Modeling project cash flows and debt service

Intellectual Capital Valuation and Debt Service: Combining EBITDA with Operating Cash Flows

Municipal fiber in the United States: A financial assessment

The extraordinary increase in reliance on debt by U.S. business in the 1980s has generated widespread concern that overextended borrowers may become unable to meet their obligations and that proliferating defaults could then lead to some kind of rupture of the financial system, with ensuing consequences for the nonfinancial economy as well. The thesis advanced in this paper, however, is that the more likely threat posed by a continuing rapid rise of corporate indebtedness is instead a return to rapid price inflation. In particular, a review of recent developments lead to four specific conclusions: First, problems of debt service within the private sector are more likely to arise among business borrowers, not households. Because businesses, and especially corporations, have used much of the proceeds of their borrowing merely to pay down their own or other firms' equity, their interest payments have risen to postwar record levels compared to either their earnings or their cash flows. Second, despite these high debt service burdens, debt default on a scale large enough to threaten the financial system as a whole is unlikely in the absence of a general economic downturn. But the sharp increase in indebtedness has made U.S. businesses crucially dependent on continued strong earnings growth. Third, the consequent need to prevent a serious recession -- so as to preclude the possibility of a systemic debt default -- will increasingly constrain the Federal Reserve System's conduct of monetary policy. The Federal Reserve's reluctance to risk a situation of spreading business (and LDC) debt defaults, especially with the U.S. commercial banking system in its current exposed position, will increasingly prevent it from either acquiescing in a recession or bringing one about on its own initiative. Fourth, over time this constraint will severely limit the ability of monetary policy to contain or reduce price inflation. Episodes of disj in the United States since World War II have invariably involved business recessions, including declines in business earnings and increases in bankruptcies and defaults. If the economy's financial system has become fragile to withstand any but the shortest and shallowest recession, it is unlikely to be able to support a genuine attack on inflation by monetary policy.

An analysis of the scientific literature on project cash flow control and fuzzy modelling shows that project cash flows are modelled using only basic approaches drawn from fuzzy theory, which may distort the credibility of the model. In this paper, we therefore propose to use the whole spectrum of fuzzy arithmetic, and to select operations that suit the nature of the cash flows in question, their dependencies and the preferences of the project manager. An analysis of the literature also shows that in practically all existing models of project costs and cash flow management, project costs and cash flows are treated at a very high level of generality (without considering the various types of project, factors influencing their variability and signals warning of imminent cash-related problems), and estimations are not updated on an ongoing basis throughout the duration of the project. The results of a survey performed with the participation of 100 project managers show that this simplistic view of project cash flows may be distorting, and cannot guarantee the development of an efficient project cost and cash flow control system. We propose an approach that at least partially compensates for these drawbacks: it differentiates between types of project cash flows and the factors and triggers affecting changes in cash flows. Two case studies are used for a an initial verification of the approach. The paper concludes with suggestions for further research perspectives.

ABSTRACT: This paper examines whether outstanding employee stock options (ESOs), which represent the firm’s contractual obligation to deliver shares upon ESO exercise, affect firms’ credit ratings. I hypothesize that outstanding ESOs play two information roles—(1) suggesting equity infusion, and (2) predicting share repurchases—that help credit-rating agencies evaluate the issuing company’s debt service ability. Consistent with these hypothesized roles, results indicate that the present values of expected cash proceeds and tax benefits from ESO exercise have favorable effects on credit ratings. In contrast, the present value of the expected cost of ESO-related share repurchases has an unfavorable effect on credit ratings and this unfavorable effect is more pronounced for firms with a greater tendency to repurchase shares. The after-tax fair value of outstanding ESOs, which summarizes the effects of the above three ESO-related cash flows, is negatively associated with credit ratings. Taken together, these findings are consistent with credit-rating agencies incorporating the information conveyed by outstanding ESOs regarding potential equity infusion and ESO-related repurchases in their credit risk assessments and assigning lower credit ratings to firms with greater values of outstanding ESOs.

