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Renewable Energy Project Finance

Excel and Finance Boot Camp


Yale University | Spring 2017
Amir Chireh Mehr, Kristofer Holz, and Ryland Parry
28th of January, 2017
Part I: Introduction to Finance

Introduction to Finance

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Part I: Introduction to Finance

Introduction to the following concepts:

–Net Present Value (NPV)


–Internal Rate of Return (IRR)
–Debt and Equity
–Debt Service Coverage Ratio

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Part I: Introduction to Finance

Net Present Value

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Part I: Introduction to Finance

Net Present Value


 PV = FV / (1 + r)n
– PV = Present value of a single cash flow
– FV = Future value of a cash flow
– r = interest rate (also known as discount rate,
hurdle rate, cost of capital etc…)
– n = number of years
– NPV = Σ or net of all PVs from t = 0 to t = n
– Ceteris Paribus, if NPV > 0 we accept the project
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Part I: Introduction to Finance

Net Present Value in Excel


 Can be calculated explicitly: NPV = Σ PVs
 Can also be obtained using NPV():
I. =NPV(Rate, Future Values) + FVo ONLY use if FVs are
periodic(e.g. one-year
II. =NPV(r, FV1, FV2,…,FVn) + FVo intervals)

III. =NPV(r, FV1:FVn) + Fvo

 OR use XNPV() for non-periodic FVs:


I. =XNPV(Rate, Future Values, Dates)
II. =XNPV (r, FVo:FVn, t0:tn)

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Part I: Introduction to Finance

Net Present Value in Excel: Example

Insert Inputs

Add Formulae
Extend Formulae

Compute Values Why is XNPV() result different?

NPV tells us what $5,000 invested today is worth if we receive $750 for two years, and $1,000 thereafter at a 10% discount rate

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Part I: Introduction to Finance

Internal Rate of Return

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Part I: Introduction to Finance

Internal Rate of Return (IRR)


 IRR: Interest Rate at which the NPV of all cash flows (both
positive and negative) is zero
 Formula solves the following equation for rIRR :
– 0 = FV0/(1 + rIRR)0 + FV1/(1 + rIRR)1 + … FVn/(1 + rIRR)n
 Can be used to evaluate a project’s attractiveness
– IRR is the actual return given certain cash flows
– If rIRR > discount rate, we accept the project
 IRR can be used to measure the return provided to different
investors in the same project
– Unlevered IRR measures the rate of return independent of
capital structure
– Levered (equity) IRR measures the return to equity investors
– IRR can be calculated on a pre- or post-tax basis
IRR and NPV are two sides of the same coin

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Part I: Introduction to Finance

Internal Rate of Return in Excel


 Can be calculated explicitly, but much harder than with NPV
 Can also be obtained using IRR():
ONLY use if FVs are
I. =IRR(Future Values, Guess) periodic(e.g. one-year
intervals)
II. =IRR(FVo:FVn, Guess)

 OR use XIRR() for non-periodic FVs:


I. =XIRR(Future Values, Dates, Guess)
II. =XIRR (FVo:FVn, t0:tn, Guess)

Note that FV0 < 0


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Part I: Introduction to Finance

Internal Rate of Return in Excel: Example

Insert Inputs

Calculate
Add Formulae
Why is XIRR() different?

The result tells us that the project’s IRR is 11.5%. This means that if our discount rate were 11.5% rather than 10.0% in the prior NPV
example, then our resultant NPV would have been 0 instead of 325 (try it for yourself)

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Part I: Introduction to Finance

Debt and Equity

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Part I: Introduction to Finance

Debt and Equity


 Debt: capital borrowed from a lender
– Usually entails repayment at predetermined date(s)
– Repayments are determine according to an amortization schedule,
which details how interest and principal are repaid over a loan’s life
– Debt is usually a senior capital instrument, i.e debt is repaid first
– Lenders take on less risk, and are compensated accordingly (e.g. a
fixed return, but no claim to any upside thereafter)

 Equity: capital representing the owners’ stake in a company


– Usually gives the owners a claim on the residual cash flows after all
senior (e.g. debt) capital is repaid
– Riskier than debt given the lower priority on the repayment waterfall
– Equity is repaid with capital appreciation (e.g. stock prices increases)
and / or regular payments (e.g. dividends); neither is a given
There exist many capital instruments with debt- and / or equity-like characteristics (e.g. convertible bonds, preferred stock etc.);
however such instruments are beyond the scope of this course.

