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Project finance is the financing of long-term infrastructure and industrial projects based upon a complex financial structure where project debt and equity are used to finance the project. Usually, a project financing scheme involves a number of equity investors, known as sponsors, as well as a syndicate of banks which provide loans to the operation. The loans are most commonly non-recourse loans, which are secured by the project itself and paid entirely from its cash flow, rather than from the general assets or creditworthiness of the project sponsors. The financing is typically secured by all of the project assets, including the revenue-producing contracts. Project lenders are given a lien on all of these assets, and are able to assume control of a project if the project
company has difficulties complying with the loan terms. Generally, a special purpose entity is created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure. As a special purpose entity, the project company has no assets other than the project. Capital contribution commitments by the owners of the project company are sometimes necessary to ensure that the project is financially sound. Project finance is often more complicated than alternative financing methods. It is most commonly used in the mining, transportation, telecommunication and public utility industries.
OBJECTIVES OF THE PROJECT
1. To assess the financial health of organizations that approach Union Bank of India for 2. credit for import export purposes. This would entail undertaking of the following 3. procedures: 4. Analysis of past and present financial statements 5. Analysis of Balance Sheet 6. Analysis of Cash Flow Statements 7. Examination of Profitability statements 8. Examination of projected financial statements 9. To assess the suitability of the company for disbursement of credit. This would involve
THE FOLLOWING ACTIONS: .
Evaluation of management risk 3. Evaluation of market-industry risk 5. NEED OF PROJECT FINANCE 1. economically and politically viable. Use of credit rating charts 2. To get an exposure of actual working environment in an organization. socially. 2. Risk sharing is another unique feature of project finance which traditional methods do not provide.1. . Project finance is a finance structure which ensures that the projects are environmentally. Evaluation of compliance of sanction terms 7. To understand project finance. Calculation of credit rating OBJECTIVES OF STUDY 1. 3. 2. Evaluation of financial risk 4. Evaluation of the facility 6. Traditional methods are not suitable for projects which have a long life and require huge capital investment.
. e-mail. 2. if approved 8. Preparation of proposal PROJECT SUMMARY Project Owner Applicant/Borrower Entity • Full legal/business name with address. etc. Determining Interest Rate 5. Carrying out due diligence 3. Submission of Project Report along with the Request Letter. If not approved 7. Project Finance improves the return on capital in a project by leveraging the investment 5. Preparing Credit Report 4. Project finance facilitates careful project evaluation & risk assessment Term Loan Assesment Steps in term loan processing 1. Preparing and submission of Term Sheet 6. phone/fax numbers.4.
fees and expenses.) • Working capital (if applicable) • Unforeseen. personal. profit centers. cash. Loan Requested • Amount and Breakdown of the use of the loan proceeds • Loan Period requested (number of years including the construction/ development period) Equity/Financial Responsibility • Hard Equity presently available (assets: land/properties. fixtures and equipment. land area/zoning. NOTE: In a case of a request for refinancing. refinancing or acquisition finance) • • • • Brief background/main activities Authorized/paid up capital Shareholdings (names of shareholders with percentage of shares Board of Directors (names and position) Total Project Cost • Cost of land • Development cost (construction/infrastructure. please indicate the breakdown of existing debt/loans outstanding. and respective names of Banks/ Financial Institutions. etc. etc.) • Offered Guarantees (corporate. others) .) Type (project finance.Project • • • • Complete name Location (exact address.) Description (concept. etc. etc. etc. furniture.
and if you decide to proceed with us – of the respective fees to be paid for our services (Project Appraisal/Evaluation Report and Loan Arranger/Lender Contact). At that time you will be informed – if applicable. figures.Communication of Sanction 14.Terms & Condition 19.Studies/Investigations already made (only author/names and dates) o Feasibilities Studies (market survey. 9.Project Rejected 16.Acknowledgement of Sanction 18. etc. marketing/operation plans.Terms & Condition 15.Application to comply with . would be in the position to initially check the parameters of your project.Sanction of proposal on various 12.If No queries raised If queries raised 11. etc.) o Appraisal Report (land/property valuation. and the necessary step-by-step procedure to follow towards a successful Project Evaluation and Funding.L.Solve the queries 17.Terms & Condition 13. financial analysis/projections/debt service. contact potential loan arrangers/lenders interested specifically in this type of project and get back to you in about 2 to 3 working days with the results. EVALUATION FUNDING S. Upon submission of the above requested information. Submission of Proposal to designated authority 10.) NOTE: Please indicate all amounts/figures in local currency and equivalent in US Dollars.
Sanction Terms & Condition & 21.Disbursement .20.execution of Loan Documents 22.
Generation of Ideas Initial Screening Is the idea Prima Facie Promising Plan Feasibility Analysis Terminate Conduct Market Analysis Conduct Technical Analysis Conduct Financial Analysis Conduct Economic Ecological Analysis & Is the Project Worthwhile ? Prepare Funding Proposal Terminate .
