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<ul><li><p>Cash-flow forecasting for investment projects with non-reimbursable </p><p>financing </p><p>BOGDAN SACAL Department of Economic Cybernetics </p><p>Academy of Economic Studies Bucharest, Piaa Roman 6, sector 1 </p><p>ROMANIA bogdan.sacal@yahoo.com </p><p> LORELAI SACAL </p><p>Department of Economic Cybernetics Academy of Economic Studies </p><p>Bucharest, Piaa Roman 6, sector 1 ROMANIA </p><p>lorelaisacal@yahoo.com </p><p>LUCIAN PUNA Department of Economic Cybernetics </p><p>Academy of Economic Studies Bucharest, Piaa Roman 6, sector 1 </p><p>ROMANIA paunalucian@yahoo.com </p><p> ADRIAN BDESCU </p><p>Department of Economic Cybernetics Academy of Economic Studies </p><p>Bucharest, Piaa Roman 6, sector 1 ROMANIA </p><p>adi_bad@yahoo.com Abstract: Non-reimbursable financing for investment projects is a high interest subject in the post-adheration phase of our country to European Union. This new way to finance projects implies new methods and techniques for financial forecasting that take into account these new challenges. The following paper present a coherent methodology that can be used in order to justify the necessity and opportunity for non-reimbursable financing for investment projects, taking into account the specific requirements of the existing financing programs available for Romanian investors. </p><p>Key-Words: Cash-flow forecasting, Net present value, Internal rate of return, Non-reimbursable financing </p><p>1 Introduction In 2007 Romania joined the European Union (EU) and, as a direct consequence, started to benefit from non-reimbursable funding in order to reduce the gap in economic and social development to the other countries in the EU. These financing opportunities are directed towards investment projects, social development projects and public services projects. </p><p>Accessing the non-reimbursable financing opportunities implies a competitive selection for the financing requests sent by applicants to the </p><p>financing authorities. The financing requests are accompanied by technical and financial documents of different complexity degrees, documents that are meant to justify the request for financing. </p><p>Investment projects are a large part of the projects proposed for financing by applicants. These investment project proposals submitted to the financing authorities have to prove that the non-reimbursable funding is necessary and appropriate, justification that is made by using financial </p><p>Mathematics and Computers in Biology, Business and Acoustics</p><p>ISBN: 978-960-474-293-6 270</p></li><li><p>forecasting of the cash-flows generated by the proposed projects. </p><p>In order to prove that an investment project submitted for financing is both necessary and financially viable, the applicant has to forecast the projects cash-flow and calculate certain indicators. The most often used indicators are the Net Present Value (NPV) and the Internal Rate of Return (IRR), both of them being well known financial indicators, but when used for projects with non-reimbursable funding they have to be adjusted in order to provide the necessary information regarding the proposed project. </p><p>The low rate of funds absorption registered by Romania at the end of 2010 and the lack of abilities both in providing and checking the financial aspects of the projects demonstrate that the problem of forecasting the cash-flows of investments with non-reimbursable funds is not yet solved. </p><p>2 Problem Formulation For an investment project that is submitted in a call for projects for non-reimbursable financing, the applicants have to forecast the cash-flows in order to determine the necessary financial indicators, NPV and IRR. </p><p>In order to analyze an investment project one has to establish certain assumptions made: </p><p>- the investment project is deployed over a prior time period, named forecasting period; </p><p>- the forecasting period is divided into two distinct time periods: the implementation period (the project is implemented in this time period) and the operating period (start when the project is finalized and the project starts functioning and producing incomes); </p><p>- for the implementation period the cash-flows should be presented monthly, and for the operating period the cash-flows should be presented yearly. </p><p>The 7th International Accounting Standard (IAS 7) defines the cash-flows as cash and cash equivalent receipts and payments. The financial statements users are provided with a useful tool for evaluating a companys ability to generate cash and cash equivalents, and its requirements for using cash and cash equivalents in current activities. </p><p>Following a functional approach to an economic entitys activities, the standard proposes three types of cash-flows: </p><p>- Investing cash-flows the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents; </p><p>- Financing cash-flows activities that alter the equity capital and borrowing structure of the entity; </p><p>- Operating cash-flows main revenue-producing activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees. </p><p>Calculating the cash-flows generated by the three activities mentioned above can be done using two methods: </p><p>- The direct method method which consists of adding the different types of cash-flows in order to determine the cash-flow of the project; </p><p>- The indirect method starts from the net profit or loss of the financial year, which