Lending to long-term investment projects in fragile countries requires additional financial instruments to control the sustainability of project cash flows and to increase the borrower’s financial discipline in debt servicing. This paper analyzes the special aspects of using financial covenants as credit risk mitigation instruments in project financing in Ukraine. It also argues that regulatory requirements to maintain financial strength indicators at the appropriate level have an indirect impact on the change in project finance loan rates. The study primarily aims at developing approaches to defining a credit rate corridor for an investment project, depending on changes in the values of financial sustainability indicators. The implementation of the proposed approach allows increasing the validity of credit risk components for investors and optimizing capital value for borrowers.As required by international practice, violation of covenant terms is the trigger for satisfying the creditors’ claims. According to the authors’ conclusions, the use of financial covenants as a tool for protecting the creditors’ interests should not be an instrument of unreasonable financial pressure on borrowers. The study reveals benefits and drawbacks of using financial covenants to mitigate credit risk and reduce the probability of a borrower default in the field of project financing in Ukraine.

The availability of credit for aquaculture businesses historically has been problematic in the U.S., but little attention has been paid in the aquaculture economics literature to effects of restricted credit and cash flow deficits on the feasibility and optimal management of fish farms. An existing multi-stage mathematical programming model of catfish production was extended to include cash flow, lending and repayment constraints and activities for various farm sizes and levels of equity. Cash flow constraints affected the optimal management plan for catfish farms, with greater changes occurring in the optimal plans for smaller farms. Smaller farms generally were affected more severely than larger farms by restricted access to capital. Sales restrictions (that reduce cash inflow due to a decrease in sales) of only 5% caused small farms to become infeasible (when debt servicing of long-term debt was considered), while the largest farm sizes considered could withstand only a 20% reduction in sales before becoming infeasible. New startup catfish farms would improve cash flow (but not profits) by purchasing large stockers for Year 1, but would need to transition to other management plans to maximize profits in subsequent years. However, use of stockers in Year 1 requires maximum levels on operating capital lines of credit that are much higher than if fingerlings only are stocked. Under-capitalization of catfish farms increases financial risk because the cash flow constraints force farms to operate at sub-optimal levels, leaving them more vulnerable financially to adverse production and/or market conditions. Results of this study confirm suggestions that tight credit for catfish farms may have contributed to recent contractions in the industry.

Chapter 3 - Project Characteristics, Risk Analysis, and Risk Management

Avoiding Distortion in Corporate Valuation Litigation: An Application of Discounted Cash Flow

Reliable knowledge of project cash flow is essential for effective project management. Since the nature of project is uncertain and easily effected by different criteria, considering uncertainty has become a vital part of any effective project management approach. Cash, as one of the most important project resources, requires reliable management techniques. In this paper, a new interval type-2 fuzzy project cash flow analysis model based on interval type-2 fuzzy project scheduling is proposed to predict project cash flow in different periods of project life cycle. Despite using type-2 fuzzy sets in various practical problems, they are new to project management; thus, they are used in this paper to address the uncertainty and lack of sufficient knowledge in project activity durations and costs. In the first part, interval type-2 fuzzy project scheduling model is introduced, and then the forward and the backward passes are defined. In order to improve this part, a new flexible and controllable method of interval type-2 fuzzy ranking is introduced. In the second part, a model of cash flow assessment is proposed under an interval type-2 fuzzy environment. This model is able to calculate the minimum and the maximum cash distribution, cash flow of project in different periods and total direct cost of projects in addition to cash flow uncertainty. The presented model provides the manager with a comprehensive insight into the cash required in different stages of project and helps the managers to locate the periods with highest uncertainty. The model also uses the concept of alpha-levels to analyze different levels of risk of uncertainty. For the purpose of illustration, the proposed interval type-2 fuzzy model is used to generate cash flow of main activities of a real construction project in a developing country, and the results are presented. The results present high flexibility of model in expressing and considering uncertainty and vagueness, in addition to its high capability in the risk evaluation. Finally, the results of the case study are used to present the managerial implications.

