ml0009 fall 2010 solutions

8/8/2019 ML0009 FALL 2010 Solutions

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Provide an assessment of the level of infrastructure facilities available at the proposed site, and provide as accurately as possible in the note as well as in Part II the cost of any additionalinfrastructure that is needed to be installed (road access, power lines, telecommunication lines,water supply, fuel storage, and cost of earthmoving and engineering works to stabilize land andcreate sufficient flat land for the project to be built.

5. TECHNOLOGY/MANUFACTURING PROCESS TO BE USEDProvide the proposed source of technology/equipment with a copy of the manufacturer(s)equipment brochure(s) and explain the rationale for the choice of equipment.The proposed production process should be described in detail and production flow diagramshould be provided. Also provide installed capacity per day and per year.6. CONSUMPTION OF RAW MATERIAL, POWER, AND WATER:The Profile should provide information on raw materials, fuel, electric power and water requiredannually. Raw materials should be calculated in terms of tones per annum, fuel in litres per annum, power in kwh per annum, and water in cubic metres per annum as under. The Profileshould also provide the source of raw material supply. Table presented below may be used to

provide the required information.

Types of Raw MaterialsRequired AnnualConsumption Source of Supply

1.2.3.4. Fuel (liters)5. Electric Power (kWh)6. Water (cubic meters)7.8.7. PROJECT COST/TOTAL INVESTMENT:Provide the project cost in detail and as accurately as possible supported an engineering plan of the site development work and an engineers estimate of the cost of the site works. The projectcost should include the cost of land, site development, infrastructure/installation charges, civilconstruction, plant and equipment, technical know-how/services, other pre-operating expense,miscellaneous/ contingencies and working capital requirement.8. PROJECT FUNDING REQUIREMENTSDescribe the proposed debt/enquiry ratio of the project, the equity funding source(s) and thevalue of contributions, and the amounts of bank loans required for fixed asset purposes, and theamounts required for working capital purposes to place the project into operation and provide itwith sufficient cash for operations in its first year;In describing the proposed security to be pledged against a fixed asset loan, attach a note to theProfile/License Application for the financial institutions detailing the promoters personalfinancial conditions (net worth) in terms of assets (land, orchards, livestock, buildings, vehicles,shares, cash etc.) and liabilities (detailing the promoters outstanding loans andmortgage/security arrangements for these current loans).9. HUMAN RESOURCES


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Specify the maximum human resource requirements of the project (at maximum level of production/sales), with a clear break-up of national/ non-national requirements, and requirementsfor professional/technical personnel as under:(1) Total National:..Professional/Technical:..Casual/Seasonal:..(2) Total Non-National:Professional/Technical:.Casual/Seasonal:.

10. MARKETS:Provide an assessment of the domestic and export market, explaining if the product is new or expected to substitute for an existing or imported product, and explaining the special (or competitive) qualities of the product. If the product is export-oriented, provide information onthe export markets target location, size, international prices, the known supply-demand gap, the

promoters marketing strategy, and current and likely competition. A table provided below may be used to provide information on the projected sales.Sales Projected Year 2 Sales Projected Year 5 SalesDomestic Sales: Nup.a. Nu..p.a.Export Sales: Nup.a. Nu..p.a.Total Sales: Nup.a. Nu..p.a.Current Local Prices of the Products: Nu.Current Export Prices of the Products: Nu11. ENVIRONMENTAL IMPACTProvide the following information to enable the NEC/DOI to access the proposed project and

process for environmental clearance: (Depending upon the complexity of the proposed project more information other than the information asked below would be required in which case the

promoter will be required to provide the specific information as and when asked by the NEC/DOI).a) Description of the present state of the environment within the 50 meters radius of the proposed

project location including in particular Topography Present land use Sett,ement / Institutions / Infrastructures Flora and fauna Cultural and heritage sites Water resources Total area required

b) Description of the principal environmental issues during the construction phasec) Description of the principal environmental issues during the operation phase: A description of the main characteristics of the production processes, for instance, nature andquantity of the materials used and the final product(s) Identification and estimation, by type and quantity, of expected wastes resulting from theoperation of the proposed project.d) A description of the likely impact that the proposed project would have on the environment,including, in particular, population, fauna flora, soil, water, air, material assets, including culturaland heritage resources, landscape and the inter-relationship between the above factors bothduring construction and operation phases.e) A description of the measures envisaged to prevent, reduce and where possible offset anyadverse effects on the environment.


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f) A description of the method and site of disposal of the waste, indicating waste and residual products stored at the plant.g) A description of measures to prevent or reduce Occupational Health and Safety (OHS) issues.h) Provide the name and proper contact address including telephone and fax numbers, and emailaddress of person(s) who would be responsible for the environmental management of the Project.

12. PROJECT FINANCIAL PROJECTIONSPrepare and attach to the Profile/License Application the proposed projects financial statements projected to year 5 of production/sales (projected cash flow statement, projected profit/lossstatement, and projected balance sheet. In considering funding requirements and calculatingfinancial projections, use the current debt/equity ratio in vogue.


