VCE Summer Internship Program 2020

Smart Task Submission Format

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Intern’s Details
Name Meet Agrawal

Email-ID Meetagrawal39@gmail.com

Smart Task No. 2

Project Topic Project Finance – Modelling and Analysis

Smart Task (Solution)

Task Q1: While preparing a financial model what are the assumptions we need to take.
Please list down the list of assumptions with the values, assuming the project will be set up
in India.

Task Q1 Solution: Assumptions in financial model are made on the basis of future business
conditions. Getting the estimates of the project cost and having a rough idea about the overall cost
of the project. We can categorize these assumptions as under:

1. Cost Sheet Assumptions:

 Flat Cost – Rs. 75,00,000

 Development Cost – Rs. 11,85,000
 Interest & Commission – Rs. 14,85,000
 Total Project Cost – Rs. 1,01,70,000
 Operating & Maintenance Cost – Rs.1,08,000

2. Revenue Sheet Assumptions:

 Land Size (Sq. ft) – 3000

 Average Occupancy (Months) – 10
 Rent – Rs. 2,50,000
 Deposits (Months) – 4
 Rent Appreciation (P.a.) – 5%
 Interest on Rental Deposit (P.a.) – 8%

3. Fin Flows Sheet Assumptions:

 Equity – 30%
 Debt – 70%
 Debt Service Reserve (DSR) – 0.25 years ~ 3 Months
 Inflation Rate – 4%
 Dividend Distribution Tax (DDT) – 0%
 Tax Rate – 25%

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 Debt Rate – 10%

 Moratorium Period – 0.25 years ~ 3 Months
 Debt Tenure – 10 years
 Depreciation – 7%
 Discount – 10%
 Construction Time – 0.25 years ~ 3 Months
 Minimum Alternate Tax (MAT)– 18.5%

4. Debt Sheet Assumptions:

 Term – 10 Years
 Payment Period – 40

500 Words (Max.)

Task Q2: Explain the function of revenue, cost and debt sheet of the financial model.

Task Q2 Solution: The functions of revenue, cost and debt sheet of the financial model are as
follows:

1. Revenue Sheet:

 Revenue is the most important component while preparing the financial model.
 All the items which are related to revenue are being added here.
 It shows how much rent is going to be received and what will be the rate of deposit.
 The total rent is calculated by adding rent and interest on deposits.
 We can get all the information about the interest which we are earning from our
investments.
 We can define the different sources of revenue or revenue parameters of the project.

2. Cost Sheet:

 A cost sheet is a statement that breaks down the various components of a product's
total cost and compares them to previous statistics.
 All the expenses like capital expense and operating expenses of the project are being
listed here.
 The costs which are all included while completing a project are covered in cost sheet.
 Can differentiate the cost of a particular unit from the overall total cost.
 It helps in controlling the manufacturing cost.

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3. Debt Sheet:

 A debt schedule organises all of a company's debt into a timeline based on its
maturity.
 It is used by businesses to get a cash flow analysis.
 It shows the amount of principle in total payable amount.
 It is used to calculate the amount of interest payable.
 Depending on the length of the debt the time period can be divided accordingly like
monthly, quarterly and yearly.
500 Words (Max.)

Task Q3: Explain in detail the various steps involved (with the importance) in the fin flows
sheet. Why and what the bank needs to check before financing the project.

Task Q3 Solution: The various steps which are involved in the fin flows sheet are as follows:

1. Calculation of IRR:

 Internal rate of return (IRR) is a financial statistic that is used to calculate the
profitability of possible investments. In a discounted cash flow analysis, the IRR is a
discount rate that makes the net present value (NPV) of all cash flows equal to zero.
Internal rate of return is used to evaluate the attractiveness of a project or investment.
If the
 IRR of a new project exceeds a company’s required rate of return, that project is
desirable.
 If IRR falls below the required rate of return, the project should be rejected.

2. Calculation of EBITDA:

 Earnings Before Interest, Taxes, Depreciation, and Amortization, or EBITDA, is a

statistic used to assess a company's operating performance. It can be viewed as a
proxy for the total cash flow generated by the company's operations.

3. Calculating DSCR:

 In business, government, and personal finance, the debt-service coverage ratio is

used. The debt-service coverage ratio (DSCR) is a measure of a company's available
cash flow to fulfil current debt obligations in the context of corporate finance. The
DSCR informs investors about a company's ability to pay its debts.

4. Purpose of the Loan:

 First, give the bank a business plan. Show them that your business is solid and you

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have a strong track record of performance. Convince the bank that you don't really
need their money, but if you had it, here's what you could do with it. Banks get rough
about lending to desperate borrowers. Be specific about how much money you need,
what you will do with it and how you will pay it back.

5. Character of the Borrower:

 The most important thing on the list is personality. If the bank does not trust you or
thinks you are an honest person, they will not approve your loan application. No
matter how long your warranty period is; it is not enough to make up for the lack of
trust. The lender needs to believe that the borrower has the experience, education
and industry knowledge to successfully run the business. The reputation of the
borrower plays an important role in obtaining bank loans. ...Your credit history shows
your debt payment history.

6. The need for Collateral:

 When the bank issues a loan, it will formulate a plan for how the borrower will repay
the loan. If the borrower defaults on the loan, the bank will return the loan because
the sale of may not be enough to repay the loan. Banks like to use real estate and
assets as collateral to repay loans to prevent borrowers from failing to pay as
planned.

7. Capacity to Repay the Loan:

 Borrowers must provide evidence that they can repay the loan at the expense of
's cash flow. The bank analysed the company’s debt-to-income ratio and free cash
flow. Lenders like these ratios to provide a cushion in case the business takes a
downturn.

8. The Need for Capital:

 For banks, it is more convenient for owners to invest their own money
in business. The lender wants to know that if the
business fails, the owner will lose something. If the owner does not invest in his own
business, why should the bank invest?
is a high-net-worth company because it means that the owner has some skins in the
game. When the owners have more personal capital in the company, they will work
harder and donate more
to rescue the company and pay off the debt.

The bank will check all the below listed things before financing a project:

 Company Profile
 Management Profile
 Last Three Years’ Audited Financial Statements

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 Certificate of Incorporation of the Company

 Copies of MOA & AOA
 Copy of Business Bank Statement
 Detail of Existing Loans from Other Banks
 Project Feasibility Report
 Project Cash Flow Report
 Agreements Related to Project
 Pay-Back Plan and Income Sources
 Detail of Assets available for Collateral

500 Words (Max.)

Please add /delete blocks for if needed.

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