VCE Summer Internship Program 2021

Smart Task Submission Format

[ Download This Format in .DOCX format and then Edit it and SUBMIT]
Intern’s Details
Name Prateek Joshi

Email-ID joshiprateek904@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:

When preparing a financial model for a project set up in India, several assumptions need to be considered.
Below is a list of common assumptions along with example values.:
1. Inflation = 4%
2. DDT = 0%
3. Tax Rate = 25%
4. Debt Rate = 10%
5. Debenture = 10 Years
6. Depreciation = 7%
7. Discount = 10%
8. MAT = 18.5%

Above all mentioned assumptions is according to the financial model provide. Listing down all other
assumptions which is considered for the project which Is setup in India.

1. Revenue Assumptions:
 Sales growth rate: e.g., 10% per year.
 Average selling price: e.g., ₹1,000 per unit.
 Sales volume: e.g., 10,000 units per year.
 Market share: e.g., 5% of the total market.

2. Cost Assumptions:
 Cost of goods sold (COGS): e.g., 60% of revenue.
 Direct labor cost: e.g., ₹50 per hour.
 Raw material cost: e.g., ₹500 per unit.
 Overhead expenses: e.g., 20% of COGS.
 Rent/lease expense: e.g., ₹50,000 per month.

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3. Operating Expenses:
 Marketing and advertising expenses: e.g., ₹100,000 per month.
 Salaries and wages: e.g., ₹500,000 per month.
 Utilities expenses: e.g., ₹10,000 per month.
 Research and development expenses: e.g., ₹200,000 per year.

4. Tax Assumptions:
 Corporate tax rate: e.g., 25%.
 Goods and Services Tax (GST): e.g., 18%.

5. Working Capital Assumptions:

 Accounts receivable (AR) days: e.g., 30 days.
 Accounts payable (AP) days: e.g., 45 days.
 Inventory turnover: e.g., 5 times per year.

6. Financing Assumptions:
 Equity financing: e.g., ₹1,000,000.
 Debt financing: e.g., ₹2,000,000.
 Interest rate on debt: e.g., 8% per annum.
 Loan repayment period: e.g., 5 years.

7. Depreciation and Amortization:

 Depreciation method: e.g., Straight-line method.
 Useful life of assets: e.g., 5 years.

8. Inflation:
 Annual inflation rate: e.g., 5%.

9. Exchange Rates:
 Exchange rate assumptions (if applicable).

10. Other Assumptions:

 Project duration: e.g., 5 years.
 Discount rate: e.g., 10%.
 Capital expenditures: e.g., ₹500,000 per year.
500 Words (Max.)

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

Task Q2 Solution:

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In a financial model, the revenue, cost, and debt sheets play important roles in analysing and forecasting the
financial performance of a business. Here is a brief explanation of each sheet:

1. Revenue Sheet: The revenue sheet focuses on the income generated by a company from its primary
operations. It tracks the sources of revenue, such as product sales, service fees, licensing fees, or
any other income streams specific to the business. The revenue sheet includes key elements like
sales volume, unit price, discounts, and any other revenue-related factors. By projecting and
analysing revenue, businesses can assess their growth potential, evaluate market trends, and make
informed decisions regarding pricing, marketing strategies, and resource allocation.
2. Cost Sheet: The cost sheet outlines the expenses incurred by a business in producing its goods or
services. It encompasses various cost categories such as raw materials, labour, manufacturing
overhead, marketing expenses, administrative costs, and other operational expenditures. The cost
sheet helps in understanding the cost structure of a business, identifying areas for cost optimization,
and determining the profitability of different products or services. By analysing the cost sheet,
businesses can assess their cost-efficiency, manage expenses, and make informed decisions
regarding pricing, budgeting, and operational improvements.
3. Debt Sheet: The debt sheet provides a snapshot of a company's debt obligations, including short-
term and long-term debts. It includes details about loans, bonds, lines of credit, or any other forms of
borrowed capital. The debt sheet tracks the principal amount, interest rates, repayment terms, and
maturity dates of the debt instruments. By analysing the debt sheet, businesses can evaluate their
leverage, assess their ability to meet debt obligations, and manage their overall financial health. It
helps in understanding the debt structure, monitoring debt levels, and making informed decisions
regarding refinancing, debt repayment, or debt restructuring.

These three sheets, along with other financial statements and projections, collectively form a comprehensive
financial model that assists businesses in evaluating their performance, making strategic decisions, and
planning.

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 steps involved in project financing and the key considerations banks typically evaluate before providing
financial support are mentioned below:

1. Project Evaluation: The first step is a comprehensive evaluation of the project itself. Banks assess
various factors such as the nature of the project, its size, industry, location, feasibility, and potential
risks. This evaluation helps the bank understand the viability and profitability of the project.

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2. Financial Analysis: In this step, the bank examines the financial aspects of the project. They review
the financial statements, projections, and forecasts to determine the project's potential revenue,
expenses, and profitability. This analysis helps the bank assess the project's ability to generate
sufficient cash flows to repay the financing.
3. Cash Flow Projections: Cash flow projections are crucial for evaluating the project's financial
sustainability. Banks assess the projected cash inflows and outflows over the project's lifespan,
considering factors such as sales revenue, operating expenses, capital expenditures, working capital
requirements, and potential risks. Positive and consistent cash flows are essential for repayment of
the loan.
4. Debt Service Coverage Ratio (DSCR): DSCR is a key financial metric used by banks to evaluate the
project's ability to cover its debt obligations. It is calculated by dividing the project's annual cash flow
by the annual debt service (loan principal and interest). Banks typically look for a DSCR above a
certain threshold to ensure the project can generate sufficient cash flow to meet its debt obligations.
5. Collateral and Security: Banks consider the availability and quality of collateral or security for the
financing. Collateral serves as a form of protection for the bank in case of default. The bank
evaluates the value and marketability of the proposed collateral to determine its adequacy as security
for the loan.
6. Project Risks and Mitigation: Banks carefully assess the risks associated with the project. They
evaluate factors such as market conditions, competition, regulatory environment, technology risks,
operational risks, and project execution risks. Banks also consider the risk mitigation measures in
place, such as insurance coverage, guarantees, contracts, or other risk-sharing mechanisms.
7. Project Sponsor and Management: The bank evaluates the project sponsor's track record,
experience, and financial strength. They also assess the project management team's capabilities,
expertise, and their ability to execute the project successfully. The bank seeks assurance that the
project has competent and reliable individuals responsible for its implementation.
8. Legal and Regulatory Compliance: Banks conduct due diligence to ensure that the project complies
with all applicable legal and regulatory requirements. They verify licenses, permits, environmental
clearances, land ownership, and any other legal obligations associated with the project. Compliance
with relevant laws and regulations is crucial for the bank's risk assessment and approval process.
9. Loan Structure and Terms: Once the bank has evaluated the project's feasibility and risks, they
determine the appropriate loan structure and terms. This includes deciding the loan amount, interest
rate, repayment period, amortization schedule, and any special covenants or conditions. The terms
are structured to align with the project's cash flow patterns and the bank's risk appetite.
10. Documentation and Final Approval: The final step involves preparing the necessary documentation,
including loan agreements, security documents, and other legal contracts. The bank's credit
committee or loan approval authority reviews the project proposal, financial analysis, risk
assessment, and other relevant information before making a final decision on whether to provide
financing.
It is important to note that the specific steps and considerations may vary based on the bank's internal
policies.

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500 Words (Max.)

Please add / delete blocks if needed.

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