Financial & Economic Analysis Flashcards

In a PPP financial model, what does the Debt Service Coverage Ratio (DSCR) measure for a given period?

Answer: Cash flow available for debt service divided by scheduled debt service

DSCR compares cash flow available for debt service (CFADS) to principal and interest due in that period.

Which ratio compares the NPV of CFADS over the remaining loan tenor to outstanding debt?

Answer: Loan Life Coverage Ratio

The LLCR discounts CFADS over the remaining loan life and divides it by the debt balance outstanding.

A government compares a PPP bid against a hypothetical traditionally procured project adjusted for risk. What is that benchmark called?

Answer: Public Sector Comparator

The Public Sector Comparator estimates the risk-adjusted whole-life cost of delivering the project through conventional public procurement.

Why does a PSC usually add 'competitive neutrality' adjustments?

Answer: To remove advantages or disadvantages the public sector has from public ownership, such as tax exemptions

Competitive neutrality adjustments put the public option on a like-for-like footing by offsetting ownership-related advantages such as tax exemptions.

A sensitivity analysis shows the project's equity IRR falls below target if construction costs rise 8%. What is the main purpose of identifying this?

Answer: To determine which variables most threaten project viability

Sensitivity analysis identifies the key variables whose changes most affect financial outcomes.

In economic (as opposed to financial) appraisal, which item is typically excluded as a transfer payment?

Answer: Taxes and subsidies

Taxes and subsidies move money between parties in society without consuming real resources, so economic analysis excludes them.

What does a cash sweep mechanism do in a PPP financing structure?

Answer: Uses excess cash flow to prepay debt, often when ratios fall below thresholds or late in the tenor

A cash sweep uses surplus cash to prepay debt early, reducing lender risk.