1mba3rd prtoject appraisal

8/7/2019 1MBA3RD PRTOJECT APPRAISAL

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PROJECT APPRAISALPROJECT APPRAISAL

SARITA THAKURSARITA THAKUR


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Meaning and definitionMeaning and definition Assessment of a project in terms of its economic, social and financial viabilityAssessment of a project in terms of its economic, social and financial viability

A lending financial institution makes an independent and objectiveA lending financial institution makes an independent and objective

assessment of various aspects of an investment propositionassessment of various aspects of an investment proposition

It is defined as taking a second look critically and carefully at a project by aIt is defined as taking a second look critically and carefully at a project by a

person who is in no way involved or connected with its preparation. He isperson who is in no way involved or connected with its preparation. He is

able to take independent, dispassionate and objective view of the project inable to take independent, dispassionate and objective view of the project in

totality, along with its various componentstotality, along with its various components


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UNIT - IIPROJECT APPRAISAL

INTRODUCTION PROJECT APPRAISAL:

1. Technique to analyse if the project is feasible or not.2. It helps in recognizing needs and problems, and their early

analysis3. A tool fordecision making4. Identifying input, output parameters and criteria for evaluating

systems.5. Evaluating feasibility in terms oftechnical, financial and

economic practicability.

6. Developing and implementation of system so designed interms of- Engg. Calculations


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- Specification of finalization- Production, manufacturing

Installation and commissioning

SALIENT ASPECTS OF PROJECT APPRAISAL

a. Need - New or improvedb. Realisability - Cost/benefit termsc. Practicability - Technically, Financially economically viable.d. Optimality: Project to be best alternativee. Uncertainty : Probability of risk and cost of information to

achieve greater certaintyf. Controllability - Needs a feed back loop to review update and

keep system on rough track.


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Feasibility Study:

It involvedcreating, identifying, brain storming feasibility of

ideas and then selecting to prove further one or more feasiblesolutions.- Thenprilimary design, optimal design (best alternatives)- Detailed design (a complete description of projects for its

implimentation.- Lastly planning for production:


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(ii) Environment (Business) Interest, Insurance,

Legal, Regulatory, Pollution.

b. Project Output(i) Desired(ii) Undesired

(i) Desired: Desired could involved physical quantities ofproducts how much, how many, could also involve valuejudgment status, comfort, Aesthetic Appeal (Keeping userin view undesired)

(ii) Undesired: Undesired Pollution, Waste material, WasteEnergy, Danger (Bhopal Gas Tragedy, Nuclear Explosion).

Discomfort to people living in vicinity.

c. Design Parameters: Like features attributes that wouldaffect behavior and performance. Most common ar

physical size, weight, etc.


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Feasibility Study has following sequence of events (Parts)

Need Analysis: Define objectives of the projects. New oimproves.

Project Identification: Quantifies input, output, designparameters.

a. Project Inputs:

(i) Purposeful Controllable- Uncontrollable

Controllable: Man hours, Capital Inflow,Activity Analysis:

Uncontrollable: Cost of Raw Material, Reliability of

Technology, Availability of Power, Govt.& Political Interference.


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d. Constraint Specification: on input, output, designparameters which could be essential to evaluate the alternativesolutions. Measure of the values indicate range of accepvalues.

e. Evaluation Criteria: Total revenue operating cost gross/ netprofit, ROI/ EOI etc.

3. Practicability Analysis: Idea to eliminate the concepts thatare not feasible. Are these operational financeableEconomical, Physically realizable, Politically acceptable ,

Physically Realizable which alternatives needs the

solutions within the specified parameters.

Financial Realizability: (i) Will the money requiredcome as per time frame.


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(ii) Sources of Capital Inflow who where from:4. Economic Practicality :

(i) Even a financially feasible may not beeconomically practical.

(ii) Economic Feasibility Study of alternativesolutions by constraints operating cost, Maintenancand Spare part expenditure.

(iii) Total revenue that would accrue over the operational

life of systems, (i.e. what is thebreak even point oroptimum point of economic operations of the project)

We will consider those alternative solutions to be

economically feasible that meet the specified rates ofreturn on investment.


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5. Social and Political Realizeability : The projectmay be physically, Financially, Economically feasible,but may encounter social at political obstacles.

Normally in case of large projects, there are additional

considerations ofhealth (Polio Campaign, Malaria, TB,CNG Buses) education (private and foreign universities)Welfare (METRO RAIL, Realignment over the rangearea, Civil Nuclear Technology).


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Feasibility Study: A Schematic Diagram

Yes

Initial Screening

Is the Idea Prima Facie Promising ?

Plan Feasibility Analysis

Generation of Ideas

Conduct Market Analysis Conduct Technical AnalysisBasic and functional feasibliity

Terminate

Conduct Financial Analysis

Risk./ Return

PreliminaryPractica

lAnalysis


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Yes NO

Is the Project Worthwhile?

Prepare Funding Proposal

Including optimality and controllability

Conduct Economic and Ecological Analysis

Social & Political Realisability

Terminate

St f j tSt f j t


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Steps for projectSteps for project

appraisal/Aspects of projectappraisal/Aspects of project

appraisalappraisal Economic AspectsEconomic Aspects Technical AspectsTechnical Aspects

Organisational AspectsOrganisational Aspects Managerial AspectsManagerial Aspects

Financial AspectsFinancial Aspects

Market/Commercial AspectsMarket/Commercial Aspects

K i i P j A l i


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Key issues in Project AnalysisPotential Market

Market AnalysisMarket Share

Technical ViabilityTechnical Analysis

Sensible ChoicesRisk

Financial Analysis

ReturnBenefits and Costs in Shadow Prices

Economic AnalysisOther Impacts

Environmental DamageEcological AnalysisRestoration Measure

T h i l A i l


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Technical AppraisalBy technical appraisal of project, we mean an assessment of its basic technical and

functional feasibility of project (Road under/over bridge)Besides costs and schedules, the project performance depends on how well the project ismeeting the technical requirements of the end project (connect village to stadium)

- THREE STAGES OF TECH APPRAISAL

(i) Detailed technical Appraisal

Which include describing the details of the assignment

and the key property.

It l i l d d ibi th d fi i i f ti l


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It also includes describing the deficiencies of particularacclamation.

The detailed technical appraisal method helps incommenting on the reviewers action, analysis and

conclusions.(ii) Exceptional Technical Appraisal appraisal reviews records only significant and exceptional

findings and action take by the reviewer. The exceptional review is often used forhigh level

reviews within an organization when the first level review isa narrative report.

(iii)Form Technical Appraisal In form review, further abbreviates the documentation

associated with reviewing an appraisal report. Forms are developed for specific institutional or agency

needs and the Standard Appraisal Review

R t f i b i id l t d b


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Report from is becoming more widely accepted by manyusers.

Factors Effecting Technical Appraisal

(i) Layout:- Layout of the project includes description of theproject in terms of what they represent and when theyoccur,who has authorized it, number of people who willhandle. It also states where quality control will be exercised. A description and explanation of the methods of that

will be used to monitor progress e.g. bar chartscould be used.

For Example

Weekly progress meeting to exercise control over theproject.

