Project appraisal 5

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Project Appraisal

Dr.S Sreenivasa Murthy

What is a Project ?

• A Project is a proposal for Capital Investment to develop facilities to provide goods and services. – UN, Manual for Evaluation of Industrial Projects, New York, 1980

• A Project is a specific, finite task to be

accomplished in order to generate cash flows.

• A Project is unique in nature.

• A Project is a multistage relay marathon race.

Stages in Project Appraisal

1 Commercial / Market Appraisal

2 Technical Appraisal

3 Financial Appraisal

4 Economic Appraisal / SCBA

5 Environmental Appraisal

Financial Appraisal of Projects

• Capital Cost of Projects and sources of finance

• Financial Projectins

– Projected Profitability Statements

– Projected Balance Sheets

– Projected Cash Flow Statements

• Ratio Analysis

• Break Even Point

• Discounted Cash Flow Techniques

– NPV

– IRR

– PI

Details of Capital Cost of the Project

• Land and site development

• Buildings

• Plants and Machinery

• Engineering and Consultancy fees

• Miscellaneous

• Preliminary and Preoperative expenses

• Provision for contingencies

• Margin money for working capital

Sources of Finance

• Issue of Ordinary / Preference Shares

• Issue of Secured Debentures

• Issue of Convertible Debentures and Bonds

• Term Loans from Financial Institutions and Banks

• Deferred credits from equipment suppliers including those

under bills rediscounting scheme

• Leasing Finance

• Unsecured Loans and Deposits

• Capital Subsidy or development loans/sales tax loans

• Internal accruals for existing undertakings

Details of Capital Cost of the Project and

Methods of Appraisal

Items to be included

scrutinised

A Land

and Site

Develop

ment

1 Cost of Land

2 Legal

Charges for registration

3 Cost of

levelling

4 Cost of

laying roads

5 Cost of

fencing

6 Cost of gates

1 Ascertain from plant

layout and proposed construction of buildings that land is sufficient for the project and possible future expansion

2 Agreement for

purchase of land

3 Rates of legal

charges

Items to be included

scrutinised

B

Buil-ding

1 Main factory

Buildings

2 Ancillary factory

buildings

3 Administrative

buildings

4 Total area of roads

and cost per square metre

5 Total area of fencing

and the basis on which provision has been made

1 Design of buildings

2 Different types of

construction and area under each type of construction

Items to be included

scrutinised

Cont

Building

4 Godowns

5 Canteen, Guest

houses etc

6 Quarters for

essential staff

7 Soils, tanks,

wells, etc.

8 Garages

9 Cost of

seweres, drainages, etc

10 Architects’ fee

3 Ascertain from plant

layout whether proposed construction

of buildings is sufficient and also no unnecessary

construction is done

4 Rate per square metre

of each construction

5 Agreement with

building contractor, if any

6 A note on past record

of building contractor and Architect

Items to be included Documents to be

scrutinised

C.

Plants

and

Machinery

(a) Imported Plants

1 F.O.B value of plant

to be imported

2 Shipping, freight

and insurance

3 Import duty

4 Clearing, loading,

transportation charges

1 Ensure that proposed

import of plant is necessary

necessary stock and spares are also imported

3 Quotations of plant

to be imported

4 Orders, if already

placed, of plant to be imported

Items to be included Documents to be

scrutinised

D.

genous

Plants

(b) Indigenous plants

1 Main plant and other

machineries

2 Machinery stores and

spares

3 Sales-tax

4 Transportation charges

5 Foundation and

installation charges

1 List of main items

machinery to be purchased-ensure that all items are included and they have proper balance of capacity

2 Quotations received

from various machinery suppliers

3 Cross-check with some

reputable potential suppliers from whom the promoters could have asked, but have not asked to bid or quote

4

Items to be included Documents to be

scrutinised

4 Selection should be done from various quotations on the basis

of not only price but

sophistication, reputation of suppliers, delivery dates, credit terms, etc.

machinery, if placed

6 Contract entered between the company and machinery suppliers

Items to be included Documents to be

scrutinised

D

Engineering

and consultancy

fees

1 Expenses of foreign technicians

2 Expenses of training for Indian technicians

3 Technical know-how fees

4 Expenses on drawings 5.Consultancy fees for preparing project report

1 Contract between the company and foreign collaborators

2 Contract between the company and consultants

3 A note on past record of consultants

4 Relationship, if any, between promoters of a project and consultants

Items to be included Documents to be scrutinised

E.

Miscellaneous

Fixed

Asseets

1 Furniture

2 Office machinery and equipment

3 Vehicles-cars, trucks etc.

4 Cost of electric installation

5 Equipment and pipes for distribution of water, air and steam

6 Laboratory equipment

7 Workshop equipment

8 Fire fighting equipment

9 Effluent collection, treatment and disposal arrangements

10 Miscellaneous fixed assets

1 Details of various items of furniture, office machinery, equipment etc and cost thereof

2 Ascertain whether it is necessary to invest in vehicles for the project Estimate sost of maintaining vehicle(s) and compare with transportation charges to be paid, if outside vehicles are hired

3 Contract regarding, electric installation, piping, etc.

4 Price list of laboratory equipment, workshop equipment, etc.

Items to be included Documents to be scrutinised

Preliminary and Pre operative expenses

1 Brokerage & Commission

on capital issue

2 Other capital issue expenses

3 Commitment charges

4 Interest on term loans during construction period

5 Mortgage expenses

6 Miscellaneous expenses during construction period

7 Cash losses, if any

1 Find the total amount of capital issue and calculate charges hereon

2 Find the construction period and calculate interest for that period

3 Calculate the amount of mortgage expenses

4 Calculate the other expenses during construction period

Items to be included Documents to be scrutinised

G Provision for

contingencies

1 Probable increase in cost due to new additions

2 Probable increase in cost due to rise in prices, sales-tax, excise duty,

transportation charges, fluctuation in foreign exchange rates etc

1 Divide total cost estimates into two groups-considered firm and non-firm

2 Make provision for contingencies on non-firm items

of cost at the rate of 5% to 15% depending on inflationary trend and period of project implementation Longer the implementation period, higher the contingencies required

Items to be included Documents to be scrutinised

H Margin Money for Working1 Indigenous raw materials

2 Imported raw materials

3 Consumable stores

4 Stock of goods-in-process

5 Stock of finished goods

6 Outstanding debtors

1 Calculate total requirement of working capital on the basis of expected production in first year However, if profitability estimates of first year indicate cash loss, take working capital requirement on the basis of the production for second or third year when the project is likely to generate profit

2 The level of raw material, consumable stores, goods-in process, finished goods and debtors

Sources of Finance

• Issue of Ordinary / Preference Shares

• Issue of Secured Debentures

• Issue of Convertible Debentures and Bonds

• Term Loans from Financial Institutions and Banks

• Deferred credits from equipment suppliers including those

under bills rediscounting scheme

• Leasing Finance

• Unsecured Loans and Deposits

• Capital Subsidy or development loans/sales tax loans

• Internal accruals for existing undertakings