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FACULTY OF ENGINEERING TECHNOLOGY

ENGINEERING ECONOMY

BPK 30902

INDIVIDUAL ASSIGNMENT

TITLE : PROJECT FINANCING

NAME OF LECTURER : DR MAS RAHAYU BINTI JALIL

COURSE/ SECTION : 4 BNA/ 11

STUDENTS NAME MATRIC NU

MUHAMAD SYAHRIL SYUHADA ROSLI AN130007

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Table Of Content
Title page I

Table of content II

6.1 : INTRODUCTION TO PROJECT FINANCING 1

6.2 : TYPES OF PROJECT FINANCING 4

6.3 : DEBT FINANCING 5

6.4 : EQUITY FINANCING 6

REFERENCES 7

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6.1 INTRODUCTION TO PROJECT FINANCING

6.1.1 DEFINITION OF PROJECT AND PROJECT FINANCING

Project is a temporary endeavour undertaken to create a unique product,


service or result. The temporary nature of projects indicates that a project has a
definite beginning and end. The end is reached when the projects objectives
have been achieved or when the project is terminated because its objectives will
not or cannot be met, or when the need for the project is terminated because its
objectives will not or cannot be met, or when the need for the project no longer
exists. A project may also be terminated if the client (customer, sponsor or
champion) wishes to terminate the project.

Project financing can be define as a form of debt or equity structure that relies
primarily on the projects cash flow for repayment, with the projects assets,
rights and interests held as secondary security or collateral.

6.1.2 ADVANTAGES OF PROJECT FINANCING

The advantages of project financing are:

i. Eliminate or reduce the lenders recourse to the sponsors.


ii. Permit an off-balance sheet treatment of the debt financing.
iii. Maximize the leverage of a project.
iv. Avoid any negative impact of a project on the credit standing of the
sponsors.
v. Obtain better financial conditions when the credit risk of the project
is better than the credit standing of the sponsors.
vi. Allow the lenders to appraise the project on a segregated and stand-
alone basis.
vii. Obtain a better tax treatment for the benefit of the project, the sponsors
or both.

6.1.3 DISADVANTAGES OF PROJECT FINANCING

The project financing systems have lack in several parts which are:

Often takes longer to structure than equivalent size corporate finance.


Higher transaction costs due to creation of an independent entity.
Project debt is substantially more expensive due to its non-recourse nature.
Extensive contracting restricts managerial decision making.
v. Project finance requires greater disclosure of proprietary information
and strategic deals.

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6.2 TYPES OF PROJECT FINANCING

In general there are two types of financing methods, which are equity finance and
debt finance. Each of categories includes variety of approaches with their related
advantages, disadvantages or risk and their possible foreseen solutions.

There are many types of project financing method which among them are:

Stock
Bond
Stock and bond
Loan
Counter trade
Build, Operate and Transfer (BOT)
Build-Own-Operate (BOO)
Build-Lease-Transfer (BLT)
Design-Construct (DC)
Design-Build-Operate-Maintain (DBOM)
Design-Build-Finance-Operate (DBFO)

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6.3 DEBT FINANCING

Debt financing occurs when a firm raises money for working capital or capital
expenditures by selling bonds, bills or notes to individuals and/or institutional
investors. In return for lending the money, the individuals or institutions become
creditors and receive a promise the principal and interest on the debt will be
repaid. The other way to raise capital in the debt markets is to issue shares of
stock in a public offering; this is called equity financing.

When a company needs money, it can take three routes to obtain financing: cash,
debt or some hybrid of the two. Equity represents an ownership stake in the
company. It gives the shareholder a claim on future earnings, but it does not need
to be paid back. If the company goes bankrupt, equity holders are the last in line
to receive money. The first investors in line are the lenders. These are the
investors that provide the company with debt financing. The amount of the
investment loan, referred to as the principal, must be paid back. Companies can
obtain debt financing through banks and bondholders.

Debt financing can be difficult to obtain, but for many companies, it provides
funding at lower rates than equity financing, especially in periods of historically
low interest rates. Another perk to debt financing is the interest on debt is tax
deductible. Still, adding too much debt can increase the cost of capital, which
reduces the present value of the company.

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6.4 EQUITY FINANCING

Equity financing is the process of raising capital through the sale of shares in an
enterprise. Equity financing essentially refers to the sale of an ownership interest
to raise funds for business purposes. Equity financing spans a wide range of
activities in scale and scope, from a few thousand dollars raised by an
entrepreneur from friends and family, to giant initial public offerings (IPOs)
running into the billions by household names such as Google and Facebook. While
the term is generally associated with financings by public companies listed on an
exchange, it includes financings by private companies as well. Equity financing is
distinct from debt financing, which refers to funds borrowed by a business.

Equity financing involves not just the sale of common equity, but also the sale of
other equity or quasi-equity instruments such as preferred stock, convertible
preferred stock and equity units that include common shares and warrants.

A start-up that grows into a successful company will have several rounds of
equity financing as it evolves. Since a start-up typically attracts different types of
investors at various stages of its evolution, it may use different equity
instruments for its financing needs.

The equity-financing process is governed by regulation imposed by a local or


national securities authority in most jurisdictions. Such regulation is primarily
designed to protect the investing public from unscrupulous operators who may
raise funds from unsuspecting investors and disappear with the financing
proceeds. An equity financing is therefore generally accompanied by an offering
memorandum or prospectus, which contains a great deal of information that
should help the investor make an informed decision about the merits of the
financing. Such information includes the company's activities, details on its
officers and directors, use of financing proceeds, risk factors, financial statements
and so on.

Investor appetite for equity financings depends significantly on the state of


financial markets in general and equity markets in particular. While a steady pace
of equity financings is seen as a sign of investor confidence, a torrent of
financings may indicate excessive optimism and a looming market top.

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REFERENCES:

1. Mahmood Oskooei MBA. (2015, January 31). Project Financing Method.


Retrieved from https://www.slideshare.net/MahmoodOskooei/project-
financing-methods
2. Muhammad Kamran FCA. (2010, October 17). Project Financing.
Retrieved from https://www.slideshare.net/MahmoodOskooei/project-
financing-methods
3. INVESTOPEDIA. Equity Financing. Retrieved from
http://www.investopedia.com/terms/e/equityfinancing.asp
4. INVESTOPEDIA. Debt Financing. Retrieved from
http://www.investopedia.com/terms/d/debtfinancing.asp

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