In order to determine the ability of a project to meet its debt obligations, it is...

In order to determine the ability of a project to meet its debt obligations, it is important to forecast the project cash flows. Explain why it is important to carry out a cash flow analysis in project finance and the five factors that need to be considered when calculating cash flows

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Expert Solution

Cash flows analysis helps in knowing the periodic debt repayment ability of a project and it also keeps into account the risks associated with the liquidity and probability of default.

It is always important to carry out cash flow analysis as it will help in knowing how financially sound a project is to meet with it's short term debt repayment obligation and probability of default risk associated with the project.

Five factors which are needed to be considered are -

1. Macro condition of an economy is to be considered while making an estimation with the cash flows.

2.The terms and conditions which are associated with the debt are also needed to be considered.

3. The value of collateralised assets also needed to be considered.

4.Any Increase and decrease in indirect costs are also to be discounted..

5. Inventory related risks and credit policy as well the credit ratings of firms also needed to be considered.

jeff jeffy answered 2 years ago

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