CFM Project Finance Modeling 5

Question 1

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

Accepted Answer

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

Answer

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

Question 2

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

Accepted Answer

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

Answer

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

Question 3

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

Accepted Answer

Cash is available but negative retained earnings legally prevent dividend payments

Answer

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.

Question 4

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

Accepted Answer

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

Answer

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

Question 5

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

Accepted Answer

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

Answer

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

CFM - Certified Financial Modeler Practice Test

CFM - Certified Financial Modeler Practice Test

CFM Project Finance Modeling 5