(ii) L ti Th i k f t th t i fl l ti


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(ii) Location:- The nine key factors that influence locationof a project are: (keep NANO Car Project In Mind)

- Costs- Infrastructure around the location

- Labour Characteristics- Wage rates- Motivation of workers- Telecommunication systems- Government stability and industrial relations laws

- Protection of patentsA availability of management resources and specific skills

and system and integration costs.These factors have an impact on management decisions

and governments policies.

G t li i R l t b i l d


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Government policies: Regulatory barriers may precludethe use of innovative technologies e.g. some reservation forSME Sector (Now only 3s items)

Types of equipment or processes: Equipments are

basically of two types temporary and permanentequipments. (Olympic stadium in China)

The availability and quality of equipments affect thetechnical appraisal.

Appropriateness of Local Conditions: The project should

be adaptable to local technical and environmentalconditions, such as voltage, dust, temperature, humidity, etc.

The appropriate supply of material and equipments forkeeping the project working should be available in

proximity.

I t f E i t Th t ti l i t f th


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Impact of Environment: The potential impact of theproject on the human and physical environment is examinedto make sure that nay adverse effects can be controlled orminimized e.g. pollution.

Approach Followed: Procedures for obtainingengineering, architectural, or other professional services areexamined.

Risk Factor: It is necessary to identify the risks associatedwith the project and estimate the scale of risk. There should

also be contingency plans in place to minimize the risk ofproject failure or of a major gap between whats promisedand whats delivered.

Cost Estimated: Technical appraisal is a review of the cost

estimates of the engineering and maintaining the project.Cost estimates also determine whether technical appraisal isaccurate within an acceptable margin.


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Plant CapacityPlant Capacity

Product MixProduct Mix

Structure and civil WorksStructure and civil Works Schedule of project implementation.Schedule of project implementation.


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Technical AspectsTechnical Aspects

Site and Location: RM supply, proximity to markets, transportationSite and Location: RM supply, proximity to markets, transportation

facility, power supply, manpower, water, government policies,facility, power supply, manpower, water, government policies,

labour laws, climate, taxeslabour laws, climate, taxes

Size of plant/scale of operations: Technological capacity isSize of plant/scale of operations: Technological capacity is

standardised for achieving economies of scale, low demand or lessstandardised for achieving economies of scale, low demand or less

resource availability result in economies of scaleresource availability result in economies of scale

Technical feasibility: Technology selected, availability ofTechnical feasibility: Technology selected, availability ofinfrastructure, plant layout, project implementation schedules etcinfrastructure, plant layout, project implementation schedules etc


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This can be viewed as whatever lies outside the project


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This can be viewed as whatever lies outside the project,but that which can affect and be affected by the operationsof the project.

In project parlance the environment means much more

than just the weather.For example, for automobile environment, we can considerthe roads and highways; petrol pumps and servicingstations, etc. need to be included in our definition of theautomobile system.

When we say that something lies outside the project, andhence constitutes its environment, we mean that the projectcan do relatively little about its environmentscharacteristics or behaviour.

Identification of the environment depends on the answersto the following two questions.

1. Can I do anything about it?

2 Does it affect my situation or objectives?


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2. Does it affect my situation or objectives ?If the answer to the first is No, and that do the second isYes, then it is the environment.

Characteristics of the Environment

The environment provide, given orfixed inputs to theproject.

It is also affected, directly or indirectly, by the outputsfrom the project;

Hence, it has a dynamic influence on the project or bythe project.

However, less attention is paid on environment because of

two reasons(a) Firstly : The environment is outside the project and

hence oflittle direct interest to us.


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Managerial AspectsManagerial Aspects

Organization structure, recruitment and training aspectsOrganization structure, recruitment and training aspects

are studiesare studies

Appraisal done to see if project is adequately staffed,Appraisal done to see if project is adequately staffed,initial recruitment is done. Managerial ability plays aninitial recruitment is done. Managerial ability plays an

important role in making an enterprise a success orimportant role in making an enterprise a success or

otherwise. In the absence of managerial competence ,otherwise. In the absence of managerial competence ,

the project which are otherwise feasible may fail.the project which are otherwise feasible may fail.


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It is strictly pointed out that if the project isIt is strictly pointed out that if the project is

weak, it can be improved upon, but if theweak, it can be improved upon, but if the

promoters are weak & lack in business, it ispromoters are weak & lack in business, it is

difficult to reverse the situation. So whiledifficult to reverse the situation. So while

doing the project appraisal , the managerialdoing the project appraisal , the managerial

competence or talent of the promoter shouldcompetence or talent of the promoter should

be taken into consideration.be taken into consideration.


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Managerial AspectsManagerial Aspects

Financial institutions check if promoters areFinancial institutions check if promoters are

competent and have business sensecompetent and have business sense

They can appoint nominee directors on boardThey can appoint nominee directors on board

The Companies Act and Industries ActThe Companies Act and Industries Act

empower government to exercise control overempower government to exercise control over

managementmanagement

They can also take over the management inThey can also take over the management in

case it is neededcase it is needed

Managerial Appraisal


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Managerial Appraisal

One of the main preoccupations of management in anyorganization and in project organization is the allocation ofscarce resources.

These resources include manpower, materials, facilities,and financial resources.

For every project being planned, the project manager must

ask the following two questions:- Are the resources required for the given projectavailable ?- Is this the best use to which these resources caput ?

Most project are subjected to an evaluation before they aregiven the go-ahead.

An essential part of his evaluation is the financial

appraisal


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appraisal.

Traditionally, this has been aimed at deciding whether ornot a project will be profitable and selecting the one

project out of several competing projects that appearsthe most profitable. The project manager shouldunderstand the processes so that he can benefit from them.(Difference between private public Social Benefitprojects).

It is with this intention that we present the varioustechniques ofmanagerial evaluation, which consist of thetechnical, economic, financial, social and political

appraisal and assessment of a project.


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FINDING A PROJECT MANAGERFINDING A PROJECT MANAGER 1.Project Department-1.Project Department---Growth oriented companies--Growth oriented companies

have a separate department called the projecthave a separate department called the projectdepartment.this deptt. Is responsible for:-department.this deptt. Is responsible for:-

Looking for new opportunities for growthLooking for new opportunities for growth

Formulate projectsFormulate projects

Responsibilty for implementation of the projectResponsibilty for implementation of the project

coordinating.,directing & controlling all aspects of thecoordinating.,directing & controlling all aspects of the

project.project.


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2.Recruitment from open marketA project

manager may also be appointed when the

company in venturing into new &innovtaive technology.The person to be

appointed must have considerable

experience in the new technology.


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TERM APPOINTMENTTERM APPOINTMENT IT ENGAGE A PROFESSIONAL PROJECTIT ENGAGE A PROFESSIONAL PROJECT

MANAGER ON TERM APPOINTMENT. In this case theMANAGER ON TERM APPOINTMENT. In this case the

terms of appointment have to be very lucrative to maketerms of appointment have to be very lucrative to make

the other person interested.the other person interested.

Service Companies:ItService Companies:It mean to borrow the staff frommean to borrow the staff from

project management service companis. A projectproject management service companis. A project

management compnies can offer many services includingmanagement compnies can offer many services including

loaning of staff who can bebased at the client office &loaning of staff who can bebased at the client office &

work for the client as if they were the clients regular staff.work for the client as if they were the clients regular staff.


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Problems & challenges of projectProblems & challenges of project

manager.manager. AuthorityAuthority

OrientationOrientation

MotivationMotivation Building effective groupsBuilding effective groups

Impartial approach.Impartial approach.


