exported equipment, or costs in one currency to be funded by loans in that
and having done so calculates:
• A drawdown schedule for both equity and debt;
Drawings on the debt give rise to interest payments (IDC), which also need to
During the operating period the model takes into account:
• Priorities for allocation of net operating cash ﬂow (cf. §13.5.1)
• Allocation of cash for debt repayment (cf. §13.2.4)
• Calculation of interest payments, allowing for hedging contracts (cf. §9.2)
§12.7 ACCOUNTING AND TAXATION ISSUES
Although the decision to invest in a project should be based primarily on cash
ﬂow evaluation (cf. §12.8), the accounting results are important to the Sponsors,
who will not wish to show an accounting loss from investment in a Project Com-
pany afﬁliate. In fact, a Sponsor may choose to fund a project in a less than theo-
retically ideal way (e.g., through leasing— cf. §3.4) if this produces a better re-
Thus although a ﬁnancial model for a project ﬁnancing is concerned with cash
ﬂows rather than accounting results, it is usually necessary to add accounting
sheets to the model (i.e., proﬁt and loss accounts [income statements] and balance
sheets for each calculation period).
Apart from the need to check the effect on a Sponsor’s reported earnings, there
are a number of reasons why accounting results are needed in the ﬁnancial model
for the Project Company:
• Tax payments are based on accounting results rather than cash ﬂow (cf.
• The accounting results affect a company’s ability to pay dividends (cf.
§12.7.2) and could affect its ability to keep trading (cf. §12.7.3).
• Adding a balance sheet is a good way of checking for errors in the model: if
the balance sheet does not balance, there is a mistake somewhere.
The most important difference between accounting and cash ﬂow calculations
on a project relate to the capitalization and later depreciation of the project costs.
260 Chapter 12 Financial Modeling and Evaluation