Characteristics of Project Financing

Project financing involves non-recourse financing of the development and construction of a particular project in which the lender looks principally to the revenues expected to be generated by the project for the repayment of its loan and to the assets of the project as collateral for its loan rather than to the general credit of the project sponsor. Project financing is commonly used as a financing method in capital-intensive industries for projects requiring large investments of funds, such as the construction of power plants, pipelines, transportation systems, mining facilities, industrial facilities, and heavy manufacturing plants. The sponsors (the sponsor(s) or developer(s) of a project financing is the party that organizes all of the other parties and typically controls, and makes an equity investment in, the company or other entity that owns the project) of such projects frequently are not sufficiently creditworthy to obtain traditional financing or are unwilling to takeContinue reading

Cash Flow Computations in Project Management

Financial appraisal or evaluation is a must for every project even though the outcome may not be the decision criteria for establishing the project. Financial appraisal of a project deals with cash flows. Cash, which goes out of the firm, is known as cash outflow. Typically an investment in a project is an out flow. The cash that is received in future from the project is an inflow. We should remember that cash is different from income. Cash flow and not income flow is central to project evaluation. The results of an evaluation of a project are only as good as the accuracy of our estimation of cash flows. The following illustrates computation of cash outflow. Cash outflow on installation of a machine includes; Cost of new equipment Labor and erection costs Maintenance cost While computing such outflows we should not include interest costs on debt employed. If the costContinue reading

Basic Principles for Measuring Project Cash Flows

Estimating cash flows — the investment outlays and the cash inflows after the project is commissioned — is the most important, but also the most difficult step in capital budgeting. Estimating cash flows process involves many people and numerous variables. A project which involves cash outflows followed by cash inflows comprises of three basic components. They are, Initial investment: Initial investment is the after-tax cash outlay on capital expenditure and net working capital when the project is set up. Operating cash inflows: The operating cash inflows are the after-tax cash inflows resulting from the operations of the project during its economic life. Terminal cash inflow: The terminal cash inflow is the after-tax cash flow resulting from the liquidation of the project at the end of its economic life. For developing the stream of financial costs and benefits, the following principles must be kept in mind: 1. Principle of Incremental CashContinue reading

Term Loans as a Project Financing Method

Project financing may be defined as the raising of funds required to finance a capital investment proposal which is economically separable. The assets, contracts cash flows are separated from the parent company and the assets acquired for the projects serve as collateral for loans. The repayments are made from the revenue generated from the projects. Also, the lending institution has to ensure that the investment on the proposed project will generate sufficient returns on the investments made and that loan amount disbursed for the implementation of the project will be recovered along with interest within a reasonable period of time. Term loans are meant for tying up the capital cost of the project. The primary source of such loans is financial institutions. Commercial banks also provide term finance in a limited way. The financial institutions provide project finance for new projects as also for expansion/diversification and modernization, whereas the bulkContinue reading

Commercial or Financial Profitability

In order to assess the operational efficiency of a project and its profitability most of the industrially advanced countries employed various technique for the purpose of financial profitability analysis. Profit is the primary objective of an enterprise. The word profit implies a comparison of the operations of business between two specific dates which are usually separated by an interval of one year. The maximization of profit within a socially acceptable limit implies that a proper regard for public interest has been shown. Really it is the growth of profit which enables a firm to pay higher dividends to its ordinary shareholders. According to the Economists point of view profit is the reward for entrepreneurship. Various factors influence the profit variations. They are as follows. The volume of sales plays a tremendous part in profit making. So long as a sustained maximum volume continues at the top of capacity curve, breakContinue reading

Procedural Aspects of Project Finance

The procedural aspects of project financing by banks and other major financial institutions consists of following stages: 1. Identification of the Project The project’s idea is introduced to providers by various sources: a request from the government concerned or financials identification missions may identify a proposal from other financiers, or it. Applications for financing are then sorted out and classified: projects to be financed are selected from amongst projects which have top priority in the development plans of the beneficiary countries and which meet the requirements established by the rules for financing set out by the providers and agreed upon by the government concerned. In all cases, an official request from the government should be submitted to financials before it decides to participate in the financing. 2. Desk Review and Determination of the Project’s Scope Experts, each in his field of specialization, study all the documents available on the projectContinue reading