This workout is a two part task. It's asking us for the equity required to get this project going, but to get there, we're going to have to figure out the deck capacity of the project.

Both of these figures in row 12 and 13 are going to need to fuel the project in its setup phase. And you can see here there's a rather large negative figure that needs to be paid for. The project will then take 3 years to ramp up, and then the operational phase will begin in year 4. And you can see income in year 4 to 10. And on row two we can see a useful assumption that says all of that income will be promised to the debt providers. The debt providers have offered an interest rate of 5%, and the project has an interest reduction in the form of tax because interest is tax deductible. And that means that although the interest rate is 5% from the point of view of the project, it may as well be 4% and we'll see that in detail later. And churning that all together, we're going to have to figure out the debt capacity of this project. And then the gap, which will be the equity requirement. And I think it is important to note that regardless of what kind of loan we came up with, it would also need to be equity as a cushion. So if for example, our calculation somehow came up with 500 here, that wouldn't be realistic in the real world. There would always need to be equity in a project as a cushion. Now, the first step is to get an equals NPV going. And if we open that bracket, you can see, and it might be quite small, but you can see suggested terms there. And the first term is rate. As we mentioned earlier, the rate looks like 5%, but from the project's point of view, they are experiencing reduction in that cost of 20%, and that means that the project may as well have a cost of debt of 4%. We then put a comment and we would start to point the NPV at all of the cash flows from year 1 onwards, going all the way to year 10. It's important not to omit those zeros. It would be tempting, for example, to start the nPV at that 10 just on the year 4. But the NPV formula must have the first year as the first cell, and that's D7 in the view. Now, if we were to start it at year 4, it would actually interpret that as year 1, and you would get the incorrect result. Now, having closed the brackets, we could then hit enter, and you can see the formula turn up there. And you can see that having done the NPV on those cash flows starting in year 4 and going all the way to year 10, and having promised those cash flows to the lenders and the lenders having a required rate of return of 5, but reduced by that 20% tax break, the debt capacity of this project is 369.1. Now, just a reminder that the capital need of this project is 500 to get the setup phase going, and that means that it will be the gap between these two figures, which is the equity.

Now that's slightly unsatisfying, so let's wrap that all in a bracket and multiply it by minus 1. But that gives us our equity requirement. And so the conclusion is that given the cash flows of this project from principally years four onwards, we can expect to raise 369.1 for this project, which leaves a gap of 130.9 to fuel the setup of 500, and that then would be the equity requirement.