Teaching Project Finance: An Overview of the Large-Scale Investment Course

Large-Scale Investment is a case-based course about project finance for second-year MBA students. Project finance involves the creation of a legally independent project company financed with nonrecourse debt for the purpose of investing in a single-purpose industrial asset. In 2001, firms financed almost $220 billion worth of capital expenditures through project companies, an amount that has grown and will continue to grow rapidly in the years ahead. The central theme of the course is that "structure matters," which stands in sharp contrast to the neoclassical view of the firm as a "black box" production function and the assumption underlying Modigliani and Miller's first irrelevance proposition that financing and investment are separable and independent activities. Through this course, students learn how various aspects of project structure affect managerial incentives to create value and manage risk. Ultimately, students learn how to increase value through both investment and financing choices. This note describes the course's key themes, structure, and content. Designed for educators interested in teaching a course on project finance. The material described in this note can also be used to create a module in an existing course on corporate finance, international finance, or financial institutions or to create courses on emerging market corporate finance, risk management, and energy finance.