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2. Discuss the five types of appraisals followed by a retailer in a retail store.Sol.Appraisal in retail operationsAppraisers examine works of art, jewelry, antiques, and the contents of estates to determine their value and authenticity. This job requires detailed knowledge of the subjects and an understanding

of current market values and trends.A fine art appraiser, for example, will study a work of art for style of brush strokes, color values,and other relevant characteristics. This information can establish the period in which it was

painted or help identify the artist. If a forgery is suspected, the appraiser may analyze paintsamples for their chemical content or examine the painting using sophisticated laser equipmentor under X-ray. This judgment requires knowledge of the materials, style, and techniquesemployed by different artists in different periods.Antique appraisers usually have a specialty, such as silver, jewelry, or furniture of a particular

period. They must be familiar with the styles, materials, and markings that help them date andauthenticate genuine antiques. They must also assess the condition of an article in relation toothers still in existence and determine the rarity of the piece.

Most jewelry appraisers have some training in gemology. This training enables them to appraisethe value of gemstones according to their color, the clarity of the stones, and the quality of thecut. After examining an article, a jewelry appraiser then determines its wholesale and retailvalues. This figure is based on the information the appraiser gathers about the piece and how itcompares to similar pieces. Appraisers also have to know the current market value of an itemaccording to various pricing guidelines and any trends that may affect the price, such as thecurrent price of gold.Estate appraisers are in great demand today to establish the value of items for purposes of sale,estate planning, insurance, and bankruptcy. Unlike other appraisers, they tend to deal with agroup of items rather than individual types of articles. An estate appraiser will visit a house, listand possibly photograph the contents, and take measurements of large pieces of furniture. Theappraiser then sets the value of each item by consulting catalogs, comparing retail values, andfinding prices for comparable items.Education and Training RequirementsThe education and training requirements for appraisers vary according to the types of articlesthey After examining a piece of jewelry, an appraiser determines its wholesale and retail value

based on information he gathers about the piece and how it compares to other similar pieces. (Julio Donoso/Sygma/Corbis.) appraise. Generally, training and experience are gained byworking as assistants to specialists in retail stores, galleries, and auction houses. For fine artappraisal, galleries and art dealers prefer to hire those with a bachelors degree in fine art or arthistory. For those interested in jewelry, the Gemological Institute of America offers a six-monthtraining program leading to a diploma in diamonds and colored stones. It also offers courses insales and appraisal. Estate appraisers prefer to hire high school graduates as assistants, whomthey will train to appraise certain types of articles. Hence, there are five types of appriasel inretail stores. They are as follows:1 Market Appraisal for retail2 Technical Appraisals3 Financial Appraisals4 Socio-Economic Appraisals5 Managerial Appraisals


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1 Market Appraisal for retailFair market appraisals help to determine the fair market value of an item. These appraisals aregenerally sought after when a quilt owner wishes to sell a quilt. When establishing a fair marketvalue for a quilt, the appraiser determines what a "willing buyer" may pay a "willing seller" for

the item. In establishing this value, the appraiser assumes that both the buyer and the seller would have equal knowledge concerning the item. It must also be assumed that the item would be sold under normal conditions and that neither party could be under pressure to buy or sell theitem.A good quilt appraiser will be aware of current market trends regarding the sale of quilts. Quiltappraisers frequently check auction houses, antique stores, Internet quilt sites and galleries for quilt prices and sales. Appraisers use this data to find quilts similar to the quilt you want to sell.These values fluctuate with changing trends and popularities, the economy and geographic areasof the country.It should be understood that a fair market value placed upon an item does not guarantee you willrealize that value in a sale. The value is an opinion, based upon the facts of asking and selling

prices of other similar quilts. If you sell your quilt to an antique dealer or store, they will notwant to pay the fair market appraised value. They want to purchase quilts and sell them at a profit. When selling a quilt at a regular or Internet auction (e.g. Ebay), you may realize muchmore (or much less) than the fair market value. More over Market Appraisal has the following factors: The reasonableness of the demand projections supplied by the promoters are verified byutilizing the findings of available reports/ surveys, industry association/ planning commission/DGTD projections, and independent market surveys (sometimes commissioned with the expense

borne by the promoters). Assess the adequacy of the marketing infrastructure planned in terms of promotional effort,distribution network, transport facilities, stock levels, etc. Judge the knowledge, experience and competence of the key marketing personnel.In case of appraisal for projects, the market appraisal generally tends to be accorded lowimportance. The localized/regional nature of these businesses often makes success in marketingmore a function of the entrepreneurs attributes or contacts rather than a fundamental demand-supply mismatch in the product (currently met by expensive imports or near substitutes).However, over the past few years most financial institutions, based on their experience of pastlending have drawn up categories of industries where new projects would be restricted /

prohibited. These are clearly stated in the lending policies of the financial institutions.When the lending policy of a financial institution (FI) categorizes an industry in the prohibitedcategory, it actually means that the risk of financing such projects (in its opinion) is high makingsuch projects an unacceptable risk from the point of a lender. In the event of your project beingclassified under the Prohibited Category, it would be prudent to review its viability before takingit up for implementation. Also such projects might have to be completely self-financed.

2 Technical AppraisalThe retailer has to ensure that projects are soundly designed, appropriately engineered, andfollow accepted agronomic, educational, or other standards. The appraisal mission looks intotechnical alternatives considered, solutions proposed, and expected results.


