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Module 2 Smart Task 2

The document discusses key aspects of financial modeling for a new project in India. It outlines assumptions that should be considered like depreciation rates, tax rates, inflation and discount rates. It explains the importance of the revenue, cost and debt sheets in a financial model. The revenue sheet shows projections, the cost sheet allows analyzing expenses, and the debt sheet schedules loan repayments. Finally, it details the steps in a cash flow statement including revenue, expenses, net income calculation. It notes that banks will assess the owner's investment, collateral, industry trends and ability to repay before providing financing.

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YASHASVI SHARMA
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268 views

Module 2 Smart Task 2

The document discusses key aspects of financial modeling for a new project in India. It outlines assumptions that should be considered like depreciation rates, tax rates, inflation and discount rates. It explains the importance of the revenue, cost and debt sheets in a financial model. The revenue sheet shows projections, the cost sheet allows analyzing expenses, and the debt sheet schedules loan repayments. Finally, it details the steps in a cash flow statement including revenue, expenses, net income calculation. It notes that banks will assess the owner's investment, collateral, industry trends and ability to repay before providing financing.

Uploaded by

YASHASVI SHARMA
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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SMART TASK-2

PROJECT FINANCE- MODELLING AND ANALYSIS

1. While preparing a financial model what are the assumptions we need to take. Please list
down the list of assumptions with the values, assuming the project will be set up in India.

The assumptions considered for preparation of a financial model are as follows:-


 The Depreciation(5%-10%) of the fixed asset (land) in consideration for the project.
 The tax rate consideration of the plot/land of the project. The ideal tax rates range
between (20%-25%).
 The current inflation rate which is estimated at 4%.
 The market risk premium estimated of 5%-6%.
 The discount rate @10% for the weighted average cost of capital.

2. Explain the function of revenue, cost and debt sheet of the financial model.
Revenue is the value of sales of all the recognised goods and services of the company during
a time period. Revenue(income) forms the beginning of the income statement and the
expenses of the company are deducted from the revenues to arrive at its profit or net
income. By the construction of an effective revenue model business can focus on the target
audience , fund development plans for the products/services ,establish market plans and
begin a line of credit and raise capital. Revenue model is important for the company’s long
term business projections since its presents an overview of company’s current and future
potentials to earn profits.

Every business forms a cost sheet/cost model ,run the numbers, compares those figures
with the competitors. Costs are the only component in which business has the potential to
control it. The results of cost model are to be factored into business plans,budgets and other
financial planning and tracking mechanisms. An effective and efficient cost model helps in
the following decisions to be made:-
 RESEARCH AND DEVELOPMENT DECISIONS:Cost models serve as an input for
research and development functions. These research and development departments
use cost models to identify pain points so that the output of the research has
immediate application for the firm.
 INVENTORY MANAGEMENT DECISIONS:- Holding up of inventory includes various
costs. The business has to pay the godown expenses, rents, maintainance costs.
Hence creation of a cost sheet in financial model can compare the costs and
revenues of the products and services. The cost models help the business accurately
compare the costs and make the right decision approach.
 ON-SHORE VS OFF SHORE DECISIONS:-Modern supply chain has a lot of complexity.
There are a lot of factors such as cost of fuel and cost of labour which impact the
offshoring decision. However nowdays because of trade wars import duties have
also become an important aspect. Cost models help to identify all such factors and
quantum of impact which they have on overall cost.

A debt schedule model is made to lay out the debt that a business has accrued based on
its maturity. A debt schedule is commonly used by business to build cash flow
statement.In this model the interest expense flows into the income statement. A debt
schedule model is prepared because once a debt matures,it estimates the total amount
of money that is to be paid. For eg. A decision made based on debt maturity would be
considering the refinancing of the debt through a different source when the interest rate
declines.

3. Explain in detail the various steps involved (with the importance) in the fin flows sheet.
Why and what the bank needs to check before financing the project.

The fin-flows sheet has a very dynamic nature due to recording of the cash and investments
from the beginning to the end of the period. It is a periodical statement since it covers a
particular period. This statement helps to calculate cash from operations/cash flows from
operating activities. It exhibits the changes of financial positions relating to operational,
investing and financing activities.

Steps in fin-flow sheet:-

 REVENUE COLLECTION:- The revenue generated with the sales, interest earned on
deposits and rent income is considered under this step for the defined time period by
the business.
 OPERATING EXPENSES:-Operating expenses are incurred in regular operations of the
business and involve rent,equipment, inventory costs,payroll , insurance, marketing
expenses. These expenses are not mandatory for some businesses.
 NON-OPERATING EXPENSES:- The expenses incurred from the activities not related to
the core operations. They are deducted from the operating profits and accounted for at
the bottom of a company’s income statement. For eg. Interest payments,
depreciation,costs from currency exchanges.
 NET INCOME CALCULATION:- Net income is calculated after deduction of the tax amount
from the income before the payment of interest and taxes.
 CASH FLOW STATEMENT:- The cash flow statement reports the cash generated and
spent during a specified period of time. The sections of cash flow statement include-
operating activities which report the cash flows from the current assets and current
liabilities, investing activities in which cash flows from the acquisition and disposal of
long term assets and other investments not included in cash equivalents, financing
activities which depicts any cash flow that result in the change in size and composition of
the contributed equity capital or borrowings of the entity.

WHAT THE BANK NEEDS TO CHECK BEFORE FINANCING A PROJECT

 When a bank makes a loan, it determines a plan of how a borrower will repay the loan. If
the borrower defaults on the loan, then the bank falls back on the collateral. Banks like
to have a property and assets as collateral to recover the loan in the event if the
borrower fails to repay as planned.

 Banks feel more comfortable when the owner has his own money invested in the
business. Lenders like to know the owner will lose something if the business fails.Banks
also find comfortable in lending companies with a lot of capital in the project , they will
fight harder and sacrifice more to save a business and repay their debts.
 Banks analyse the borrower, bankers will look at the overall economy, industry trends
and even the direction of politics and factors beyond the control of the business owner
that will affect the performance of the company.

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