Financial Engineering Ltd.

PRIORITY: INVESTMENT PROJECTS COST BENEFIT ANALYSIS.

Carrying out of a Cost-Benefit analysis of investment projects is an explicit requirement, according to EU regulations regarding EU structural, cohesion and pre-accession funds.

The European Commission exercises quality control on the evaluation based on the Cost-Benefit analysis of the investment projects, before granting EU co-funding for the project and before defining the relative co-funding share.

The cost benefit analysis of investment projects is carried out in accordance with the requirements of the Guide to Cost-Benefit Analysis approved by the EUROPEAN COMMISSION – DIRECTORATE GENERAL “REGIONAL POLICY”

COMPREHENSIVE: COMPLETE EU FUNDING CONSULTANCY SERVICES.

The servicing covers the entire cycle from processing of application forms to provision of financial management services after the grant for the project has been awarded (complete grant management service).

1. GOAL SETTING AND STRUCTURING OF THE PROJECT.

1.1. GOAL SETTING:

    1.1.1. Definition of project goal(s) with regard to the socio - economic benefits.

    1.1.2. Evaluation of the achievement of socio - economic benefits from carrying out of the project.

    1.1.3. Evaluation of project costs feasibility for the achievement of common economic goals.

    1.1.4. Analysis of direct and indirect socio – economic results of the project.

    1.1.5. Description of the method for measuring the extent to which the project has been carried out.

    1.1.6. Analysis and evaluation of the project’s compliance with European Union policies and priorities.

1.2. PROJECT STRUCTURING:

    1.2.1. Definition of clear individualization of the project as a separate self sufficient analytical unit.

    1.2.2. Definition, compliance and meeting the conditions regarding a project, project phase or project series.

    1.2.3. Definition of a financial threshold of project’s realization.

2. TECHNICAL AND OPTION ANALYSIS OF THE PROJECT.

2.1. Definition and presentation of sufficient evidence for the project's feasibility from engineering, marketing, management, operational, ecologic, financial and other points of view.

2.2. Analysis and evaluation for adequate consideration of alternative project variants.

3. FINANCIAL ANALYSIS OF THE PROJECT.

    3.1. Time frame definition on an annual basis.

    3.2. Definition of project costs – total amount for investments and total amount for operational costs. Specification of admissible and total expenditure.

    3.3. Definition of project generated revenue.

    3.4. Definition of forecasted annual (in certain cases broken down to monthly and quarterly annual) Profit and loss accounts, Balance sheets and Cash flow statements in accordance with the requirements of the INTERNATIONAL STANDARDS FOR FINANCIAL REPORTS and book-keeping. Evaluation of the investment balance value by accounting for the market balance value of the fixed capital as well as for all assets and liabilities balance value.

    3.5. Inflation correction.

    3.6. Verification of financial stability.

    3.7. Selection of corresponding discount percentage.

    3.8. Definition of basic realization indicators – Financial Internal Rate of Return of the Investment and Equity capital as well as corresponding Present Net Financial Values.

    3.9. Definition of co-financing rate.

4. ECONOMIC ANALYSIS OF THE PROJECT

    4.1. PHASE 1: Correction for fiscal aspects – definition of “fiscal correction” and conversion index values, applicable in relation to market prices affected by specific fiscal aspects.

    4.2. PHASE 2: Correction of external factors – inclusion of external costs and benefits with no cash flow in the incoming and outgoing flows.

    4.3. PHASE 3: Definition of transformation coefficients after conversion of market prices into accounting prices with a view to include social costs and benefits as well. (definition of conversion index vector).

    4.4. Discounting.

    4.5. Calculation of economic rate of return and of “cost/benefit” ratio.

5. MULTIFACTOR ANALYSIS OF THE PROJECT

5.1. Definition of evaluation criteria.

5.2. Analysis of the results caused by each of the chosen criteria. The results are presented in qualitative and quantitative aspects.

6. DEFINITION OF PROJECT RISK AND SENSITIVITY.

    6.1. Forecasting of uncertain events.

    6.2. Analysis and evaluation of sensitivity.

       6.2.1. Specification of all variables, used to calculate incoming and outgoing resources in financial and economic analyses and grouping of similar variables by categories.

       6.2.2. Definition of possible contingent variables which could cause distortion of results and double accounting.

       6.2.3. Analysis of critical variables influence by categories and parameters with the purpose of their classification with regard to low or utmost elasticity.

