Question
What is the Debt Service Coverage Ratio (DSCR) used for
in project finance?Solution
The Debt Service Coverage Ratio (DSCR) is a key financial metric used in project finance to assess the project's ability to generate sufficient cash flows to service its debt obligations. The DSCR is calculated by dividing the project's cash flow available for debt service by the total amount of debt service due during a given period (usually a year). The cash flow available for debt service is calculated by subtracting the project's operating expenses and taxes from its operating revenues. A DSCR of 1.0 or higher indicates that the project is generating sufficient cash flows to cover its debt service obligations. A DSCR below 1.0 indicates that the project is not generating enough cash flows to cover its debt service obligations and may have difficulty meeting its debt obligations.
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