Module 2

PROJECT FINANCE – MODELLING AND ANALYSIS :

Task :1 Theoretically, a financial model is a set of assumptions about future business conditions
that drive projections of a company's revenue, earnings, cash flows, and balance sheet
accounts. ... Each column of the table represents the balance sheet, income statement, and
cash flow statement of a future quarter or year.
List of Assumptions to be made :

 Initial investment that would be required to start the project (Investment decision)
 How much of money is locked in the business apart from the plant and machinery (Working
capital as investment)
 How are you going to get your cash back (The operations)
 How are you going to mix your equity and debt and what are the costs you pay for each
Assumption :
Year---> 1 2 3 4 5 6 7 8 9 10 11
12 13 14 15 16 17 18 19 20 21 22 23
24 25
Rent 2.500 2.625 2.756 2.894 3.039 3.191 3.350 3.518 3.694 3.878 4.072 4.276
4.490 4.714 4.950 5.197 5.457 5.730 6.017 6.317 6.633 6.965 7.313 7.679
8.063
Interest on Deposit 0.067 0.070 0.074 0.077 0.081 0.085 0.089 0.094 0.098 0.103
0.109 0.114 0.120 0.126 0.132 0.139 0.146 0.153 0.160 0.168 0.177 0.186
0.195 0.205 0.215
Revenue (million INR) 2.567 2.695 2.830 2.971 3.120 3.276 3.440 3.612 3.792 3.982
4.181 4.390 4.609 4.840 5.082 5.336 5.603 5.883 6.177 6.486 6.810 7.151
7.508 7.884 8.278
Final Project Cashflow (Equity) -3.05 0.0 0.367 0.414 0.463 0.515 0.571
0.629 0.691 0.756 0.825 0.896 2.116 2.225 2.340 2.462 2.591 2.728 2.872
3.024 3.185 3.354 3.533 3.722 3.921 4.131 4.35
Final Project Cashflow -10.17 0.0 1.502 1.548 1.597 1.650 1.705 1.764
1.826 1.891 1.959 2.030 2.116 2.225 2.340 2.462 2.591 2.728 2.872 3.024
3.185 3.354 3.533 3.722 3.921 4.131 4.352
Inflation 4.00% MAT 18.5%
Debt rate 10.0% Tax Holiday 0 yrs
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Debt tenure 10.0 yrs

Construction Time 0.25 yrs
Tax rate 25.00%
Depreciation 7.00%
USD/INR 70.00
DDT 0.00%
Moratorium 0.25 yrs
Discount 10%

Task 2 :
A) Revenue is the value of all sales of goods and services recognized by a company in a period.
Revenue (also referred to as Sales or Income) forms the beginning of a company’s Income
Statement and is often considered the “Top Line” of a business. Expenses are deducted from a
company’s revenue to arrive at its Profit or Net Income.
In this case revenue is earned by way of renting the property in India . So the Revenue is
calculated based on number of months building occupied *rent per month

REVENUE PER YEAR=NUMBER OF MONTHS PROPERTY OCCUPIED *RENT PER MONTH

Modeling Revenue Trends

Generally speaking, established companies tend to grow revenues over time at an approximate
rate—one that can be difficult to measure precisely, but often a range can often be found.
However, this long-term underlying growth trend can be obscured by short-term developments
caused by specific patterns.

There are three main types of revenue patterns, or trends, to look for: seasonal, cyclical, and
secular. When modeling business performance, it is critical to make sure that your assumptions
coincide with the economic reality of the company you are in
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In this given project the revenue is developing in a secular trend which shows gradual increase
in Revenue every year.
Revenue (million INR) 2.567 2.695 2.830 2.971 3.120 3.276 3.440 3.612 3.792
3.982 4.181 4.390 4.609 4.840 5.082 5.336 5.603 5.883 6.177 6.486 6.810
7.151 7.508 7.884 8.278

B) A cost sheet is a statement which represents the various costs incurred at different stages of
business operations, in a tabular format. It determines the total cost or expenditure made by
the organization, along with the cost incurred on each unit of a product or service in a particular
period.
The cost sheet of a business organization provides an insight into its performance and
efficiency. It helps in competitive analysis and improvement of the business operations through
cost reduction.

The cost sheet of a business organization provides an insight into its performance and
efficiency. It helps in competitive analysis and improvement of the business operations through
cost reduction.

