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International Center For
Environmental Finance
Series B – Course #3
Determination of Financial
Feasibility
Determination of Financial
Feasibility
• Is the project financially feasible? Can you
pay for the project?
(one financing option)
• Which financing option is the best?
(more than one option)
Financial Feasibility Calculation
Cash Available for Debt Service (CADS)
must exceed Annual Debt Service
Payments.
Financial Feasibility Calculation
1. Calculate CADS.
2. Calculate project’s debt.
3. Calculate Annual Debt Service Payments
(for each option).
4. Subtract Annual Debt Service Payments
from CADS
Financial Feasibility Calculation
• If the Financial Feasibility Calculation is
positive, the project is financially feasible.
• If the Financial Feasibility Calculation is
negative, the project is not feasible.
Illustration of Financially Feasible
Project
Annual
Debt
Service
Payments
CADS
40
30
20
10
0
1
2
3
4
5
6
7
8
9
10 11
12
Illustration of Financially Not
Feasible Project
CADS
40
30
20
10
0
1 2 3 4 5 6 7
8 9 10 11 12
Annual
Debt
Service
Payments
Determination of Financial
Feasibility
The ratio of CADS to Annual Debt
Service is called the “Debt Service
Coverage Ratio”
Determination of Financial
Feasibility
• If the Debt Service Coverage Ratio is
>1.0, the project is feasible.
• If the Debt Service Coverage Ratio is
<1.0, the project is not feasible.
Determination of Financial
Feasibility
If there is more than one project finance
option, then the option with the highest
debt service coverage ratio is the most
feasible.
Financial Feasibility Calculation
1. Calculate CADS.
2. Calculate project’s debt.
3. Calculate Annual Debt Service Payments
(for each option).
4. Subtract Annual Debt Service Payments
from CADS
Financial Feasibility Calculation
Calculation of CADS
Calculation of CADS
Total Cash Income
Non-recurring Cash Income*
CADS
*Non-recurring cash income may be used to
reduce total project cost
Financial Feasibility Calculation
Calculation of Project Debt
Calculation of Project Debt
Total Project Cost
Cash Contributions
Project Debt
Cash Contributions
• Savings.
• Non-recurring cash income*.
• Grants.
*Collected prior to debt issuance.
Financial Feasibility Calculations
Calculate Annual Debt Service
Payments, using either:
1. The Level Payment Method
2. The Level Principal Payment Method, or
3. The Irregular Method
Financial Feasibility Calculations
CADS
Annual Debt Service Payments
(either + or - )
Financial Feasibility Calculation
• If the Financial Feasibility Calculation is
positive, the project is financially feasible.
• If the Financial Feasibility Calculation is
negative, the project is not feasible.
Determination of Financial
Feasibility
What to do if project is not feasible ?
Determination of Financial
Feasibility
If the financial feasibility calculation is
negative, then you must:
1. Increase income, or,
2. Reduce project costs, or
3. Both.
Determination of Financial
Feasibility
Increase Project Income
Increase Project Income
1. Adopt a consumption based tariff
2. Replace general rate subsidies with
targeted rate subsidies
3. Increase tariffs to the maximum extent
that is politically possible
4. Improve billing and collection.
5. Reduce operating costs for labor, energy,
etc., to the greatest extent possible.
Determination of Financial
Feasibility
Reduce Project Costs
Reduce Project Costs
1. Reduce size and scope of the project
2. Seek grants or additional cash
contributions
3. Seek extended terms
4. Seek lower rates.
Determination of Financial
Feasibility
Re-calculate financial feasibility using
increased income and lower annual debt
service payment.
Re-calculation of Financial Feasibility
25
20
15
10
5
0
Old Debt
Service
New Debt
Service
Old
Income
1 2 3 4 5 6 7 8 9 10 11 12
New
Income
Once Cash Available for Debt
Service and Annual Debt Service
Payments are Known, a Determination
of Financial Feasibility for the Project
can Readily be Made.