Most importantly, therefore, the model is used to determine the maximum amount of debt the project company (Special-purpose entity) can maintain - and the corresponding debt repayment profile; there are several related metrics here, the most important of which is arguably the Debt Service Coverage Ratio (DSCR) - the financial metric that measures the ability of a project to generate enough cash flow to cover principal and interest payments.
While the output for a project finance model is more or less uniform, and the calculation is predetermined by accounting rules, the input is highly project-specific.
Then, a model sensitivity analysis is conducted to determine effects of changes in input variables on key outputs, such as internal rate of return (IRR), net present value (NPV) and payback period.
Practically, these are usually built as Excel spreadsheets and then consist of the following interlinked sheets (see Outline of finance § Financial modeling for further model-build items), with broad groupings: As stated above, the model is used to determine the most appropriate amount of debt the project company should take: in any year the debt service coverage ratio (DSCR) should not exceed a predetermined level.
It is a measure of the number of times the cash flow over the life of the project can repay the outstanding debt balance.