Terms of prices

8/12/2019 Terms of prices

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PROJECT ANALYSIS AND ASSESSMENT OF TERM LAON

Project finance involves providing credit and other facilities to a borrower , for setting up

new projects, expansion, diversification and modernization of existing industrial units.

While considering the project for assistance, we evaluate technical feasibility,commercial and economic viability and financial soundness of the project. The

repayment of the loans and facilities is normally fixed on case to case basis depending on

projected cash flow of the borrower.

Infrastructure Non- Infrastructure Services

Road and rban

!evelopment

Power " tilities

#il " $as, #ther natural

Resources Ports and %irports

Telecommunication

&ement, 'teel, (ining,

)ngineering, %uto&omponents, Textile, Pulp "

Paper, &hemicals,

Pharmaceutical **.)tc

Tourism "

+ospitality,)ducational

nstitutions

)tc.

Various asects of ro!ect ana"#sis$

%& Tec'nica" Ana"#sis&

(& Co))ercia" Ana"#sis * Ana"#sis of De)an+ forecast&

,& Financia" Ana"#sis

I. Capital cost of Project & Sources of Finance.

II. Financial Projections Cash Flow and profitability Estimates.

III. Ratio nalysis

I!. "rea# E$en point

!. IRR

& Ana"#sis of Mana.e)ent&

/& Monitorin.


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Tec'nica" Ana"#sis$

Technical analysis is essential to ensure that necessary physical facilities re-uired forproduction will be available and the best possible alternatives is selected to procure

them. These are to be assessed by common sense, experience and discussions with the

promoters

%& Manufacturin. Process 0 Tec'no"o.#

(& Tec'nica" arran.e)ent

,& Si1e of t'e "ant

& Pro+uct Mi2

/& Se"ection of P"ant an+ Mac'iner#

3& Procure)ent of P"ant an+ Mac'iner#

4& P"ant "a# out

5& Location of t'e "ant&

I. %and

II. Raw aterial

III. ar#et

I!. %abour

!. 'tilities such as water( Power( fuel etc.

!I. Effluent disposal

!II. )ransportation

6& Sc'e+u"e of Pro!ect I)"e)entation


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%& Manufacturin. Process 0 Tec'no"o.#

f a product can be manufactured by using alternative raw materials with

alternative process routes, a comparative study should be done to choose

the most suitable process depending upon the -uality of product re-uired,

its end use.

f a product is to be manufactured by a particular process for the first time

in the country, necessary study should be done about the success of theprocess in other countries.

(& Tec'nica" arran.e)ent

Technical arrangement made to obtain technical now how re-uired for

the proposed project.

'upport to be provided by technical collaborators in planning anddesigning of the project

'election and procurement of e-uipment, installation and operation of the

plant, training etc.

&ollaborator has agreed to provide the benefits of research and

development.

%ny restriction imposed by collaborator /)xports etc.0

,& Si1e of t'e "ant

'ize of the plant depends on the manufacturing process, availability of raw material,

capital investment, size of the maret.

Si1e of t'e "ant or caacit# can 7e e2resse+ in one of t'e fo""o8in. ter)s$

1 With Respect to the output

/ -uantity of finished product0

Pulp and paper, &ement, 'teel, etc.

2 With Respect to input

/ -uantity of main raw material used0

'ugar (ill, &ottonseed expeller unit,

'olvent extraction plant.etc.

3 With respect to number or machines Power looms, 'pinning (ills, Textile(ills etc.

The concept of economic size of the plant changes with the changes in technology,

price structure, availability of raw material, demand of the product and other

circumstances.


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& Pro+uct Mi2

Product mix or product range depends upon maret re-uirement of certain items mayhave to be done in different sizes and -uality to suit different consumers.

f plant may have flexibility to change product mix according to changes in themaret conditions, such flexibility may need additional investment, its impact on the

viability of the project be analysed.

/& Se"ection of P"ant an+ Mac'iner#

'election of plant and machinery should be done according tomanufacturing process and size of the unit. !ifferent stages of

manufacturing process should have proper balance of capacity.

% product has to pass through 4 stages and the capacity of proposed

machinery for each stage is as under

Production &ycle

Raw(aterial 'tages

5 6inished$oods

&apacity 78 98 :8 98

The total capacity of the plant in above case will be considered as :8 units because

the capacity in the third stage of process is only :8 units.

)-uipments for utilities /Power, water, fuel etc0 should also have sufficient

capacity to meet the re-uirements of main plant and machinery.

%de-uate provisions should also be made for tools and spares.

