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Table 5 Project finance variables

From: The commercial performance of cellulosic ethanol supply-chains in Europe

Discount rate The greater the discount rate, the more expensive it becomes to finance a project. For a project financed by a combination of debt and equity the effective discount rate is given by the Capital Asset Pricing Model. This discount rate is a function of the expected asset price volatility (Beta), risk-free market rate, market-risk premium, cost of debt and the ratio of debt to equity.
Investment life A longer investment life increases the value of future revenues thereby reducing the cost of project finance.
Salvage value at end of project The greater the salvage value, the lower the financing cost.
Capital grants Capital grants directly reduce the amount of capital that must be financed by other means, thus lowering the finance cost.
Build duration Increasing build time delays the point at which the project begins to generate revenues thereby increasing the financing cost.
Tax rate Increasing the tax rate reduces the value of future revenues. This increases the cost of financing the project.
Depreciation Proportion of capital costs which can be written off against tax each year; normally determined by legislation.