Selected Tricky Subjects in Project Finance Models
This lesson describes some difficult details of Project Finance models. Subjects include S-curves with delay or acceleration in construction; dealing with interest during construction, fees and the associated funding needs and construction; equity bridge loans; and, sculpting in situations where the amount of debt is given.
Timing is one of the keys to project finance. Different stages have different risks and must be defined in a model. Exercise 2 demonstrates how to structure inputs in a basic project finance model (it is associated with the project finance inputs video). The second exercise addresses how to structure a model with flexible dates so that different construction periods and project lives can be included in the analysis. The flexible dates and the advanced timing exercises demonstrate alternative ways to deal with different timing structures.
Corporate Finance involves comparing the ROIC with WACC while project IRR is computed in project finance. This file demonstrates how to reconcile the ROIC and the IRR over the life of a project (it is associated with the IRR reconciliation video). The project IRR is related to WACC (although it is not very useful to evaluate WACC in project finance) and should be computed after tax. After-tax IRR is computed without IDC but after depreciation on the base plant. This file demonstrates how to compute after-tax IRR in a project finance model (it is associated with the project finance after-tax IRR video).
The exercises below address various issues associated with cash flow waterfalls. Exercise six addresses the issue of adding cash sweeps to a model. The first part of the exercise shows how to model a basic cash sweep and evaluate the benefits of the cash flow sweep when cash flow falls off a cliff. One of the key issues with cash sweeps is to not include the cash sweep in the debt structuring part of the model. The fourth exercise illustrates how to create a cash flow waterfall that includes a default on debt and repayment of the default. Including provisions for a default on debt allows computation of the break-even point for things like delay in construction and other items. It also enables the evaluation of debt IRR for alternative types of securities. Exercise eight describes various modelling issues associated with cash lock-up accounts.
Sizing debt is a key issue in a project finance model. This file demonstrates basic sizing from the DSCR (it is associated with the debt sizing video).
|Miscellaneous Project Finance Exercises||Files with Exercises||Video Links|
|Converting from Monthly to Quarterly and Monthly/Semi-Annual||Exercise 7: Advanced Timing||https://www.youtube.com/watch?v=G3dEapTxaqk|
|Reconciliation of IRR and ROI||Exercise 6: ROI and IRR Reconciliation||https://www.youtube.com/watch?v=yD0LfAAoxPU|
|Multiple Equity Owners in Project Finance||Exercise 22: Equity Allocations|
|Multiple Equity Owners and Cash Flip||Exercise 23: Flip Exercise Pre-tax||https://www.youtube.com/watch?v=gFERDTjqtXg|
|Find the flip period with fraction of year||Flip period.xlsm||https://www.youtube.com/watch?v=IqghCkfMg1I|
|Create a payback function with period fractions||Payback.xlsm||https://www.youtube.com/watch?v=7Cmbh_XMnks|
|Annual Fees and IDC||Annual IDC Fees.xlsm||https://www.youtube.com/watch?v=mUrS-bFk2SE|
|End of Quarter Function||End of Quarter Function|
|Half Year and Monthly Function||Half Year and Month Function|
|Percent of Time Function||Percent of Time Function|
|Complex Working Capital in Project Finance Model||Gas Plant Example||https://www.youtube.com/watch?v=v5BXBpnFbXQ|
|Computing the outages from periodic maintenance periods||Gas Plant Example||https://www.youtube.com/watch?v=0Xt7p5z3o18|