3& Procure)ent of P"ant an+ Mac'iner#

The machinery suppliers should be decided eeping in view the -uality ofthe machine, the reputation of the suppliers, delivery schedule, payment

terms , performance guarantee and other relevant matters.

t is not always necessary to procure machinery from suppliers whose

-uotations are the lowest.

f the project is being implemented on turney basis , the reputation of

)P& contractor, main terms and conditions of contract to be analyzed.

f promoters proposes to import second hand machinery a certificate fromchartered )ngineer giving details of its history, present performance,


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valuation, economic life and suitability of second hand machinery should

be obtained&

n order to have uninterrupted production, it should be ensured that

satisfactory arrangements for repair have been made and necessary spare

parts will be available in time.

4& P"ant "a#out

Proper plant lay out can reduce manufacturing cost by savings time and

money .

Plant lay out be done in such a way that minimum time is taen in handling

e-uipment , raw material, consumables, goods ;in ;process and finished

goods&

5& Location of t'e "ant&

I. Land


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IV. Labour

'ometimes silled labour is not available at a particular place. f

labour has to be obtained from outside ,arrangements to provide

housing facilities analyzed.

V. Utilities such as water , Power, fuel etc.

rran+ement for utilities power( water( fuedl etc to be ensured. If

there is shorta+e of power supply alternati$e arran+ement be way

of ,en Sets etc be ensured.

VI. Effluent disposal

The problem of effluent differs from industry to industry

depending on nature and -uantity of effluent.

t should be ensured that necessary treatment is provided the

effluent unit.

VII. Transportation

f the proposed site is not connected with main road, an approach

road may have to be laid from the site to the main road.

The -uality of road may be decided eeping in view the -uantum

of goods to be transported.

f the unit proposes to buy their own vehicles cost benefit analysis

be made, by calculating deprecation, interest and other expenses ofmaintaining vehicle compared to vehicles engaged on hire basis.

6& Sc'e+u"e of Pro!ect I)"e)entation

The Project )valuation and Review Techni-ue / P)RT0 or &ritical Path (ethod

/&P(0 helps in proper planning , scheduling and controlling various activities

essential for the execution of the project.

%ll possible activities from project identification to commencement of production

should be listed.

t should be ensued that all the activities have been included and the time schedulegiven by the promoter is reasonable.

%rrangement should be made to procure necessary raw material inputs lie raw

material, power, labour etc appropriate time so that plant does not remain idle and the

implementation may commence soon as the installation of the plant is completed.


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Co))ercia" 9 Mar:et Ana"#sis$

Ma!or ;ea+in.s Infor)ation Nee+e+!emand Product, ses, the consumers, actualconsumption, liely consumption in future

and exports

'upply Production &apacity, actual production,&apacity utilization, mports and liely

future capacity.

!istribution &hannels of !istribution involved, the cost

of distribution and the mode of transport

Pricing !omestic and international price trends,

control on prices, duties and taxes

)xternal forces $overnment Policies regardingindustrialization, exports, imports, foreign

collaboration, Plan outlay etc.


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Financia" Ana"#sis$

%& Caita" Cost of Pro!ect

I. %and and Site -e$elopment.

II. "uildin+s

III. Plant and achineryI!. En+ineerin+ and consultation fees

!. iscellaneous Fied ssets

!I. Preliminary and Pre operati$e Epenses!II. Pro$isions for contin+encies

!III. ar+in oney for *or#in+ Capital

(& Sources of Finance&

,& Financia" Pro!ections

I. Profitability EstimatesII. Cash flow Estimates

III. Projected "alance Sheet

& Ratio Ana"#sis

I. -ebt E/uity Ratio

II. Current RatioIII. -ebt Ser$ice Co$era+e Ratio

I!. Fied ssets Co$era+e Ratio

/&


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Caita" cost of Pro!ects an+ sources of Finance

)stimation of capital cost of the project provides the basic information to decide its

pattern of financing and viability. f cost of project is not estimated correctly, the

preparation of cash flow and profitability estimates will be futile exercise because theamount of deprecation , interest and dividend will change with the change in the capital

cost of the project.


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Esti)ation of t'e caita" cost of t'e ro!ect is necessar# not on"# in t'e interest of

t'e ro)oter 7ut a"so in t'e interest of t'e "en+er&

DETAILS OF CAPITAL COST OF PROJECT AND MET;ODS OF ANALYSIS

Sr

No

Particu"ars Ite)s to 7e inc"u+e+ Docu)ents0Particu"ars to 7e

Scrutini1e+A Lan+ an+

Site

Deve"o)ent

&ost of uarters for essential staff

'oils , tans, wells etc

$arages

&ost of sewers, drainagesec

%rchitect?s fee

!esign of buildings

!ifferent types of

construction and areaunder each type of

construction %scertain from plant

outlay whetherproposed construction

of building is sufficient

and also no unnecessaryconstruction is done.

Rate per s-uare meter

of each construction

%greement with

building &ontractor, if

any

% note on past record of

building contractor and

%rchitect.

Sr

No


Scrutini1e+


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C P"ant an+

Mac'iner#

I)orte+ P"ants

6#= value of plant to beimported

'hipping, freight and

insurance mport duty

&learing uotations of plant to

be imported

#rders, if alreadyplaced of plant to be

imported.

mport license

Report of an

independent )ngineer,

if second hand plant is

being imported.

In+i.enous P"ant

(ain Plant and other

(achinery

(achinery stores and

spares

'ales tax

Transportation charges

6oundation and

installation charges


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SrNo

Particu"ars Ite)s to 7e inc"u+e+ Docu)ents0Particu"ars to 7eScrutini1e+

D En.ineerin.

9

Consu"tanc#

Fees

)xpenses of foreign

technicians

)xpenses of training forndian technicians

Technical @now how

fees

)xpenses on drawings

&onsultancy fees for

preparing project report.

&ontract between

company and foreign

collaborator

&ontract between

company and

consultants

% note on past record of

consultants

Relationship, if any,

between promoters of aproject and consultants.

Sr

No


Scrutini1e+

E Misc Fi2e+

Assets 6urniture

#ffice machinery and

e-uipments

5ehicle &ars, trucs etc.

&ost of electric

installation

)-uipments and pipes fordistribution of water , air

and steam


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issue

#ther &apital issue

)xpenses

&ommitment charges

nterest on Term


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The level of raw materials,

consumable stores, goods inprocess, finished goods and

debtors should be decided

eeping in view of production

re-uirements, process time andpractice prevailing in the

industry.

2BC of the total current assets

should be financed by long term

resources and included in thecapital cost of the project.


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Means of Finance$

%& Pro)oters contri7ution

(& De7ts

Pro)oter>s contri7utions

The minimum promotorDs contribution envisaged in the project is wored out on the basisof !ebtE)-uity norm and the security margin norm applicable at the time of sanction of

the loan. The debt e-uity ratio is the ratio of loan component and the e-uity contribution

in the total project cost. The maximum amount of assistance shall be lower of the twoamounts wored out on the basis of !ebtE)-uity norm and the security margin norm. The

normal lending norm for debtE e-uity is 2F1, however in some specific schemes this norm

may be flexible.

The entire promoterDs contribution envisaged in the project is desired to be raised by wayof capital before first disbursement of the loan installment. +owever in case the

promoters are short of own capital, some amount may be raised as unsecured loans in the

form of -uasiEcapital. The -uantum is ascertained during the appraisal of loan proposal.

Pro)oter>s contri7utions inc"u+e?

10 'hare &apital to be subscribed by promoters

20 nsecured


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+igher debt e-uity is allowed for projects promoted by Technocrats,capital intensive projects, projects located in bacward areas etc.

Profita7i"it# Esti)ates

Profitability estimates are estimates of expected sales realizations and expenses to be

incurred by the unit. )xcess of sales realization over expenses indicates the expected

profit of the unit.

tems to be included in profitability estimatesF

'ales Realizations

Raw (aterials and &onsumable 'tores.

tilities / Power, fuel, Water etc0

Repair and (aintenance

Wages and salaries

Rent insurance etc.

!epreciation

BC on =uilding

18C on Plant and (achinery / %dd B C for every extra shift0

28C on (isc fixed %ssets

&ontingencies provided in the estimation of capital cost of project should

be added to the fixed assets proportionately to ascertain the value of fixedassets for calculating depreciation.

Preliminary expenses upto a limit of 2.BC of the project cost / excluding

margin money for woring capital 0 can be written off from profits at therate of 18C every year over a period of 18 years.

f preliminary expenses are more than 2.BC of capital cost , the excess

portion and also pre ;operative expenses should be added to fixed assets

proportionately to ascertain that value of fixed assets for calculatingdeprecation on them.

!epreciation to be calculated on straight line method for the purpose of

profitability estimates and on written down method for the purpose of taxcalculations.

%dministrative expenses

'elling )xpenses

nterest on Term


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CAS; FLO@ ESTIMATES

&ash flow estimates are prepared to ensure that unit will have necessary cash with it and

it will not face li-uidity problems

While profitability estimates are prepared only from the year in which unit os liely to

commence production, &ash flow estimates are necessary for the construction period also

to ensure availability of cash according to the re-uirement of the project.

Sources of fun+s$

10 'hare &apital20 Term


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%ny other items.

The level of inventories and boo debts will increase in first 2E3 years with the increase

in the level of production.

