VCE Summer Internship Program 2020

Smart Task Submission Format

Intern’s Details
Name Abhishek Dongre

Email-ID abhishekdongre1999@gmail.com

Smart Task No. 1

Project Topic Project Finance – Modeling and Analysis

Smart Task (Solution)

1. What is Finance? How Finance is different from Accounting? What are important basic
points that should be learned to pursue a career in finance?

Solution: In Simple terms, finance means the futuristic management of money. Finance includes
investing, borrowing, lending, budgeting, saving and forecasting. There are three types of finance –
1. Project Finance – In these, when corporate sets up new entity(project) and want to take loan
on that new entity, if the project is qualified for loan, the amount received by project is called
project finance.
2. Corporate Finance – The management of funds by the corporates is called corporate
finance. These includes investment, borrowings, lending’s etc.
3. Public Finance/Government - The management of a country’s revenue, expenditures, and
debt load through various government and quasi-government institutions is called Public
Finance.
Finance and Accounting are two different terms. Accounting is the process of Identifying,
recording, classifying, summarizing, analyzing and Interpreting of financial transactions.
While Finance is the futuristic management of money optimally i.e. effective and efficient utilization
of money in order to get maximum return with minimum cost.

Finance is just like playing with numbers, but in monetary terms. Many of them makes their
career in finance. There are some important basic points that should be learned to pursue a career
in finance. They are:-

1. Firstly, you require basic knowledge of finance and accounts. Basic knowledge is not
easy as it creates the base of an aspirant.
2. He / She should be able to manage your own Money & finance optimally.
3. He must have an Aptitude towards number crunching.
4. He must have an ability to perform calculations mentally.
5. He should Understand the importance of Cash flow ( Inflow and Outflow of cash)
6. He must understand the Value of Money with respect to the current economic situation
7. He must have financial awareness knowledge like banking, fiscal policy, Monetary
policy etc.
500 rds (Max.)

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

Solution: Project finance is the funding of long-term infrastructure, industrial projects, and public
services using a non-recourse or limited recourse financial structure. In these, when a corporate
want to set up a new entity and want to take a loan on that new equity, and that loan if that project
is qualified for finance by the bank, then that kind of a project is known as Project Finance. Here,
the collateral on the loan is the project itself as the owners of corporate has limited liability.
Because of these, The new entity is called Special Purpose Vehicle,
Also, all projects are not comes under project finance as some projects raise funds through
Equity, Debentures (Debt) in order to undertake such projects.

Project Finance is totally different from Corporate Finance. Corporate Finance is the division
of finance that deals with how corporations deal with funding sources, capital structuring, and
investment decisions. Corporate finance is primarily concerned with maximizing shareholder value
through long and short-term financial planning and the implementation of various strategies.
Corporate finance activities range from capital investment decisions to investment banking.
We cannot put project finance into corporate finance as it is financing that relies on the balance
sheet of the borrower. It would typically be used by a company that wishes to procure financing for
something (including a project such as a new factory) and is prepared to provide its full faith and
security to the lender. Typically the company will provide security and collateral to the lenders such
as a guarantee from its parent, or debtors and stock and property.

Project Finance on the other hand is finance that relies on the credit of the project being
financed. So for example say the Indian government wants a new Delhi Meerut expressway to be
built, and three companies come together to form a consortium to build and operate the new road,
and none of them wants the road on its own balance sheet. The bank/s financing the new toll road
would consider the possible number of vehicles using the road, the strength of the operator of the
road and all attendant risks, which as you can see is much more complicated than simple corporate
finance. Project Finance involves much more extensive due diligence than Corporate Finance.

Project Finance is known as non-recourse financing because you have no recourse to the sponsors
of the project, other than what they contractually agree to.