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More concretely, technical appraisal is concerned with questions of physical scale, layout, andlocation of facilities; what technology is to be used, including types of equipment or processesand their appropriateness to local conditions; what approach will be followed for the provision of services; how realistic implementation schedules are; and what the likelihood is of achievingexpected levels of output. In a family planning project, the technical appraisal might be

concerned with the number, design, and location of Maternal and child health clinics and theappropriateness of the services offered to the needs of the population being served; in highways,with the width and pavement of the roads in relation to expected traffic and the trade-offs

between initial construction costs and recurrent costs for maintenance, and between more or lesslabor-intensive methods of construction; in education, with whether the proposed curriculum andthe number and layout of classrooms, laboratories, and other facilities are suited to the countryseducational needs.A critical part of technical appraisal is a review of the cost estimates and the engineering or other data on which they are based to determine whether they are accurate within an acceptable marginand whether allowances for physical contingencies and expected price increases duringimplementation are adequate. The technical appraisal also reviews proposed procurement

arrangements to make sure that the Banks requirements are met. Procedures for obtainingengineering, architectural, or other professional services are examined. In addition, technicalappraisal is concerned with estimating the costs of operating project facilities and services andwith the availability of necessary raw materials or other inputs. The potential impact of the

project on the human and physical environment is examined to make sure that any adverseeffects will be controlled or minimized.Further, the technical appraisal is done by qualified & experienced personnel (internal or external) and focuses is mainly on the following aspects: Product mix Capacity Process of manufacture Engineering know-how and technical collaboration Raw materials and consumables Location, site and building Plant and equipment Manpower requirements Break-even point

Normally, projects do not involve breakthrough technology. As a result, the technology aspect isfairly simple to appraise. However, substandard equipment resulting in unsuccessful pilot runsand prolonged rectification process is often a major problem leading to a unit turning sick even

prior to commercial operations. What is accorded maximum importance by the FIs is thereputation of the suppliers and the necessity of 2-3 quotes for the key equipment to judgereasonableness of quality and price. Some of the FIs maintain lists of approved suppliers fromamong whom such equipment will have to be sourced (if available). However such lists also tendto have problems since they are not updated on a regular basis. Consequently, some delays andminor problems are unavoidable in most cases on this count

3 Financial AppraisalTerm lending institutions try to assess the following in their financial appraisal of a project

proposal:


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a. Estimate of capital cost b. Estimate of working resultsc. Rate of returnd. Financing patterna. Estimate of capital cost:

a. The assessment of capital cost involves a vigorous check of the financial projections provided by the promoter on the following aspects: Padding or under-estimation of costs Proper specification of machinery Credibility of various suppliers Allowances for contingencies Inflation factorsb. Estimate of working results: The projections supplied by the promoters regarding the sales, realizations and profits areassessed by checking whether:

A realistic market demand forecast has been given

Price computations for inputs and outputs are based on current quotations and inflationary factors An appropriate time schedule for capacity utilization is given The cost projections are distinguished between fixed and variable costs appropriately

c. Rate of return: The norms for the financial viability are generally in the range of: Internal Rate of Return (IRR) 15-20% Return on Investment (ROI) 20-25% Debt-service coverage ratio (DSCR) 1.5 to 2

The above mentioned figures are not mandatory and a certain degree of flexibility is shown onthe basis of the nature of the project, risks inherent in the project, and the status of the promoter.d. Financing pattern :

A general debt-equity ratio norm of 1.5:1 Minimum Promoters contribution 20-25% of the project cost Stock-exchange listing requirements in cases part of the equity is proposed to be raised

from the public The financial capability of the promoter

In case of sectors involving standard technologies and having seen numerous projects, norms arereadily available for most of the parameters such as the gestation period, build-up of capacityutilization, the unit project cost, cost structure etc. However, in case of other projects, suchfinancial analysis often tends to be based on an aggregation of reasonable assumptions. FIsrework these projections based on the 2-3 parameters where they have standardized assumptions.These could be build-up in capacity utilization, power tariff per unit, etc.The beauty of Financial Analysis is that the viability of projects can be established by effectingminor changes in assumptions such as growth rates, cost structure, residual value, etc (often atthe second or third decimal.). So, achieving the cut-off IRR or coverage may not prove difficultto a person well versed with the various facilities available on spreadsheets.However, Financial Analysis remains an extremely important step, as it is the standard thatinfluences decision of the financiers. (Especially of the public sector). Secondly, the sensitivityanalysis conducted as part of such studies forms the basis for identifying the crucial parameters


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for the success of the project. Financiers tend to monitor the project progress through thesemilestones and parameters.In day-to-day practice the financial institutions have their own independent criteria and creditrating methodology for arriving at the credit rating of each project. Financial institutionscalculate the Internal Rate of Return (IRR) . The Internal Rate of Return refers to the rate of

return that the project is expected to generate based on its projected cash flows accruing over itsexpected lifespan. Institutions have a threshold IRR that the project needs to surpass to assess itsviability.Various financial ratios are calculated for the past and future by the data provided to them by the

promoters after checking the veracity of the same. The various ratios, which are frequentlycalculated include: Current ratio:[(Receivables + material and finished good inventory)/ (creditors for goods and expenses)] Long term debt-equity ratio[Long Term Debt/ Networth] Interest coverage ratio

