For a thermal power plant project, a project finance model's input typically looks as follows:
Power plant's installed capacity, MW
Capacity utilization factor
Internal consumption rate, %
Power plant's gross efficiency, %
Lower heat value of fuel, MJ/unit
Price of fuel, $/unit
Offtake electricity price, $/MWh
Inflation rate, %
Fuel price escalation, % per year
Electricity price escalation, % per year
Cost of consumables, $/MWh
Equipment maintenance, $/MWh
Depreciation period, years
Personnel expenses, $per year
General and administrative expenses, $per year
Corporate tax rate, %
Total CAPEX $
'Buffer' for cost overruns, % of total amount to be financed
Fuel and consumables reserve, days
Imported equipment, %of total CAPEX
Import duties, %
Initial insurance premium, % of total CAPEX
Construction period, years
Period of commercial operation, years
Equity portion in total financing, %
Required return on equity, %
Tenor of debt, years
Grace period on debt repayment, years
Interest rate during construction, %
Interest rate during commercial operation, %
A project finance model is a specialized financial model, the purpose of which is to assess the economic feasibility of the project in question. The model's output can also be used in structuring, or "sculpting", the project finance deal.
Project finance is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project - rather than the balance sheets of its sponsors. The project is therefore only feasible when the project is capable of producing enough cash to cover all operating and debt-servicing expenses over the whole tenor of the debt.
Most importantly, therefore, the model is used to determine the maximum amount of debt the project company (Special-purpose entity) can maintain - and the corresponding debt repayment profile; there are several related metrics here, the most important of which is arguably the Debt Service Coverage Ratio (DSCR) - the financial metric that measures the ability of a project to generate enough cash flow to cover principal and interest payments.
Model structureedit
The general structure of any financial model is standard: (i) input (ii) calculation algorithm (iii) output; see Financial forecast. While the output for a project finance model is more or less uniform, and the calculation is predetermined by accounting rules, the input is highly project-specific. [1] Generally, the model can be subdivided into the following categories:
As stated above, the model is used to determine the most appropriate amount of debt the project company should take: in any year the debt service coverage ratio (DSCR) should not exceed a predetermined level. DSCR is also used as a measure of riskiness of the project and, therefore, as a determinant of interest rate on debt. Minimal DSCR set for a project depends on riskiness of the project, i.e. on predictability and stability of cash flow generated by it.
Related to this is the Project life cover ratio (PLCR), the ratio of the net present value of the cash flow over the remaining full life of the project to the outstanding debt balance in the period. It is a measure of the number of times the cash flow over the life of the project can repay the outstanding debt balance. The Loan life cover ratio (LLCR), similarly is the ratio of the net present value of the cash flow over the scheduled life of the loan to the outstanding debt balance in the period. Other ratios of this sort include:
Debt sculpting is common in the financial modelling of a project. It means that the principal repayment obligations have been calculated to ensure that the principal and interest obligations are appropriately matched to the strength and pattern of the cashflows in each period. The most common ways to do so are to manually adjust the principal repayment in each period, or to algebraically solve the principal repayment to achieve a desired DSCR.