Project evaluation helps to decide which of the several alternative projects has a better success rate. a higher turnover.PROJECT EVALUATION Project evaluation is a high level assessment of the project to see whether the project is worthwhile to proceed and whether the project will fit in the strategic planning of the whole organization. STEPS IN PROJECT EVALUATION Inception of Idea Econom Analysis ic Need & Justification Strategic Analysis Project Design Selection Cost Analysis Revenue Analysis Financial Analysis Sensitivity Analysis .
Project Cost Estimation 4. Risks associated with capital investment proposals can be broadly classified as: 1. Break Even Analysis. Demand Analysis 3. Sensitivity Analysis. DCF. Other-Risk: Financial Risk: Financial risk is defined as the possibility that the actual return on an investment will be different from the expected return. Financial Analysis 6. Risk Analysis 2. Standard Deviation etc.KEY PARAMETERS TO BE EVALUATED IN A PROJECT The key parameters to be evaluated in a project are: 1. Revenue Analysis 5. . Probability Assignment. Financial Risk 2. Certainty Equivalent. Project Selection Criteria RISK ANALYSIS Risk analysis is a technique to identify and assess factors that may jeopardize the success of the project. Many techniques are available for determining financial risk involved with the projects like Risk adjusted Discount Rate.
In the demand analysis we check if there is a scope for laying a pipeline. Risks which can be included in other risk are 1. the designing are studied under demand forecasting. Availability Risk 2. The major Steps in demand analysis are Determining different uses of a project output Determining current consumption level and future demand Finding financial and economical benefits from the project . Inflation Risk 6. Technological Risk DEMAND ANALYSIS: Success of a project depends on the projects usage potential and user willingness to pay. their habits. Input and throughput Risk 7. Counterparty credit risk 4. the pricing of the products.OtherRisks: Other risks constitute risks which may be an obstacle in the success/ Completion of the project. Completion (technical and timing) Risk 3. then a pipeline is not required. Demand analysis involves forecasting the demand on the basis of market surveys and manufacturing capacity of the unit and this is decided through the study of demand and supply. and possibility of changing these habits. if the demand at destination is less. Market (demand) Risk 8. Country (political) Risk 5. The potential users.
The capital costs and operating costs of the project is considered in this step. It seeks to ascertain whether the proposed . Revenue projections are formed on the basis of Output sales.PROJECT COST ESTIMATION Accurate estimation of costs is vital for the effective evaluation of the project since it is important for knowing the financial feasibility of the project. stability & profitability of a project. The following factors needs to be kept in mind while estimating costs. Revenue analysis is all the more important in project finance because the debts have to be repaid through the revenues generated by the project. It helps in finding out the profits/ losses in the future. Base Cost Estimate Contingency Costs Cost Factor for difference between domestic & foreign inflation rates Financing cost incurred during the construction period on loans specifically borrowed for project is capitalized at the actual borrowing rates. REVENUE ANALYSIS Revenue analysis is estimation of the revenues which would be earned in the future. FINANCIAL ANALYSIS Financial analysis refers to an assessment of the viability.
ARR = Average Annual Profits after depreciation & Taxes x 100 Average Investment . The return on investment is calculated with the help of following formula. PROJECT SELECTION CRITERIA Once information about expected return and costs has been gathered. Under this method various investments are ranked according to the length of their pay-back period and the investment with a shortest pay back period is preferred. the next question arises: whether the project should be selected or not.project will be financially viable in the sense of being able to meet the burden of servicing debt and whether the project will satisfy the return expectations of those who provide the capital. According to this method the project with the highest rate of return is selected. The pay-back period can be ascertained in the following manner: Payback period = Investment Cash Flows/year 2) AVERAGE RATE OF RETURN METHOD: This method takes into account the earnings expected from the investment over their whole life. The various commonly used methods are as follows: 1)PAY-BACK PERIOD METHOD: It represents the period in which the total investment in permanent assets pays back itself. There are many methods of evaluating the profitability of the project.
Average Investment = Original Investment + Salvage Value 2 3) NET PRESENT VALUE METHODS: The Net present value method is the modern method of evaluating investment proposals. This method takes into consideration the time value of money and attempts to calculate the return on investments by introducing the factor of time-element. . The cash inflows are estimated for future profits before depreciation but after taxes.Where.e. c) Accept the proposal if the IRR is higher than or equal to the minimum required rate of return i. The following steps are required to practice the internal rate of return method: a) Determine the future net cash flows during the entire economic life of the project. 4) INTERNAL RATE OF RETURN METHOD: It is also known as trial & error yield method. NPV= Present value of cash inflows – Present value of cash outflows. b) Determine the rate of discount at which the value of cash inflows is equal to the present value of cash outflows. cost of capital or otherwise reject the proposal. If annual cash flows are equal then it can be easily found out otherwise it has to be found out by hit and trial method.
d) In case of alternative proposals select the proposal with highest IRR. It measures the Present Value of returns per rupee invested based on the following formula: PI = Present value of Cash Inflows Present value of cash Outflows . 5) PROFITABILITY INDEX This method is also known as benefit cost ratio and is similar to NPV approach.