[(Profit Before Interest Provision for Tax)]/(Interest payments due for the year] Fixed assets coverage ratio[Fixed Assets/ (Term loan and other long term debt obligations)] Debt-service coverage ratio[{(Profit before interest- Provision for taxes)+Depreciation}/ {Interest repayments + (Principle

Repayments*(1-effective tax rate))}] Profit after tax/salesThe minimum or maximum values for some of the ratios are as follows:Long-term debt-equity ratio (Maximumallowable) 2

Current ratio (Minimum) 1.33

Interest cover ratio (Minimum) 2Fixed asset coverage ratio (Minimum) 1.25The above values are taken as standard though a certain amount of flexibility is exerciseddepending on the perception and personal judgment of the appraising officer. A rating isassigned to the project based on the scores of the different ratios. A cut-off rating determinesfinancing decision (whether the project would be financed or not).Above the rating, the projects maybe categorized into excellent, good and average. Based on thisand the project characteristics, the final terms and conditions of financial assistance are decidedupon like: Moratorium Repayment period Availability period Security (like pari-passu charge, first charge, personal guarantee, corporate guarantee etc.) Interest rateAll the expenses like service fee, processing fee, document fee and other expenses likeinspection of site, factory, etc. are charged to the applicant and is a source of income for thelending institution.More over, Capital Investment Programs (CIP) is usually thought of as building things. Thisincludes: development of land; erection of buildings; installation of roads, bridges, pipes and


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other infrastructure above, on and under the ground; or, the supply of equipment for use on asemi-permanent basis.Primary participants in these activities are mainly engineers. Thus, it is natural that they will beconcerned to build and install, as rapidly as possible, the infrastructure and other fixed assets

perceived to be urgently needed. They, after all, have the primary expertise for this task. A

principal limit on the pace and magnitude of their work is, clearly, financial resources. A capitalinvestment program, therefore, is an opportunity for prioritization of fixed asset implementationactivity and the related access to urgent and important funding sources. It will also show how thevision and operational strategy of a community is reflected in the program for capitalexpenditures.Because of the very large Capital Investment Programs (CIP) to be financed, failure to consider the availability of funding could give rise to an undue sense of urgency. That might engender adisregard for the need to carefully examine each project component with due diligence. It isimportant, of course, to ensure that the necessary funding will be available, in full and on time,as and when needed for each project component. However, it is also important to ensure that:(a) each project component, as well as its size and scope, is selected on the basis of a rational

prioritization, with reference to its financial and economic costs, measured against its benefits or effectiveness economic, financial, social and equity; and(b) each project component represents the least economic cost of providing a sound solution tothe concern being addressed.These should be addressed on the basis of life-cycle costs. These allow for the capital costs andalso the impact of these on recurrent finances, together with costs of operation, maintenance andadministration. Also to be considered are the costs of replacement or rehabilitation of equipmentthat will not continuously serve with optimum efficiency, or even become unserviceable, duringthe life-cycle of the principal project assets. Analyses will need to allow for expenditure in later years to be discounted against earlier expenditures.It is also important to take account of the extent and timing of revenue flows from the use of various infrastructure items. Some components, such as water supply, will provide immediateindividual benefits and may well be connected with optimum promptness.Others, such as sewerage, provide benefits that are only partially directed to individualhouseholds. Some benefits accrue to the community as a whole. They are also more diverse andless immediately obvious. It may be that there will be a greater reluctance by individualhouseholds to connect to the system. Solid waste services also exhibit some of the samecharacteristics.Sometimes, financial revenues may still be collected, by levying charges whether there is a directhousehold service or not. However, this may well be contentious, especially for sewerage. For example, households that can ill-afford this may need modifications to internal plumbing.Moreover, lack of connection will likely have technical shortcomings. Low flows will potentiallyharm the sewer pipes, while a lack of connections will limit public health benefits to the wider community.Some infrastructure, such as roads and drainage, will likely provide benefits that are of a general

public nature, rather than to individuals. Road improvements, moreover, are likely to improvethe efficiency of other public services that rely on transport, especially solid waste removal,

police, fire and ambulances. The operation and maintenance of roads and storm drainage,together with necessary capital cost recovery, will need to be borne mainly from general taxes.Thus, it is important to ensure that the necessary increases in general tax revenues are