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Project Management SkillsProject Management Skills

Program area knowledge, standards, andProgram area knowledge, standards, and

regulationsregulations

Understand the project environmentUnderstand the project environment


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Program area knowledge, standards, andProgram area knowledge, standards, and

regulationsregulations

Understand the project environmentUnderstand the project environment


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General management skills (budgeting,General management skills (budgeting,

scheduling)scheduling)

Communication skillsCommunication skills

Interpersonal skillsInterpersonal skills


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The project manager makes thingsThe project manager makes things

happen!happen!


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Methods of Project AppraisalMethods ofProject Appraisal


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Meaning of Project AppraisalMeaning of Project Appraisal: -: -

Project AppraisalProject Appraisal is the analysis of costs and benefits of a proposed project with ais the analysis of costs and benefits of a proposed project with a

goal of assuring a rational allocation of limited financial resources amongst alternategoal of assuring a rational allocation of limited financial resources amongst alternate

Investment opportunities with the objective of achieving specific goals.Investment opportunities with the objective of achieving specific goals.

Project AppraisalProject Appraisal is mainly the process of transmitting information accumulatedis mainly the process of transmitting information accumulatedthrough feasibility studies into a comprehensive form in order to enable thethrough feasibility studies into a comprehensive form in order to enable the

decision maker undertake a comprehensive appraisal of various projects anddecision maker undertake a comprehensive appraisal of various projects and

embark on a specific project or projects by allocating resources.embark on a specific project or projects by allocating resources.

The various Factors considered by Financial Institutions while appraising aThe various Factors considered by Financial Institutions while appraising aproject are: -project are: -

Technical, Financial, Economic, Commercial, Social andTechnical, Financial, Economic, Commercial, Social and

Managerial Factors.Managerial Factors.


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Objectives & ScopeObjectives & Scope: -: -

To extract relevant information for determining the success orTo extract relevant information for determining the success or

failure of a project.failure of a project.

To apply standard yardsticks for determining the rate of success orTo apply standard yardsticks for determining the rate of success or

failure of a project.failure of a project.

To determine the expected costs and benefits of the project.To determine the expected costs and benefits of the project.

To arrive at specific conclusions regarding the project.To arrive at specific conclusions regarding the project.


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SignificanceSignificance: -: -

It helps in arriving at specific and predicted results.It helps in arriving at specific and predicted results.

It evaluates the desirability of the project.It evaluates the desirability of the project.

It provides information to determine the success or failure of aIt provides information to determine the success or failure of aproject.project.

It employs existing norms to predict the rate of success or failureIt employs existing norms to predict the rate of success or failure

of the project.of the project.

It verifies the hypothesis framed for the project.It verifies the hypothesis framed for the project.


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Factors Considered while Appraising a ProjectFactors Considered while Appraising a Project: -: -

Technical FactorsTechnical Factors

Financial FactorsFinancial Factors

Economic FactorsEconomic Factors Social FactorsSocial Factors

Commercial FactorsCommercial Factors

Managerial FactorsManagerial Factors


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Methods of Project AppraisalMethods ofProject Appraisal

METHODS O FPROJECT APPRAISAL

DISCOUNTING

CRITERIA

NON -DISCOUNTING

CRITERIA

NET

PRES ENT

VALUE

PROFIT-

ABILITY

INDEX

INTERNAL

RATE OF

RETURN

PAYBA CK

PERIODACCOUNTING

RATE OFRETURN


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Pay-Back Period MethodPay-Back Period Method: -: -

TheThe Pay-Back PeriodPay-Back Period is the length of time required to recover the initial outlay onis the length of time required to recover the initial outlay on

the project Or It is the time required to recover the original investment throughthe project Or It is the time required to recover the original investment through

income generated from the project.income generated from the project.

Pay-Back PeriodPay-Back Period == Original Cost of Investment____Original Cost of Investment____

Annual Cash Inflows or SavingsAnnual Cash Inflows or Savings

ProsPros: -: - a) It is easy to operate and simple to understand.a) It is easy to operate and simple to understand.

b) It is best suited where the project has shorter gestation period andb) It is best suited where the project has shorter gestation period and

project cost is also less.project cost is also less.

c) It is best suited for high risk category projects. Which are prone to rapidc) It is best suited for high risk category projects. Which are prone to rapid

technological changes.technological changes.

d) It enables entrepreneur to select an investment which yields quick returnd) It enables entrepreneur to select an investment which yields quick return

of funds.of funds.


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Accounting Rate of Return MethodAccountingRate of Return Method: -: -

This method is considered better than pay-back period method because it considersThis method is considered better than pay-back period method because it considers

earnings of the project during its full economic life. This method is also knownearnings of the project during its full economic life. This method is also known

asas Return On InvestmentReturn On Investment (ROI). It is mainly expressed in terms of percentage.(ROI). It is mainly expressed in terms of percentage.

ARR or ROIARR or ROI == Average Annual Earnings After Tax_______Average Annual Earnings After Tax_______ * 100* 100

Average Book Investment After DepreciationAverage Book Investment After Depreciation

Here, Average Investment = (Initial Cost Salvage Value) * 1 / 2Here, Average Investment = (Initial Cost Salvage Value) * 1 / 2

Decision RuleDecision Rule: - In the ARR, A project is to be: - In the ARR, A project is to be ACCEPTEDACCEPTED when ( If Actual ARRwhen ( If Actual ARR

is higher or greater than the rate of return) otherwise it is Rejectedis higher or greater than the rate of return) otherwise it is Rejected

and In case of alternate projects, One with the highest ARR is toand In case of alternate projects, One with the highest ARR is to

be selected.be selected.

PP ) i i) I i i l l l d d d


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ProsPros: -: - a) It is simple to calculate and easy to understand.a) It is simple to calculate and easy to understand.

b) It considers earning of the project during the entire operative life.b) It considers earning of the project during the entire operative life.

c) It helps in comparing the projects which differ widely.c) It helps in comparing the projects which differ widely.

d) This method considers net earnings after depreciation and taxes.d) This method considers net earnings after depreciation and taxes.

ConsCons: -: -a) It ignores time value of money.a) It ignores time value of money.b) It lays more emphasis on profit and less on cash flows.b) It lays more emphasis on profit and less on cash flows.c) It does not consider re-investment of profit over years.c) It does not consider re-investment of profit over years.

d) It does not differentiate between the size of investments required ford) It does not differentiate between the size of investments required for

different projects.different projects.

For ExampleFor Example: -: - Project AProject A Project BProject BInvestmentInvestment 25,00025,000 37,00037,000

Expected Life (In Yrs.)Expected Life (In Yrs.) 4 4

Net Earnings (After Dep. & Taxes)Net Earnings (After Dep. & Taxes)

YearsYears

11 25002500 37503750

22 18751875 3750375033 18751875 25002500

44 12501250 12501250

If the Desired rate of return is 12%, which project should be selected?If the Desired rate of return is 12%, which project should be selected?


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NPV (Net Present Value) MethodNPV (Net Present Value) Method: -: -

This method mainly considers the time value of money. It is the sum of theThis method mainly considers the time value of money. It is the sum of the

aggregate present values of all the cash flows positive as well as negative thataggregate present values of all the cash flows positive as well as negative that

are expected to occur over the operating life of the project.are expected to occur over the operating life of the project.

