VCE Summer Internship Program 2020
Smart Task Submission Format
Intern’s Details
Name
Vanraj Makwana
Email-ID
vanrajm007@gmail.com
Smart Task No.
TASK 2
Project Topic
Project Finance - Modeling and Analysis
Smart Task (Solution)
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:
Task Q1 Solution:
The assumptions should be serious and reasonable numbers and thus should be a product of
proper research but also critical thinking. For instance, a new start up has increased needs in
marketing and thus should not blindly use the average spending of a few big, mature companies in
the sector.
Project finance models start with some assumption- how much you estimate to spend constructing
the project, what percentage of financing will come from equity financing versus debt, and also cost
of different debt items. Usually, the assumptions are split into two- financing and operating
assumptions. The assumptions are classified as:
1. Project assumptions:
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Completion time- 20 years
Land size in Sq. ft.- 3500
Deposit- 35% of annual rent
Debt repayment- 15 years.
Monthly Rent- 3,00,000
2. Financing assumption:
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Debt - 75%.
Equity - 25%.
Debt service reserve- 0.50 years.
Payment periods- 40 (Quarters).
Repayment periods- 10 years.
Debt rate-12%
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VCE Summer Internship Program 2020
Smart Task Submission Format
3. Cost assumptions:
These can be further classified as.
⮚ CAPEX or project cost related assumptions- 10,250,000.
⮚ OPEX or operating cost related assumptions. 966,000
4 Economic assumptions:
⮚ Inflation- 4%
⮚ Exchange rate- 70
5. Tax assumptions:
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Tax rate- 30%.
Corporate tax- 30%.
Tax holiday- 0 years.
Minimum alternate tax - 18%.
Dividend distribution tax- 0
500 Words (Max.)
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VCE Summer Internship Program 2020
Smart Task Submission Format
Explain the function of revenue, cost and debt sheet of the
financial model.
Task Q2:
Task Q2 Solution:
Financial Modeling is a tool that can be used to forecast a picture of a security or a financial
instrument or a company’s future financial performance based on the historical performance of the
entity. The purpose of Financial Modeling is to build a Financial Model which can enable a person
to make better financial decisions. The decision could be affected by future cash flow projections,
debt structure for the company, etc. All these factors may affect the viability of a project or
investment in a company. The function of revenue, cost and debt sheet of the financial model is
as follows:
Revenue:
It implies that there are 2 cash inflows. One is rental and another is interest earned on the
deposits paid by tenants. The total is the revenue earned. To know the interest earned on
various investments. To define the different source of revenue or revenue parameters of
the project.
Cost:
It covers all the costs incurred during the setting up of the project. Estimation of overall cost
incurred while completion of project. It includes all the hard costs such as rent, interior decoration,
furniture, etc. as well as maintenance costs such as broker fee, stamp duty, training, etc.
Debt:
It lays out all of the debt a business has in a schedule based on its maturity; it is typically used by
business to construct a cash flow analysis. The debt schedule report can be used as an instrument
to negotiate a new line of credit for the company. Leaders will use the report and consider the risk
before granting new credit. Debt functions are for projection of interest expense & calculation of
interest payment.
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VCE Summer Internship Program 2020
Smart Task Submission Format
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:
Task Q3 Solution:
Steps involved in preparation of fin flow sheet are as follows:
1) Prepare the investing activities section by converting net income net income an accrual
basis to a cash basis. The first step involved in preparation of the fin flow sheet is to project
all details related to the project in the fin flow sheet. This will help to show the percentage of
debt and equity used to finance the project and the debt service coverage ratio.
2) Prepare the investing activities section by presenting cash activities for noncurrent assets.
3) Prepare the financing activities section by presenting cash activities for noncurrent liabilities
& owner’s equity. Finding total project cash flow from the project’s equity financing.
4) Reconcile the change in cash. Each section of the statement of cash flow the total cash
provided by or used by each activity. debt service coverage ratio and final project cash by
deducting principal and interest amount from final project cash flow from equity.
Bank always tries to understand the ability of the customer and in order to know the capabilities of
the project company, the bank checks out the whole profit and background of the company. Bank
needs to check following before financing a report:
1. Company and management profile.
2. Last three years audited financial results.
3. Details of collateral security.
4. Projected cash flow for next five years.
5. Bank loan of the company and its repayment structure.
6. All commercial agreements related to the project.
7. Memorandum and articles of association of company with certification of incorporation.
8. Last one year bank statement from all the bankers.
9. Personal guarantee of the directors and their net worth statement.
10. Any other document which banker may feel necessary.
500 Words (Max.)
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