       6.2.4. Definition of important variables and evaluation of their elasticity in relation to the Internal Rate of Return and Net Present Value of the Investment and Equity Capital.

    6.3. Scenario Analysis. Definition of the optimistic and pessimistic scenario by defining the extreme values of each critical variable in the interval set by probability distribution.

    6.4. Analysis of Risk Probability.

       6.4.1. Definition of probability distribution of critical variables.

       6.4.2. Evaluation of probability distribution of the Internal Rate of Return and Net Present Value of the Investment and Equity Capital of the project.

The Financial Cost-Benefit Analysis frame refers to investment projects that generate income and seek co-financing by the European Union structural funds.

GOALS

First.    To evaluate the necessity and with optimum mix to define the size of:

    - amount of free grants from the European Union;
    - use of other public means;
    - contribution of the candidate;
    - use of borrowed funds;
    - use of possible direct income;
     for securing the financial feasibility of the investment project.

Second.    To be used as a base for arranging the relationship between the co-financing Beneficiary (e.g. a municipality) and the investment project Executor ((e.g. a company) when giving the grant capital from the Beneficiary to the Executor in the meaning of the Commercial law and International accounting standard 20.

Third.    To project, analyze and evaluate the investment project Business Potential for generating a net cash flow and for its possibilities to cover debt payments in dynamics.

Fourth.    To be used as financial grounds when the Executor of the investment project applies for long and short-term bank (e.g. European Investment Bank) or non-bank loans.

Fifth.    To determine, analyze and evaluate in dynamics the level of finance efficiency and corporate value using a system of indicators for finance analysis and multivariate business-evaluation.

PHILOSOPHY

The Financial Cost-Benefit Analysis is made in the context of a comprehensive research of financial advisability from realization and development of the investment project.

The study generalizes the incoming operative information given in a number of financial reports, prognoses, initial agreements on the project development strategy, etc., and defined pro-form finance accounts into one current to the date of the study financial model.

The study summarizes the incoming operative information and defined pro-form financial reports into one up to date of the research financial model.

METHODOLOGY

First.    Standards and advisable formats defined by the Guide to Cost-Benefit analysis of investment projects, approved by the EUROPEAN COMMISSION – DIRECTORATE GENERAL "Regional Policy".

Second.    International (Bulgarian) standards for financial reports and book-keeping, approved by the EUROPEAN COMMISSION. The formats used are the ones applied by public companies in Bulgaria and abroad.

Third.    Universal, from the point of view of internationally adopted practice, standards, software and formats for financial prognosis, analysis and evaluation of investment projects applied by the European Investment Bank as well.

WORKING TOOLS

The working tools used is a “Finance engineering and business evaluation” system (FEBE).. FEBE is an integrated system for economic and mathematical modeling, financial engineering, management accounting, financial analysis and business evaluation.FEBE has been developed and constantly updated using leading world technologies and software based on project oriented CASE tools.

INFORMATION SOURCES

All kinds of research including marketing, legal, technological and others that define the development program of the Investment project.

C O N T E N T S

PREAMBLE

The preamble announces the actions taken regarding the definition of: Referent time horizon; Total value of investment and current expenses, project revenue and the used current or constant prices defined during the referent time horizon; Net working capital; Residual accounting value of the investment; Investment financing sources; Financial stability; Discount rate; Performance indicators; Co-financing amount; Sensitivity and risk; Financial business plan.

EXECUTIVE SUMMARY:

The final results of the analysis whose values speak for themselves are defined in the Executive Summary.

SECTION "A": FINANCIAL COST-BENEFIT ANALYSIS. SENSIBILITY AND RISK EVALUATION ANALYSIS.

FINANCIAL ANALYSIS:

Table A-1: TOTAL INVESTMENT COSTS.

Table A-2: OPERATING COSTS AND REVENUES. TAXES.

Table A-3: EVALUATION OF THE FINANCIAL RETURN OF THE INVESTMENT. Basic Scenario.

Table A-4: SOURCES OF FINANCING.

Table A-5: FINANCIAL SUSTAINABILITY.

Table A-6: EVALUATION OF THE FINANCIAL RETURN OF THE NATIONAL PRIVATE AND PUBLIC CAPITAL. Basic Scenario.

Table A-7: DETERMINATION OF THE EU GRANT.