is then corrected by removing the non-monetary transactions and information. </p><p> 2.1 The direct method The direct method is the method used in order to forecast the cash-flows required in the financing request documentation for non-reimbursable funding, according to current regulations. </p><p>The forecasted cash-flows are presented using the following structure: </p><p> A. Investing cash-flows </p><p>B. Financing cash-flows </p><p>C. Operating cash-flows </p><p>D. Net cash-flow of the period (A+B+C) </p><p>E. Available from the previous period F. Cumulative cash-flow (D+E) </p><p>Table 1 </p><p>Forecasting the cash-flows is a straight-forward procedure using one of the numerous methods and techniques from the financial forecasting theory. This present paper will not present any of these well-known techniques and assumes them employed in order to obtain the necessary cash-flows. 2.2 Net Present Value (NPV) and Internal </p><p>Rate of Return (IRR) Using the net cash-flows of every forecasted period, one can calculate the Net Present Value using the following relation: </p><p>( )1 1==</p><p>+n</p><p>i</p><p>ii</p><p>CFNPV</p><p>r (1) </p><p>where, the discount rate</p><p>net cash-flow generated in period .i</p><p>rCF i</p><p>Mathematics and Computers in Biology, Business and Acoustics</p><p>ISBN: 978-960-474-293-6 271</p></li><li><p>Analyzing the value calculated for the Net Present Value, a decision-maker should decide to implement/finance the project if 0&gt;NPV . </p><p>The other indicator, the Internal Rate of Return can be calculated as the value for the discount rate that makes 0=NPV . The decision-maker should decide to implement/finance the project if &gt;IRR r . </p><p>The presented cash-flows and indicators calculated based on those cash-flows can be employed by a economic entity in order to determine if an investment project is worth doing or not. </p><p>The specific problem adressed in this paper is regarding those investment projects that are submitted for non-reimbursable funding. The applicants that submit this projects have to prove the necessity and opportunity of the proposed investment projects. </p><p>Forecasting the cash-flows and calculating the financial indicators for those projects requires adapting the presented methodology to the specifics of non-reimbursable funding. </p><p>3 Problem Solution Forecasting cash-flows for investment projects with non-reimbursable funding requires using a specific structure in order to appreciate the necessity and opportunity of the proposed investments. </p><p>In order to evaluate a proposed investment project, one has to forecast two separate cash-flows that integrate different elements for the three cash-flow types identified using the functional approach. Evaluating the necessity for the non-</p><p>reimbursable financing requires using the following cash-flow structure: </p><p> A. Investing cash-flows </p><p>- contains the investment value minus the VAT (Value Added Tax), distributed over the implementation period B. Financing cash-flows </p><p>- doesnt contain the financing sources for the project (ex: non-reimbursable financing, the state budget, attracted financing sources, the applicant own financing sources) </p><p>- doesnt contain the cash payments afferent to the attracted financing sources (rates and interests) C. Operating cash-flows </p><p>- contains the operating cash receipts and payments excluding the VAT </p><p>- the residual value is included in the last forecasting period D. Net cash-flow of the period (A+B+C) </p><p>E. Available from the previous period F. Cumulative cash-flow (D+E) </p><p>Table 2 </p><p> Using this structure for the forecasted cash-</p><p>flows, by adding the different cash-flows considered, the following relation can be used for the Net Present Value at Investment Costs: </p><p>( )( ) ( ) ( )1 11 1 1= = +</p><p>= + ++ + +</p><p> n m</p><p>ji m</p><p>i j mi j n</p><p>CFI RVNPV C</p><p>r r r (2) </p><p>where, { ,..., } the implementation period{ ,...., } the operating periodthe discount ratethe investment cost in period </p><p>cash-flows generated in period residual value.</p><p>11</p><p> + </p><p>i</p><p>j</p><p>m</p><p>i nj n mrI iCF j</p><p>RV</p><p>The evaluation of the necessity of the non-reimbursable financing is done based on the following conclusions: </p><p>- the Net Present Value at Investment Costs has to be negative ( ( ) 0</p></li><li><p>E. Available from the previous period F. Cumulative cash-flow (D+E) </p><p>Table 3 </p><p>Using this method for building the forecasted cash-flows, we can use the following relation to calculate the financial indicators: </p><p>( )( ) ( ) ( )1 11 1 1= = +</p><p>= + ++ + +</p><p> n m</p><p>ji m</p><p>i j mi j n</p><p>CFK RVNPV K</p><p>r r r (3) </p><p>where, { ,..., } the implementation period{ ,...., } the operating periodthe discount rate</p><p>the applicants resources in period cash-flows generated in period the residual value.</p><p>11</p><p> + </p><p>i</p><p>j</p><p>m</p><p>i nj n mrK iCF j</p><p>RV</p><p>The evaluation of the opportunity of the non-reimbursable financing is done based on the following conclusions: </p><p>- the Net Present Value at Invested Capital has to be negative ( ( ) 0</p></li><li><p>[3] *** (2006) - Working Document no.4: Guidance on the Methodology for carrying out Cost-Benefit Analysis (http://ec.europa.eu/ regional_policy/) </p><p>Mathematics and Computers in Biology, Business and Acoustics</p><p>ISBN: 978-960-474-293-6 274</p></li></ul>