200 Energy Project Financing: Resources and Strategies for Success
Figure A-2. Heat pump and baseboard system differential life cycle
costshas been omitted in Figure A-2. The requirements for a good cash flow
diagram are completeness, accuracy, and legibility. The measure of a suc-
cessful diagram is that someone else can understand the problem fully
from it.A.4 SOURCES OF FUNDSCapital investing requires a source of funds. For large companies
multiple sources may be employed. The process of obtaining funds for
capital investment is called financing. There are two broad sources of fi-
nancial funding, debt financing and equity financing. Debt financing in-
volves borrowing and utilizing money that is to be repaid at a later point
in time. Interest is paid to the lending party for the privilege of using
the money. Debt financing does not create an ownership position for the
lender within the borrowing organization. The borrower is simply obli-
gated to repay the borrowed funds, plus accrued interest according to a
repayment schedule. Car loans and mortgage loans are two examples of
this type of financing. The two primary sources of debt capital are loans
and bonds. The cost of capital associated with debt financing is relatively
easy to calculate, since interest rates and repayment schedules are usu-
ally clearly documented in the legal instruments controlling the financing
arrangements. An added benefit to debt financing under current U.S. tax
law (as of April 2000) is that the interest payments made by corporations
on debt capital are tax deductible. This effectively lowers the cost of debt
financing. For debt financing with deductible interest payments, the after-
tax cost of capital is given by: