VCE Summer Internship Program 2020

Smart Task Submission Format

Intern’s Details
Name Ruchit Gupta

Email-ID gruchit270298@gmail.com

Smart Task No. 2

Project Topic Project Finance - Modeling and Analysis

Smart Task (Solution)

Task Q1: While preparing a financial model what are the assumptions we need to take. Please list
down the list of assumptions with the values, assuming the project will be set up in India.

Task Q1 Solution :
While preparing the financial model there are few assumptions which we need to take
are as follows:-
1. Inflation: - Inflation is the overall impact of price changes for a diversified set of products and services,
and allow for single value reprenstation of the increase in the price level of goods and services in an economy
over a period of time.

2. DDT: - Dividend Distribution Tax (DDT) is a tax levied on dividends distributed by companies out of their
profits among the shareholders. DDT is levied at the hands of the firms, and the shareholder.

3. Tax Holiday: - Tax holiday is a temporary reduction or elimination of a tax. Government usually create
tax holidays as incentives for business investment.

4. Tax Rate: - Tax rate is the percentage at which an individual or corporation is taxed.

5. Debt Rate/Interest Rate: - Interest rate is rate charged by a lender of money or credit to a borrower.

6. Moratorium: - It is the temporary suspension of an activity or law until future consideration warrants
lifting the suspension.

7. Debt Tenure: - Debt tenure refers to the time period for which the debt is been taken.
8. Depreciation: - Depreciation is defined as the reduction of recorded cost of a fixed asset in a systematic
manner until the value of the asset becomes zero.

9. Discount Rates

10. Construction Time

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11. MAT: - The Minimum Alternative Tax is imposed on book profit of the companies to pay the usual
corporate income tax.

The assumptions with the values are as follows:-

A. Inflation:- 6.2%
B. DDT:- 0.0%
C. Tax Holiday- 1 Year
D. Tax rate :- 27%
E. Debt rate:- 9.2%
F. Moratorium:- 0.5 Year
G. Debt tenure:- 15 Year
H. Depreciation:- 8%
I. USD/INR:- 72.53
J. Discount:- 10%
K. Construction Time:- 2 Year
L. MAT:- 16.5%

500 Words (Max.)

Task Q2: Explain the function of revenue, cost and debt sheet of the financial model.

Task Q2 Solution:
The function of revenue, cost and debt sheet of the financial model is as follows:-

1. Cost: - The 2 types of cost is being covered in which one is the “PROJECT COST” which is also
referred to as the capital expenditure which is being incurred to construct and build up the project. Project
cost includes the Furniture’s, Fixtures, Stamp Duty, Interior Decoration, Loan and documentation fees etc.

The other cost which is being incurred is the “OPERATIONAL EXPENDITURE” which refers to the
expenditure done on the day-to-day operations of the business or the amount spent in order to run the project.
It includes Building Maintenance, Utilities (Electricity, Water and Internet), Salary, and Insurance etc.

2. Revenue: - In order to run the business over a longer period of time revenue is the most important part. It
acts as a major component.
In the financial model 2 types of revenue being shown one is in the form of “RENT” which is being received
in the city of Mumbai and the other one is in the form of “INTEREST ON DEPOSIT” and finally both
being added to receive the “TOTAL REVENUE”.

3. Debt: - Debt refers to the sum of money owned by one person and due to another person.
In project finance we use “Non- Recourse debt” which means that the owners do not have any kind of

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recourse if debt is not being paid.

Debt sheet covers about the Amount of loan being taken, Rate of interest, Moratorium period, Period of loan,
series of loan payment etc.

500 Words (Max.)

Task Q3: Explain in detail the various steps involved (with the importance) in the fin flows sheet. Why
and what the bank needs to check before financing the project.

Task Q3 Solution :
The various steps involved in the fin flows sheet are as follows:-
The first step is to calculate the “Total Revenue” i.e. The amount received in the form of rent, interest on
deposit and from other sources.

The second step is to calculate the “OPERATING EXPENSES i.e. The amount which is need to run the
day-to-day operations of the business or the project. It includes Building Maintenance, Utilities (Electric +
Water + Internet), Salary (Maid + Accountant), Plumber, Electrician, Misc. etc., Insurance. All of these
constitutes to the “TOTAL OPERATING EXPENSES”.

The third step is to calculate the “EARNINGS BEFORE INTEREST TAX DEPRECIATION and
AMMORTIZATION” which is calculated by subtracting the Total Operating Expense from Total Revenue.
The importance of calculating EBITDA is to analyze and compare profitability among companies and
industries, as it eliminates the effects of financing and capital expenditure.

The fourth step is to calculate the “NON OPERATING EXPENSES” which includes the payment of the
interest on the debt as well as the depreciation. Non-operating expenses are often considered to be
the cost that a company must incur to fulfil certain monetary obligations. Other than that, these expenses are
said to play a vital role when it comes to ascertaining the net earnings of a firm during any given period.

The fifth step is to calculate the “INCOME BEFORE TAXES” after which the “TAX” is being deducted
in order to arrive at the “NET INCOME”.

The final step is to calculate the Final Project Cash flow which calculated using the :-
 EQUITY
 NET INCOME

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 DEPRECIATION
 PRNICIPAL PAYMENT
 CSR(certain % of net income)

The bank needs to check certain things before financing any project are as follows:-

1. Business Plan
2. Project Financial Structure + Legal Structure + Management Structure
3. Revenue Model
4. Cash Flow Projections for the next five to ten years
5. SWOT Analysis of the project
6. Risk Analysis & Mitigation details 
7. SPV/SPC(Special Purpose Company/Vehicle) Registration documents
8. Federal and Local Government Departmental Clearances and Approval records
9. Environmental Clearances
10. Market Research Report
11. Detailed Project Report (DPR)
12. Off Taker Agreements/ Contracts /PPAs
13. Procurement Agreements / Contracts supported by Equipment specs and Performa Invoices
14. Operations & Maintenance (O&M) Agreements / Contracts
15. Debt Exposure Details
16. Patents or Copyright certificates (If any)
17. Project Land Status and records including ownership/lease records

500 Words (Max.)

Please add /delete blocks for if needed.

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