NPVNPV = PV of Net Cash Inflows Initial Outlay (Cash outflows)= PV of Net Cash Inflows Initial Outlay (Cash outflows)

Decision RuleDecision Rule: -: - If NPV is positive, ACCEPTIf NPV is positive, ACCEPT If NPV is negative, REJECTIf NPV is negative, REJECT If NPV is 0, then apply Payback Period MethodIf NPV is 0, then apply Payback Period Method

The standard NPV method is based on the assumption that the intermediateThe standard NPV method is based on the assumption that the intermediatecash flows are reinvested at a rate of return equal to the cost of capital. Whencash flows are reinvested at a rate of return equal to the cost of capital. Whenthis assumption is not valid, the investment rates applicable to the intermediatethis assumption is not valid, the investment rates applicable to the intermediatecash flows need to be defined for calculating the modified NPV.cash flows need to be defined for calculating the modified NPV.


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Pros and Cons of NPVPros and Cons ofNPV: -: -

ProsPros: -: -a) This method introduces the element of time value of money and as such is aa) This method introduces the element of time value of money and as such is a

scientific method of evaluating the project.scientific method of evaluating the project.

b) It covers the whole project from start to finish and gives more accurateb) It covers the whole project from start to finish and gives more accurate

figuresfigures

c) It Indicates all future flows in todays value. This makes possiblec) It Indicates all future flows in todays value. This makes possible

comparisons between two mutually exclusive projects.comparisons between two mutually exclusive projects.

d) It takes into account the objective of maximum profitabilityd) It takes into account the objective of maximum profitability

ConsCons: -: -a) It is difficult method to calculate and use.a) It is difficult method to calculate and use.

b) It is biased towards shot run projects.b) It is biased towards shot run projects.

c) In this method profitability is not linked to capital employed.c) In this method profitability is not linked to capital employed.

d) It does not consider Non-Financial data like the marketability of a product.d) It does not consider Non-Financial data like the marketability of a product.

For ExampleFor Examp

le: -: -


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For ExampleFor Example: : Initial Investment 20,000Initial Investment 20,000

Estimated Life 5 years

Scrap Value 1000 XYZ Enterprises Capital Project

Year Cash flow Discount factor Present V@10%

1 5.000 0.909

2 10,000 0.826

3 10,000 0.751

4 3,000 0.683

5 2,000 0.621

5 1,000 0.621

PV of Net Cash Inflows = 24227

NPV = PV of Net Cash Inflows Cash Outflows

= 24227 20,000

NPV = 4227Here, NPV is Positive (+ ve) The Project is ACCEPTED.


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Profitability Index MethodProfitability Index Method: -: -

Profitability IndexProfitability Index is the ratio of present value of expected future cash inflowsis the ratio of present value of expected future cash inflows

andand

Initial cash outflows or cash outlay. It is also used for ranking the projects in orderInitial cash outflows or cash outlay. It is also used for ranking the projects in order

of their profitability. It is also helpful in selecting projects in a situation of capitalof their profitability. It is also helpful in selecting projects in a situation of capital

rationing. It is also know as Benefit / Cost Ratio (BCR).rationing. It is also know as Benefit / Cost Ratio (BCR).

PI =PI = Present value of Future cash InflowsPresent value of Future cash Inflows

Initial Cash OutlayInitial Cash Outlay

Decision RuleDecision Rule: - In Case of Independent Investments,: - In Case of Independent Investments, ACCEPTACCEPT a Project If a PI isa Project If a PI isgreater ( > 1 ) and Reject it otherwise.greater ( > 1 ) and Reject it otherwise.

In Case of Alternative Investments,In Case of Alternative Investments, ACCEPTACCEPT the project withthe project with

thethe

largest PI, provided it is greater than ( > 1 ) and Reject others.largest PI, provided it is greater than ( > 1 ) and Reject others.


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IRR (I l R f R ) M h dIRR (I

l R f R ) M h d


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IRR (Internal Rate of Return) MethodIRR (Internal Rate of Return) Method: -: -

This method is known by various other names likeThis method is known by various other names like Yield on InvestmentYield on Investment ororRate ofRate of

Return MethodReturn Method. It is used when the cost of investment and the annual cash inflows. It is used when the cost of investment and the annual cash inflowsare known and rate of return is to be calculated. It takes into account time value ofare known and rate of return is to be calculated. It takes into account time value of

Money by discounting inflows and cash flows. This is the Most alternative to NPV.Money by discounting inflows and cash flows. This is the Most alternative to NPV.

It is the Discount rate that makes it NPV equal to zero.It is the Discount rate that makes it NPV equal to zero.

In this Method, the IRR can be ascertained by theIn this Method, the IRR can be ascertained by the Trial & Error Yield MethodTrial & Error Yield Method,,

Whose the objective is to find out the expected yield from the investment.Whose the objective is to find out the expected yield from the investment.

rate + NPV @ Smaller rateSum of the absolute values of the

NPV @ smaller and the bigger

Discount rates

Bigger

X discount discountrate

Decision Rule: - In the Case of an Independent Investment, ACCEPT the project if


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p p j

Its IRR is greater than the required rate of return and if it is lower, ThenReject it. In Case of Mutually Exclusive Projects, ACCEPT the project with thelargest IRR, provided it is greater than the required rate of return &Reject others.

Pros: - a) It considers the profitability of the project for its entire economic life andhence enables evaluation of true profitability.

b) It recognizes the time value of money and considers cash flows overentire life of the project.

c) It provides for uniform ranking of various proposals due to thepercentage rate of return.

d) It has a psychological appeal to the user. Since values are expressed inpercentages.

Cons: - a) It is most difficult method of evaluation of investment proposals.b) It is based upon the assumption that the earnings are reinvested at the

Internal Rate of Return for the remaining life of the project.

c) It may result in Incorrect decisions in comparing the Mutually ExclusiveProjects.


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Assessment of NPV & IRR MethodAssessment of NPV & IRR Method

NPVNPV IRRIRRTheoretical ConsiderationsTheoretical Considerations: -: -

a) Does the method discount all casha) Does the method discount all cash YesYes YesYes

flows?flows?

b) Does the method discount cash flowsb) Does the method discount cash flows YesYes NoNo

at the opportunity cost of funds?at the opportunity cost of funds?

c) From a set of M.E. Projects, does thec) From a set of M.E. Projects, does the

method choose the project whichmethod choose the project which

maximizes shareholder wealth?maximizes shareholder wealth? YesYes NoNo

Practical ConsiderationsPractical Considerations: -: -

a) Is the Method Simple?a) Is the Method Simple? YesYes YesYes

b) Can the method be used with limitedb) Can the method be used with limited

information?information? NoNo NoNo

c) Does the method give a relative measure? Noc) Does the method give a relative measure? No NoNo

CASH FLOW ANALYSIS OFCASH FLOW ANALYSIS OF


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CASH-FLOW ANALYSIS OFCASH-FLOW ANALYSIS OF

THE PROJECTTHE PROJECT PREPARE FINANCIAL PROJECTIONS:PREPARE FINANCIAL PROJECTIONS: FINANCIAL ADEQUACYFINANCIAL ADEQUACY FINANCIAL WORTHFINANCIAL WORTH RETURNS TO FINANCIALRETURNS TO FINANCIAL

STAKEHOLDERSSTAKEHOLDERS LIST THE ASSUMPTIONSLIST THE ASSUMPTIONS

SENSITIVITY ANALYSISSENSITIVITY ANALYSIS


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SCHEDULES (CONTD.)SCHEDULES (CONTD.)