500 Words (Max.)

3. Define 20 terminologies related to project finance.

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Solution: There are many terminologies related to project finance. The most important 20 of them
are given below: -
Annuity: - Repayment of debt where the sum of principal and interest is equal for each period;
also, a term used in India for availability payments.
Bond: - The paper evidence of a legal promise by the issuer to pay the investor on the declared
terms. Bonds are usually negotiable and customarily long-term, e.g., five to 25 years. Short-term
bonds are usually referred to as notes.
Buy-back: - A promise to repurchase unsold production. Alternatively, a promise to repay a
financial obligation.
Capital Expenditure: - Long-term expenditure on fixed assets such as land, buildings, plant and
equipment.
Collateral: - Assets pledged as security under a loan or other financing instrument, to assure
repayment.
Compound Interest: - Interest resulting from the periodic addition of simple interest to principal,
the new base thus established being the principal for the computation of interest for the following
period.
Consortium: - Two or more parties act together as a partnership or joint venture.
Cost of Debt: - Yield to maturity on debt; frequently after tax, in which event it is one minus the tax
rate times the yield to maturity.
NPV: - Net present value, the discounted value of an investment’s cash inflows minus the
discounted value of its cash outflows. To be adequately profitable, an investment should have a net
present value greater than zero.
Internal Rate of Return: - The discount rate that equates the present value of a future stream of
payments to the initial investment.
Equity: - It is the owner’s fund of the company. It is issued by companies by issuing share capital.
The shareholder’s area the owners of the company.
Debt: - It is the borrower’s fund of the company. It is issued by issuing debentures or borrowing
loans from the financial institutions.
Revenue: - The income earned by the companies or projects is called Revenue.
Debt Repayment: - When we return the borrowed amount with interest to any financial institutions,
It is called Debt repayment.
NPA (Non-Performing Asset): -  It is a loan or advance for which the principal or interest payment
remained overdue for a period of 90 days.
Non-Recourse debt: - The debt where owners do not have any recourse if the debt is not
repayable.
Future Value: - The value of an initial investment after a specified period at a certain rate of
interest.
Present Value: - The current value or the market value of the project or currency or property is
called present value.

Salvage Value: - The estimated selling price of an asset once it has been fully been depreciated is
called salvage value.
Simple Interest: - The interest amount which is chargeable only at principal amount is called
Simple Interest.

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500 rds (Max.)

4. What is non-recourse debt / loan? What is mezzanine finance explained with an example.

Solution: Non-recourse debt is a type of loan secured by collateral, which is usually

property. If the borrower defaults, the issuer can seize the collateral but cannot seek out the
borrower for any further compensation, even if the collateral does not cover the full value of
the defaulted amount. This is one instance where the borrower does not have personal
liability for the loan.

For example - if a borrower defaults on a nonrecourse home loan, the bank can only foreclose on
the home. The bank generally cannot take further legal action to collect the money owed on
the debt.

Mezzanine financing is a kind of financing that has both features of debt and equity financing that
provides lenders the right to convert its loan into equity in case of a default. Mezzanine funds can
be used for buying a company or for expanding one’s own business without going for an IPO.

For example – Let’s say that Mr. X has an ice-cream parlor. He wants to expand his business. But
he doesn’t want to go for the conventional equity financing. Rather he decides to go for mezzanine
financing.

He goes to mezzanine financiers and asks for mezzanine loans. The lenders mention that they
need warrants or options for the mezzanine loans. Since the loans are unsecured, Mr. Richard has
to agree to the terms set by the mezzanine lenders.

So Mr. Richard takes Rs.10,00,000 by showing that he has a cash flow of Rs.6,00,000 every year.
He takes the loans and unfortunately defaults at the time of payment since his ice-cream
parlor couldn’t generate enough cash flow. The lenders take a portion of his ice-cream parlor and
sell off to get back their money.

501 rds (Max.)

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

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Solution: Project finance is the financing of long-term infrastructure, industrial projects, and
public services using a non-recourse or limited recourse financial structure. The debt and
equity used to finance the project are paid back from the cash flow generated by the
project. Project Finance is suitable in various projects. Project financing in India is used for both
greenfield and brownfield projects in sectors such as:
 Public infrastructure (roads, airports, metro rail and ports, among others).
 Energy (power generation (solar, thermal, wind, hydro), power transmission and so on).
 Construction.
 Manufacturing (cement).
 Education.
 Healthcare.
 Telecommunication.
 Green Buildings

There are benefits of project finance to these above projects such as: -

1. Length: Agreement to finance infrastructure via public finance is time-consuming and must

go through budget review before approval.

2. Contractual Inflexibility: Regulatory reviews allow changes that you won't find in other
forms of private financing companies.

3. Off-balance sheet: If risks are transferred to the private sector, private finance infrastructure
does not add to the standard measures of the public sector's debts. These things would be
politically beneficial.

4. Transferred responsibility: Responsibility of investment in infrastructure can be shifted to

the private sector.

500 Words (Max.)

Please add /delete blocks for if needed.

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