Case study

Motorway project, Sylvania

15^th December 2014

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Contents

Infrastructure project finance of motorway project. 3

Sol 1:- What are the key risks? How might they be controlled or mitigated?Some of the possible and general risks which each of the internationally trading firms face are: 3

1.      Quarantine compliance risks: 3

2.      Exchange rate risk: 3

3.      Non Payment Risks: 4

4.      Legal Risks: 4

5.      Political Risks: 4

Q3:- How might the project is funded? How much debt? How much equity?. 10

Q4:- What financial structure would you recommend?. 10

The Facets of Credit Risk Management 10

• Credit transaction management 11
• Credit portfolio management 11
• Enterprise credit risk management 11

Infrastructure project finance of motorway project

Financial management allows Motorway Project, Sylvania departments to establish control over their own financial activities and lay the foundations to build financial credibility with the business units that are the customers of Motorway Project, Sylvania. It also provides those customers with accurate costing and charging for the Motorway Project, Sylvania services they consume. Service-based costing and pricing are critical for Motorway Project, Sylvania as Engine Room if it is to remain financially viable. Theodoulou, Jacqueline (2005).

Sol 1:- What are the key risks? How might they be controlled or mitigated?Some of the possible and general risks which each of the internationally trading firms face are:

1. Quarantine compliance risks: Most of the countries in the world have strict quarantine requirements. Any business which is exporting to any country should be aware about the quarantine law of that country. On the other side there might be huge import restrictions if one is importing certain kind of good in one country. Both the side of business should adequately prepare themselves for the quarantine law for the destination. If one wants to know about the Australian agency for the same they can look for Australian Quarantine Information Service (AQIS).
2. Exchange rate risk: Since the value of currency is not stable, this is one of the biggest risks which any corporations involved in international business faces. Many a time’s profit margins of the traders get eroded because of the impact they face from the movements in the currency. A proper hedging policy of the company alongside proper advice from the bank on the same is very important to save the company from currency risks.
3. Non Payment Risks: It does not matter with which country you are trading, risk of not getting paid in lieu of goods and services provided in the foreign nation is one of the biggest risk in international trade. Some of the instruments which can save the exporter from this kind of risk are pre payment mode or Irrevocable Letter of Credit. Companies in Australia can create stringent credit policy and also look into taking credit insurance. Exporter can look into ‘Export Finance Navigator’ which is the insurance provider on credit provided and is managed by Australian government.
4. Legal Risks: There are very high chances that there exist huge difference between the law of the other country and current prevalent law in Australia. In such cases taking legal advice from experts about the law of the other land is highly desirable. Both the importer and the exporter need to understand the differences in law which exist and then determine whether the trade can be established or not. (SitiZaleha, 2011)
5. Political Risks:Export contracts can be highly disturbed if there is political turbulence in the land where export is taking place. Same can also happen if one is importing any good and your own country is facing political problems. A trader in Australia can take help in this matter from The Department of Foreign Affairs and Trade (DFAT). They monitor political changes in any Australian business and can be an appropriate guide for the business people.

2. Is the project financially feasible? Will investors and lenders be attracted?

to this project [prepare a simple cash-flow model]

FINANCIAL MANAGEMENT OBJECTIVES

To reach Level 4 or higher in financial management, companies need to improve their formal costing and budgeting processes to capture and control end-to-end Motorway Project, Sylvania process costs in delivering the Motorway Project, Sylvania services, and to apportion these costs back to their consumers. In practice, this means focusing on four key areas:

