LNG Project Valuation with Financial Leasing Contracts
USAEE-IAEE WP 09-027
24 Pages Posted: 6 Dec 2009
Date Written: December 2, 2009
Abstract
Financial leasing is prevalent in LNG projects. Actually, in many LNG infrastructure projects, leasing is the only option for oil companies. A common approach in such settings is to treat financial leasing costs as operating cost and discount with the firm’s weighted average cost of capital (WACC). This method, which is applied on huge investments in LNG infrastructure, overstates project profitability and may lead to overinvestment. Since financial leasing payments are contractual and deterministic, a separate cash flow valuation is called for, with a lower discount rate for financial leasing costs. We present a correct method for calculating the net present value of projects when there are no investment alternatives, i.e., when leasing is the only option. Finally, we demonstrate through a real LNG project example, the magnitude in the project net present value error with the current valuation method.
Keywords: Project Valuation, Capital Budgeting, Financial leasing, Financial cost
JEL Classification: G31, G32
Suggested Citation: Suggested Citation