37 project report and appraisal

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CA Day July 01 20071

Project Report and AppraisalProject Report and Appraisal

Preparation of a Project Report

and appraisal thereof



CA Day July 01 2007CA Debasish Banerjee 2

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«




Agenda Agenda Today we are going to discuss the method

of preparing a Project Report and its

appraisal

Preparing of Schemes for SSI Registration




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




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






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




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




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




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




Escalation and contingencies

Escalation and contingencies

Takes care of escalation which may take placeduring the actual implementation of the project.




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




Technical know

Technical know--how feeshow fees

Fees for technical consultancy




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




Preliminary & preoperativePreliminary & preoperative

expensesexpenses Expenses which are not directly related

with any of the above expenses and are

required to be incurred




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)




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




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




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



CA Day July 01 2007CA Debasish Banerjee19

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




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




Break

Even Point

Break

Even Point

Fixed Cost

Variable Cost

Contribution

Break Even Point




Internal Rate of ReturnInternal Rate of Return Return on Investment method

Pay back method criteria

Net present value criteria ( discounted)

Internal Rate of return




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%




Essential criteria

Essential criteria

For project financing, the financier essentially looks at the revenue generating

capacity of the project for which a loan issought.




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)




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

37 project report and appraisal

Documents