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.… Read the rest

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.… Read the rest

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.… Read the rest

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 take the risks and assume  the debt obligations associated with traditional financing methods.… Read the rest

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,

  1. Initial investment: Initial investment is the after-tax cash outlay on capital expenditure and net working capital when the project is set up.
  2. Operating cash inflows: The operating cash inflows are the after-tax cash inflows resulting from the operations of the project during its economic life.
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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.… Read the rest