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Using Quantrix in Capital Budgeting


Often decision makers need to build complex simulation models to evaluate various risk and return scenarios for capital investment projects. This is commonly referred to as a capital budgeting or project finance exercise. In this Modeler note, a Quantrix model is used to simulate an investment opportunity for a wind power generation plant.* The financial analysis in this model includes calculation of depreciation/amortization, debt structure, cash flow, discounted cash flow and debt coverage ratios based on investment assumptions, a working balance sheet and a profit and loss forecast. Potential dividends and return analysis are calculated across two different operating scenarios.

While the wind power spreadsheet is well structured, it does encounter some unavoidable spreadsheet limitations that can be addressed in Quantrix. Specifically, advantages of the Quantrix model over the spreadsheet include:

Extendible - Multiple Scenarios Additional scenarios can be added to the Quantrix model with very little effort. One needs only to add a scenario category to the Annual Increase Assumptions matrix, enter the new assumptions, and link the Scenario category across the other relevant matrices. Additional scenarios can be added with no additional formulas.

Extendible - Multiple Projects
One can model multiple projects by simply adding an additional category for "projects". The existing logic would apply - no additional formulas needed. By linking the Project category to the Annual Increase Assumptions matrix one could maintain various assumptions across multiple projects - again with the same logic. Results could be easily consolidated across multiple projects.

More Efficient use of Formulas
The Excel spreadsheet has approximately 1,200 formulas; with two scenarios it would have approximately 2,200 formulas. The Quantrix model has about 120 plain language formulas.

Reduced File Size
The Quantrix model, even with two scenarios, is approximately one-fifth the file size of the Excel file. When models become more elaborate, this can make the model much more practical to work with when emailing to colleagues, storing on servers and sharing across a network.

In addition to these advantages, Quantrix allows the easy ability to slice and dice across multiple scenarios, projects and years by moving the category tiles in each matrix to the different axis. This flexibility also carries across to the graphical presentation.

Downloads:

>> Wind Power Project Financial Model
>> Working Spreadsheet

* The Quantrix model structure is based on a spreadsheet model freely available at www.mofinet.com. Mofinet.com is a web site promoted with the aim of offering working tools to be used in the fields of financing of investment projects and in the valuation of start-up and existing companies.
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