Project appraisal 5

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Project Appraisal

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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.

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Stages in Project Appraisal

1 Commercial / Market Appraisal2 Technical Appraisal

3 Financial Appraisal

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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

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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

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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

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Details of Capital Cost of the Project and Methods of AppraisalItems to beincludedDocuments to bescrutinisedA Landand SiteDevelopment1 Cost of Land2 LegalCharges forregistration3 Cost oflevelling4 Cost oflaying roads5 Cost offencing6 Cost of gates

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Items to beincludedDocuments to bescrutinisedB.Buil-ding1 Main factoryBuildings2 Ancillary factorybuildings3 Administrativebuildings

4 Total area of roadsand cost per squaremetre

5 Total area of fencingand the basis onwhich provision hasbeen made

1 Design of buildings2 Different types of

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Items to be includedDocuments to bescrutinisedC.Plants andMachinery

(a) Imported Plants

1 F.O.B value of plantto be imported2 Shipping, freightand insurance3 Import duty4 Clearing, loading,unloading andtransportationcharges1 Ensure that proposedimport of plant isnecessary2 Ensure that

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Items to be includedDocuments to bescrutinisedD.genousPlants(b) Indigenous plants1 Main plant and othermachineries2 Machinery stores andspares3 Sales-tax4 Transportation charges5 Foundation andinstallation charges1 List of main itemsmachinery to bepurchased-ensure thatall items are includedand they have properbalance of capacity2 Quotations receivedfrom various machinerysuppliers3 Cross-check with somereputable potentialsuppliers from whomthe promoters couldhave asked, but have notasked to bid or quote

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Items to be includedDocuments to bescrutinised

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Items to be includedDocuments to bescrutinisedD Engineeringand consultancyfees1 Expenses of foreigntechnicians2 Expenses of training forIndian technicians3 Technical know-how fees4 Expenses on drawings

5.Consultancy fees forpreparing project report

1 Contract between thecompany and foreigncollaborators

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Items to be included Documents to be scrutinisedE MiscellaneousFixedAsseets1 Furniture2 Office machinery andequipment3 Vehicles-cars, trucks etc.4 Cost of electricinstallation

5 Equipment and pipes fordistribution of water, airand steam6 Laboratory equipment7 Workshop equipment8 Fire fighting equipment9 Effluent collection,treatment and disposalarrangements10 Miscellaneous fixedassets

1 Details of various items of furniture, officemachinery, equipment etc and cost thereof2 Ascertain whether it is necessary to invest in

vehicles for the project Estimate sost ofmaintaining vehicle(s) and compare withtransportation charges to be paid, if outsidevehicles are hired

3 Contract regarding, electric installation,piping, etc.

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Items to be includedDocuments to be scrutinised

Preliminaryand Pre operative expenses

1 Brokerage & Commissionon capital issue

2 Other capital issueexpenses

3 Commitment charges4 Interest on term loans

during construction period5 Mortgage expenses

6 Miscellaneous expensesduring construction period7 Cash losses, if any

1 Find the total amount of capitalissue and calculate chargeshereon

2 Find the construction periodand calculate interest for thatperiod

3 Calculate the amount ofmortgage expenses

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G Provision for contingencies

1 Probable increase in costdue to new additions

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

transportation charges,fluctuation in foreignexchange rates etc.

1 Divide total cost estimates intotwo groups-considered firm andnon-firm

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H Margin Money for Working1 Indigenous raw materials2 Imported raw materials3 Consumable stores

4 Stock of goods-in-process5 Stock of finished goods6 Outstanding debtors

1 Calculate total requirement of workingcapital on the basis of expectedproduction in first year However, ifprofitability estimates of first yearindicate cash loss, take working capitalrequirement on the basis of theproduction for second or third yearwhen the project is likely to generateprofit

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