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Part I: Introduction to Finance

Types of Debt Amortization Schedules


Level Principal Annuity (Mortgage-style) Sculpted

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Principal Interest Expense Principal Interest Expense Principal Interest Expense

Repay a fixed amount per


Repay both interest and
Repay a fixed principal annum of periodic debt
principal based on a ‘sculpted’
amount per annum until the service (i.e. principal +
amortization schedule,
loan is repaid + Periodic interest), with the payments
whereby principal and
Interest on outstanding loan being weighted towards
interest payments depend on
balance interest in the earlier periods
a coverage ratio such as DSCR
(as with a home mortgage)

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Part I: Introduction to Finance

Debt Service Coverage Ratio

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Part I: Introduction to Finance

Debt Service Coverage Ratio (DSCR)


 The periodic ratio of cash flow available for debt service (CADS or
CFADS) over scheduled interest and principal payments (Debt Service)
– CADS = EBITDA – Capex [In most cases]
– EBITDA: Earnings before interest, tax, depreciation and amortization expenses
– Debt Service: schedule interest and principal payments
 DSCR used to make sure that there is a sufficient cash flow buffer to
meet debt service needs even if the project underperforms
– PF Lenders often structure loans by sizing the debt using a minimum DSCR
– Typical target DSCRs are in the 1.3x – 1.6x range, depending on a variety of factors
 Example DSCR Calculation
– EBITDA = $2,500,000; Capex = $500,000; Total Debt Service = $1,600,000
– What is the DSCR?
– DSCR = CADS / Debt Service
– DSCR = $2,000,000 / $1,600,000
– DSCR = 1.25x

A Debt Service Coverage Ratio of 1.25x means that for every $1 of debt, there is $1.25 of project cash flows available to service debt

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Part I: Introduction to Finance

Internal Rate of Return (IRR)


 IRR: Interest Rate at which the NPV of all cash flows (both
positive and negative) is zero
 Formula solves the following equation for rIRR :
– 0 = FV0/(1 + rIRR)0 + FV1/(1 + rIRR)1 + … FVn/(1 + rIRR)n
 Can be used to evaluate a project’s attractiveness
– IRR is the actual return given certain cash flows
– If rIRR > discount rate, we accept the project
 IRR can be used to measure the return provided to different
investors in the same project
– Unlevered IRR measures the rate of return independent of
capital structure
– Levered (equity) IRR measures the return to equity investors
– IRR can be calculated on a pre- or post-tax basis
IRR and NPV are two sides of the same coin

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Part II: Introduction to Excel

Introduction to Excel

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Part II: Introduction to Excel

Introduction to the following concepts:

–Model Structure
–Colour Formatting
–Cell Names, Range Names, Arrays
–Other

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Part II: Introduction to Excel

Model Structure

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Part II: Introduction to Excel

Model Structure (1/3)


 Keep inputs separate from calculations and model outputs
Inputs Calculations Outputs
 Keep all inputs in as few  Should take your static  Should include the
tabs / cells as possible; inputs and perform results of your
calculations necessary calculations and that
 Keep all input tabs in to obtain outputs; which you plan to
one section of present to others;
workbook;  Format calculation cells
so that it is clear that  Format output cells so
 Never duplicate the they should not be that it is clear that they
same input in two changed. should not be changed.
different locations.

