Project Cash Flow Analysis – Components & Estimation
Building accurate cash flow projections is the foundation of project finance. Lenders, sponsors, and investors all rely on the cash flow model to make decisions.
Cash Flow Model Structure
A typical project finance model spans 20-25 years and includes:
- Construction Period (2-5 years): Cash outflows
- Operational Period (15-25 years): Cash inflows and outflows
- Terminal Year: Residual value/scrap
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Component 1: Revenue Projections
Revenue is the lifeblood of the project. Estimation varies by project type:
A. Toll Roads / Highways
Formula:
Revenue = Traffic Volume × Toll Rate
Traffic Volume Estimation:
- Base year traffic (from traffic study)
- Annual traffic growth rate (3-8%, linked to GDP growth)
- Ramp-up period (Year 1 may be only 60-70% of projected)
Example:
Year 1: 10,000 vehicles/day × ₹50/vehicle × 365 days = ₹18.25 crore
Year 2: 10,500 vehicles/day × ₹52/vehicle × 365 days = ₹19.93 crore
(5% traffic growth + 4% tariff escalation)
B. Power Plants
Formula:
Revenue = Units Sold × Tariff per Unit
Units Sold = Installed Capacity × Capacity Utilization Factor (CUF) × Hours
Example for 100 MW Solar Plant:
Installed Capacity = 100 MW
CUF = 19% (typical for solar in India)
Hours per year = 8,760
Units Generated = 100 MW × 0.19 × 8,760 hours = 166,440 MWh
Tariff = ₹3.50 perUnit
Revenue = 166,440 × 3.50 = ₹58.25 crore per year
Tariff Escalation:
- Some PPAs have fixed tariffs for 25 years
- Others have 3-5% annual escalation
- Some have variable component (linked to fuel cost)
C. Airports / Ports
Revenue Streams:
- Aeronautical Revenue: Landing fees, parking fees (regulated)
- Non-Aeronautical Revenue: Retail, duty-free, car parking, advertising (non-regulated, higher margins)
Formula:
Revenue = (Passenger Traffic × Revenue per Passenger) + Non-Aero Income
D. Water / Sewerage Projects
Formula:
Revenue = Volume Supplied/Treated × Tariff per Unit
Often has assured off-take from government (Municipal Corporation).
Component 2: Operating Expenses
Operating expenses (OPEX) are cash outflows needed to run the project.
Categories
A. Operation & Maintenance (O&M)
Fixed O&M:
- Manpower salaries
- Insurance premiums
- Administrative expenses
- Security
Variable O&M:
- Maintenance of roads/equipment
- Spare parts
- Repairs
Typical O&M as % of Revenue:
| Project Type | O&M % of Revenue |
|---|---|
| Toll Roads | 8-12% |
| Solar Power | 1-2% |
| Thermal Power | 15-20% |
| Airports | 30-40% |
B. Fuel / Raw Material (for power/manufacturing)
- Coal for thermal plants
- Gas for combined cycle plants
- Solar plants have zero fuel cost (advantage!)
C. Utilities
- Electricity consumption
- Water charges
- Telecommunication
D. Taxes (Excluding Income Tax)
- Property tax
- Toll tax
- GST on inputs
Component 3: EBITDA
EBITDA = Revenue - Operating Expenses
EBITDA Margin varies by sector:
| Project Type | Typical EBITDA Margin |
|---|---|
| Toll Roads | 70-85% |
| Solar Power | 80-90% |
| Thermal Power | 30-50% |
| Airports | 40-60% |
High EBITDA margin = Lower operating risk = Better for lenders!
Component 4: Depreciation & Tax
Depreciation
- Accounting entry, not a cash flow
- But affects taxable income, so affects tax (which is a cash flow)
- Method: Straight Line or Written Down Value (WDV)
Example (Straight Line):
Asset Cost = ₹1,000 crore
Useful Life = 25 years
Annual Depreciation = 1,000 / 25 = ₹40 crore per year
Income Tax
Taxable Income = EBITDA - Depreciation - Interest
Tax Payable = Taxable Income × Tax Rate (currently 25% for companies in India)
Tax Holidays: Many infrastructure projects get tax holidays for 5-10 years under Section 80-IA.