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engendered from: buoyant increases in the tax bases; politically acceptable and administrativelysustainable increases in the tax levies; or, reductions in other tax-borne expenditures. The last-named would need to result either from efficiency improvements or curtailment of other services.All of these matters are the concern of both technical and financial expertise. Moreover, theyhave financial and economic effects beyond the scope of the individual projects. They impact

upon the entire financial framework of the local government unit, and way beyond it, to other entities. Engineering specialists should, therefore, work closely with financial colleagues. Thiswill provide greater assurance that appropriate costs are budgeted and accounted for, in ways thatwill be both credible for reporting and useful for effective action. Most importantly, these are

policy issues.Cost RecognitionThe above view of Capital Investment Programs has focused on the raising and spending of cash,to provide the infrastructure and other assets. Some attention has also been given to the provisionof funds to operate and maintain these.Certainly, cash-flow management is important, for a variety of reasons. However, other than by

blind coincidence, "cash-flow," is unlikely to be synonymous with "cost." Cost definition cannot

be meaningful unless based on economic principles. Therefore, it should relate as closely as possible to the concept of resource consumption, rather than to the mere receipt and payment of cash. It should also incorporate, where possible, recognition of the recovery of capital costs.Therefore, costs in terms of resource use of any business or public activity should include

properly recognized and recorded expenditures on the following:(a) operation of the activity in terms of the production of goods and services;(b) maintenance of all premises, plant and equipment in a satisfactory condition to perform itsoperations in a safe and efficient manner for its entire working life;(c) administration and management of the activities, together with the payment of taxes,necessary to ensure that operations are efficiently effected; and,(d) the rental cost (capital cost recovery factors) of fixed and working capital, comprising, either (for property not owned) the market rent, or (for property owned):(i) consumption of capital , typically recognized as depreciation of premises, plant andequipment;(ii) adjustment of value , either in terms of changes in real values (opportunity costs) of propertyor in recognition of the effects of changes in monetary values (inflation and deflation); and,(iii) return on investment , including interest on debt and an expected and reasonable return oncontributed (equity) capital, either by dividends to owners or by retained earnings.After covering all the above, which are resource costs, it would be prudent to expect that the

budgeted activity costs would also allow for an additional (albeit small) "surplus," over andabove the expected and reasonable costs of capital. This would allow for periodical fluctuationsin financial fortunes, more specifically: risk; uncertainty; new activity; and, longer-term stability.Return on InvestmentIncluded as part of the "return on investment" is the provision for dividend and retained earnings,typically accruing to the owners (shareholders) of an entity. These are items which, according to"generally accepted accounting principles" are not treated as costs but as allocations of "profit."The distinction arises because financial accounts reflect property rights rather than economic

principles. Thus, the interests of owners (shareholders) are reported as the earnings (profits) after all claims have been met from outside of the entity, including those of lenders.


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There is, however, common agreement among economists that what are considered to be"normal" profits are no more than a part of the "opportunity cost of capital." Only extraordinaryearnings are typically regarded as true "profits." This is somewhat analogous to what is describedas "surplus" in the above set of distinctions. Furthermore, the standard practices of financialanalysis deal explicitly with costs of capital, the return on total net assets, as the weighted

consolidation of the separate and specific returns to debt and equity financing.This has a parallel in the public sector. In some countries, notably in the USA and UK, it had inthe past typically been standard practice for state and local governments to finance up to andincluding 100% of many items of capital expenditure by borrowing. This usually hadamortization periods closely related to the working life of the fixed assets acquired.However, even where all or part of these assets may have been financed from sources other thandebt , the funds used for this purpose still have an opportunity cost. Indeed, the financing of capital expenditure from general government revenues (local, state or central) will do one of twothings. Either it will add to the overall "deficit," which will have to be borrowed, with interest, or it will eliminate some part of the overall "surplus," which will create a loss of interest on therelated monetary investment. Even if the deficit is covered by increased taxes, the taxpayers

(effectively the "shareholders" of the government) will (collectively) lose the equivalent ininterest on what would otherwise have been their own money. They will also forego the use of the principal sum.The issue of cost definition has been fully stressed and explained because it forms the basisagainst which all related aspects will need to be assessed. For example, it affects, or is affected

by: cost accounting systems; prices; allocation of overheads; budgetary management; fiscaldeficits; maintenance of assets; and, inter-governmental transfers. Costs of service cannot becredibly stated, nor fully recovered, unless they include reference to all of these various factors.Effective decisions on public service delivery depend upon whether, and in what form, the costsof these are determined. Furthermore, cost recognition, to be consistent, should relate to themaintenance, use and consumption of resources and not to the manner in which these resourcesare originally financed. Sometimes, subsidies are appropriate, for economic or social reasons.However, unless costs are determined in an authentic fashion, there is no way to know whether,or to what extent, the subsidies already exist (such as in the initial capitalization) or areultimately justified, as in transfers from other accounts, funds or governmental entities.An example of the presentation and use of financial statements, incorporating fullaccounting for resource use costs, is given in the annual financial statements of the City of Birmingham, England. As required by law, it follows the Code of Practice on LocalAuthority Accounting in Great Britain and the Statements of Standard AccountingPractice (SSAP) required by the Chartered Institute of Public Finance and Accountancyand other UK professional accounting bodies. These include stipulations for full accountingof all fixed assets, irrespective of the method of financing. It includes imputed rental,depreciation and interest costs, where appropriate at current (replacement) values.Government GrantsCentral governments, of many other countries, are attempting to encourage and support activity

by the local government units. This includes activity that it favors or for which there is someclear justification on national grounds. However, the prime responsibility is, increasingly, that of the local government units.A most important means of financial support by the central government of local governmentunits is the government grant. Among the many reasons for government grants are the following:


