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CS Professional · Strategic Management and Corporate Finance · Project Evaluation

Which feature best distinguishes project financing (non-recourse or limited-recourse) from ordinary corporate financing of a new plant?

Project financing is distinguished by lenders relying mainly on the project's own cash flows, usually through a separate special purpose vehicle, with limited or no recourse to the sponsor's wider balance sheet, unlike ordinary corporate borrowing.

  1. ALenders depend mainly on the cash flows of the project itself, which is set up as a separate entity, rather than on the sponsor's overall balance sheetCorrect
  2. BLenders rely entirely on the sponsor's general assets and guarantee for repayment
  3. CThe project is always financed fully by equity with no borrowing
  4. DThe project must be listed on a stock exchange before any loan is sanctioned

Explanation

In project financing a special purpose vehicle is created and lenders look to the project's cash flows and assets for repayment, with limited or no recourse to sponsors. Reliance on the sponsor's general balance sheet describes ordinary corporate finance, so that option is wrong.

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