9. CASH-FLOW STATEMENT;9. CASH-FLOW STATEMENT;

10. RATE OF RETURN CALCULATION;10. RATE OF RETURN CALCULATION;

11. SENSITIVITY ANALYSIS.11. SENSITIVITY ANALYSIS.


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SELECTION CRITERIASELECTION CRITERIA

BENEFIT/COST RATIO;BENEFIT/COST RATIO;

NET PRESENT VALUE;NET PRESENT VALUE;

INTERNAL RATE OF RETURN:INTERNAL RATE OF RETURN: IRR;IRR;

ERR.ERR.

NON REVENUENON REVENUE


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NON-REVENUE-NON-REVENUE-

GENERATING PROJECTSGENERATING PROJECTS WEAK FINANCES, SO WHY DO A FINANCIALWEAK FINANCES, SO WHY DO A FINANCIAL

ANALYSIS?ANALYSIS? NEED TO QUANTIFY THE ANNUAL DEFICITS;NEED TO QUANTIFY THE ANNUAL DEFICITS; NEED TO DEVELOP STRATEGIES TO SUSTAIN THENEED TO DEVELOP STRATEGIES TO SUSTAIN THE

PROJECT IMPACT;PROJECT IMPACT; POLICYPOLICY: SUBSIDISE ONLY THOSE WHO NEED IT,: SUBSIDISE ONLY THOSE WHO NEED IT,

BUT NOT FOREVER!BUT NOT FOREVER!

SELECTION CRITERIA:SELECTION CRITERIA:

LEAST-COST ANALYSIS:LEAST-COST ANALYSIS:LEAST-COST ANALYSIS.xlsLEAST-COST ANALYSIS.xls COST-EFFECTIVENESS ANALYSIS:COST-EFFECTIVENESS ANALYSIS:

COST-EFFECTIVENESS.xlsCOST-EFFECTIVENESS.xls

NON REVENUE GENERATINGNON REVENUE GENERATING
http://../My%20Documents/LEAST-COST%20ANALYSIS.xlshttp://../My%20Documents/LEAST-COST%20ANALYSIS.xlshttp://../My%20Documents/COST-EFFECTIVENESS.xlshttp://../My%20Documents/COST-EFFECTIVENESS.xlshttp://../My%20Documents/COST-EFFECTIVENESS.xlshttp://../My%20Documents/LEAST-COST%20ANALYSIS.xls


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NON-REVENUE GENERATINGNON-REVENUE GENERATING

PROJECTS (CONTD.)PROJECTS (CONTD.)

NEED FOR GRANT FUNDS;NEED FOR GRANT FUNDS;

GIFTS;GIFTS;

VERY SOFT LOANS;VERY SOFT LOANS;

SWEAT-EQUITY GET THE TARGETSWEAT-EQUITY GET THE TARGET

GROUP TO CONTRIBUTE WHATEVERGROUP TO CONTRIBUTE WHATEVER

THEY CAN, IN SUPPORT OF THETHEY CAN, IN SUPPORT OF THE

PROJECT.PROJECT.


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SENSITIVITY ANALYSISSENSITIVITY ANALYSIS

WHAT IF?WHAT IF? .SALES DECLINE BY 10%.SALES DECLINE BY 10% .CAPITAL COST INCREASE BY 10%.CAPITAL COST INCREASE BY 10% .OPERATING COST INCREASE BY 10%.OPERATING COST INCREASE BY 10% . THERE IS A 10% DELAY IN PROJECT. THERE IS A 10% DELAY IN PROJECT

IMPLEMENTATIONIMPLEMENTATION

WHICH HAS THE GREATEST IMPACT?WHICH HAS THE GREATEST IMPACT? IS THE PROJECT STILL VIABLE?IS THE PROJECT STILL VIABLE?


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ECONOMIC ANALYSISECONOMIC ANALYSIS

WHY THIS ANALYSIS? :WHY THIS ANALYSIS? : MARKET FAILURE;MARKET FAILURE;

MONOPOLIES;MONOPOLIES; MERIT/DEMERIT GOODS;MERIT/DEMERIT GOODS;

GOVERNMENT FAILURE;GOVERNMENT FAILURE;

DIFFERENCE BETWEEN PRIVATE AND SOCIALDIFFERENCE BETWEEN PRIVATE AND SOCIAL

VALUATION OF COSTS AND BENEFITS;VALUATION OF COSTS AND BENEFITS;

IDENTIFY INTERNAL AND EXTERNAL COSTSIDENTIFY INTERNAL AND EXTERNAL COSTSAND BENEFITS:AND BENEFITS: ECONOMIC FOCUS.xlsECONOMIC FOCUS.xls
http://../My%20Documents/ECONOMIC%20FOCUS.xlshttp://../My%20Documents/ECONOMIC%20FOCUS.xlshttp://../My%20Documents/ECONOMIC%20FOCUS.xls


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ECONOMIC ANALYSIS (CONTD.)ECONOMIC ANALYSIS (CONTD.)

DOES THE PROJECT GENERATE NETDOES THE PROJECT GENERATE NET

BENEFITS FOR THE COUNTRY?BENEFITS FOR THE COUNTRY?

VALUING COSTS AND BENEFITS FROMVALUING COSTS AND BENEFITS FROM

THE NATIONAL PERSPECTIVE;THE NATIONAL PERSPECTIVE;

SHADOW-PRICING;SHADOW-PRICING;

RE-CALCULATING PROJECT WORTHRE-CALCULATING PROJECT WORTH


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ECONOMIC ANALYSIS (CONTD.)ECONOMIC ANALYSIS (CONTD.)

THE NUMERAIRE USED IN MEASURINGTHE NUMERAIRE USED IN MEASURING

VALUE;VALUE;

CONVERSION FACTOR V/S THECONVERSION FACTOR V/S THE

SHADOW FOREIGN EXCHANGE RATESHADOW FOREIGN EXCHANGE RATE

APPROACH;APPROACH;

COMPARING THE RESULTS;COMPARING THE RESULTS;

RATIONALE FOR CHOOSING THERATIONALE FOR CHOOSING THE

CONVERSION FACTOR APPROACH.CONVERSION FACTOR APPROACH.


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SOCIAL PERSPECTIVESSOCIAL PERSPECTIVES

SO THE COUNTRY GAINS; BIG DEAL!SO THE COUNTRY GAINS; BIG DEAL! .WHO EXACTLY.WHO EXACTLY GAINS? .GAINS? . .THE POOREST OF THE POOR? ..THE POOREST OF THE POOR? . . OTHER DISADVANTAGED GROUPS?. OTHER DISADVANTAGED GROUPS?

WOMEN, YOUTHS, RURAL PEOPLE?WOMEN, YOUTHS, RURAL PEOPLE? ??