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(a) transfer to local government units of a proportion of revenues collected in or for their areas, but which can be collected more efficiently at national level (e.g. income tax, sales tax, VAT andcustoms duty);(b) support for services in which national government has an interest but which may be better

performed locally, with input from local people (e.g. primary and secondary education, local

roads and public health);(c) equalization, to some degree, of the needs and resources among different areas;(d) provision for specific burdens upon individual areas not shared generally;(e) encouragement of practices which are consistent with national social, economic or financial

policies (and discouragement of those which are not);(f) enhancement of limited local resources to provide reasonable flexibility in decision-makingon the provision of services;(g) major shifts in political, economic or social characteristics of a nation, group of nations or region (e.g. the massive political changes resulting from the liberalization policies in EasternEurope).There needs to be a great deal of common sense and political wisdom, as well as economic logic,

in the administration of a grant structure. For example, whatever may be argued for the needs of a particular area, it may also be one of the most important commercial centers, with a great dealmore economic potential than elsewhere. Thus, there might be a strong economic or equity-basedcase for a net transfer of resources away from the area, in favor of much poorer areas.Capital GrantsGrants may be given towards specific capital projects or to support recurrent operations. In

principle , capital grants have a distinct disadvantage. They will tend to support new capitalschemes, perhaps too soon, too large or even not justified at all, instead of encouraging thecontinuance of a service using existing available equipment and infrastructure. This is veryserious in any country where capital resources, especially in foreign currency, are scarce and thuscostly.Faced with a choice of spending its own resources on maintenance or getting a grant for newcapital investment, a local government unit may be strongly tempted to opt for a capital grant. Amore appropriate financial support for capital expenditure would be a loan, for the life of the newasset, at market interest rates. Then, the local government would be faced with a more even-handed financial choice. It would either continue to pay operation and maintenance costs for theold (probably inefficient) asset or pay debt service (more strictly, capital charges) on the newone.However, in practice , application of these principles may often be difficult, even inappropriate.First, much local infrastructure is in a very poor state and in urgent need of replacement. Indeed,there are some areas or communities that have been so disadvantaged that there is little or nodecent infrastructure to begin with . Second, there is no reasonable supply of market-drivenmedium-term or long-term capital. Even if there were, there is no satisfactory mechanism toadminister it. Third, many local government units lack credit-worthiness, at least until revenuesare greatly stabilized and enhanced. Finally, with the meager and uncertain financial resourcesavailable to the central government, capital grants at least represent one-time payments for whichthere is no continuing obligation beyond the duration of a particular program .

Thus, capital grants offer the opportunity to assist with the initial installation, expansion,reconstruction and rehabilitation of infrastructure. They can also be highly selective, giving

preference to areas of greatest need and with the poorest resources. Where used, they will almost


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always represent a proportion of an approved capital cost, after careful examination and appraisalof the project by central government officials, or those acting on their behalf (e.g. staff of a"development fund" or "municipal bank").Sometimes, as an alternative, projects will qualify if they meet pre-determined conditions thatapply to all similar and relevant circumstances. This suggests that the central government

ministry responsible for local government should try to develop an improved capability for project appraisal. This could provide significant assistance to local government units in planningtheir development, even without grant support.Recurrent GrantsHowever capital expenditure is financed or supported, there will usually be some need for continuing support of recurrent operations. Thus, methods must be found to provide this support.To some degree, at least, this may also need to be supplied by central or state government grants.Usually, there is a system which combines a local governments own revenue sources withrecurrent grants from state or central governments.Some of the methods to be considered for the administration of a recurrent grant system are setout below. However, it must be realized that, at present, many would need to rely upon statistical

information that is simply not available or reliable. The ministry of local government or of finance should, therefore, attempt to build a data-base for this and many other purposes.Possible assessment and distribution methods for recurrent grants are:(a) budget review central government reviews each local budget in turn, assesses its credibilityand provides a grant to cover all or some of any expected recurrent deficit;(b) policy support central government undertakes to reimburse local government units for thecosts of nationally mandated policies, such as nation-wide salary increases;(c) reimbursement central government effectively pays for the costs of delegated services,

properly the primary responsibility of the central government;(d) revenue compensation central government covers losses resulting from curtailment of localrevenues as a result of national policy (e.g. abolition of a local tax based on incomes or theimposition of rent controls affecting property tax valuations);(e) percentage central government provides a percentage of the cost of local services, with

percentages, typically, varying from service to service;(f) population central government provides a lump sum per head of population, which couldvary among age-groups to take account, for example, of the special needs of children and theelderly, with respect to education, health and welfare;(g) unit central government provides a lump sum per unit of service or potential service (eg.

per mile of road, per patient at clinics, per refuse vehicle);(h) revenue potential central government compensates for potential loss of revenue, for example, based on property tax values or assessed incomes for graduated tax, relative to total

population and national average tax potentials;(i) revenue sharing government designates all or part of nationally-collected revenues (eg.vehicle licences) to be shared among local government units; and(j) formula a variety of factors is taken into account to provide a grant structure which meetsmultiple objectives.All of these procedures are appropriate for most sets of circumstances, although only some of them may be chosen for practical use


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4 Socio-Economic AppraisalThrough cost-benefit analysis of alternative project designs, the one that contributes most to thedevelopment objectives of the country may be selected. This analysis is normally done insuccessive stages during project preparation, but appraisal is the point at which the final reviewand assessment are made.

