In this workout we're going to have a look at how much this project could borrow. Let's take a look at the facts first.

First off, if we take a look, you can see the expectation is that we come up with a maximum loan. We are then going to use a loan analysis to prove that the cash flows we offer the loan will be enough to pay it off.

You can see we've been given cash flows in row seven and notably there's a gap at year zero. There would for this project be outflows such as the construction phase, but those will be the loan as in they'll we matched by the loan amount. So they're a bit of a missing figure right now. The cash flows that we'll be interested in are the cash flows from year three onwards. This is presumably where the project comes online and starts generating inflows. And these are the inflows that we can promise to the bank when we are coming up with debt capacity. Now down here you can see the interest rate and the tax rate. Now these are important because although the interest rate on the loan will be five, the project won't really be paying five because once they take into account the 20% tax break that they get on interest, you could think of the interest rate being the net of four. So what we're going to do is we're going to use the NPV function and we're gonna use that to build up the amount of debt that will be offered. Um, you can see, maybe it's a bit small for you, but just below the formula bar you can see a suggestion of how the MPV works as a function. And you can see the first thing at wants is the rate. Now as we mentioned earlier, the rate will be 5%, but from the point of view of the project, that will be mitigated by the tax amount. And so the rate will effectively be a net of 4%. What we'll do then is we'll offer the MPV, the project's cash flows. It's important that we highlight years one even though it's got a zero in it. And that's because if we were to start from year three onwards, um, the MPV would actually start to believe that's year one. So what we've got to do is say, right, that's year one, I'll offer you what year one to 10, and then we can close the bracket, press enter, and you can see that the maximum loan based on the cash flows from years one to 10 is 3 0 8 0.9. And if I show my formula there, that will make things a bit clearer, okay? So rather than believe that blindly, what we can do is we can prove it down here. So we can say the loan will start out in year zero at 3 0 8 and that's where we'll end up at the start of the next year. 'cause this is a base account, it's good to have the starting being the last ending. It will then accrue interest. And what it's gonna do is it's gonna accrue interest at the rate. Now as we grab the rate, it's just important to lock it 'cause we're gonna wanna copy that to the right a bit later. And it's important to realize that we also need to take that tax reduction that we spoke about earlier. Okay? So if we lock that twice, now we've got a rate and it's building up interest on the beginning balance, we're then gonna have the loan being paid off eventually, but we want the amount up there to end up as a negative figure because it will pay off the loan. And so let's tack a minus one to that and then we'll do all equals there. And if I show you my formula, and if you need to take a look at that for a little while, you could pause the recording.

But if I've done my job properly, now what we can do is we can take that whole thing and then we can highlight to the right and then we can copy. And you can see that as if by magic, the whole loan amortizes down to zero. And you can see the reason it does is because although it's accruing interest, eventually that interest is starting to be paid and eventually being overcome. And the principle is being repaid. And the way we've done this is this was always going to end up down at zero because this is like us reversing the MPV that we did earlier up here. Okay? So this is a way of establishing debt capacity and then proving it using an amortized debt table.