Guide for Financial Analysis of Economic Development Projects City of Hampton Finance Committee

9/14/2005 Introduction Purpose—Provide standard analytic model to assess feasibility of proposed investments Purpose—Provide standard analytic model to assess feasibility of proposed investments Scope—Limited to use of cash flow and cash discounting techniques Scope—Limited to use of cash flow and cash discounting techniques Background—Proposed procedures used with increasing frequencies throughout the world Background—Proposed procedures used with increasing frequencies throughout the world

9/14/2005 Financial Analysis Model Anticipated Cash Receipts by Year Anticipated Cash Receipts by Year Anticipated Cash Disbursement by Year Anticipated Cash Disbursement by Year Anticipated Net Cash Flows by Year Anticipated Net Cash Flows by Year Net Present Value (NPV) Computations Net Present Value (NPV) Computations Sensitivity Analysis Sensitivity Analysis

9/14/2005 Net Present Value Analysis NPV represents the expected net benefits (benefits minus costs) expressed in today’s dollars NPV represents the expected net benefits (benefits minus costs) expressed in today’s dollars Elements: Description of project, assumptions, and evaluation of alternatives Elements: Description of project, assumptions, and evaluation of alternatives Steps: Steps: –Forecast expected benefits and costs over life of the project –Determine discount rate –Enter data into the NPV model worksheet

9/14/2005 Determining the Discount Rate Components: Risk-free rate and risk premium Components: Risk-free rate and risk premium Numerous approaches: partnership, risk, government, and cost of capital Numerous approaches: partnership, risk, government, and cost of capital In cases of uncertainty about the rate, computation of the critical rate is sometimes helpful In cases of uncertainty about the rate, computation of the critical rate is sometimes helpful Critical rate is that rate at which NPV changes sign from negative to positive Critical rate is that rate at which NPV changes sign from negative to positive

9/14/2005 Wrap-Up Sensitivity Analysis Sensitivity Analysis Qualitative Analysis Qualitative Analysis –Specialized expertise and proprietary technology –Private sector can sometimes more easily handle problems such as downsizing, coordination of political entities, regionalization, cross border relationships, implementation of difficult policies, etc. Reporting Reporting –Track expected benefits and costs with actual results –Submit quarterly reports comparing actual to estimated benefits

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