counterpart to strive for better performance/efficiency ➢ Main fields of application are local public services (e .g.water supply, sewages, waste management) Build -Own -Operate (BOO) :a private entity finances and builds/refurbishes a facility that provides services to a single or small group of large offtakers (often a public utility) or directly to consumers (e .g.toll roads) .The private entity is also owner of the infrastructure and responsible for operating activities and service availability . Section III – Q6 (Solution) Section III – Q7 Describe two types of financial contracts utilized for risk transfer. Please explain the main characteristics, types of risks that aim to manage and functioning. The rates defined above represent the basis to construct derivative contract . There are many different types of such contracts, with a huge variety of underlying instruments and pricing functions . Here, we first distinguish among : • Forwards and Futures : applied to exchange an asset in the future at a specified price and time ; • Swaps : utilized to exchange a series of cashflows at specified prices and dates . • Options : applied to assign the holder the right to buy (call option) or sell (put option) an asset at a specified price ; Section III – Q7 (Solution) Forward contract Forward It stands for a commitment to purchase at a future date a given amount of an asset at a price agreed on the time the contract is signed . Flows of money are exchanged at maturity . We denote the price fixed at time of the agreement for future exchange as the forward price . This is typically a customized instrument, traded over -the -counter (OTC) . Limitations : often illiquid, high counterpart risk . Section III – Q7 (Solution) Futures contract Futures : It is an exchange -traded and standardized contract that is marked to market daily . This type of contract can be used to establish a long (or short) position in the underlying asset . It is typically traded on regulated markets where a clearing house minimizes the risk of counterpart . Gains (losses) are settled daily (marked to market) . It typically requires margins as collateral to cover losses . Standardization enhances liquidity Section III – Q7 (Solution) Interest Rate Swap Swaps : • Plain vanilla Interest Rate Swaps are financial instruments allowing one counterpart to exchange a regular stream of fixed cash flows for a floating (variable) one ; • More practically : one counterpart pays/receives a fixed interest rate over a notional amount, while receiving/paying a floating interest rate over the same notional C that is never exchanged ; • In jargon, the series of fixed coupons iC is named fixed leg , while the floating series of indexed coupons Ik is named floating leg ; • The series of net cash flows s guarantees that at inception the contract is fair : P(t 0,s) = 0 . Section III – Q7 (Solution) Options Options : • Options are financial instruments (derivatives) based on the value of underlying securities such as stocks . • An option offers the buyer the opportunity to buy or sell (depending on the type of contract they hold) the underlying asset at specific price (strike price) . • Unlike futures, the holder is not required to buy or sell the asset if they choose not to . Section III – Q7 (Solution) Options Options : ➢ A call specifies the right of a holder for the option to buy the underlying asset ; ➢ A put specifies the right of a holder for the option to sell the underlying asset . ➢ European option : the right can be exercised only on a single date specified in the contract . ➢ American option : the right can be exercised on any date before the specified date in the contract . Section III – Q7 (Solution)