SENSIBILITY AND BUSINESS RISK:

Table A-8: SENSIBILITY AND BUSINESS RISK EVALUATION ANALYSIS.

Table A-3-1 and -2: EVALUATION OF THE FINANCIAL RETURN OF THE INVESTMENT. Optimistic and Pessimistic Scenario.

Table A-6-1 and -2: EVALUATION OF THE FINANCIAL RETURN OF THE NATIONAL PRIVATE AND PUBLIC CAPITAL. Optimistic and Pessimistic Scenario.

SECTION "B": INCOMING PROJECTED OPERATIVE INFORMATION.

Table B-1: INVESTMENTS & SOURCES FOR FINANCING.

Table B-2: CURRENT SALES NET INCOME.

Table B-3: CURRENT OPERATING EXPENSES.

Table B-4: CURRENT FINANCIAL EXPENSES.

Table B-5: CALCULATION OF THE INVESTMENTS RESIDUAL NET BOOK VALUE AT END YEAR OF THE TIME HORIZON.

Table B-6: SINKING PLANS OF LONG-TERM LOANS FOR FINANCING OF INVESTMENTS.

SECTION "C": FINANCE BUSINESS PLAN.

Section "C-1": Executive Summary of the Finance Business Plan

Table C-1.1.: GENERALIZED DEFINING OF INCOMING AND OUTGOING CASH FLOW MOVEMENT. Structural analysis.

Table C-1.2.: GENERALIZED DEFINING OF BALANCE SHEET REQUISITES MOVEMENT.

Chart C-1.1.: COVER OF THE LONG-TERM DEBT INTEREST PAYMENT - final results. Basic, Optimistic and Pessimistic Scenario.

Chart C-1.2.: COVER OF THE LONG-TERM DEBT PRINCIPAL REPAYMENT - final results. Basic, Optimistic and Pessimistic Scenario.

Chart C-1.3.: CURRENT ONE SHARE EVALUATION ANALYSIS - final results.

Chart C-1.4.: CURRENT ONE SHARE EVALUATION ANALYSIS. SENSIBILITY EVALUATION.

Chart C-1.5.: BREAK-EVEN ANALYSIS.

Chart C-1.6.: TEST OF CORPORATE PROJECTION.

Chart C-1.7.: TEST OF FINANCIAL RISK (Altman Z-Factor analysis).

Section "C-2": Financial Reports.

STATEMENTS OF EARNINGS (PROFIT AND LOSS ACCOUNTS)

According to International (Bulgarian) № 1 accounting standard: "Financial Reports Presentation".

BALANCE SHEETS

According to International (Bulgarian) № 1 accounting standard: "Financial Reports Presentation".

STATEMENTS OF CASH FLOWS

According to International (Bulgarian) № 7 accounting standard: "Cash Flow Statements".

STATEMENTS OF CHANGES IN FINANCIAL POSITION - CASH BASIS

TAX CALCULATIONS

INVESTMENTS FOR FIXED ASSETS

WRITTEN OFF FIXED ASSETS

AMORTIZATION PLAN

Section "C-3": Current Common Stock (Shares) Evaluation Analysis.

NET BOOK VALUE

CAPITALIZATION OF EARNINGS

DIVIDEND PAYING CAPACITY

DISCOUNTED FUTURE EARNINGS

DISCOUNTED FUTURE NET CASH FLOW

AVERAGE WEIGHED EVALUATION ("FAIR VALUE ")

INCOMING INFORMATION FOR BUSINESS EVALUATION ANALYSIS - Discounted Future Net Cash Flow

Section "C-4": Finance Analysis for Evaluation of Key Management Coefficients.

STANDARD ANALYSIS OF FINANCE COEFFICIENTS

Test of operating and general effectiveness

Test of profitability measures

Test of investment utilization

Test of financial condition

Test of financial levarage

Test of Growth Performance

Break-Even Analysis

CORPORATE FINANCE ANALYSIS

Corporate Evaluation test – General status regarding the exchange Capitalization rate.
Test of the rate of the financial risk - Altman’s Z-Factor analysis.

ROBERT MORICE’S FINANCIAL ANALYSIS

Assets %

Liabilities %

Income data %

Ratios

CONCLUSION

The COST AND BENEFIT ANALYSIS of an Investment Project done within the above framework achieves the goals that have been set and gives the opportunity for a proper protection of the interests of all sides involved in the process of co-financing by the European Union structural funds.