Example Calculation:
EBITDA = ₹100 crore
Depreciation = ₹40 crore
Interest = ₹30 crore
Taxable Income = 100 - 40 - 30 = ₹30 crore
Tax (assuming no holiday) = 30 × 25% = ₹7.5 crore
Component 5: Working Capital
Working Capital = Current Assets - Current Liabilities
Current Assets:
- Receivables (Revenue billed but not yet collected)
- Inventory (spare parts, fuel)
Current Liabilities:
- Payables (expenses incurred but not yet paid)
Working Capital Changes are cash flows:
- Increase in Working Capital = Cash outflow (money locked)
- Decrease in Working Capital = Cash inflow (money released)
Typical Working Capital Days:
Receivables = 30-60 days of revenue
Inventory = 15-30 days of consumption
Payables = 30-45 days of expenses
Component 6: Capital Expenditure (CAPEX)
Construction CAPEX (During Construction Period)
Includes:
- Land acquisition
- Civil works
- Equipment (turbines, generators, solar panels)
- Electrical & instrumentation
- Pre-operative expenses
- Interest During Construction (IDC)
- Financing costs
Disbursement Schedule: Linked to construction milestones (10%, 20%, 30%, 40% completion, etc.)
Replacement CAPEX (During Operations)
- Equipment replacement midway through project life
- Major overhauls
- Technology upgrades
Example: Solar plant may need to replace inverters after 12-15 years (₹10-15 crore)
Component 7: Debt Service
Interest Payment
- Calculated on outstanding debt balance
- Interest rate: 9-12% for infrastructure projects (floating rate linked to MCLR)
- Moratorium Period: No principal repayment during construction + 1-2 years
Principal Repayment
- Starts after moratorium period
- Repayment tenure: 10-18 years
- Methods:
- Equal Annual Installments (most common)
- Balloon Payment (small installments, large final payment)
- Sculpted Repayment (tailored to project cash flows)
Example Debt Schedule:
Debt = ₹700 crore at 10% interest
Moratorium = 3 years (construction period)
Repayment = 15 years (equal installments)
Year 1-3: Interest only (₹70 crore per year)
Year 4-18: Principal = 700/15 = ₹46.67 crore + Interest on outstanding balance
Component 8: Free Cash Flow
Free Cash Flow to Firm (FCFF) - Project Cash Flow
EBITDA
- Tax Paid
- CAPEX (including construction & replacement)
- Change in Working Capital
= FCFF (Project Cash Flow)
Free Cash Flow to Equity (FCFE) - Equity Cash Flow
FCFF (Project Cash Flow)
- Interest Paid
- Principal Repayment
+ New Debt Drawn (during construction)
= FCFE (Equity Cash Flow)
Cash Flow Waterfalls
Lenders insist on a cash waterfall - a priority order for cash distribution:
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Escrow Mechanism: All project revenues flow into an Escrow Account controlled by lenders. Disbursements follow the waterfall.
Key Assumptions to Validate
When building a model, these assumptions must be validated by experts:
| Assumption | Validated By |
|---|---|
| Traffic / Demand | Independent Traffic Consultant |
| Construction Cost | EPC Contractor |
| O&M Cost | Independent Engineer / Operator |
| Tariff | Regulator / Market Study |
| Debt Terms | Financial Advisor / Lenders |
Summary
- Cash flows are built monthly/quarterly for 20-25 years
- Revenue = Traffic/Demand × Tariff (sector-specific formulas)
- OPEX = 8-40% of revenue (varies by sector)
- EBITDA Margin = 30-90% (higher is better for debt serviceability)
- Tax is calculated on (EBITDA - Depreciation - Interest)
- Working Capital changes are cash flows (often forgotten!)
- Debt Service = Interest + Principal (follows sculpted schedule)
- Cash Waterfall ensures lenders get paid before sponsors
- Escrow Account holds all revenues and disburses per waterfall
Quiz Time! 🎯
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