VCE Summer Internship Program 2024
Smart Task Submission
Intern’s Details
Name Krishnaja Prakash
Email-ID [email protected]
Smart Task No. 1
Project Topic Financial Modeling (Infra)
Smart Task (Solution)
Task Q1 : What is Finance? How is Finance different from accounting? What are important basic
points that should be learned to pursue a career in finance?
Task Q1 Solution : Finance is the futuristic management of money. The system or study of
generating, circulating, and managing money is termed as finance. Finance is the management of
money and investments, including activities such as budgeting, saving, borrowing, lending, and
investing. It has a broad range of disciplines, including corporate finance, personal finance, and
public finance.
Difference between Finance & Accounting: -
Accounting is the process of recording, summarizing, and reporting financial transactions. It
involves the preparation of financial statements such as balance sheets, income statements, and
cash flow statements, which provide an overview of a company's financial performance and
position. While finance focuses on decision-making and allocation of resources, accounting focuses
on accurately recording and communicating financial information.
The Important basic points that should be learned to pursue a career in finance
1. Basic maths - to be quick analytically & do fast calculations
2. Concept of Return - understanding that money idle is money wasted, you need to put it in
bank (or invest) and earn returns on it
3. Concept of Risk Vs Return - higher the risk, higher should be the return. If share market
gives you same return as fixed deposits, choose fixed deposit as risk there is less. If risk
increases, return should also increase.
4. Money and Investments: Understanding how money works and how people invest it.
5. Making Smart Choices: Learning how to make good decisions about where to put money
6. Using Models: Being able to use tools to predict financial outcomes.
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VCE Summer Internship Program 2024
Smart Task Submission
7. Financial Markets: Knowing where money is traded and how it affects the economy.
8. Basic Economics: Knowing the basics of how money, goods, and services move in the
economy.
Task Q2 : What is project finance? How is project finance different from corporate finance? Why
can’t we put project finance under corporate finance? Define 20 terminologies related to project
finance.
Task Q2 Solution : Project finance is the funding of long-term infrastructure, industrial projects,
and public services using a non-recourse or limited recourse financial structure. The debt and
equity used to finance the project are paid back from the cash flow generated by the project.
It is commonly used to finance oil and gas companies and the power sector, and also used to
finance certain economic bodies like special purpose vehicles (SPVs). The funding required for
these projects is based entirely on the projected cash flows.
Difference between Project finance & Corporate Finance:-
Professionals typically use the project financing model for infrastructure projects with various
stages of development and no terminal value on the project. Corporate finance involves both equity
and debt financing, where equity investors receive company ownership status with voting rights.
As project finance has a significantly lower risk than corporate finance investments, they also might
have lesser returns on the investment. Corporate finance is useful for short-term financial
management, where immediate liquidity is required, whereas project finance is ideal for larger and
longer-term projects.
Project finance carves out a distinct path from corporate finance by focusing on a single project's
cash flow for repayment, creating a separate entity to shield the company's assets from risk, and
catering to unique financing needs of high-cost, long-term ventures.
Some terminologies related to project finance: -
1. CAPEX stands for Capital Expenditures. These are expenses used to acquire, improve, or
maintain physical assets that will benefit the company for an extended period, typically more
than one year.
2. OPEX stands for Operating Expenses. These are the ongoing costs associated with running
the day-to-day operations of a business. They are essential for keeping the business
functioning but are not investments in long-term assets.
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VCE Summer Internship Program 2024
Smart Task Submission
3. Debt Service Reserve Account (“DSRA”) is a cash reserve which works as an additional
security measure for the lender as it ensures that the borrower will always have funds
deposited to cover future debt service. It is generally a deposit which is equal to a given
number of months projected debt service obligations.
4. NPA commonly refers to Non-Performing Assets, which are loans or advances made by
banks that are no longer generating income for the lender due to missed payments by the
borrower.
5. Debt repayment refers to the process of paying back borrowed money, along with any
accrued interest, to the lender.
6. Revenue is the income generated from the sale of goods or services to customers.
7. Net Present Value (NPV): NPV builds on PV by considering all the project's cash flows,
both inflows (revenue) and outflows (expenses). It essentially subtracts the present value of
all future cash outflows from the present value of all future cash inflows.
8. Present Value (PV): PV calculates the current worth of a future sum of money.
9. Special Purpose Vehicle (SPV): A legal entity created specifically to hold and manage the
assets and liabilities of a project.
10. Debt Service Coverage Ratio (DSCR): A metric measuring the project's ability to generate
enough cash flow to cover its debt obligations
11. Internal Rate of Return (IRR): The discount rate that makes the net present value of a
project's cash flows equal to zero, used to assess project profitability.
12. Non-Recourse Financing: Financing where lenders cannot go after the sponsor's assets if
the project fails, limiting their recourse to the project itself.
