In project finance, how is debt and equity repaid?

In project finance, debt and equity are primarily repaid from the cash flow generated by the project itself. This approach is fundamental to the structure of project finance, as it isolates the financial viability of the project from the overall financial performance of the sponsoring company or organization.

This means that the revenue generated from the project—through operations such as the sale of goods or services—serves as the source of funds for repayment. The structure of the financing ensures that lenders and investors are compensated based on the specific performance of the project, making the analysis of cash flow crucial during the planning and funding stages. This mechanism aligns the interests of the financiers with the project's performance, as their returns depend entirely on the project's success, which is determined by its ability to generate cash flow.

In contrast, options like overall company profits, government subsidies, or reinvesting earnings from other operations do not reflect the typical model of financing a project specifically designed to be self-sustaining and reliant on its cash flows. Such alternatives can be relevant in different contexts, but they do not capture the essence of project finance, which emphasizes the independent financial structure of the project in question.