Project finance model
specialized financial model for assessing the economic feasibility of the project in question
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.
Context
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 structure
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.
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.
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This entry incorporates text from “Project finance model” on English Wikipedia. Contributors are listed in the page history. Text is available under the Creative Commons Attribution-ShareAlike 4.0 License. Selected authority identifiers and statements are retrieved from Wikidata under CC0; their references and qualifiers remain part of the verification path.