During economic appraisal, the project is studied in its sectoral setting. The investment programfor the sector, the strengths and weaknesses of public and private sectoral institutions, and keygovernment policies are all examined.In transportation, each appraisal considers the transportation system as a whole and itscontribution to the countrys economic development. A highway appraisal examines therelationship with competing modes of transport such as railways. Transport policies throughoutthe sector are reviewed and changes recommended, for example, in any regulatory practices thatdistort the allocation of traffic. In education, power, and telecommunications, the "project" asdefined by the Bank may embrace the investment program of the whole sector. In agriculture,which is more diversified and accounts for a much larger share of a developing countryseconomic activity, and where it is more difficult to formulate a comprehensive strategy for the

sector; attention is given to sectoral issues such as land tenure, the adequacy of incentives for farmers, marketing arrangements, availability of public services, and governmental tax, pricing,and subsidy policies.Whenever the current state of the art permits, projects are subjected to a detailed analysis of their costs and benefits to the country, the result of which is usually expressed as an economic rate of return. This analysis often requires the solution of difficult problems, such as how to determinethe physical consequences of the project and how to value them in terms of the developmentobjectives of the country.Over the years, the retailer has kept in close touch with progress in the methodology of economicappraisal. "Shadow" prices are used routinely when true economic values of costs are notreflected in market prices as a result of various distortions, such as trade restrictions, taxes, or subsidies. These shadow price adjustments are made most frequently in the exchange rate andlabor costs used in the calculations. The distribution of the benefits of a project and its fiscalimpact are considered carefully, and the use of "social" prices to give proper weight in the cost-

benefit analysis to the governments objectives of improved income distribution and increased public savings is passing through an experimental phase. Since the estimates of future costs and benefits are subject to substantial margins of error, an analysis is always made of the sensitivityof the return on the project to variations in some of the key assumptions.Less frequently, in cases of major uncertainty, a risk/probability analysis is also carried out. Theoptimal timing of the investment is tested in relation to the first years benefits. When the Batik

provides funds to intermediate agencies (development finance companies, agricultural creditinstitutions) for relending to smaller operations, or in the case of sector lending, those agenciesown appraisal methods must be acceptable.Some of the elements of project costs and benefits, such as pollution control, better health or education, or manpower training, may defy quantification; in other projects, for example electric

power or telecommunications, it may be necessary to use proxies, such as revenues, that do notfully measure the value of the service to the economy. In some cases, it is possible to assessalternative solutions that have the same benefits and to select the least-cost solution. In other cases, for example education, alternatives are likely to involve different benefits as well asdifferent costs, and a qualitative assessment must suffice.


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Whether qualitative or quantitative, the economic analysis always aims at assessing thecontribution of the project to the development objectives of the country; this remains the basiccriterion for project selection and appraisal. And while greater concern with the distributionaleffects of projects reflects broader objectives of development, it does not mean that the Bank haslowered its standards of appraisal. Whether "old" style or "new," every project must have a

satisfactory economic return, a standard that the Bank believes serves the best interests of boththe country and the Bank itself

5 Managerial AppraisalManagerial competence and integrity is an extremely important pre-requisite to translate a

project viable on paper into a real life success. Capital markets across the world (and even Indianinvestors in recent times) factor in the company management in company valuations (in other words share prices).The following criteria tend to be looked at by the FIs to form a judgement regarding themanagerial competence and resourcefulness. Track record in earlier projects

Resourcefulness of the promoter Understanding of the business Commitment to the project and IntegritySanction In the event of the project being assessed as viable, Sanction is accorded for financing to the

proposal. The Sanction is an in-principle decision for financing the project and is generallysubject to fulfillment of certain terms and conditions. Some of these conditions could be standardones such as: In-principle approval from a bank for working capital No Objection certificate from the Pollution Control Board Sanction for power from the Electricity Board Completion of all documentation formalities creating a charge in favour of the financial institution on all the relevant assets. Disbursement shall commence only when the First Investment Clause has been satisfied. First

Investment Clause requires the entrepreneur to invest his contribution before approaching the Financial Institutions for disbursement.Additionally in the event of the Financial Institution being dissatisfied with any particular aspectof the project, then a condition stipulating the fulfillment of the desired change may be made for disbursement to commence.


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3. List out the planning components in retail operations and describe the project designingprocess in retail project management.Sol.Planning Components in Retail Operations

It is necessary to lead a retail operation with adequate project planning components. Thesummary of Project planning components are as follows:Summary of Supplemental ProjectPlan Components

Project Plan Component PurposeKey Elements /Notes

Impact onProject Planning

Change Control Plan Describes how the project success factors(scope, cost, schedule,quality) will bemanaged and howchanges will beintegrated.

Can includeassessment of expectedstability of

project scope

Proactiveapproach; manageexpectations.

Communications Plan Describes how theinformation andcommunication needsof project stakeholderswill be met.

Oftendocumented and

presented intabular form.

Communicationsmanagement plandetails must beadded to WBSand projectschedule.

