Common use of Financial Metrics Clause in Contracts

Financial Metrics. The financial metrics used in the Space@Sea business case is summarised as the following: ▪ Annual financial profit ▪ Return on Investment (ROI) ▪ Discounted Cash Flow (DCF) and Net Present Value (NPV) ▪ Payback Period ▪ Internal Rate of Return (IRR) The most basic metric for assessing the financial feasibility of a business case is the annual financial profit, which is calculated as revenue less expenses. Expenses include both operating costs for day-to-day activities of the farm, and capital costs of financing borrowings and depreciation. The latter is not a cash expense or outflow, but needs to be accounted for in the financial performance of the business case as it captures the loss in value in the capital investment, which needs to be recovered or replaced over time. More specifically, annual financial profit is calculated as: 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 ▇▇▇▇▇▇▇ = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑡 − 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑡 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑡 Or 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 ▇▇▇▇▇▇▇ = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑡 − 𝐶𝑎𝑠ℎ 𝑐𝑜𝑠𝑡𝑡 − 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛𝑡 The next metric that needs to be considered is the Return on Investment (ROI), which measures the annual return as a percentage of initial capital investment. This is calculated as: 𝑅𝑂𝐼 (%) = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑔𝑎𝑖𝑛𝑠𝑡 + 𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑦𝑖𝑒𝑙𝑑𝑡 × 100 𝑡 𝐶𝑎𝑝𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑡 For the purpose of this study, we do not assume that any capital investments are sold during the period of operation, so that the ROI simplifies to: 𝑅𝑂𝐼 (%) = 𝑁𝑒𝑡 ▇▇▇▇▇▇▇ × 100 𝑡 𝐶𝑎𝑝𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑡 8 Unpublished report; Bioeconomic model of Aquaculture feasibility – Application to four species in AquaVlan, 2012. ▇▇▇▇▇ K & ▇. ▇▇▇▇▇▇▇, LEI Wageningen UR. As the value of money declines with time, it is important to establish the worth of cash flows in today’s dollars, or present value, so that it can be accurately weighed against the capital investment needed upfront. The present value of cash flows is reflected by the metric Discounted Cash Flow (DCF) and the cumulative sum of all DCF over the period of interest is defined by the Net Present Value (NPV). The two metrics can be calculated as the following: 𝐷𝐶𝐹 = 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 = 𝑁𝑒𝑡 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜H𝑡/(1 + 𝑖)𝑡 𝑁𝑃𝑉 = J 𝑡 where i is the discount rate or the return that could be earned in alternative investments, and t is the time period (with the maximum number of periods set to n). Related to the concept of NPV are the Payback Period and Internal Rate of Return (IRR). The Payback Period is specified as the number of years for the NPV to become positive – that is, the number of years for initial investment to be recuperated or paid back with discounted cash inflows. On the other hand, the IRR corresponds to the discount or interest rate that will equate to a NPV of zero. It is used to evaluate the attractiveness of various business cases against others, or against a company’s minimum threshold rate to take on an investment. For example, if the IRR falls below the desired rate of return, the project may be rejected. As mentioned earlier, the IRR is calculated by setting NPV to zero: 𝑁𝑃𝑉 = J 𝑡 = 0 The combination of financial metrics outlined here provides a comprehensive assessment of the attractiveness of the Space@Sea business case for farming seabream in the Mediterranean.

Financial Metrics. The financial metrics used in the Space@Sea business case is summarised as the following: ▪ Annual financial finance profit ▪ Return on Investment (ROI) ▪ Discounted Cash Flow (DCF) and Net Present Value (NPV) ▪ Payback Period ▪ Internal Rate of Return (IRR) The most basic metric for assessing the financial feasibility of a business case is the annual financial profit, which is calculated as revenue less expenses. Expenses include both operating costs for day-to-day activities of the farm, and capital costs of financing borrowings and depreciation. The latter is not a cash expense or outflow, but needs to be accounted for in the financial performance of the business case as it captures the loss in value in the capital investment, which needs to be recovered or replaced over time. More specifically, annual financial profit is calculated as: 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 ▇▇▇▇▇▇▇ = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑡 − 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑡 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑡 Or 𝐹𝑖𝑛𝑎𝑛𝑐𝑖�where t is the time period, whether it is a calendar year or a financial year. �𝑙 ▇▇▇▇▇▇▇ = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑡 − 𝐶𝑎𝑠ℎ 𝑐𝑜𝑠𝑡𝑡 − 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛𝑡 The next metric that needs to be considered is the Return on Investment (ROI), which measures the annual return as a percentage of initial capital investment. This is calculated as: 𝑅𝑂𝐼 (%) = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑔𝑎𝑖𝑛𝑠𝑡 + 𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑦𝑖𝑒𝑙𝑑𝑡 × 100 𝑡 𝐶𝑎𝑝𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑡 For the purpose of this study, we do not assume that any capital investments are sold during the period of operation, so that the ROI simplifies to: 𝑅𝑂𝐼 (%) = 𝑁𝑒𝑡 ▇▇▇▇▇▇▇ × 100 𝑡 𝐶𝑎𝑝𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑡 8 Unpublished report; Bioeconomic model of Aquaculture feasibility – Application to four species in AquaVlan, 2012. ▇▇▇▇▇ K & ▇. ▇▇▇▇▇▇▇, LEI Wageningen UR. As the value of money declines with time, it is important to establish the worth of cash flows in today’s dollars, or present value, so that it can be accurately weighed against the capital investment needed upfront. The present value of cash flows is reflected by the metric Discounted Cash Flow (DCF) and the cumulative sum of all DCF over the period of interest is defined by the Net Present Value (NPV). The two metrics can be calculated as the following: 𝐷𝐶𝐹 = 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 = 𝑁𝑒𝑡 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜H𝑡/(1 + 𝑖)𝑡 𝑁𝑃𝑉 = J 𝑡 where i is the discount rate or the return that could be earned in alternative investments, and t is the time period (with the maximum number of periods set to n). Related to the concept of NPV are the Payback Period and Internal Rate of Return (IRR). The Payback Period is specified as the number of years for the NPV to become positive – that is, the number of years for initial investment to be recuperated or paid back with discounted cash inflows. On the other hand, the IRR corresponds to the discount or interest rate that will equate to a NPV of zero. It is used to evaluate the attractiveness of various business cases against others, or against a company’s minimum threshold rate to take on an investment. For example, if the IRR falls below the desired rate of return, the project may be rejected. As mentioned earlier, the IRR is calculated bymussels setting NPV to zeroNorth Sea: 𝑁𝑃𝑉 = J 𝑡 = 0 The combination of financial metrics outlined here provides a comprehensive assessment of the attractiveness of the Space@Sea business case for farming seabream in the Mediterranean.