• Motorway Project, Sylvania funding models in the four futures: In Motorway Project, Sylvania as Engine Room, Motorway Project, Sylvania funding uses a service center model. It is an efficient provider of Motorway Project, Sylvania services, but many of the services are technical rather than business services (as in Motorway Project, Sylvania as Global Service Provider). Funding of Motorway Project, Sylvania services is based on demand and the value that those services provide to the enterprise. (Theodoulou, Jacqueline (2005)).
• Motorway Project, Sylvania cost models: In Motorway Project, Sylvania as Engine Room, building on the traditional asset-based view of spending to provide Motorway Project, Sylvania cost transparency at the service level, this typically remains an Motorway Project, Sylvania-centric view. This area provides visibility into technology costs, including benchmarking by technology component or domain (for example, servers, storage, network and so on).
• Motorway Project, Sylvania pricing models: In Motorway Project, Sylvania as Engine Room, Motorway Project, Sylvania delivery teams attempt to price Motorway Project, Sylvania services at cost, or at least as closely as possible to the cost figure. Motorway Project, Sylvania service cost is typically calculated at the Motorway Project, Sylvania component or domain level (server, storage, network and so on) and combined into an Motorway Project, Sylvania bill of materials.
• Motorway Project, Sylvania chargeback models: In Motorway Project, Sylvania as Engine Room, chargebacks in this model require a higher level of sophistication than low-level or high-level allocations. The majority of chargebacks are service-based pricing. However, certain services still may be charged via negotiated flat rate, tiered access, measured resource usage or direct cost.

“Achieving Level 4 With the Financial Management Practices

1. “Define your service asset accounting models in line with the overall cost components, including technology, people and process costs incurred in generating, delivering and supporting each Motorway Project, Sylvania service.
2. “Review these models and the estimation processes regularly to identify cost reduction and value enhancement opportunities.
3. “Share your Motorway Project, Sylvania service costs versus value metrics with relevant stakeholders from business units and functions.
4. “Have SLAs defined and ready with multiple service providers (internal and external), and have policies defined on the requisition and usage of these services. These policy definitions should be attribute-based, which includes kinds of services, actual requirement type, cost of service, costing parameters (time/number of users/size of data) and duration of time.
5. “Link financial tools to all service requesting tools, enabling the direct posting of all costs to the relevant cost centers. This should be automated and real time.
6. “Enable workflow-based approvals for all new service requests.
7. “Define and lay out financial management processes (especially steps such as project appraisal and approval, which include budgetary approvals) at the service strategy level.
8. “Define and elaborate on service costing, service billing, costing techniques, cost driver identification and mapping of costs to service requests at the service strategy level, and provide proper linkages to the service portfolio and service catalog.” David N. Gordon (2006).

This function addresses strategic planning (such as site identification, selection and development), capital planning, RFP and lease analysis, real estate portfolio, financial management and analytics, tax management, lease administration (such as accounts receivable and accounts payable), transaction management, and support for the proposed new Financial Accounting Standards Board (FASB)/International Accounting Standards Board (IASB) accounting standard (see the Market Overview section), which eliminates the off-balance-sheet operating lease. We are seeing the concept of “big data” (defined as high-volume, high-velocity, high-variety information assets that demand cost-effective, innovative forms of information processing for enhanced insight and decision making) playing a growing role in many corporate real estate operations, and many IWMS vendors are actively developing robust big data solutions specifically tailored for the real estate function.

The relationship between the physical information infrastructure and the information architecture has always been the outcome of ad hoc implementations of custom and commercial off-the-shelf (COTS) solutions based on isolated business process demands. In Gartner’s 2012 CEO survey, 100% of the business leaders were able to identify missing data or information that would allow them to run their business better. For example, many organizations elect to use existing, often inadequate, data transfers but do not correct for record selection, record rejection or even use-case-biased enrichment processing — thus preventing direct access to previously excluded information, which then remains dormant. Simultaneously, Motorway Project, Sylvania managers and architects are finding it increasingly difficult to maintain existing systems and then determine the best approach to combining information from increasingly diverse information sources (the introduction of mobility, Web logs, NoSQL and so on).

Importantly, architecture is very different from infrastructure. Infrastructure is the result of engineering choices, often deployed out of respect for specifications located in the design. In all industries, the relationship between architecture, design and engineering is often blurred. In the case of Motorway Project, Sylvania system designs, the information architecture centers on how data is reused, where the authority for writing and editing it exists, and how it relates to business processes. This yields a design, and then engineers choose the tools and forms they will use to instantiate the designs. However, Motorway Project, Sylvania systems are frequently designed as applications with incumbent data stores based on the demands or needs of only a single business process. The resulting infrastructure is thus ad hoc. When the information architecture emphasizes the importance of data reuse over data capture, this deliberate approach to the information architecture creates a very different infrastructure.(Benefits, Features and Tools of a Managed Motorway)

Cash flow model

Q3:- How might the project is funded? How much debt? How much equity?

