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For athermal power plant project, a project finance model's input typically looks as follows:
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Aproject finance model is a specializedfinancial model, the purpose of which is to assess theeconomic 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 theprojected 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 theDebt 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.
The general structure of any financial model is standard: (i) input (ii) calculation algorithm (iii) output; seeFinancial 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:
A model is usually built for a most probable (or base) case. Then, a modelsensitivity analysis is conducted to determine effects of changes in input variables on key outputs, such asinternal rate of return (IRR),net present value (NPV) andpayback period.
For discussion (a) re cash-flow modelling, seeValuation using discounted cash flows § Determine cash flow for each forecast period;and (b) re model "calibration", and sensitivity- andscenario analysis, see§ Determine equity value there.
Practically, these are usually built asExcel spreadsheets and then consist of the following interlinked sheets (seeOutline of finance § Financial modeling for further model-build items), with broad groupings:
As stated above, the model is used to determine the most appropriate amount of debt the project company should take: in any year thedebt 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 theProject life cover ratio (PLCR), the ratio of thenet 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. TheLoan 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:
Standard profitability metrics are also considered - most commonly,Internal rate of return (IRR),Return on assets (ROA), andReturn on equity (ROE)
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.