How do companies assess the economic feasibility and ability of the project to pay back? It is none other than by preparing a financial model to help assess the economic feasibility of the project. By using the financial model, it will become a tool in creating a proper framework for a project finance deal. Most importantly, it is used to determine the maximum amount of debt a project can incur as well as draft up a proper repayment plan.
Generally, the basic framework of any financial model is very simple: input – calculation algorithm – output. While in project finance model, it is more or less uniform and the calculation algorithm is predetermined by the accounting rules, where the input is highly project-specific. It is subdivided into categories such as:
• Variables for forecasting revenues
• Variables for forecasting expenses
• Capital expenditures
• Financing
Did you notice that most financial models end with an xls file extension? XLS file extension stands for an Excel file. You may be wondering why mention Excel, but you see, to have a better outlook or view on a structured model, using Excel is preferable and the best tool that provides the features that will make the task easier and simpler. Since building a project finance model xls typically consist of the usual accounting spreadsheets like the balance sheet, income statement, cash flow, retained earnings, taxes, present values, etc.
You might have heard of the term Debt Sculpting as it is common in project finance modeling. Basically, it calculated the principal repayment liability to make sure that the principal and interest liabilities are matched properly to the expected pattern of the cash flows in each period. The calculation algorithm will be easily understood and done by making use of the excel tool features.
A project finance model xls is usually build to serve as a base and conducting a sensitivity analysis is critical, to determine the effects and changes in input variables on key outputs such as internal rate of return, net present value and payback period. This means, building a project finance model xls is critical to ensure feasibility and profitability.
Planning to build a model is one thing but the task itself is very complex and needs the know-how to ensure that the model works as it should be. So, instead of building from scratch, it is better to download project finance model xls templates ready-made by financial modeling experts. You can find them at eFinancialModels, a platform that offers industry-specific financial model templates as well as providing financial modeling services to assist those who are in need of help with their financial modeling tasks. You can also learn more about project finance by reading more here: All about Project Finance.
