Project Management

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Project Management Course

IV School of Management Engineering Dept. of Production Systems and Business Economics

Project Management Project Financing
Instructor: Alberto De Marco

Project Management Phase

FEASIBILITY

DESIGN PLANNING

DEVELOPMENT CLOSEOUT

OPERATIONS

Financing&Evaluation Risk Analysis&Attitude

Alberto De Marco

1

Financing

Project Management Course

Project Financing Context
Evaluating and financing as precursor to decision d i i to proceed (feasibility phase) d (f ibili h ) Ongoing evaluation through design and planning phase

Outline
Session Objective & Context Financing projects
Owner O Project Contractor

Financial Evaluation

Time value of money Present value NPV & Discounted cash flow Simple Examples Formulae IRR

Missing factors

Alberto De Marco

2

Financing

Project Management Course

Session Objective & Context
The role of project financing p j g Mechanisms for project financing Measures of project desirability Assumptions behind evaluation mechanisms

Components

Context: Feasibility Phases

Project concept Land Purchase & Sale Review Program evaluation (scope, size, etc.) Constraint survey Site constraints Cost models Site infrastructural issues Permit requirements

Summary Report (Business case) Decision to proceed Regulatory process (obtain permits, variances, etc) Design Phase

Alberto De Marco

3

Financing

Project Management Course

Outline
Session Objective & Context Project Financing
Owner O Project Contractor

Financial Evaluation

Time value of money Present value NPV & Discounted cash flow Simple Examples Formulae IRR

Missing factors

Financing – Gross cashflows
years OWNER investment operation incomes owner cashflow owner cum cashflow 1 2 3 4 5 6 7 8 9 10 ($10,000,000) ($20,000,000) $2,000,000 $4,000,000 $6,000,000 $6,000,000 $0 ($10,000,000) ($20,000,000) $2,000,000 $4,000,000 $6,000,000 $6,000,000 $0 ($10,000,000) ($30,000,000) ($28,000,000) ($24,000,000) ($18,000,000) ($12,000,000) $6,000,000 $6,000,000 ($6,000,000) $6,000,000 $6,000,000 $0 $6,000,000 $6,000,000 $6,000,000 CONTRACTOR costs ($4,000,000) ($7,000,000) ($14,000,000) revenues $0 $10,000,000 $20,000,000 contractor cashflow ($4,000,000) $3,000,000 $6,000,000 contractor cum cashf ($4,000,000) ($1,000,000) $5,000,000 $0 $0 $0 $5,000,000 $0 $0 $0 $5,000,000 $0 $0 $0 $5,000,000 $0 $0 $0 $5,000,000 $0 $0 $0 $5,000,000 $0 $0 $0 $5,000,000 $0 $0 $0 $5,000,000

Owner investment = contractor revenue
$10,000,000 $5,000,000 $0 ($5,000,000) ($10,000,000) ($15,000,000) ($20,000,000) ($25,000,000) ($30,000,000) ($35,000,000) 1 2 3 4 5 6 7 8 9 10 11 owner cum cashflow contractor cum cashflow

Alberto De Marco

4

Financing

Project Management Course

Critical Role of Financing
Makes projects possible Difficulty of Financing is a major driver towards alternate delivery methods Flexibility on owner financing Flexibility for contractor financing

Has major impact on
Riskiness of construction Claims Types of construction undertaken Prices offered by Contractors

Outline
Session Objective & Context Project Financing
Owner O Project Contractor

Financial Evaluation

Time value of money Present value NPV & Discounted cash flow Simple Examples Formulae IRR

Missing factors

Alberto De Marco

5

Financing

Project Management Course

Public Financing
Sources of funds
General purpose or special-purpose bonds specialTax revenues Capital grants subsidies International subsidized loans

Public owners face restrictions (e.g. Bonding caps)
Major motivation for public/private partnerships

May group small construction projects to lower fixed financing costs Social benefits important justification User surplus, benefits to region, quality of life, unemployment relief

Important consideration: Exemption from taxes MARR much lower (e.g. 8-10%), often standardized 8-

Private Financing Options
Equity (corporate...
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