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Project Appraisal- An OverviewProject Appraisal- An Overview


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A dAgenda


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AgendaAgenda

IntroductionIntroduction Aspects of Project FinanceAspects of Project Finance

Managerial AppraisalManagerial Appraisal

Technical AppraisalTechnical Appraisal

Commercial AppraisalCommercial Appraisal

Selected financial indicatorsSelected financial indicators

Case StudyCase Study

P j tP j t


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ProjectProject

A non repetitive activityA non repetitive activity

Involves large capital expendituresInvolves large capital expenditures

Returns over a long period of timeReturns over a long period of time

Requires significant managerial bandwidthRequires significant managerial bandwidth

Varied risksVaried risks

Uncertainty of future business environmentUncertainty of future business environment

P j FiP j t Fi


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Project FinanceProject Finance

Level of funding raised based purely on the meritsLevel of funding raised based purely on the meritsof the relevant projectof the relevant project

Lender is satisfied to look initially at the cashflowsLender is satisfied to look initially at the cashflows

and earnings of a economic unitand earnings of a economic unit

Debt would be repaid from the economic unitDebt would be repaid from the economic unit

The loan and equity returns are tied to the cashThe loan and equity returns are tied to the cash

flows and fortunes of the project rather than beingflows and fortunes of the project rather than being

dependant on the parent company/companies.dependant on the parent company/companies.

Project AppraisalProject Appraisal


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The purpose of Project Appraisal is to ascertainThe purpose of Project Appraisal is to ascertainwhether the project is sound technically,whether the project is sound technically,economically, financially and managerially and iseconomically, financially and managerially and isultimately viable as a commercial proposition.ultimately viable as a commercial proposition.

Multifaceted activity; Requires skills ofMultifaceted activity; Requires skills of PsychologistPsychologist EngineerEngineer Financial AnalystFinancial Analyst

EconomistEconomist

P j t A i lProject Appraisal


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Each and every project is based upon assumptions, necessarilyEach and every project is based upon assumptions, necessarilyinvolve capital expenditure in the hope of a reasonable returninvolve capital expenditure in the hope of a reasonable returnon investment over a future period of time.on investment over a future period of time.

Project Appraisal necessarily involves validation of variousProject Appraisal necessarily involves validation of variousassumptionsassumptions

Appraisal ofAppraisal of Management/ Sponsor/ PromoterManagement/ Sponsor/ Promoter Technical aspectsTechnical aspects Market & Selling ArrangementsMarket & Selling Arrangements Financial viabilityFinancial viability

I iti l S i 1/ 3Initial Screening 1/ 3


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Initial Screening 1/ 3Initial Screening 1/ 3

WHAT IS THE PRODUCT (General industry structure)WHAT IS THE PRODUCT (General industry structure) WHO IS SETTING UP THE PROJECT (Promoters andWHO IS SETTING UP THE PROJECT (Promoters and

their experience)their experience)

Our experience from similar unitsOur experience from similar units

Banks lending policiesBanks lending policies Government/ RBI RegulationsGovernment/ RBI Regulations

Past business financialsPast business financials

CollateralsCollaterals

I iti l S i 2/ 3Initial Screening 2/ 3


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Distance of unit from branchDistance of unit from branch RBI/ CIBIL/ AML ListsRBI/ CIBIL/ AML Lists

ECGC Specific Approval ListECGC Specific Approval List

Discussions with banksDiscussions with banks Independent Market EnquiryIndependent Market Enquiry



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Prudential Exposure normsPrudential Exposure norms Individual & Group Exposure normsIndividual & Group Exposure norms

Industry Exposure normsIndustry Exposure norms

Scheme Eligibility Norms DER, PC, DSCR, AssetScheme Eligibility Norms DER, PC, DSCR, Asset

coveragecoverage Takeover norms, if applicableTakeover norms, if applicable

Profitability ProjectionsProfitability Projections

Credit Risk Rating normsCredit Risk Rating norms

M t A i l 1/ 5Management Appraisal 1/ 5


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Management Appraisal 1/ 5Management Appraisal 1/ 5

Who are the promoters KYCWho are the promoters KYC Cohesiveness - relationshipCohesiveness - relationship

Competence - Age, QualificationsCompetence - Age, Qualifications

Experience general or similar lineExperience general or similar line

Net-worth of promotersNet-worth of promoters

IT/ Wealth tax statusIT/ Wealth tax status



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Associate concerns in which interestedAssociate concerns in which interested Associate ConcernsAssociate Concerns

When establishedWhen established

Which industry; ProductsWhich industry; Products

Financial performanceFinancial performance

Visit to associate concernsVisit to associate concerns

Role of promoters in the associate concernsRole of promoters in the associate concerns


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Shareholding patternShareholding pattern % stake of promoters; Majority shareholder% stake of promoters; Majority shareholder Stake held by investment companiesStake held by investment companies Stake by foreign funds/ FDI/ Overseas investorsStake by foreign funds/ FDI/ Overseas investors

Examine shareholders agreements; restrictiveExamine shareholders agreements; restrictivecovenantscovenants Partnership deed/ Society/ Trust deed to bePartnership deed/ Society/ Trust deed to be

examined for any restrictive clausesexamined for any restrictive clauses

Memorandum & AoA to be examined forMemorandum & AoA to be examined forobjectives, borrowing powers, security, nomineeobjectives, borrowing powers, security, nomineedirectors etc.directors etc.



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Composition of BoardComposition of Board

Chief Executive; Organisational set upChief Executive; Organisational set up

In case promoters not qualified/ experienced,In case promoters not qualified/ experienced,

critically examine line managementcritically examine line management Adequacy of personnel for projectAdequacy of personnel for project

implementation and each of functional areasimplementation and each of functional areas

viz. finance, marketing, technology, production,viz. finance, marketing, technology, production,materials, HR etc.materials, HR etc.

KYCKYC


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KYCKYC

Companies : Memorandum and articles of associationCompanies : Memorandum and articles of association object clause, borrowing powers, power to object clause, borrowing powers, power tomortgage, authorized share capital, directors andmortgage, authorized share capital, directors andboard of directors, nominee directors provision, Pvtboard of directors, nominee directors provision, Pvt

or public ltdor public ltd Partnership concerns Partnership deed Partnership concerns Partnership deed

(registration), no of partners, powers to borrow(registration), no of partners, powers to borrow Trusts, HUFs, Co-operatives necessary safeguardsTrusts, HUFs, Co-operatives necessary safeguards Address and Identity proof, Networth statements,Address and Identity proof, Networth statements,

ITRs, Signature attestation from bankers, PAN/SalesITRs, Signature attestation from bankers, PAN/Salestax/ EPF registrationtax/ EPF registration

Technical Aspects 1/3Technical Aspects 1/3


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Scope of projectScope of project Plant scale, product mixPlant scale, product mix CapacityCapacity Bottlenecks in upscalingBottlenecks in upscaling

LocationLocation Approach roadApproach road Infrastructure facilitiesInfrastructure facilities

Power distance from substationPower distance from substation Raw materialsRaw materials Availability of skilled/ unskilled labourAvailability of skilled/ unskilled labour



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Mfg process - Selection of technologyMfg process - Selection of technology Technical consultants/ collaboratorsTechnical consultants/ collaborators Similar technology used by other unitsSimilar technology used by other units

Selection of machinery cost and qualitySelection of machinery cost and quality Performance guaranteePerformance guarantee Training personnelTraining personnel

Imported After sale serviceImported After sale service Second hand/ fabricatedSecond hand/ fabricated



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Major Raw MaterialsMajor Raw Materials Availability (Quantity & Quality)Availability (Quantity & Quality) Price fluctuationsPrice fluctuations Imported or Indigenous - duty structureImported or Indigenous - duty structure

ProximityProximity Power, Water, FuelPower, Water, Fuel Effluent DisposalEffluent Disposal

Manpower availabilityManpower availability Implementation Schedule ????Implementation Schedule ????

