Defined Terms and Documents     Discussion Paper      Annexure A    Annexure B    

Base Case Financial Model means a large Excel spreadsheet containing many worksheets dynamically linked to simulate inter alia the Economic Return On Capex and associated future fiscal Capex requirements, which -

(i)         is based on a set of best-estimate assumptions, known as a 'Base Case', to produce a set of likely results;

(ii)        incorporates 'Scenario Testing' eg. 'Less Effective', 'Forecast' and 'More Effective' outcomes;

(iii)       will not incorporate 'Stress Testing' changes to the fundamentals (ie reduced water supply, increased food costs, higher energy costs, a disease outbreak or epidemic etc.) which impact the Ascribed Economic Value;

(iv)       might incorporate some 'Sensitivity Testing' to identify the impact of changing one assumption, or perhaps a few linked assumptions and appraise if the model is realistic as users will generally have a meaningful idea of the outcome when they alter a 'Sensitivity';

(v)        might incorporate some 'Probabilistic Stochastic Testing' using random numbers to simulate a large number of alternative scenarios that might transpire so as to calculate percentiles to get some idea of the probability of different outcomes on Economic Return on Capex;

(vi)       calculates the time (in years and months) to reach the 'break even point' where total revenue (sales, tolls or turnover) equals total construction and operating costs. At this point there is no profit or loss—in other words, the project has achieved 'break even'; and

(vii)      the financial model contains many worksheets dynamically linked which deploy the following modelling protocols in a large Excel spreadsheet that calcs the IRR which is higher than the hurdle rate (required yield); and a positive NPV.     

 

Wikipedia says

Financial modelling is the task of building an abstract representation (a model) of a financial decision making situation. This is a mathematical model, such as a computer simulation, designed to represent (a simplified version of) the performance of a financial asset or a portfolio, of a business, a project, or any other form of financial investment.

Financial modelling is a general term that means different things to different users. For some, it means the development of a mathematical model to predict a fair equilibrium price for an asset. For others, it means the development of a mathematical model and the associated computer implementation to simulate scenarios of financial events, such as asset prices, market movements, portfolio returns and the like. Or it might mean the development of optimization models for managing and controlling the risk of a financial investment.

While there has been some debate in the industry as to the nature of financial modelling whether it is a tradecraft, such as welding, or a science, such as metallurgy, the task of financial modelling has been gaining acceptance and rigor over the years. Several scholarly books have been written on the topic, in addition to numerous scientific articles, and the definitive series Handbooks in Finance by Elsevier contains several volumes dealing with financial modelling issues.  One such publication is Practical Financial Optimization: Decision Making for Financial Engineers.

There are non-spreadsheet software platforms available on which to build financial models. However, the vast proportion of the market is spreadsheet-based, and within this market Microsoft Excel now has by far the dominant position, having overtaken Lotus 1-2-3 in the 1990s.