Assessment of profitability and project finance risk

Project finance is way different from typical crediting. The main characteristic is that the return of the invested funds is expected from the cash inflows generated by the project itself, and not from the debtor. Whether the investment will be successful depends on whether the project is successful. The classic assessment of the debtor's creditworthiness on the basis of its financial reports is not used to a great extent when reaching a decision on financing a certain project. For the needs of some project, a special purpose vehicle is usually formed, which, as a newly-established company, in most cases does not even have a balance sheet, or has the 'weak' balance sheets. The key thing when it comes to investment projects analysis is the high-quality forecast of the expected project's cash flows, along with the project risk assessment. The main methods for assessing the investment projects profitability are net present value (NPV), internal rate of return (IRR), and benefit-cost ratio (BCR). These are the elimination criteria for the investment projects assessment. Apart from these, the project sustainability criteria are also used, first and foremost the project liquidity testing during the credit payback period, the estimation of the project profitability threshold, as well as testing the project's sensitivity to the various changes of the input parameters (micro and macro variables). Another significant aspect of the analysis is the identification of all risks accompanying the project that may reduce the expected project's cash flows. Upon identification of risks, the possibilities of their mitigation are considered. The risks that are not possible to mitigate are to be integrated into the price of capital of the concrete project. Project finance is launched only if the concrete investment meets the elimination and functional assessment criteria. In addition, the decision-making in project finance is often influenced by some other important criteria for the project profitability and significance assessment, such as, for instance, environmental protection criteria, energy-wise efficiency, social responsibility, regional and strategic importance, etc.