Corporate and Project Finance Modeling

Chapter 6Developing and Efficiently Organizing Assumptions

In discussing the architecture of various models in Chapter 4 for the corporate model, project finance model, acquisition model, and integrated model, it was evident that each of the financial models have many things in common. All of the models begin with an input section and end with a balance sheet. Each model includes a working section that computes pretax cash flow comprising revenues, expenses, and capital expenditures; each model moves from pretax cash flow to after-tax free cash flow by computing depreciation, taxes, and working capital; each model type has a debt schedule; and each model contains an income statement and a cash flow analysis. These components that are common across the different types of models are described in the next few chapters. This chapter begins the discussion of common model elements by explaining some theory and practical issues associated with model inputs.

Assumptions in Demand-Driven Models versus Supply-Driven Models: The Danger of Overcapacity in an Industry

The most important part of the modeling process is to accurately define and analyze input items that drive the value of an investment and then effectively present how risks associated with these value drivers affect the ultimate investment value. Value drivers can be economic parameters such as industry demand, behavior of competitors, product prices, cost of capital expenditures per unit, and the fixed and variable cost structures. ...