Think about your model structure from the get-go, as doing so can significantly simplify the modelling exercise

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Part II: Introduction to Excel

Model Structure (2/3)


 For simple models, one can keep inputs, calculations and outputs on one tab

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Part II: Introduction to Excel

Model Structure (3/3)


 More complex models may require separate tabs

– Separate tabs increase model readability


– Separate tabs also increase the ease of auditing the model

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Part II: Introduction to Excel

Colour Formatting

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Part II: Introduction to Excel

Colour Coding in Models (1/2)

 Allows users to run the model and know


what can be altered (assumptions) and
what should not be modified (formulae)

 Facilitates easier auditing of the model

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Part II: Introduction to Excel

Colour Coding in Models (2/2)

Source: Gross, Daniel. “F&ES 635b / MGT 683 Renewable Energy Project Finance Modeling.” Class lecture, Session 4: Variability and Sensitivity
Analysis Best Practices in Modeling from Yale University, April 4, 2016.

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Part II: Introduction to Excel

Cell and Range Names

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Part II: Introduction to Excel

Cell and Range Names (1/4)

 Using cell and range names allows users to quickly


identify and refer to a single cell, or a range (group)
of cells in a worksheet
 One can use cell and name ranges in a variety of
formulae across the model
 Cell ranges or individual cells are often named after
specific data they include e.g. inflation escalator,
PPA price etc.

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Part II: Introduction to Excel

Cell and Range Names (2/4)


 Using formulae update columns: (i) Revenue; (ii) Subtotal; and (iii)
Total
 Name ranges for all columns e.g. Quantity
 Sum Grand Totals for (i) Quantity; and (ii) Total using named ranges

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Part II: Introduction to Excel

Cell and Range Names (3/4)


 Define range names for (i) Units; and (ii) Unit Price.
 Using an array and range names previously defined, populate Total Sales (mark all
cells E3:E13 -> insert formula “=Units*Unit_Price” -> press CTRL+SHIFT+ENTER
(RETURN on Mac):
 Using range names populate Grand Total for the following: (i) Units; and (ii) Total
Sales.

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Part II: Introduction to Excel

Cell and Range Names (4/4)


Array formulas also offer these advantages:
 Consistency: if one clicks any of the cells in an array,
ones sees the same formula. This consistency can help
ensure greater accuracy.
 Safety: one cannot overwrite a component of a multi-
cell array formula. One must either select the entire
range of cells and change the formula for the entire
array, or leave the array as is.
 Smaller file sizes: You can often use a single array
formula instead of several intermediate formulas.

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Part II: Introduction to Excel

Other

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Part II: Introduction to Excel

Other: Fix Cell References (1/4)


 To fix a reference cell place $ symbols in front of the column letter
and row number e.g. $H$3 for Conversion Rate below
 Press F4 (SHIFT + COMMAND + K for Mac) over a relevant part of the
formula to cycle through different fixed reference possibilities

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Part II: Introduction to Excel

Other (2/4)
 Use the same formulae across an entire row. This practice
makes it easier to audit or modify the model
 Use the same column for the same period (across tabs and
within tabs)
 Create new tabs if you intend to introduce periodicity into
your model (e.g. a separate quarterly income statement tab
versus a summary annual income statement tab)

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Part II: Introduction to Excel

Other (3/4)
 Use consistent number formatting
– Units specified in the model (separate column)
– Inputs, calculations and outputs must be expressed in consistent
units e.g. $000, $MM, $/MWh
– Ensure negative numbers stand out from positive numbers e.g.
($11,135,745) vs. $1,021,841
 Never embed hard-coded numbers in formulae; instead
store them as separate inputs in assumptions (inputs) tab:
– Poor practice: {=annual_output_series*ppa_price*(1+2%)^1}
– Best practice: {=annual_output_series*ppa_price*ppa_escalator}

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Part II: Introduction to Excel

Other: Index Match (4/4)


 INDEX(MATCH(()) is a lookup function, which searches a range/array for a value
 The formula should be applied as such:
=INDEX(Range containing Desired Value, MATCH(Lookup Value, Lookup Range, 0))
– 0 = exact match; 1 = less than; and 2 = greater than

=INDEX(Salary Column, MATCH(Nate Harris Cell, Full Name Column, 0)


=INDEX(C2:C55,MATCH(F2,A2:A55,0)

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Part II: Introduction to Excel

Demo

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Part III: Questions and Answers

General Questions and Answers

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