Market Analysis 1/ 2Market Analysis 1/ 2


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Target customersTarget customers Market prospects - Market SurveyMarket prospects - Market Survey

Demand Supply scenarioDemand Supply scenario

Price trendsPrice trends Competition - localCompetition - local

Competition foreign - duty structureCompetition foreign - duty structure

Firm tie ups (collaborator off take !!!)Firm tie ups (collaborator off take !!!)



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Selling arrangementsSelling arrangements Industry practicesIndustry practices

Credit periodCredit period

Payment defaultsPayment defaults Advance paymentsAdvance payments

Ancillary units : Tripartite agreementsAncillary units : Tripartite agreements


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Financial Appraisal - Cost of Project & Means of FinanceFinancial Appraisal - Cost of Project & Means of Finance

Project Cost Means of Finance

Land & site development Equity

Buildings (Main/ Auxiliary) Promoters Equity

Plant and Machinery Internal Accruals

Miscellaneous fixed assets Unsecured Loans

Pre. & pre-op exp. Subsidy

Contingency Term Loans

Margin Money for WC Others

Total Total

Capital Cost ValidationCapital Cost Validation


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Capital Cost Validationp LandLand

Cost as per Sale / Lease deed, Registration costCost as per Sale / Lease deed, Registration cost

Cost of Land Development, as estimated by a CivilCost of Land Development, as estimated by a CivilEngineerEngineer Land use permissionLand use permission

Building & Civil worksBuilding & Civil works Approval of construction plan by Local AuthoritiesApproval of construction plan by Local Authorities Types of construction Estimates by a Civil EngineerTypes of construction Estimates by a Civil Engineer

Plant, Machinery & EquipmentsPlant, Machinery & Equipments Selection criteria i.e. Technical specifications, Capacity,Selection criteria i.e. Technical specifications, Capacity,

Quality, After sales service, Guarantee, DeliveryQuality, After sales service, Guarantee, Deliveryschedule, Cost, Terms of paymentschedule, Cost, Terms of payment

Quotations / Offer letters from manufacturersQuotations / Offer letters from manufacturers Excise Duty, Sales Tax, TransportationExcise Duty, Sales Tax, Transportation Foundation, Erection & CommissioningFoundation, Erection & Commissioning


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Financial Viability 2/ 2Financial Viability 2/ 2


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Financial Viability 2/ 2Financial Viability 2/ 2 DERDER

GPM and NPM comparison with peersGPM and NPM comparison with peers DSCRDSCR Project IRRProject IRR BEPBEP Cost of Capital (CoC)Cost of Capital (CoC) Return on Capital Employed (RoCE)Return on Capital Employed (RoCE) Sensitivity analysisSensitivity analysis

Variations in capacity utilisation, selling price, raw materialVariations in capacity utilisation, selling price, raw materialand other key costsand other key costs

Test the performance of key parametersTest the performance of key parameters Inter-firm comparisonInter-firm comparison Project Cost, Means of finance, Projections of income andProject Cost, Means of finance, Projections of income and

profitability and DSCRprofitability and DSCR

OthersOthers


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Ot e s

Repayment schedule EMI/ BalooningRepayment schedule EMI/ Balooning

MoratoriumMoratorium

Capital/ interest subsidyCapital/ interest subsidy

Internal Risk RatingInternal Risk Rating

External ratingExternal rating

Primary and collateral securityPrimary and collateral security

Security Margin/ Asset CoverageSecurity Margin/ Asset Coverage

Pre-disbursement conditionsPre-disbursement conditions


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Thank YouThank You


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THE MAIN SCHEDULESTHE MAIN SCHEDULES


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THE MAIN SCHEDULESTHE MAIN SCHEDULES

1. CAPITAL COST;1. CAPITAL COST; 2. DEPRECIATION SCHEDULE;2. DEPRECIATION SCHEDULE; 3. CAPITAL REPLACEMENT SCHEDULE;3. CAPITAL REPLACEMENT SCHEDULE;

4. CASH OPERATING EXPENSES;4. CASH OPERATING EXPENSES; 5. WORKING CAPITAL REQUIREMENTS;5. WORKING CAPITAL REQUIREMENTS; 6. LOAN REPAYMENT SCHEDULE;6. LOAN REPAYMENT SCHEDULE;

7. CASH REVENUE SCHEDULE;7. CASH REVENUE SCHEDULE; 8. INCOME STATEMENT;8. INCOME STATEMENT;


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Presentation on

Appraisal of Project ReportBanks Perspective

Appraisal?Appraisal?


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Appraisal?pp

A structured analytical tool to take a creditA structured analytical tool to take a credit

decision The basic premises of an appraisal aredecision The basic premises of an appraisal areto assess/ analyze:to assess/ analyze:

The Promoters.The Promoters. Viability of the business Macro & MicroViability of the business Macro & Micro

Environment of the Business.Environment of the Business. Business financialsBusiness financials Various Risk & its mitigation.Various Risk & its mitigation.

Permission & Approvals from RegulatoryPermission & Approvals from RegulatoryBodies.Bodies.

Promoter e al ationPromoter evaluation


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Promoter evaluationPromoter evaluation

Track record of promotersTrack record of promoters

- Net worth/Availability of funds- Net worth/Availability of funds

ManagementManagement

- Experience of Management- Experience of Management- Ownership Pattern- Ownership Pattern

Check RBI Defaulters ListCheck RBI Defaulters List

Check CIBIL RecordsCheck CIBIL Records

Viability of the BusinessViability of the Business


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Viability of the BusinessViability of the Business

SWOT AnalysisSWOT Analysis

Strengths & Weaknesses InternalStrengths & Weaknesses Internal

Opportunities & Threats - ExternalOpportunities & Threats - External


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StrengthsStrengths

(Areas to Look for)(Areas to Look for)

Competent ManagementCompetent Management Distinctive competitive edgeDistinctive competitive edge

in terms of cost, productin terms of cost, productdifferentiation, R&D, skillsdifferentiation, R&D, skills

etcetc Good Brand Image StrongGood Brand Image Strong

& growing customer base.& growing customer base. Industrial relations lowIndustrial relations low

attrition rate.attrition rate. Sufficient FinancialSufficient Financial

Resources.Resources.

WeaknessesWeaknesses


Lack of Management Depth/Lack of Management Depth/TalentTalent

Deteriorating competitiveDeteriorating competitivepositionposition

Newcomer with unprovenNewcomer with unproventrack record.track record.

Short on FinancialShort on FinancialResourcesResources

Technology Obsolescence.Technology Obsolescence.


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OpportunitiesOpportunities


Industrial ScenarioIndustrial Scenario

Faster market growthFaster market growth

Enter new market/Enter new market/customer segments.customer segments.

Expand product line/Expand product line/

Move up in the valueMove up in the value

chain to meet thechain to meet thegrowing aspirations ofgrowing aspirations of

customerscustomers

Vertical Integration.Vertical Integration.

ThreatsThreats


Growing competitiveGrowing competitive

pressures.pressures.

Growing bargainingGrowing bargaining

power of customers/power of customers/supplierssuppliers

Changing buyersChanging buyers

needs/ tastes Risingneeds/ tastes Rising

sale of substitutesale of substituteproductsproducts

Adverse Govt Policies.Adverse Govt Policies.