project, finance, model, this, article, includes, list, general, references, lacks, sufficient, corresponding, inline, citations, please, help, improve, this, article, introducing, more, precise, citations, october, 2021, learn, when, remove, this, message, ex. This article includes a list of general references but it lacks sufficient corresponding inline citations Please help to improve this article by introducing more precise citations October 2021 Learn how and when to remove this message Example Input for a thermal power plant model For a thermal power plant project a project finance model s input typically looks as follows Power plant s installed capacity MW Capacity utilization factor Internal consumption rate Power plant s gross efficiency Lower heat value of fuel MJ unit Price of fuel unit Offtake electricity price MWh Inflation rate Fuel price escalation per year Electricity price escalation per year Cost of consumables MWh Equipment maintenance MWh Depreciation period years Personnel expenses per year General and administrative expenses per year Corporate tax rate Total CAPEX Buffer for cost overruns of total amount to be financed Fuel and consumables reserve days Imported equipment of total CAPEX Import duties Initial insurance premium of total CAPEX Construction period years Period of commercial operation years Equity portion in total financing Required return on equity Tenor of debt years Grace period on debt repayment years Interest rate during construction Interest rate during commercial operation A project finance model is a specialized financial model the purpose of which is to assess the economic feasibility of the project in question The model s output can also be used in structuring or sculpting the project finance deal Contents 1 Context 2 Model structure 3 Metrics in assessing a project 4 Debt sculpting 5 See also 6 ReferencesContext editProject finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors The project is therefore only feasible when the project is capable of producing enough cash to cover all operating and debt servicing expenses over the whole tenor of the debt Most importantly therefore the model is used to determine the maximum amount of debt the project company Special purpose entity can maintain and the corresponding debt repayment profile there are several related metrics here the most important of which is arguably the Debt Service Coverage Ratio DSCR the financial metric that measures the ability of a project to generate enough cash flow to cover principal and interest payments Model structure editThe general structure of any financial model is standard i input ii calculation algorithm iii output see Financial forecast While the output for a project finance model is more or less uniform and the calculation is predetermined by accounting rules the input is highly project specific 1 Generally the model can be subdivided into the following categories Variables needed for forecasting revenues Variables needed for forecasting expenses Capital expenditures Financing A model is usually built for a most probable or base case Then a model sensitivity analysis is conducted to determine effects of changes in input variables on key outputs such as internal rate of return IRR net present value NPV and payback period For discussion a re cash flow modelling see Valuation using discounted cash flows Determine cash flow for each forecast period and b re model calibration and sensitivity and scenario analysis see Determine equity value there Practically these are usually built as Excel spreadsheets and then consist of the following interlinked sheets see Outline of finance Financial modeling for further model build items with broad groupings Project build and operation Data input operating assumptions Capital costs construction Insurance Taxes Depreciation Financing Corresponding financial statements Income statement Balance sheet Cash flow statement Resultant project metrics Retained earnings Coverage ratios Present valuesMetrics in assessing a project editAs stated above the model is used to determine the most appropriate amount of debt the project company should take in any year the debt service coverage ratio DSCR should not exceed a predetermined level DSCR is also used as a measure of riskiness of the project and therefore as a determinant of interest rate on debt Minimal DSCR set for a project depends on riskiness of the project i e on predictability and stability of cash flow generated by it Related to this is the Project life cover ratio PLCR the ratio of the net present value of the cash flow over the remaining full life of the project to the outstanding debt balance in the period It is a measure of the number of times the cash flow over the life of the project can repay the outstanding debt balance The Loan life cover ratio LLCR similarly is the ratio of the net present value of the cash flow over the scheduled life of the loan to the outstanding debt balance in the period Other ratios of this sort include Cash flow available for debt service clarification needed Drawdown cover ratio Historic debt service cover ratio Projected debt service cover ratio Repayment cover ratio Standard profitability metrics are also considered most commonly Internal rate of return IRR Return on assets ROA and Return on equity ROE Debt sculpting editFurther information Cashflow matching Immunization finance and Asset liability mismatch Debt sculpting is common in the financial modelling of a project It means that the principal repayment obligations have been calculated to ensure that the principal and interest obligations are appropriately matched to the strength and pattern of the cashflows in each period The most common ways to do so are to manually adjust the principal repayment in each period or to algebraically solve the principal repayment to achieve a desired DSCR See also editProject finance project risk management power purchase agreementReferences edit See for example Renewable Energy Financial Model Renewables Valuation Institute Retrieved 2023 03 19 Penelope Lynch Financial Modelling for Project Finance 1997 ISBN 978 1 85564 544 8 Renewables Valuation Institute Debt Sizing with Target DSCR Project Finance Peter K Nevitt and Frank J Fabozzi Project Financing 2000 ISBN 978 1 85564 791 6 John Tjia Building Financial Models 2009 ISBN 978 0 07 160889 3 Retrieved from https en wikipedia org w index php title Project finance model amp oldid 1209199456, wikipedia, wiki, book, books, library,
