Vardhan consulting engineers (VCE)

Summer Internship program 2020

Smart task 01
ST01-PROJECT FINANCE
-Submitted by: Riya Verma
Q1. What is Finance? How Finance is different from Accounting? What are important
basic points that should be learned to pursue a career in finance?

Answer 1. What is Finance?

Finance is a broad term involving a lot of things from banking, capital markets to money,
debts, credits and investments. There are a lot of functions that can be performed under
finance, analysis, banking, equity research, portfolio management of the financial products
and a lot more is there to the field of finance the most fundamental theory of finance is the
time value of money, as we know due to inflation the value of money keeps on changing a lot
over time, and to understand the concept of time value of money is very significant to pursue
finance.

Difference between accounting and finance

Basis Accounting Finance

Meaning It is the method of recording It is the science of
and reporting various management of funds of the
transactions in a business business
Careers Accountants, auditors, tax Investment banker, finance
consultants etc. consultant, financial analyst
etc.
scope Accounting is a part of Finance is not a part of
finance accounting
Tools Income statement, balance Capital budgeting, ratio
sheet, cash flow statement analysis. Risk analysis,
working capital management
Objectives To provide useful To study the funds and
information about the capital markets to make
business to the readers of the future strategies for business
financial statements

Important points to be learned to pursue a career in finance:

 1. You should be able to first mange your own money and funds
2. Have analytical skills to analyse the risks and opportunities in order to make strategies
for future.
3. Understand the importance of financial statements and should have knowledge of
reading the financial statements.
4. Understand the concepts of inflation rates, time value of money.
5. Strategy making, decisiveness all these things you must know to pursue a career in
finance.
6. Have the basic knowledge of preparing financial statements, ratio analysis.

Q2. What is project finance? How is project finance different from corporate
finance? Why can’t we put project finance under corporate finance?

Answer 2. Project finance

Project finance is the long term funding or financing of the industrial projects based upon
the projected cash flows of the project and not on the financial statements.

Difference between project finance and corporate finance

Basis Corporate finance Project finance

Risk Risk is higher Risk is much lower
Returns As the risk is higher, As the risk is lower the
therefore the returns are also returns are also relatively
higher, lower.
Collateral The financier usually The financier looks at the
provides finance on the project assets as collateral
assets of the company
Decisional basis Investors look at the balance The investors look at the
sheet of the company to projected cash flows by
make the investment following a route of financial
decision. modelling.

We cannot add project finance under corporate finance because of the various differences
in both of them, we usually make use of corporate finance for smaller projects, whereas
project finance is used in case of large projects, and in project finance we can only use the
revenues from the project to pay back the loan. Corporate finance is appropriate in case
when the company is relatively strong and large.

Q3. Define 20 terminologies related to project finance

Answer 3

1. Sponsor (typically also an Equity Investor)

2. Lenders (including senior lenders and/or mezzanine)
3. Off-taker(s)
 4. Contractor and equipment supplier
5. Operator
6. Financial Advisors
7. Technical Advisors
8. Legal Advisors
9. Equity Investors
10.Regulatory Agencies
11.Multilateral Agencies / Export Credit Agencies
12.Insurance Providers
13.Hedge providers
14.Financial modelling
15.Project documents
16.Finance documents
17.Shareholders documents
18.Security documents
19.Other project documents
20.Director/ promoter contribution

Q4. What is non-recourse debt/loan? What is mezzanine finance explain with example.

Answer4 Non-recourse debt/loan

Non-recourse debts is the debt or loan that is secured against the collateral and in case of the
default the lender can seize the asset to recover the loan but in case the amount of loan is not
completely covered by the secured asset the lender cannot seek out further compensation
from the borrower if the whole amount of loan is not recovered with the asset, the borrower
does not have the personal liability for the loan.

Mezzanine finance

Mezzanine financing is the hybrid of debt and equity financing that gives the lender the right
to convert equity interest in the company in case of the default. Mezzanine financing is a way
for companies to raise funds for specific projects or to aide with an acquisition through a
hybrid of debt and equity financing. This type of financing can provide more generous
returns compared to typical corporate debt, often paying between 12% and 20% a year.
Mezzanine loans are most commonly utilized in the expansion of established companies
rather than as start-up or early-phase financing.

Q5. Explain in detail with reasons of what the sectors are or which type of projects is
suitable for project finance?

Answer 5 Project finance is the long term funding or financing of the industrial projects
based upon the projected cash flows of the project and not on the financial statements. Project
finance is used in case of large projects, and in project finance we can only use the revenues
from the project to pay back the loan.
We cannot add project finance under corporate finance because of the various differences in
both of them, we usually make use of corporate finance for smaller projects, whereas project
finance is used in case of large projects, and in project finance we can only use the revenues
from the project to pay back the loan. Corporate finance is appropriate in case when the
company is relatively strong and large.

Project finance usually involves lower risks and lower returns, we only get the project cash
flow revenues to pay back the loans, project finance should be applies and used when we
need to work on a infrastructure or industrial project that is large and more valuable.