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Project Report and AppraisalProject Report and Appraisal
Preparation of a Project Report
and appraisal thereof
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IntroductionIntroduction Project finance is« providing finance
for particular projects, which is later
repaid from cash flows generated bythose specific projects.
Importance of risk management inproject finance«
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Agenda Agenda Today we are going to discuss the method
of preparing a Project Report and its
appraisal
Preparing of Schemes for SSI Registration
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Overview
Overview
Project Report preparation involves
Fixation of Cost of Project
Fixation of Means of Financing
Preparation of Financial Statements
Assessing Financial viability
Assessing Economic viability
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Fixation of cost of Project
Fixation of cost of Project
Great care should be taken
Every item is properly scrutinized by financer
Over-invoice to be avoided and creditability of the promoters retained
Omission to be financed by promoter
Time schedule fixed by
Bar-Chart ( < 5 crores)
PER T or CPM method
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Fixation of cost of Project
Fixation of cost of Project
The Cost of Project
Land and Site development
Building and civil woks Plant & Machinery
Escalation & contingencies
Other Fixed Assets
Technical know-how fees
Interest during construction
Preliminary & Preoperative expenses
Margin Money for working capital
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Land and site developmentLand and site development
Basic Cost of land
Conveyancing charges and other allied charges
Levelling of the plot Laying of the internal road
Laying of the approach road
Construction of the Boundary Walls
Construction of the main gate
Tube-well digging cost
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Building and civil works
Building and civil works
Main factory Building
Allied civil structure
There is a tendency of over stating this cost
There is a tendency for over-run due to increase inthe area and / or cost of construction
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Plant & MachineryPlant & Machinery Evaluation of technologies
Increased Profitability
Saving of labour Better consumption norms
Lesser requirement of Plants
Ease in availability of raw material
Selection of plant & machinery
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Escalation and contingencies
Escalation and contingencies
Takes care of escalation which may take placeduring the actual implementation of the project.
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MiscellaneousF
ixed AssetsMiscellaneousF
ixed Assets There are other items of machinery which
do not form part of the direct
manufacturing process
These should be supported with quotations
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Technical know
Technical know--how feeshow fees
Fees for technical consultancy
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Interest during constructionInterest during construction
periodperiod The promoter is required to pay the interest
during the period and depends on
Quantum of loan
Duration for which the loan will remain
outstanding
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Preliminary & preoperativePreliminary & preoperative
expensesexpenses Expenses which are not directly related
with any of the above expenses and are
required to be incurred
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Margin money for workingMargin money for working
capitalcapital Essential requirement of any project is the
Working Capital
Assessment of W.C. requirement
20% of Turnover
CA-CL=WC & then 25% margin
MPBF (Maximum Permissible Bank Finance)
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Fixation of Means of
Financing
Fixation of Means of
Financing
Debt Equity Ratio
maximum permissible is 3:1 for small scale unit
And 2:1 for other units
Promoters¶ contribution
Unsecured Loan
Debt Service Coverage Ratio Repaymentcapacity
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Debt Service Coverage Ratio
Debt Service Coverage Ratio
Should be in the vicinity of 1.5. Earlier it was 2.
High DSCR can be reduced by
Reducing cash accrualsBy lower Capacity Utilization
More Pessimistic Approach
Altering the Interest
Increasing the Instalment of the loan Low DSCR can be reviewed alternatively by
reversed remedy
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Preparation of financialPreparation of financial
statementstatementfor the period of atleast the tenure of the term
loan
Cost of production and profitability
Cash Flow Statement
Balance Sheet
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Preparation of financialPreparation of financial
statement for existing Unitsstatement for existing Unitsfor the period of atleast the tenure of the term
loan
Cost of production and profitabilityIncrease in Sale above 20% should be properly
explained
Cash Flow Statement Balance Sheet
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Performance RatiosPerformance Ratios Share Capital Reserve NET WOR TH
Profitability ratios
Analysis of Cash Accruals Analysis of Sales
Analysis of the Working Capital
Analysis of Debtorsmore than 6 months may be considered notrecoverable
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Break
Even Point
Break
Even Point
Fixed Cost
Variable Cost
Contribution
Break Even Point
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Internal Rate of ReturnInternal Rate of Return Return on Investment method
Pay back method criteria
Net present value criteria ( discounted)
Internal Rate of return
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Internal Rate of ReturnInternal Rate of Return Internal Rate of return
The cash flow are total ( Rs 35,000)
The average cash flow calculated ( Rs 35000/5= Rs7000)
The initial investment is divided by the average Cash
flow to 3 decimal places (Rs 20000/7000=2.856)
This figure is matched with the annuity table and theclosed rate for the number of years ( 5 yrs) for which
the project is expected to have economic life is
evaluated. It works out to 22.1%
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Essential criteria
Essential criteria
For project financing, the financier essentially looks at the revenue generating
capacity of the project for which a loan issought.
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AdditionalF
ormats AdditionalF
ormats Preparation of a Project Report
Preparation of the CMA Data for the Bank
(Format enclosed) Appraisal Report of the Banker (Format
enclosed)
Credit rating Norms ( details enclosed ) Preparation of Schemes ( Format enclosed)
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MoreInformationMoreInformation
For those who love to read
³Guide to Project Finance´ enclosed in CD
(downloaded from Net)
Project Reports and Appraisals byH.P.S.Pahwa (Bharat Law House Pvt Ltd)
Credit Appraisal of any Bank
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