Components :

 Prime Cost

 Works Cost

 Cost of Production

 Total Cost

In the following project cost staements are as follows :

Project Cost (CapEx)

Rate (Rs./sq.ft) 3000 % of Project Cost

Flat 2500 7,500,000 73.7%
Interior Decoration 125 375,000 3.7%
Furniture 250 750,000 7.4%
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Fixtures 10 30,000 0.3%

Building Registration 10 30,000 0.3%

Broker Fee 75 225,000 2.2%

Stamp Duty 250 750,000 7.4%
Fund Raising Fee 25 75,000 0.7%
Tranfer of Deed Fee 50 150,000 1.5%

Interest During 60 180,000 1.8%

Moratorium
Loan and 25 75,000 0.7%
Documentation Fee

CSR, HSE, Training 10 30,000 0.3%

Total Project Cost 10,170,000

O & M Cost (Monthly

Breakdown) (OpEx)
Building 15 45,000
Maintainence
Utilities (Electric + 4 12,000
Water + Internet)
Salary (Maid + 4 12,000
Acountant)
Plumber + Electrician 3 9,000
+ Misc etc
Insurance (0.35 %) 10 30,000

Total O&M Cost (per 966,000

year)
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C) A debt schedule is made to lay out the debt that a business has accrued based on its
maturity. A debt schedule is commonly used by businesses to build a cash flow analysis. In
the debt schedule, interest expense flows into the income statement.
The total of closing debt balances also flows into the balance sheet. The debt schedule is a
supporting schedule, and it is one of the schedules that ties together the three financial
statements.

All debt that is currently owed by a business must be included in the debt schedule. The types
of debt included are:

 Leases

 Loans

 Debentures

 Bonds

In this project details relating to this project are as follows :

Debt Amount 7.12(*10lakhs Rs)

Debt rate 10.00%
Moratorium 0.25 yrs
Term 10.0 yrs
Payment Periods 40
One period is one quarter
COD 9-Sep-2020
First Quarter End 8-Dec-2020

Payment :

Principle : 7.12

Interest. : 4.225

Debt sheet mainly used for:

Usually a debt schedule is made because once a debt matures, it’s useful to be able to estimate
the total amount of money that a company has to pay. A debt schedule is also used so that the
company can monitor the maturity of the debt, which is then used to make decisions. An
example of a decision made based on debt maturity would be considering the refinancing of
debt through a different source or institution when the interest rate declines.
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As well as this, the debt schedule report is able to be used to negotiate a new line of credit for
the business. Lenders will consider the balance between risk and reward using the report
before they grant a new credit

Task 3 :

Before banks decide to grant you a loan, they take all of the financial aspects of a
business, including its financial statements, into consideration. The balance sheets, income
statements and cash flow statements are major documents to be reviewed by the bank
because they are liable to safeguard their shareholders’ capital and comply with regulations.
They also need to prepare for the worst as the borrower might go bankrupt, which makes
recovery of the loan extremely difficult. Therefore, before extending credit, banks thoroughly
go through the financial statements of individuals and businesses to ensure the repayment of a
loan.

There are three steps involved in preparing financial statements they are

 Income statement
 Cash flow statement
 Balance sheet

Income Statement

An income statement breaks down the sales and expenses of a company into all its components
and also highlights the net profit. By carefully analyzing the income statement, banks try to
figure out the expenses that go into making a certain product or service, including direct and
indirect expenses. Before extending credit, financial experts, hired by banks, go through the
income statements to find out if a firm invests in premium products with low volume or indulge
in high volume sales at a discounted price. All of this information is necessary to determine if
the business under scrutiny is sustainable over a long period of time or if it is just another
hopeful venture that falls into oblivion, like many others.

Cash Flow Statement

For a banker, it’s valuable to assemble creditworthiness of data from balance sheets and
income statements. However, the eventual goal is to measure the cash flows of the borrower.
By reviewing liquidity arrangements, the bank ensures that the company has a steady influx of
cash and that it is eligible for extending credit. A cash flow statement offers an understanding
of a company’s liquidity movements in operating, investing and financing activities.

The flux of cash, whether in or out, can be because of past actions by the company. Therefore,
cash flow is carefully analyzed by the bank. If there is any loan that was taken previously, it
would show in the cash flow. Basically, the goal of the bank is to see if you have enough cash
resources to run the business and pay off the loans at the same time. Banks actually like
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extending credit to clients that have a positive cash flow statement because, to run their
business, they require people and businesses that are in need of a loan. So, it ultimately serves
their own interest as well.

Balance Sheet

The balance sheet of a company shows what the company owns and what it owes in the form
of liabilities. The assets of a company, which include land, machinery, cash, and other intangible
assets, are analyzed to judge the worth of a business. Any loans and accounts payable fall under
liabilities that need to be paid off by the company. Information about equity and stockholders is
also included in the balance sheet and, before extending credit, banks go through that
information to find the liable parties in case of a nonpayment. Also, the assets of the business
are the first items to be disposed of by the bank if the business fails to repay the loan. A balance
sheet offers a detailed description of a business and is the most vital source of information used
by banks and other stakeholders.

Other Considerations Before Extending Credit

Most of the information about a company will come from these above statements. However,
there are always some details that remain hidden from these reports and are sought after by
the bank. For example, if a company has been involved in a lawsuit or any other judicial
proceeding, the information will not be present in the statements. To tackle that, banks go
through extensive research about the company operations and sometimes even conduct
interviews with company’s management and employees to better understand the situation. In
short, banks take all possible measures before extending credit to ensure its full repayment
with interest.