VCE Summer Internship Program 2021

Smart Task Submission Format

[ Download This Format in .DOCX format and then Edit it and SUBMIT ]
Intern’s Details
Name T.V.V. Ram Mohan

Email-ID 2201192@ipeindia.org

Smart Task No. 3

Project Topic Financial modeling and analysis

Smart Task (Solution)

Task Q1: How a new venture is assessed to qualify as project finance. What are the factors that
needed to be considered?

Task Q1 Solution:
Assessing a new venture for project finance, especially in the real estate sector, involves a
thorough evaluation of various factors to determine its viability and creditworthiness. Here are the
key factors that need to be considered:

Project Feasibility Study: The businessman needs to conduct a comprehensive feasibility study to
determine the viability of the real estate investment. This study should include an analysis of the
demand and supply dynamics in the location where the luxury flat is planned to be purchased,
current rental market trends, and potential rental income over time.

Financial Projections: The businessman should create detailed financial projections, taking into
account the expected rental income, potential vacancy periods, maintenance costs, property taxes,
insurance, and other associated expenses. These projections will help in assessing the ability to
service the debt and generate sufficient returns on investment.

Debt Service Coverage Ratio (DSCR): The Debt Service Coverage Ratio is a critical metric used by
lenders to assess the project's ability to generate enough cash flow to cover the debt payments. A
DSCR of at least 1.25 or higher is generally preferred by banks to ensure sufficient cushion for debt
repayment.

Loan-to-Value (LTV) Ratio: Lenders will consider the Loan-to-Value ratio, which represents the
proportion of the property's value that the loan will cover. In this case, with a 70:30 debt-equity ratio,
the LTV would be 70%.

Creditworthiness and Collateral: The businessman's creditworthiness and financial history will be
evaluated by the bank before approving the loan. Additionally, the luxury flat being purchased will

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serve as collateral against the debt, which means that the property's value and condition will be
assessed to determine its suitability as collateral.

Location and Market Conditions: The location of the luxury flat is essential in determining its
potential for appreciation and rental demand. Factors such as infrastructure development, proximity
to commercial hubs, schools, hospitals, and public transportation will impact the property's long-
term value and rental income potential.

Regulatory and Legal Considerations: Compliance with local regulations, permits, and legal aspects
related to property purchase and rental operations need to be thoroughly examined.

Economic and Industry Trends: The overall economic conditions and real estate market trends,
including interest rates, inflation, and property price movements, should be considered to assess
the investment's stability and risks.

Contingency Plans: The businessman should have contingency plans in place to handle
unexpected events, such as a decline in rental demand, higher-than-expected expenses, or
changes in interest rates.

Exit Strategy: An exit strategy should be planned in case the businessman decides to sell the
property at a later stage or refinance the debt.

500 Words (Max.)

Task Q2: Explain in detail the revenue model (process of generating revenue) for Solar PV Project,
Residential Building, Manufacturing Unit and other PPP projects.

Task Q3 Solution:
A revenue model is how a company generates revenue. The following provides an explanation of
the revenue model for a solar PV project, a home, a factory, and other PPP projects.
A. The solar-powered photovoltaic plant has the following revenue model.
Basically, this has two different types of models.
1. CAPEX
a) The customer/end client is responsible for paying the plant's cost.

b) Under STC, the client is responsible for framework upkeep after the AMC period (Standard
test conditions).

c) The EPC has no additional costs (designing, acquisition and development).

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d) EPC faces no risk of capital loss.

2. Resco, Opex, and PPA

b) Revenue is based on the PPA rate and is most likely to remain stable over time. A Solar
Power Purchase Arrangement is an agreement in which an engineer coordinates the design,
permitting, support, and setup of a solar energy framework on a client's property at no cost.

c) For the duration of the PPA, the foreigner oversees maintaining the framework.

B. A revenue-generating private structure

Structures that produce revenue or have the capacity to do so are referred to as private structures.
Contrary to private property, like single-family homes, which is owned by the owner and is not
rented to others, corporation property is typically purchased and then leased to individuals or
organisations. In order to use a private residence, people or businesses must pay the landowners
rent. A percentage of the rent received under this lease is used by the owner to pay for expenses
including utilities, local taxes, and security. Sometimes, part of these costs is also passed down to
the occupiers. This definition of residential monetary exhibiting is significant.

C. Unit assembly and other PPP projects' revenue model

The assembly facility makes money by selling finished goods. The Manufacturing Revenue Model
offers a framework for exactly predicting the budget summary for an assembly company for the
following ten years. To evaluate the organization's operational assumptions on a per-tonne basis,
the technique uses an itemised breakdown. The model then uses a DCF valuation scheme and
financial proportion analysis. The methodology also incorporates a financial backer IRR analysis
based on profit and leave value considerations, as well as an acquisition evaluation employing
asset sources and uses.

500 Words (Max.)

Task Q3 Solution:
If the financing bank is from abroad and the debt is in US dollars (USD), while the revenue from the
rent is in Indian Rupees (INR), there are several additional points that need to be considered in the

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financial model:

Exchange Rate Risk: The businessman will be exposed to exchange rate fluctuations as his
revenue (rental income) is in INR, but he needs to service the debt in USD. Changes in the
USD/INR exchange rate can significantly impact the debt repayment amount and overall
profitability.

Currency Hedging: To mitigate the exchange rate risk, the businessman may consider using
currency hedging instruments like forward contracts or options. These financial products can
provide protection against adverse exchange rate movements, ensuring a predictable debt
servicing cost.

Interest Rate Risk: Interest rates in foreign countries may be different from those in India. If the debt
has a floating interest rate, changes in foreign interest rates can affect the debt servicing cost. A
fixed interest rate might be preferable to avoid uncertainty.

Regulatory and Tax Implications: When dealing with international financing, there may be additional
regulatory requirements and tax implications that need to be taken into account. The businessman
should consult with financial advisors and tax experts familiar with cross-border transactions.

Currency Conversion Costs: There are costs associated with currency conversion, which could
impact the overall return on investment. These costs may include conversion fees, bank charges,
and potential spreads between buying and selling exchange rates.

Inflation Differentials: Inflation rates in India and the foreign country might vary, affecting the
purchasing power of both the rental income and the debt repayment over time.

Legal and Documentation Requirements: International transactions often involve complex legal and
documentation procedures. The businessman should ensure compliance with all the necessary
regulations and have a clear understanding of the terms and conditions of the loan agreement.

Contingency Planning: Due to the increased complexity of cross-border financing, the businessman
should have contingency plans in place to address unforeseen circumstances or economic
downturns that could impact his ability to service the debt.

Sensitivity Analysis: Given the potential risks associated with exchange rates and other
international factors, it is essential to perform sensitivity analyses to understand how changes in
variables like rental income, exchange rates, and interest rates may impact the project's viability.

Professional Assistance: Given the intricacies of international financing, seeking advice and

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assistance from professionals experienced in cross-border transactions and real estate investment
can be valuable in developing a robust financial model and risk management strategy.

500 Words (Max.)

500 Words (Max.)

500 Words (Max.)

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