Configuration Management Plan Describes howchanges to projectdeliverables and work

products will becontrolled andmanaged.

Should include both technicalwork productsand projectdocumentation

Proactiveapproach; manageexpectations.

Procurement Management Plan Describes how the procurement processwill be managed.

Contract typesRoles of projectteam and

procurementdept.

Remaining procurementmanagement tasksmust be added to

project schedule.Constraints of scheduling

procurementactivities withthird-partyvendors mayimpact the projectschedule.

Summary of SupplementalProject Plan Components


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Project Plan Component PurposeKey Elements /Notes

Impact onProjectPlanning

Quality Management Plan Describes the project qualitysystem.

Should address both projectwork productsand the project

processes.

Cost andscheduleadjustmentsmay be neededto meet qualitystandards.Qualityassurance andquality controlactivities must

be staffed andadded to the

project

schedule.Responsibility Matrix Lists the project roles and

responsibilities. Cross-referencesroles with assigned resources.

RACI matrix. Ensure allrequiredresources areaccounted for.

Resource Management Plan Indicates when project resourcesare needed on the project (startand end dates).

Impact if resource cannotmeet all skillrequirements.Impact if resource must

be acquired atrates higher than estimated.

Cost baseline,work estimates,and projectschedule are influx until thefinal resourcesare acquired.

Risk Management Plan Describes how the risk management process will bestructured and performed.

Describes the process to beused.

Ensure risk managementtasks are addedto WBS and

projectschedule.

Risk Response Plan Describes the response strategies

for identified risks.

Risk Log.

Details actionsteps to betaken if risk event occurs.

Risk response

strategies mayentail theallocation of additionalresources, tasks,time, and costs.Budgetreserves,


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contingency plans.

Variance Management Describes how performance(cost, schedule) variances will bemanaged.

Documents plannedresponses todifferentvariance levels.

Proactiveapproach;manageexpectations

Project DesigningAfter you have a list of tasks for your project and estimates for how long it will take to completethem, you can schedule (schedule: The timing and sequence of tasks within a project. A scheduleconsists mainly of tasks, task dependencies, durations, constraints, and time-oriented projectinformation about the tasks). Depending on how you schedule the tasks, you can predict finishdates for the tasks and the project as you enter information about how the project is progressing.You can use this information to determine whether your project schedule is at risk.1. Get ready to sequence your project tasks:At this point, you should have entered some tasks that must be completed in order to completeyour project. Each task should be associated with a duration, which indicates how long the task will take to complete.Task schedule is easier if you list your tasks in the approximate order that you expect work to bedone on them. You may have to enter some tasks out of sequence, but be sure to list together thetasks that will be done in the same time frame. There are two ways to sequence tasks:1. Use dependency: To indicate that work on a task cannot begin or end until work on another task begins or ends. For example, you use a dependency if painting cannot start until preparationwork is finished.2. Use constraint : To indicate that work on a task must begin or end in relation to a specificdate. For example, you use a constraint if a task must end by June 30, because the subject matter expert will be unavailable after that time.2. Sequence the tasks in a project: You can link tasks according to their dependencies (Task dependencies: A relationship between two linked tasks: linked by a dependency between their finish and start dates: There are four kinds of task dependencies:1. Finish -to -start (FS),2. Start- to- start (SS),3. Finish -to -Finish (FF) and4. Start- to- finish (SF).specifying the sequence for your tasks includes showing which tasks overlap or have a delay

between them.A) Create a dependency between tasks in a project: to link dependent tasks and tell Project how

they are dependent. Tasks often happen in a linear sequence: For example, you first prepare thewalls, then paint them, and then hang pictures. However, there are exceptions in any project. Inthe same example, as one person prepares the walls for painting, someone else can buy the

pictures that you intend to hang.B) Set lead or lag time between tasks: to show a delay between tasks. If a task link alone is notenough to accurately show the relationship between tasks, you can set lag time (lag time: A delay

between tasks that have a dependency. For example, if you need a two-day delay between the


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finish of one task and the start of another, you can establish a finish-to-start dependency andspecify a two-day lag time(has appositive value).3. Create a milestone to represent an external dependency:When you want to track an event but you cant link to it because the event doesnt appear in any

project, you can create a milestone to represent the event. For example, you may not be able to

begin a certain task until another company completes a software program that you need to use.You can create a milestone in your project that represents the completion of that program andreminds you to track its progress.4. Create a deadline for a task: To be notified when a task is finished after a particular date,you can create a deadline. Creating a deadline does not restrict you from freely adjusting theschedule when you update information, just as it does when you enter flexible constraints.(Flexible constraints: A constraint is flexible because it does not tie a task to a date. Theinflexible constraints must finish on and must start on a fixed date.5. Tie a task or phase to specific date : When you absolutely must start or finish a task on a

particular date, tie a task or phase to a specific date. That date can represent an event, such as aseminar or class.

6. Add supporting information about task: Add more information about a task in the form of notes, documents, and links to Web pages.a) Add a note to tasks, resources or assignments: if you have only a small amount of informationthat you want to include directly in your project file. You can also add a file from another

program to a note. b) View and Upload document: if you want to link supporting documents by using ProjectServer.