The first graph shows the IRR earned since 1930. Notice that the nominal IRR is 4.57%. If you take away inflation, the IRR since 1930 was ___. This is compared to the real GNP since ___.
Chapter 1: The Dabhol Project Financed Project and why Dr. Phalippou of Oxford and other academics labeling of IRR as Bull Shit is academic arrogance
Quote and how I teach the case.
Introduction to case and project finance versus finance. Why the MM theory does not apply to project finance.
I admire Merton Miller and the fact that his idea on the irrelevance of debt does not apply to project finance does not change my opinion of his ideas. His idea that you should focus on what a company really does rather than how it is financed. The quote of Yogi Berra that I am really hungry so I will divide the pizza into twelve instead of six pieces was his favourite quote. This idea that you should focus on the real economics can be applied all over finance. Not only should you apply this to debt and loan agreements, but to any contract. A contract does not change the fundamental economics, it only allocates costs. For the Dabhol case, the fundamental question is whether the plant made economic sense. If it makes sense, the contracts can allocate risks to different parties but not change the economic value. If the plant is bad for the country, a series of contracts cannot change that.
But Miller’s theory is violated in project finance because the debt is a test that verifies the project. It is like getting your passport stamped.
IRR versus ROI and weighted average ROIC.
I received information about a project finance and the following statistics were presented. This would be the same as the Dabhol case. Not the return on capital employed begins as a negative number and then increases. This number which is essentially the same as the
Immediately go to end of the case and compute the project IRR and the equity IRR. Why these IRR’s are so important to understand the project.
Biggest Variable in Finance – Real Return above Economic Growth. Philosophy and distribution of income. Come back to this.
Productivity and population growth. What happens when large payments made to foreign investors.
Project finance versus corporate finance
Changing risks. Irrelevance of WACC
Measurement of Value
Understanding probabilities and development costs
Creating a structure diagram
What is a reasonable return for the project, for equity investors and for debt providers?
Credit Spreads, probability and required return
Measurement of MIRR instead of IRR
Notice from Figure 1.2 that IRR for stocks since was 4.14%, (not 8% that compares to the real GNP growth of 3.16%. Note that return on stocks did not exceed the
I have used 1993 as the split year. The first graph shows the GNP and the stock price from 1947 to 1993. The second graph shows the same graph after 1993.
Start in 1953 when the interest rate was published.