Effective project management requires reliable knowledge of cash required in different stages of project life cycle. Getting this knowledge is highly dependent on sophisticated consideration of project environment. Nature of projects and their environments are associated with uncertain conditions. In this paper, a new project cash flow assessment method based on project scheduling is proposed to foresee projects' cash flow in their different stages. Interval-valued fuzzy sets (IVFSs) are applied to address the uncertainty of activity durations and costs. First, an IVF-project scheduling method is proposed to calculate early start time and early finish time of activities under IVF-environment and based on that, a new method of cash flow assessment is introduced under IVF-environment. For the purpose of illustration, the proposed method is implemented to generate cash flow of main activities of a large-scale project. The results show the flexibility of presented assessment method in expressing uncertainty, in addition to its capability in risk evaluation. Furthermore, using alpha-cuts to address different levels of uncertainty and risk provides a comprehensive insight of the cash required in different stages of project life cycle under different levels of risk and uncertainty. Finally, the results are discussed and the proposed method is believed to be useful in the project evaluation.

PurposePrevious studies have postulated that an advance payment system (APS) positively impacts the contractor's working capital and is paramount to ensuring an efficient and effective project cash flow process. However, scant research has been undertaken to empirically establish the cash flow performance and domino effect of APS on project and organisational performance.Design/methodology/approachThe epistemological design adopted a positivist philosophical stance augmented by deductive reasoning to explore the phenomena under investigation. Primary quantitative data were collected from 504 Construction Industry Development Board (CIDB) registered contractors (within the grade bandings 1–9) in South Africa. A five-point Likert scale was utilised, and subsequent data accrued were analysed using structural equation modelling (SEM).FindingsEmergent findings reveal that the mandatory use of an APS does not guarantee a positive project cash flow, an improvement in organisational performance or an improvement in project performance.Practical implicationsThe ensuing discussion reveals the contributory influence of APS on positive cash flow and organisational performance, although APS implementation alone will not achieve these objectives. Practically, the research accentuates the need for various measures to be concurrently adopted (including APS) towards ensuring a positive project cash flow and improved organisational and project performance.Originality/valueThere is limited empirical research on cash flow performance and the domino effect of APS on project and organisational performance in South Africa, nor indeed, the wider geographical location of Africa as a continent. This study addresses this gap in the prevailing body of knowledge.

A company invests in capital projects in order to increase stockholder value by investing in projects that generate cash flows in the future whose present value exceeds the present value of the cash flows needed to make the investment. When it invests in new capital projects, it expects the future cash flows to be greater than without this new investment. Hence, in estimating a project's cash flows, the focus is on incremental cash flows. These cash flows must take into account investment costs (that is, acquisition costs adjusted for the cost of asset disposition) and operating cash flows (that is, changes in revenues, expenses, taxes, and working capital). Keywords: incremental cash flows; investment cash flows; asset acquisition; asset disposal; sunk cost; tax basis; capital gain; recapture of depreciation; capital loss; tax shield; operating cash flows; tax credit

Contractors usually prepare a project cash flow (PCF) on construction projects. The flow of cash in and cash out within a construction project may vary depending on the owner, contract documents, and construction service providers who have their own authority. Other factors affecting the PCF are down payment, termyn, progress schedule, material schedule, equipment schedule, manpower schedules, and wages of workers and subcontractors. This study aims to describe the cash inflow and cash outflow based on the empirical data obtained from contractors, develop a PCF model based on Halpen & Woodhead’s PCF model, and investigate whether or not there is a significant difference between the Halpen & Woodhead’s PCF model and the empirical PCF model. Based on the researcher’s observation, the PCF management has never been implemented by the contractors in Malang in serving their clients (owners). The research setting is in Malang City because physical development in all field and there are many new construction serv...

Cannibalization Risk and Limited Liability: Implications for Firm Valuation and Capital Budgeting