The project can be funded by debt as well as be equity and as well as by combination of both that is debt and equity. As to raise the fund government has issued a short term euro bond at the 6% to collect the funds but at the same time it was overspent on the public services investments in 2013-014 so the corporate defaults were rising. So the motorway should try to fund its project by both ways that one is debt and another is equity.

Q4:- What financial structure would you recommend?

We would recommend the finance structure of mixture of long term debt and equity so that motorway can finance its operation.  The mixture of financial structure directly affects the value and the risk at the company.   The main concern for financial manager for the company is deciding how much money has to be borrowed and what will be the capital structure and how it would be invested.(Lemke, Lins, Hoenig and Rube)

The Facets of Credit Risk Management

Credit risk is not a single monolithic subject, nor is there a single technology solution for managing all aspects of credit risk. At its basic level, credit risk is the potential loss of principal

resulting from a customer’s failure to repay a loan or to meet other contractual credit obligations.

Rather than treating credit risk management as an accounting and reporting exercise, it should be approached as an ongoing dynamic management process grouped at three broad levels:

·         Credit transaction management

·         Credit portfolio management

·         Enterprise credit risk management

Performance of an individual loan or credit facility, and the relationship management process, can extend across one or more of these areas. Also, it is difficult to separate the operational risk (process-related risk) and market risk (e.g., interest rate risk, changes in counterparty creditworthiness, valuation and pricing of securitized credit instruments, and collateral value) from credit risk when managing these processes. All these factors ultimately influence and contribute to risk and performance of credit instruments that an institution originates or purchases. (KhaledMokni, 2011)

Credit risk calculation engines are used in various manners at the transaction, portfolio and enterprise levels to quantify and analyze risk exposures at any point in time. These include metrics such as probability of default (PD), loss given default (LGD), exposure at default (EAD) and other assessments, including the likelihood and effect of potential credit default and the valuation of collateral. These calculation engines are necessary to more effectively relate capital reserves to actual levels of exposure, to quantify capital to absorb unexpected losses, and to quantitatively understand the interdependency of credit and market risk with operational risk exposures.Vuong, Quan Hoang (2014).

5. What addition information or support is required?

If we talk about the other required information we should try to get more information on future planning of motorway project Sylvania. As it will help we to understand the capital need in the future of the company and we can accordingly design the capital structure of the company that what type of capital structure should be used by the company.

References:

•  David N. Gordon (2006). “M80 Stepps to Haggs Road Scheme – The Scottish Ministers’ Decision”. Edinburgh: The Scottish Executive. p. 42 (para 2.164). Retrieved on 15 December 2014.
• Theodoulou, Jacqueline (2005). “There are better places to spend £200m”. Cyprus Mail. Archived from the originalon 2007-09-27. Retrieved on 15 December 2014
•  SWR M4 Motorway website, M4 Motorway Website. Retrieved on 15 December 2014.
•  Alpha Numeric Implementation Factsheet, Roads and Maritime Services. Retrieved on 15 December 2014

•  Benefits, Features and Tools of a Managed Motorway – Roads and Traffic Authority. Retrieved on 15 December 2014

•  Western Motorway (M4) Ozroads: the Australian Roads Website. Retrieved on 15 December 2014

• Lemke, Lins, Hoenig and Rube, Hedge Funds and Other Private Funds: Regulation and Compliance, Chapter 15 (Thomson West, 2014-2015 ed.).
• Vuong, Quan Hoang (2014). “Operational scales, sources of finance, and firms’ performance: Evidence from Vietnamese longitudinal data”. CEB Working Paper Series (N° 14/017). Retrieved on 15 December 2014
• Myers, Stewart C.; Majluf, Nicholas S. (1984). “Corporate financing and investment decisions when firms have information that investors do not have”. Journal of Financial Economics 13(2): 187–221
• Kieso, Donald E.; Weygandt, Jerry J. & Warfield, Terry D. (2007). Intermediate Accounting (12th ed.). New York: John Wiley & Sons. p. 738.
• William Lasher (2010). Practical Financial Management. South-Western College Pub; 6 ed.
• Virginia Clark, Margaret Reed, Jens Stephan (2010). Using Monte Carlo simulation for a capital budgeting project, Management Accounting Quarterly, Fall, 2010