VCE PROJECT FINANCE TASK 2

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.

 Answer- Financial modeling is a process of forecasting the future of financial affairs of a firm by
projecting the actual value corresponding to its present financial position. There are profound
assumptions that we must take into consideration such as financing and operating key factors
before commencing the project. The major assumptions are required as follows-
 1. Project assumptions-
 Completion time- 25 years
 B.Land size in Sq. ft. - 3000
 C.Deposit- 25% of annual rent
 D.Debt repayment- 10 years
 E.Monthly Rent- 250,000

 2. Financing assumption-
 A.Debt - 70%
 B.Equity - 30%
 C.Debt service reserve- 0.25 years
 D.Payment periods- 40 (Quarters)
 E.Repayment periods- 10 years
 F.Debt rate-10%

 3. Cost assumptions-
 A.CAPEX or project’s capital expenditure related assumptions- 10,170,000
 B.OPEX or project’s operating cost related assumptions. 966,000

 4. Economic assumption-
 A.Inflation scenario – 4.5%
 B.Exchange rate (USD/INR) – 70

 5. Tax assumptions-
 A.Tax rate- 25%
 B.Corporate tax- 25%
 C.Tax holiday- 0 years
 D.Minimum alternate tax - 18%
 E. Dividend distribution tax- 0%
Task Q2:

 Explain the function of revenue, cost and debt sheet of the financial model.

 Answer- As explained before, financial modeling is an analytical tool to interpret the prospective
state of assumptions of a particular business or any activity. Due to soaring competition and
homogenous product segmentation, businesses now need to be aware about the untapped
financial breakthroughs before launching any product or purchasing the existing company.
Hence, immense need emerges to figure about the profitability as well as up to date valuation to
cope with monetary aspects of business. There are different models for different nature of
business for example- start-ups have subscription based model; existing firms have three
statement financial model and non-recourse projects such as infrastructure have revenue and
cost model along with debt-sheet. However, in this topic, we are only concerned about project
based model.

 Revenue based financial model-

 To figure out the present as well as forecasted revenue projection.

 To figure out heterogeneous sources of income
 To calculate interest earned on deposits.
 To forecast revenue during varied time period as well as their comparisons.

 Cost based financial model

 To anticipate the present as well future expenses related to project.
 To evaluate individual unit cost as percentage of revenue.
 To extrapolate CAPEX (capital expenditure) as well as OPEX (operating expenses).

 Debt based model-

 1. for projection of interest expense.
 2. Calculation of interest payment.
 3. Projection of principal amount of debt.
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.
 Answer – There are numerous stage that formed the whole project financing preparation ,
and will be discussed as follows-

1. Pre-financing stage

 Identification of the project plan- this process includes identify the strategic plan
of the project and analyze it whether plausible or nor. In order to ensure that the
project is in line with the goals of the financial services company, it is crucial for the
lender to perform this step.

 Recognizing and minimizing the risk factor- before investment is being done, the
lender has right to check if the project has enough available resources to sustain
and eliminate any future risks.

 Checking project feasibility- it is vital to check beforehand the financial as well as

technical appropriation by analysis associated factors.

2. Financing stage

 Arrangements of finances- for financial due-diligence, sponsors need to obtain

equity or debt or both in part from financial services providers such as banks or
private equity firms whose goals are aligned with the project.

 Loan or equity negotiation- during this step, the borrower as well as lender
negotiates the loan amount and arrives at unanimous conclusion regarding the
same.

 Documentation and verification- here the terms of loan are mutually decided and
documented considering the policies of project in mind.

 Payment- once financing has been done, the borrower receives the funds as
agreed previously to carry out the operations of the project.
3. Post financing stage
 Project time monitoring- as per project requirement, it is the responsibility of
project manager to check the advancement and timely completion of project.
 Project closure –It leads to operation and the revenue generation phase of
completed project.
 Loan re-payment- immediately after project’s completion, adequate cash flows
must be compared with actual and find the deviation and bridge the gap to repay
the debt owed by project.
 At the pre-financing stage, banks have responsibility to recognize and minimize the risk involved
in financing as if project is not able to fulfill its commitment post-completion. The ultimate
reason for taking this due-diligence to avoid any risk associated with project in future because of
the insufficiency of financial and operational resources. For coping this, banks determine and
assess the company’s capability and its soundness in terms of financial aspects before issuing
any debt instruments or equity or both in part.

 The bank will generally demand for following documents on priority basis to support the
financing of project.
 Company profile (nature of operation and specialization)
 Management profile(directors /promoters net-worth and background)
 Last three years audited financial statement
 Certificate of incorporation of company
 Copies of memorandum and articles of association
 Copies of business bank statement
 Details of existing loans from other banks previously
 Project feasibility report
 Project cash flow report
 Agreement related to project
 Pay-back plan and income sources
 Details of assets available for collateral
 Industry trends and analysis