Project Financial Analysis Flashcards
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Read the first 7 Project Financial Analysis flashcards as text
What is the modified internal rate of return (MIRR) designed to address compared to the conventional IRR?
Answer: The assumption that interim cash flows are reinvested at the project's IRR
MIRR corrects the IRR's unrealistic assumption that interim cash flows are reinvested at the IRR itself, instead using the cost of capital.
In project financial analysis, what does 'working capital' represent?
Answer: Current assets minus current liabilities needed for project operations
Working capital is the difference between current assets and current liabilities, representing the short-term liquidity needed to run the project.
A project has revenues of $500,000, operating costs of $300,000, depreciation of $50,000, and a tax rate of 25%. What is the operating cash flow?
Answer: $162,500
Operating income = $500k − $300k − $50k = $150k; Tax = $150k × 25% = $37.5k; Net income = $112.5k; OCF = $112.5k + $50k = $162,500.
Which financial ratio measures a project's ability to cover its debt service from operating earnings?
Answer: Debt Service Coverage Ratio (DSCR)
DSCR = Net Operating Income / Debt Service; a ratio above 1.0 indicates sufficient cash flow to meet debt obligations.
What is the primary limitation of using the payback period as the sole financial evaluation criterion for a project?
Answer: It ignores the time value of money and cash flows beyond the payback period
The simple payback period ignores both the time value of money and any cash flows that occur after the payback period is reached.
In project finance, what is a 'terminal value' used to represent?
Answer: The present value of all cash flows beyond the explicit forecast period
Terminal value captures the value of a project's cash flows beyond the detailed forecast horizon, often as a perpetuity or growth model.
Which scenario best illustrates the concept of 'financial leverage' in project funding?
Answer: Funding a project predominantly with debt to amplify equity returns
Financial leverage involves using borrowed funds to finance a project, which amplifies equity returns when project returns exceed the cost of debt.