Project Finance Modeling Flashcards

Why is equity IRR usually higher than project IRR in a leveraged project?

Answer: Debt costs less than the project's return, so leverage magnifies equity returns

When the cost of debt is below the project's unlevered return, gearing boosts the return on the smaller equity investment.

Project (unlevered) IRR is calculated using which cash flows?

Answer: Pre-financing cash flows: capex outflows and post-tax operating cash flows, ignoring debt

Project IRR measures the asset's return regardless of how it is financed, so all debt flows are left out.

A 'dividend trap' in a project finance model occurs when:

Answer: Cash is available but negative retained earnings legally prevent dividend payments

Large early depreciation can cause accounting losses that block dividends even when the project has cash, so shareholder loans are often used to get around this.

Which tool is commonly used to find the breakeven opex increase at which minimum DSCR falls to 1.00x?

Answer: Goal Seek (or a macro) targeting minimum DSCR = 1.00x by changing an opex sensitivity input

Breakeven analysis solves for the input value that drives a chosen output, here minimum DSCR, to a critical threshold.

A six-month delay to the commercial operation date (COD) would most likely cause which combination of effects?

Answer: Higher IDC and fees, lost early revenue, and possibly delay liquidated damages received

Delay extends construction financing costs and defers revenue, which is partly offset by any delay LDs from the contractor.

The weighted average life of a project finance loan is calculated as:

Answer: The sum of each principal repayment times its time from drawdown, divided by total principal

Average life weights each principal repayment by when it occurs, so it shows how long the debt is outstanding on average.

In a well-built project finance model, an 'operations flag' for each period is typically:

Answer: 1 if the period falls between COD and the end of operations, otherwise 0

Timing flags are binary 1/0 switches driven by dates, which are multiplied into calculations to turn them on in the right periods.