Business Case Studies & Business Publications

An Introduction to Project Finance: The ...

Harris, Robert S.,...

Technical Note

An Introduction to Project Finance: The Partitioning of Cash Flow

Harris, Robert S.; Schill, Michael J.

F-2106 | Published May 27, 2025 | 5 pages Technical Note

Collection: Darden School of Business

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A standard approach to business valuation is to value the total cash flows that the business is expected to provide to all investors, but when the implications of financing decisions take center stage, it is useful to consider the underlying cash-flow and valuation effects of financing-specific cash-flow forecasts that are partitioned by financing instrument and valued independently. Project finance is an area in which partitioning the cash flow may be particularly important. A partitioned-cash-flow approach may be motivated by large differences among types of investors in their ability to take advantage of tax benefits or subsidies that accompany the project. If a project is accompanied by specific tax provisions or subsidies, partitioning the cash flow to each set of investors, as is commonly done with project finance, may offer ways to identify the sources of value creation. This technical note introduces project finance and includes algebraic and numerical examples. At the University of Virginia Darden School of Business, it is taught in the “Valuation in Financial Markets” elective course and would be suitable in any module introducing valuation in project finance.