then tax is not to be charged.33% (10% tax + 10% surcharge + 3% education cess). then MAT is calculated and if MAT shows profits. If a company is having regular profits then income tax @ 33. . To avoid this practice. However if the books show losses.TAX CALCULATION In project finance basically three types of taxes are calculated while doing financial analysis and these are: Minimum Alternate Tax Income Tax Capital Gains Tax Minimum Alternate Tax (MAT) Normally. Profit computed under the regular method is called regular profit and profit computed under sec 115JB is called Book profit and the tax computed is called MAT.99% (30% tax + 10% surcharge + 3% education cess) is charged on it. And if MAT shows losses. MAT was introduced in section 115JB of the Income Tax Act. There were large number of companies who had profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the income tax act was either nil or negative. tax is calculated @ 11. but the profit and loss account of the company is prepared as per provisions of the Companies Act. a company is liable to pay tax on the income computed in accordance with the provisions of the income tax Act.
debentures and mutual fund units the period of holding required is only 12 months.33% (MAT rate). In case of shares. Capital Gains Tax If any Capital Asset is sold or transferred.66% (20% tax + 10% surcharge + 3% education cess). MAT CALCULATION First of all. MAT credit will be allowed carry forward facility for a period of five assessment years immediately succeeding the assessment year in which MAT is paid. tax credit is allowed in respect thereof during the years when the company pays normal corporate tax. The amount of MAT credit can be setoff only in the year in which the company is liable to pay tax as per the regular tax. . Capital asset gains are of two types Long term capital gains: Gains on assets held for more than 36 months before they are sold or transferred. The tax credit earned is the difference between the amount payable under MAT and the regular tax.MAT Credit When a company pays tax under MAT. the profits arising out of such sale are taxable as capital gains in the year in which the transfer takes place. the book profits are calculated using the formula Book profit= Taxable profit + depreciation previously deducted . Rate of tax applied on long term capital gains is 22.actual depreciation as per Income tax Act MAT loss is added to the book profit to obtain the adjusted book profit on which the MAT is calculated @ 11.
Short term capital gains: Gains on assets held for less than 36 months are included in this category. . CALCULATION OF CAPITAL GAIN Net capital gain is calculated with help of formula: Net Capital Gain = Gross Gain (Cost of Acquisition + Indexation Cost) – Expenses on Sale Indexation CostBase year/year of Acquisition Index Index = Original value X Present year Capital gain is calculated at 22. Rate of tax applied on short term capital gains is 15%.66% of Net Capital Gain.
investors are now reluctant to take currency mismatch. corruption.CHALLENGES IN PROJECT FINANCING Infrastructure development has huge potential in developing countries of the Asia-Pacific region. commercial banks have been the suppliers of longterm financing in Asia and in doing so they have heavily relied on short-term deposits to meet their funding requirements. inconsistent enforcement of laws. these economies have failed to attract a supply of private investment in infrastructure projects. weak accounting and disclosure norms. Such a practice.. However. exposes the banking sector to systemic risks. reluctance in honoring concession commitments. This lack of ventures in building adequate infrastructure can be attributed to weak tariff regulation. Emerging economies in this area need billions of dollars in private funding to spark infrastructure investment. poor governance practices. especially in a weak banking environment. the classic problem of supply and demand puts forth an obstacle – while the demand for infrastructure investment is enormous. A testament to these issues is the large number of infrastructure projects in Asia that were financed in hard currency and later struggled with the adverse impact of Asian financial turbulence and required restructuring. . As the problem persists. interest rate and refinancing risks. and . We are all aware that the real cost of the Asian financial crisis was in the form of reduced lending volumes. Traditionally. and weak securities legislation. lack of availability of long-term local currency financing at fixed interest rates.
Financing of Projects: Project finance is a new & emerging concept for financing the projects. Corporate aspect: This project has provided me with good exposure to actual working environment of an organization. .gritties & application of project finance which cannot be understood by reading books. Procedure of evaluating projects: Through this project. .KEY LEARNINGS FROM THE PROJECT Each and every activity in life helps us to learn new things. This project too was a perfect learning experience and has helped me to learn a lot. financial tools for assessing the viability of project. taxes etc impact the evaluation of the projects. I have learned the various aspects of evaluating the project. cost estimation and how depreciation. This project has helped me to understand the nitty.
Data collection was strictly confined to secondary source thus is subject to slight variation than what the study includes in reality. .e. for a period of two months. There was a constraint with regard to time allocation for the research study i. There were various technical terms used in the project. be it time constraints or any other such issues that invariably. plague the result. which were difficult to understand.LIMITATIONS Each and every project or research carried out has some limitations.
This project includes step wise analysis starting from need & justification to sensitivity analysis. . It covers all the aspects of the project and help in mitigating the risks.CONCLUSIONS At the end it may be concluded that project financing is a good method for financing and evaluating the projects.
scribd. Projects: Appraisal. www.google. www.india.REFERENCES/BIBLOGROPHY: BOOKS 1. Evaluation and Financing by Prasanna Chandra WEBSITES 1.com 2.com . www.in 3. Financial Management By D K Goel 3. Financial Management By I M Pandey 2.incometax.
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