Project Economics

Discount Rate

1) The interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank. 2) The ineterest rate used in determining the present value of future cash flows.

Depreciation

An accounting method used to attribute the cost of an asset over the span of its useful life. The cost, of a portion thereof, can be assigned as a loss on the project's balance sheet to reduce the tax base of the project.

Debt vs. Equity

An amount of money borrowed and owed by one party to another is considered debt. For example: bonds, loans, and commercial paper. Equity is a term whose meaning depends very much on the context, but in general, it refers to ownership in any asset after all debts associated with that asset are paid off.

Debt-to-Capital Ratio

A measurement of a company's financial leverage, calculated as long-term debt divided by long-term capital. Total debt includes all short-term and long-term obligations. Total capital includes all common stock, preferred stock, and long-term debt. This capital structure ratio can provide a more accurate view of a company's long-term leverage and risk, since it considers long-term debt and capital only. By excluding short-term financing in its calculation, the ratio provides an investor with a more accurate look into the capital structure a company will have if they were to own the stock over a long period of time.

Debt Service Coverage Ratio (DSCR)

The ratio of net operating income to the amount of money that is required to make regular debt payments. A DSCR of greater than one means that the project is taking in enough income to cover payments on loans. A number of less than one means that the project will have to dip into reserves or other financial resources to cover debt payments. Lending institutions generally frown on lending to projects that have a DSCR of less than one.

Coverage Ratio

A type of accounting ratio that helps measure a company's ability to meet its obligations satisfactorily. A coverage ratio encompasses many different types of financial ratios. Typically, these kinds of ratios involve a comparison of assets and liabilities. The better the assets "cover" the liabilities, the better off the company is.

Business Metrics

A system of parameters or other quantitative assessments of a business that can be measured periodically and systematically. Business metrics are often used to keep track of how well a business is meeting its objectives.

Avoided Cost

The rate that utilities are required to pay independent power producers according to the Public Utilities Regulatory Policy Act (PURPA). Avoided cost is the simply the cost that the utility would have incurred for producing the same amount of power. This is not a favorable rate to recieve as an independent power producer.

Alternative Minimum Tax (AMT)

AMT can be thought of as a different tax system with different rules and deductions; taxpayers must compute their taxes under both the regular tax and AMT rules and then pay the greater of the two. The purpose of the AMT is to prenvet those in the higher tax bracket from getting by from year to year tax free. A consequence is that many unsuspecting taxpayers who make less than $100,000 a year with certain kinds of investments and deductions end up having to pay the AMT. Investing in certain types of businesses can trigger the AMT.

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