!ecrease in Term


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Pro!ecte+


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Ratio Ana"#sis$

De7t EBuit# Ratio$ !ebtG )-uity

Current RatioF &urrent %ssetsG &urrent


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The fixed assets coverage ratio depends on debt e-uity ratio. +igher the debt

e-uity ratio, lower will be the margin available because the amount of term loanwill be higher for creation of fixed assets.


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Contri7ution

Contri7ution$ !ifference between sale price and variable cost is called contribution. Thecontribution helps a unit to recover its fixed cost. The level of production at which the

contribution recovers entire fixed cost is called brea even point.

6ixed &ost Rs. :888.88

'ale Price Rs. 12 per unit5ariable &ost Rs. :

=rea even Point K 6ixed &ost K :888 K1888 'ale Price ; 5ariable &ost 12E:

The brea even point will be at 1888 units, the contribution of Rs. : per unit will recover

the entire cost of Rs. :,888 at the production of 1888 units.


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Mana.e)ent Ana"#sis

% project which is considered technically feasible, economically viable and financially

sound may run into difficulties if it is not baced by sound and efficient management.

(an behind the project is very important. )xperience shows that may of the projects havebeen rendered sic owing to inefficient or dishonest management. Therefore , proper

evaluation of management is a highly essential part of appraisal

%& ua"ities of an entrereneur

I. 0onesty and Inte+rity

II. In$ol$ement in the projectIII. Financial Resources

I!. Competence

!. Initiati$e!I. Intelli+ence

!II. -ri$e & Ener+y

!III. Self confidenceI1. Fran#ness

1. Patience

(& Various for)s of or.ani1ation&

II. Proprietary Concern

I. Partnership firmIII. Corporate Sector


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ua"ities of Entrereneur

)ach promoter has to come in contact with the appraising officer several times for discussion

regarding the project. %ppraising officer should evaluate the -ualities of the promoter after

interviewing him two three times.

% chec list giving 18 -ualities of an entrepreneur is given below to judge promoter of a project.

%lthough the same is highly subjective , it gives and idea about the -ualities of the promoters.

E2ce""ent =oo+ Poor

(G %(G G

% C'aracter +onest and eep itsword under all

circumstances

(aes sincere effortsto honour his words

!oes not bother muchto honour his words

( Invo"ve)ent

in t'e ro!ect

+ighly nvolved ;

#nly source of

ncome

+as other source of

ncome

!oes as part time

activities

, Financia"

Resources

+as enough financial

resources to meet not

only the re-uirement

of promoter?s

contribution but also

to finance small

overrun in the projectcost

+as sufficient

financial resources to

meet the re-uirement

of promoters

contribution

(ay have to borrow

to meet the

re-uirement of

promoters

contribution

Co)etence +as nowledge an+

experience relating to

the project.

+as nowledge or

experience relating to

the project.

+as neither

experience nor

nowledge relating to

the project.

E2ce""ent =oo+ Poor

%G 3G (G

/ Initiative +ighly alert to

opportunities

Performs wor with

just the general

guidance

Routine worer,

awaits decisions

3 Inte""i.ence 5ery -uic in

understandingpertinent points of a

problem

nderstand the

problem afterreasonable

explanation

Taes time to

understand theimplications of any

action

4 Drive 9

Ener.#

%lways highly

energetic

6airly )nergetic %voids +ard wor

5 Se"f

Confi+ence

=elieves strongly in

himself and hisabilities

+as faith in his

abilities

=elieves in luc


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6 Fran:ness Tals franly about

the wea points of the

project

Prepared to tal on

wea points of the

project

%voids taling on

wea points of the

project

% Patience +as patience and does

not expect -uic

results

%ppreciates the time

taen by lending

institutions in

appraisal

Wants -uic results.

Monitorin.$

Term


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envisaged initially should be reviewed afresh and final decision should be taen and

documented under intimation to sanctioning authority. t is also important to monitor the

progress of the project under implementation on an ongoing basis to ensurecommencement of commercial production in time and as per the schedule approved at the

time of financial closureGsanction.

E2ercise for


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A& Varia7"e Cost$

Particu"ars Rs0

La:'s

Raw material B.2B

&onsumable 'tores 4.B8

Power fuel water etc 1.1B

'elling )xpenses 1.B8

nterest on woring &apital 8.7B

Tota" %,&,/

< Fi2e+ Cost$

Particu"ars Rs0

La:'s

Repairs and maintenance 8.IB

Wages and 'alaries 4.9:

Rent nsurance etc 8.IB

!epreciation 2.72

%dministrative )xpenses 1.38

nterest onTerm


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Terms of prices

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