VCE Summer Internship Program 2020

Smart Task Submission Format

Intern’s Details
Name Ruchit Gupta

Email-ID gruchit270298@gmail.com

Smart Task No. 1

Project Topic Project Finance - Modeling and Analysis

Smart Task (Solution)

Task Q1: What is Finance? How Finance is different from Accounting? What are important basic
points that should be learned to pursue a career in finance?

Task Q1 Solution :
Finance is the process in which the money is managed and transferred from savers or investors to
whom who are in need of it.

Accounting is an art of systematically keeping the records of the business transactions so that the
financial stability or position of the business can be ascertained at the end of each financial year
whereas finance is related to the overall management of the funds of the business. In other ways we can
say that Accounting is the subset of Finance.
Accounting help us to find the present financial positon of the company or business whereas Finance
helps in forecasting the performance of the company or business.
The tools used in accounting are Income Statement, Balance Sheet and Cash Flow Statement on the
other hand Leverage, Capital Budgeting, Ratio Analysis, Risk Analysis, Working Capital Management,
etc. are financial tools.

The important basic points that one should learned to pursue a career in finance are :-

1. Ability to communicate:
2. Problem-Solving Skills
3. Analytical Skills
4. Innovative
5. Commercial Acumen
6. Financial Reporting

500 Words (Max.)

Task Q2: What is project finance? How is project finance different from corporate finance? Why

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can’t we put project finance under corporate finance?

Task Q2 Solution:
Project finance basically means funding to the long-term infrastructure or industrial projects using the
non-recourse loans.
In layman language we can say whenever any corporate body or individual is involved in building up
some infrastructure projects for which they require huge loans or debts, then the project finance comes
into place. The repayment of the same can be made out with the cash flows which will be generated in
the near future and if they are not able to repay the debt, the liability is limited to the project not to the
assets of a corporate body or an individual.

The risk involved in the Project Finance is much lower as compared to the Corporate Finance.
In Corporate Finance the investor usually looks at the revenue before the lending whereas in Project
Finance the sponsor or the lender look at the projected cash flows.
When we talk about the return then in Corporate Finance the return is higher whereas for Project
Finance the return is less.
In Corporate Finance the debt is provided against the assets of the company whereas in Project
Finance the project itself is used as the collateral.

According to my understanding, We can’t put project finance under the corporate finance because for
one it’s an off-balance sheet transaction and for other is totally based on the balance sheet.

500 Words (Max.)

Task Q3: Define 20 terminologies related to project finance.

Task Q3 Solution :
1. Working Capital: - Working capital is calculated by current assets minus current liabilities of an
organization.
2. Depreciation: - It refers to the decrease in the value of the fixed assets over a period of time due to wear
and tear.
3. Amortization: - Amortization is the reduction of the capital balance or up-front (capitalized) expenses
over time to reflect life-cycle depreciation and obsolescence, often an equal amount per annum. 

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4. Break Clause: - A clause giving a party the right to terminate the contract at a particular point, often called
the “break point”.
5. Bullet: - A one-time repayment, often after little to no amortization of the loan balance. Also referred to as
a balloon payment.
6. Capital Expenditure: - Long-term expenditure on fixed assets such as land, buildings, plant and
equipment.
7. Commitment Fee: - Any fee paid by a potential borrower to a lender for the lender’s promise to lend
money at a specified rate and within a given time. 
8. EPC Contract: - Engineering, Procurement and Construction Contract or EPC Contract is a type of
construction contract that establishes a contractual relationship between a project company as owner and an
EPC contractor as the contractor to provide turnkey construction services that encompass project design,
engineering, procurement and construction of the project. 
9. Financial Internal Rate of Return: - The discount rate that equates the present value of a future stream of
payments to the initial investment.
10. Greenfield: - Often used to refer to a planned facility which must be built from scratch, without existing
infrastructure.
11. Power Purchase Agreement: - (PPA) An offtake purchase agreement in relation to a power project, for
the purchase of electricity generated.
12. Project Documents:- (or project agreements) The commercial agreements that are the subject of this
book, including the concession agreement, the construction contract, the input supply agreement, the offtake
purchase agreement and the operation and maintenance agreement
13. Public Private Partnership Framework :-( PPP framework) The combination of legal, regulatory,
institutional and financial framework that together facilitates the implementation of PPP, generally on a
programmatic rather than ad hoc basis.
14. Sponsor: - A party wishing to develop and finance (with equity) a project. Shareholders of project
companies are known as sponsors.
15. Yield to Maturity: - The rate of return yielded (for example, by a debt security held to maturity) when
both interest payments and the investor’s capital gain or loss on the security are taken into account.
16. Sunk Cost: - At a point during the project, sunk costs represent all money that has been spent till now in
the project. 
17. Opportunity Cost: - Opportunity cost is the opportunity given up by selecting one project over another.
18. Economic Value Added: - EVA is the amount of added value the project produces for the company’s
shareholders above the cost of the project.
19. Claw back:- The ability (e.g. on the part of the grantor) to recover prior project cash flow that may have
been distributed or paid as dividends or other form of payout to the project sponsors.
20. Concession: - The right granted by the host government for a private company to undertake an otherwise
public sector project and operate that project over a period of time.

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500 Words (Max.)

Task Q4: What is non-recourse debt / loan? What is mezzanine finance explained with an example

Task Q4 Solution :
Non-Recourse debt/ loan refers to the debt in which owners do not have any kind of recourse if debt is
not payable.
Usually non-recourse debt is available on companies project and project is liable to payback the loans
not the owners.
Non-recourse debt is characterized by high capex, long loan period and uncertain revenue stream. It
also carry high interest rate.

Mezzanine Finance is a kind of financing that has features of both the debt and the equity that provide
lenders the right to convert the loan into equity if there is any default.
This kind of debt has equity instruments attached, which are also known as warrants, and what these
do is increase the value of the lower level debts as well as give more flexibility when it comes to dealing
with a bondholder. We largely see this type of financing is used if someone is trying to buy out a
company.

Example:-
You want to buy a small bakery shop in Patna, Bihar. The small bakery shop earns Rs.200, 000 per
year in operating income, and the owners will sell it to you for Rs.10, 00,000. You don't have Rs.10,
00,000 laying around to invest, so you find a senior lender who will finance Rs.700, 000 of the purchase
price at a rate of 7% per year.
The capital structure looks like this:
The senior lender contributes Rs.700, 000 of debt financing at a cost of 7% per year.
You, the equity investor, contribute Rs.300, 000 in equity.
The return on your investment will be as follows: - We know the business produces Rs.200, 000 in
operating income per year. We need to subtract the Rs.49, 000 in interest payable to the senior lender,
thus arriving at pretax profits of $151,000. The profits are taxed at 30%, so the after-tax profit is Rs.
1,05,700
Thus, your return on your Rs.300, 000 equity investment is Rs.1, 05,700 annually, or 35.23% per year.

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500 Words (Max.)

Task Q5: Explain in detail with reasons of what the sectors are or which type of projects are suitable
for project finance?

Task Q5 Solution :
The sectors which are suitable for project finance can be :-
1. Water: - Water treatment, Waste water treatment, Desalination requires huge machine which
involve lot of cost which can be raised through project finance.
2. Power and Energy
3. Transport: - Bridges, roads, railways, airports require huge cost for their development sop project
finance can help.
4. Healthcare
5. Housing
6. Real Estates

500 Words (Max.)

Please add /delete blocks for if needed.

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