Modeling question

For a financial model, if I expect several capital expansions (to be debt-financed) throughout the project life, should I model one up-front borrowing now or multiple borrowings when additional capital is needed throughout the project? What would be the best way to handle this? Thanks a lot for your help.

Depends on your outlook for interest rates generally and borrowing costs for the industry/issuer specifically. How long of a project are you looking at?

30 years. Cap is needed for 2015 and 2030. I agree with you but it just seems that I’m introducing unnecessary complexity to the model. Thanks for your insight, vanz1212.

Then definitely don’t model upfront borrowing if capital is not required for that many years. Why would anybody pay fixed borrowing costs for 22 years on an unfunded potential project?

Good point, vanz1212. A couple of questions: - How would you project borrowing rates for the future financing? - If borrowing rates are different, should I assume different discount rates for multiple periods? Thank you.

Impossible to forecast interest rate for thelong-term future so I would never do it. I would either use the current interest rates throughout the model or use an average histrocial interest rate. The problem is you can forecast everything if you want, but you will make the model more complex than it needs to be. And yes, inject that borrowing when it is required, not before. You should structure the model so if the cash flow is negative ( and there is not cash in the bank) that the company automatically borrows funds to meet obligations. Garbage in, garbage out.

Thanks a lot, dein_geisicht. That makes a lot of sense. While I have your attention, could I pick your brain on the following questions as well? If we expect capital expansion for 10 years out of the 30 year period, should we then model 10 times of borrowing? Or can I simplify to 2-3 borrowings? Also, is it usual to add debt service reserve to the cost of debt? Say, if cost of borrowing is 5%, do you use this as your cost of debt or 5% + spread to account for the debt service reserve requirement (1.20x or whatever that might be)? How do you account bond issuance cost or other charges related to borrowing for this type of long-term forecasts? This would add up for 10 times of borrowing discussed above… Thank you.