13. Financial Model: A computer-based tool simulating the project's cash flow and financial
performance over its lifespan.
14. Project Lifecycle: The various stages a project goes through, from planning and
development to construction, operation, and eventual decommissioning.
15. Equity: When you invest in equity, you're essentially buying a piece of ownership in a
company. This can be done by purchasing stocks, which represent fractional shares of
ownership.
16. Debt: When you borrow money, you're taking on debt. In the context of a company, debt
financing involves borrowing funds from lenders like banks or issuing bonds.
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VCE Summer Internship Program 2024
Smart Task Submission
17. Accountancy is the practice of recording, classifying, and reporting on business
transactions for a business. It provides feedback to management regarding the financial
results and status of an organization.
18. Management Accounting is a method of accounting that creates statements, reports, and
documents that help management in making better decisions related to their business'
performance. Managerial accounting is primarily used for internal purposes.
19. Project Cost are the total funds needed to monetarily cover and complete a business
transaction or work project.
20. Refinancing: Replacing existing debt with new debt with more favourable terms.
Task Q3 : What is non-recourse debt / loan? What is mezzanine finance explained with an
example.
Task Q3 Solution : Non-recourse debt is a type of loan secured by collateral, commonly property.
If the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any
further compensation, even if the collateral does not cover the full value of the defaulted amount.
A non-recourse debt does not hold the borrower personally liable for the loan.
Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to
convert the debt to an equity interest in the company in case of default, generally, after venture
capital companies and other senior lenders are paid. In terms of risk, it exists between senior debt
and equity.
Key features of mezzanine financing: -
Loan with equity-like features: It acts like a loan with interest payments, but it may also
include warrants or options that give the lender the right to convert the debt into ownership
shares (equity) if certain conditions are met.
Higher interest rates: Since mezzanine financing is riskier for lenders than traditional debt,
it comes with higher interest rates to compensate for the increased risk.
Used for specific purposes: This type of financing is often used for acquisitions, growth
initiatives, or project funding when a company might not qualify for traditional loans or wants
to avoid diluting ownership through equity issuance.
Example of mezzanine
Bank XYZ provides Company ABC, a maker of surgical devices, with $15 million in a mezzanine
loan financing. The funding replaced a higher interest $10 million credit line with more favorable
terms.
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VCE Summer Internship Program 2024
Smart Task Submission
Task Q4 : Explain in detail with reasons of what the sectors are or which type of projects are
suitable for project finance?
Task Q4 Solution :
Sectors and projects suitable for project finance typically exhibit characteristics such as high capital
requirements, long project durations, predictable cash flows, and the potential for revenue
generation. Project finance structures enable stakeholders to effectively manage risks and allocate
resources to maximize project value.
Here are some sectors and types of projects that are particularly suitable for project finance: -
Infrastructure Projects: Large-scale infrastructure projects such as highways, airports,
ports, and power plants often require substantial upfront capital investment. Project finance
allows the risks associated with these long-term projects to be allocated appropriately
among stakeholders, including investors, lenders, and governments.
Renewable Energy Projects: Wind farms, solar parks, and other renewable energy projects
benefit from project finance due to their capital-intensive nature and long payback periods.
Investors are attracted to these projects because they often offer predictable revenue
streams through power purchase agreements (PPAs) and government incentives.
Oil and Gas Developments: Upstream oil and gas projects, including exploration, drilling,
and production, frequently use project finance to fund their operations. The significant capital
requirements and long lead times associated with these projects make them suitable
candidates for project financing.
Telecommunications Infrastructure: Building telecommunications networks, such as fiber
optic cables or mobile networks, requires substantial investment in equipment and
infrastructure. Project finance enables telecom companies to manage the financial risks
associated with these capital-intensive projects.
Public-Private Partnerships (PPPs): PPPs involve collaboration between public and
private sectors to finance, build, and operate public infrastructure projects such as hospitals,
schools, and water treatment facilities. Project finance is well-suited for PPPs because it
allows risks to be allocated efficiently between the public sector, private investors, and
lenders.
Mining Projects: Large-scale mining operations, including the development of mines and
extraction facilities, often rely on project finance to fund exploration and construction
activities. Project finance helps mining companies manage the risks associated with
commodity price volatility and geological uncertainties.
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VCE Summer Internship Program 2024
Smart Task Submission
Real Estate Developments: Major real estate projects like commercial buildings, residential
complexes, and mixed-use developments may utilize project finance to secure funding for
construction. Project finance allows developers to leverage their equity investments and
obtain debt financing for the project.
Transportation Infrastructure: Projects involving the construction and operation of
transportation infrastructure, such as toll roads, bridges, railways, and airports, often use
project finance to fund development. The long-term revenue potential from user fees or
concessions makes these projects attractive to investors and lenders.
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