SENSITIVITY ANALYSIS

Financial evaluation of the project from both equity investors and lenders' perspective is initially carried out with the base case scenario. Certain assumptions are normally made in the financial model while arriving at the indicators for measuring the financial viability. The key assumptions that are required for the financial modeling can be grouped into: (1) macroeconomic assumptions; (2) project cost and funding structure; (3) operating revenues and costs; (4) loan drawdown and debt service; and (5) taxation and accounting.

During the project operation, the actual values for those assumptions could be different from the assumptions made. For instance, actual revenues from the project have fallen short of the expected level, or operation and maintenance expenditures have increased, or cost of capital have increased. It is therefore to assess the sensitivity of the projected returns on equity or ADSCR to changes in the assumptions. Different possible scenarios are normally created and the sensitivity of the project financial measures is evaluated during financial evaluation of the project. The different possible scenarios could include combination of the following cases:

• Construction cost overrun
• Delay in construction
• Reduction in performance
• Higher downtime or lower availability of services
• Reduced usage of the project services or outputs from the project
• Higher input costs
• Higher operating costs
• Higher exchange rate (if funds in foreign currency is used)
• Higher interest rate (if interest rate for debt financing is floating interest rate)

FINANCIAL STATEMENTS

Financial evaluation of the project has been based on the projected cash flows while deciding to make investment in the project or to provide debt financing to the project. The cash flow projections help in assessment of how profitable the project is expected to be, how much cash flow is expected to generate, and how much cash will be allocated to the various project. From the sponsor's perspective, the ability of the project company to pay dividends depends on the accounting results of the project company. The investment decision of the sponsor therefore depends on the accounting results of the project. Therefore, the financial evaluation also needs to predict how the project's financial condition is expected to change over the life of the project. This is normally done through preparation of a set of financial statements such as profit and loss account statement, and balance sheet.