Vulnerability toVulnerability to

recession/ businessrecession/ business

Business FinancialsBusiness Financials


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Manufacturing efficiencyManufacturing efficiency Operating efficiencyOperating efficiency Is the unit turning over the assets efficiently.Is the unit turning over the assets efficiently. Cash Flow pattern.Cash Flow pattern. Liquidity to meet day to day operationsLiquidity to meet day to day operations What is the quality of current assetsWhat is the quality of current assets

Can the unit sustain in difficult timesCan the unit sustain in difficult times Can it service our interest and repaymentsCan it service our interest and repayments

What are we looking at?What are we looking at?

Key Financial RatiosKey Financial Ratios


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Key Financial RatiosKey Financial Ratios

Growth in sales - It shows prosperityGrowth in sales - It shows prosperity RM Content in sales It indicates cost efficacyRM Content in sales It indicates cost efficacy Gross profit/sales It indicates mfg. efficacyGross profit/sales It indicates mfg. efficacy

PBDIT/sales It indicates operPBDIT/sales It indicates oper Cash accruals/Sales Ultimate earningsCash accruals/Sales Ultimate earnings Current ratio Will it meet comCurrent ratio Will it meet com TOL/TNW Resilience inTOL/TNW Resilience in Sales/TTA Asset turn arSales/TTA Asset turn aro ROCE ROCE

Assessment of Right Quantum &Assessment of Rig

ht Quantum &


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Type of DebtType of Debt

Broadly Debt is required by the Corporates for Broadly Debt is required by the Corporates for

Capital Investment (Project Finance)Capital Investment (Project Finance)

Working CapitalWorking Capital

F f AdF f Ad


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Forms of AdvancesForms of Advances

Fund Based FacilitiesFund Based Facilities

Term LoansTerm Loans

Cash CreditCash Credit

Bills Discounted/ PurchasedBills Discounted/ PurchasedDemand Loans, Overdraft etcDemand Loans, Overdraft etc

Non Fund Based FacilitiesNon Fund Based Facilities

Letter of Credit (Domestic/ Foreign)Letter of Credit (Domestic/ Foreign)

GuaranteeGuarantee

Deferred Payment Guarantee/ Co-Deferred Payment Guarantee/ Co-Acceptance of BillsAcceptance of Bills

Project FinancingProject Financing


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Project FinancingProject Financing

A funding structure that relies on future cash flowsA funding structure that relies on future cash flowsfrom a specific development as the primary sourcefrom a specific development as the primary sourceof repayment with that developments assets, rightsof repayment with that developments assets, rightsand interests legally held as collateral security. Theand interests legally held as collateral security. The

Key Areas are -Key Areas are -Management AnalysisManagement AnalysisMarket & Demand AnalysisMarket & Demand Analysis

Technical AnalysisTechnical AnalysisFinancial AnalysisFinancial Analysis

Project FinancialsProject Financials


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jFocus AreasFocus Areas

Capital StructureCapital Structure

a) Desired Debt/Equity Ratio < 2:1a) Desired Debt/Equity Ratio < 2:1

b) Min. Promoter Contribution at 20-25%b) Min. Promoter Contribution at 20-25%

Fixed Asset Coverage RatioFixed Asset Coverage Ratio

(Fixed Assets (WDV)/Term Liabilities)(Fixed Assets (WDV)/Term Liabilities)Fixed Asset Coverage >1.25 is preferred.Fixed Asset Coverage >1.25 is preferred.

Debt Service Coverage Ratio (DSCR)Debt Service Coverage Ratio (DSCR)

EBIDA/(Interest + Principal Amount)EBIDA/(Interest + Principal Amount)

Desired DSCR is >1.50Desired DSCR is >1.50

Project FinancialsProject Financials


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jFocus AreasFocus Areas

Break Even PointBreak Even PointLower the level, the better it is for the project.Lower the level, the better it is for the project.

Sensitivity AnalysisSensitivity Analysis

Impact study on the cash flows due to adverseImpact study on the cash flows due to adversechanges in the Cost or the Sales side.changes in the Cost or the Sales side.

Repayment PeriodRepayment PeriodNormally repayment term of 7 years is preferred.Normally repayment term of 7 years is preferred.

WorkingWorkingCapital FinancingCapital Financing


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What we look for?What we look for?

Focus onFocus on Volumes/ Sales growthVolumes/ Sales growth

Operating efficiencyOperating efficiency

LiquidityLiquidity

GearingGearing

Quality of current assets.Quality of current assets. Efficiency in asset turn over.Efficiency in asset turn over.

Methods of WC AssessmentMethods of WC Assessment


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Methods of WC AssessmentMethods of WC Assessment

As per Nayak committee (TurnoverAs per Nayak committee (Turnover

Method)Method)

Working Capital Gap MethodWorking Capital Gap Method Cash flow methodCash flow method

Turnover MethodTurnover Method


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Turnover MethodTurnover Method

For Working Capital Limits up to Rs. 5.00 CroreFor Working Capital Limits up to Rs. 5.00 Crore

1.1. Annual turnover as projected by borrower.Annual turnover as projected by borrower.

2.2. Turnover as accepted by Bank.Turnover as accepted by Bank.

3.3. Working Capital requirements [25% of sales i.e.Working Capital requirements [25% of sales i.e.item 2].item 2].

4.4. Minimum margin required [5% of sales i.e. item 2].Minimum margin required [5% of sales i.e. item 2].

5.5. Actual margin available (Net Working Capital).Actual margin available (Net Working Capital).6.6. Maximum permissible Bank Finance is lower of theMaximum permissible Bank Finance is lower of the

(item 3 item 4) and (item 3 item 5).(item 3 item 4) and (item 3 item 5).

Working Capital Gap MethodWorking Capital Gap Method


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11stst

Method ofMethod ofLendingLending 22ndnd

Method ofMethod ofLending (MPBF)Lending (MPBF)

CACA 10001000 10001000

CL excl BankCL excl Bank 400400 400400

WC GapWC Gap 600600 600600

Min. StipulatedMin. Stipulated

NWCNWC

150150

(25% of WC Gap)(25% of WC Gap)

250250

(25% of CA)(25% of CA)

Bank FinanceBank Finance 450450 350350

Working Capital Gap Methodg p p

Cash-flow MethodCash-flow Method


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Cash-flow MethodCash flow Method

Prepare a cash flow statement for the next 12 monthsPrepare a cash flow statement for the next 12 months Arrive at the maximum requirement.Arrive at the maximum requirement.

Obtain documents for the max. amount.Obtain documents for the max. amount.

Operation based on monthly requirements.Operation based on monthly requirements. Monitoring at periodical intervals.Monitoring at periodical intervals.

Challenges Faced by Risk and Providers ofChallenges Faced by Risk and Providers of

CapitalCapital


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CapitalCapitalRisk Head Description

Promoter Risk Capability to implement projects

Ability to Infuse Capital

Market Risk Demand Risk Tariff Risk

Financing Risk Financial Closure Risk

Equity Infusion Risk

Construction Risk Capability to construct

Technology Used, Equipment Quality

Land Acquisition Risk, Environmental Risks

Fuel Supply Risk Availability of Requisite quantity and Quality of Fuel at

Budgeted Cost

Regulatory Risk Risk of not getting approvals