8.1. Key Financial Viability Indicators and Interpretation
The key financial viability indicators that are most commonly used are Project Net Present Value (PNPV), Equity Net Present Value (ENPV), Project Internal Rate of Return (PIRR) and Equity Internal Rate of Return (EIRR). A positive NPV for a project when discounted at weighted average cost of capital (WACC) would mean that project returns are higher than WACC.
| The equation for calculation of project NPV is provided below.
C0 = Initial Investment for the Project C = Project Cash Flow in a particular year i = Time in years r = Discount Rate |
A financially viable project should meet all debt service requirements. PIRR is the value of the discount rate (r) in the above formulae at which the PNPV is zero. Similarly, if the project investments and project cash flows are replaced by equity investments and equity cash flows, the equation would give ENPV and EIRR.
| For any project, if: NPV > 0: It implies that the project is financially feasible and that it would provide positive value to the respective capital provider. NPV <0: It implies that the project is financially not attractive for capital providers. EIRR > cost of equity: It implies that the project is attractive for equity investors and it is expected to generate sufficient returns for equity investors. |
The financial analysis is represented in terms of the cash flow statement, profit and loss statement and balance sheet.
A project could be termed financially viable (or bankable) if
1. It meets debt service obligations
2. The Project NPV and Equity NPV are positive
3. The estimated Equity IRR is more than the cost of equity
| If the project is not viable on a standalone basis, the estimated support required from the Government needs to be assessed. If the support is within the acceptable range of existing Government support such as the Viability Gap Funding or other budgetary support, the project could be taken up with Government support. Annexure 6 to this module describes the frequently used financial terminologies in project finance |
|
