In this session we are ready to analyze how

to set up the budget of the operational phase.

Before starting an important premise,

in real life what happens is that when you set up the budget you will have to coordinate

different sheets of calculation that then

will be used in order to calculate the cash flow statement.

So apparently it becomes a little bit more complex

but at the end of the day it is the price to pay to get to the final result.

I will use up pieces of paper but of course you can turn the exercise into

an Excel file in order to make things easier and train your brain in terms of what we do.

So now let's assume that we have a project whose value is at 200 million.

That starting times zero.

So this is the total value of our project in t_0.

We skipped the construction phase for the sake of simplicity.

Suppose that this project would be amortized in

10 years time using a 10 percent percentage.

So the useful life of the project is 10 years.

Then we can assume that this project is financed the way the term loan,

a senior term loan of 100 million euros.

So 100 million that, 100 million equity.

The debtor pays a 5 percent fixed rate and debt

would be amortized in constant principal repayments in five years.

So in five years time we paid 20 percent of the debt each year.

We can also assume that the corporate tax rate is 50 percent.

The final assumption is that from year one or year five,

our infrastructure will be able to generate and a EBITDA margin of 75 Million per annum.

We are now ready to start.

The first document that we want to draft is

the profit and loss of the SPV in the first five years.

We must do it because we need the taxes

and the taxes must be used in order to calculate the tax loss.

So we can start from here numbers 0,

1, 2, 3, 4, and 5.

We know that the EBIDTA margin of our project is essentially represented by

75 constant million euros for five years.

Then in order to calculate the profit and loss,

we must calculate the depreciation and amortization costs.

DNA can be easily calculated because 200 is

the value of the project the project is amortized 10 percent per annum.

So basically we will have 20,

20, 20, 20, 20 per annum.

So taking the EBIDTA and deducting the DNA,

we can get the EBIT margin of this product which is 55 constant for five years.

Now in the profit and loss,

we have the value related to interest expenses.

But we can calculate interest expenses only if we

know how the loan will be amortized throughout the period from 1 to 5.

So in your ideal Excel 5 you have to move up on another sheet and then determine

the amortization schedule of the loan in order to calculate

how much outstanding loan you will have in

five years time and the interest that will be paid in every year.

So if we can restart again our exercise for year 1, 2, 3, 4,

and 5 and then we can start using first of all,

the outstanding amount of the loan in all the five years and you can appreciate that

the outstanding amount of the loan year number zero is

exactly the 100 million that has been granted by the creditors.

We also know that the loan will be amortized in five years.

So 20 million euros per annum.

So the remaining portion of the debt will become 80 at the end of year 1,

60 at the end of year 2,

40 at the end of year 3,

20 at the end of year 4 and we'd be completely exhausted at the end of year 5.

On this outstanding amount we can calculate the interest expenses.

And interest expenses are calculated there with an interest rate of 5 percent.

So in year one you will pay 5 per cent times 100.

In year number 2 you will pay 5 percent times 80 or 4.

And then if you can repeat the exercise you will get three.

You will get 2 and you will get 1.

The principle that is paid in every year,

is a fixed amount of 20 percent per annum and so 20 at the end of year 1,

20 at the end of year 2,

20 at the end of year 3, 20 at he end of year 4 and 20 at the end of year 5.

You can now close

your amortization schedule sheet calculating the so-called debt service,

which is the sum of interest and principal.

You will pay 25 in year 1, 24 in year 2,

23 in year 3,

22 in year 4 and 21 in year 5.

With these values in mind you can now return to our profit and loss.

And so now we have the list of expenses that we can

factor in the calculation of our profit and loss.

So we have 5 4 3 2 and 1.

We have then the possibility to calculate

the earnings before taxes and earnings before taxes is 50 year 1,

51 year 2, 52 year 3,

53 year 4, 54 year 5.

Given the corporate tax that we have set at 50 percent,

we can calculate also taxes that

this project will generate throughout the first five years of the operation life.

It is exactly 50 percent so we have 25,

25.5, 26, 26.5 and 27.

Taking the difference of these two values,

returns us the net income that

this project is able to generate during the first five years.

So we have 25, 25.5,

26, 26.5, and 27.

We have completed the first part of our capital budgeting

because we prepared the Excel sheet including all the values of net income.

It is important from our point of view to stress one important fact.

In capital budgeting we don't look at assets,

liabilities, net income, we look at cash flows.

So we must necessarily carry out

the calculations of the net income and PNL not for the sake of having it but

simply because we want to have a clear view in terms of how much I will pay in terms of

taxes and how much I will pay in

terms of interest payment- that are the two components of the cash flows.

We can now understand why we need to go through

this calculation because we can now turn to the third and final sheet

which is the most important one that is the cash flow statement where we

can understand how much cash the project generates during its operational life.

So again we can start from time 0,

1, 2, 3, 4, and 5.

The cash flow statement is the wrap up of all the older sheets.

So you must imagine that all the Excel sheets that you have

created convey inside this final sheet.

We can pick up the different information from the different sheets.

First of all the basic information taken from the profit and loss.

In particular from the profit and loss we can't get the value of EBITDA.

And we know that the value of EBITDA is 75 year 1,

75 year 2, 75 year 3 and so for year number 4 and year number 5.

Now we know from our previous sessions that EBITDA is

deducted by the value of corporate taxes that have being paid by the SPV.

And we can get them from the profit and loss so we can get them from here.

We take taxes, and the taxes are 25, 25.5, 26, 26.5, and 27.

We can assume- this is an assumption,

you can remove this assumption in more complex cases- that

the change in working capital items is negligible or close to zero.

So we can add the zero row here.

It is not always the case.

We know that CAPEX which is another item that you use typically in capital budgeting

for existing corporates do not exist because

all the CAPEX has been born during the construction phase.

So again we have a roll of zeros.

And we can now draw a line which returns us

an important outcome which is our Unlevered Free Cash Flow free cash flow.

Which is the cash flow that we can use in order to repay the interest of creditors,

principal to creditors and dividends to shareholders.

So we can now calculate them.

We will have 50,

year number 1, 49.5 year 2,

49 year 3, 48.5,

48 year number 5.

Once we have the Unlevered Free Cash Flow,

another piece of information is the net service.

But we already know that service because that service has been included

into our armotization schedule of the loan sheet.

And so we can get the debt service from our previous sheet debt service.

And we can factor in the value in our cash flow statement.

We know that the debt service is 25,

24, 23, 22.

And 21.

So basically what we get from

this exercise is the bottom line of our cash flow statement.

Which is the cash flow for project sponsors.

And the cash flow for

project sponsors is essentially the difference between the two rows.

So it is 25,

25.5, 26, 26.5, 27.

We have completed our exercise.

The final point that you must keep in mind is that

these cash flows are potentially the cash flows that can be distributed

to shareholders once all the other participants have been

paid unless you have in action some provisions to

reserves in liquidity inside the SPV this cash flow for project sponsors

equals exactly to this stream of dividends that project sponsors will receive by DXP.