Project Report and Appraisal

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Project Report and AppraisalPreparation of a Project Report

and appraisal thereof


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Introduction

Project finance is providing financefor particular projects, which is later

repaid from cash flows generated bythose specific projects.

Importance of risk management inproject finance


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Agenda

Today we are going to discuss the methodof preparing a Project Report and its

appraisal

Preparing of Schemes for SSI Registration


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OverviewProject Report preparation involvesFixation of Cost of Project

Fixation of Means of FinancingPreparation of Financial StatementsAssessing Financial viability

Assessing Economic viability


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Fixation of cost of Project

Great care should be takenEvery item is properly scrutinized by financer

Over-invoice to be avoided and creditability ofthe promoters retainedOmission to be financed by promoterTime schedule fixed byBar-Chart ( < 5 crores)PERT or CPM method


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Fixation of cost of Project

The Cost of ProjectLand and Site developmentBuilding and civil woksPlant & MachineryEscalation & contingenciesOther Fixed AssetsTechnical know-how feesInterest during constructionPreliminary & Preoperative expensesMargin Money for working capital


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Land and site development

Basic Cost of landConveyancing charges and other allied charges

Levelling of the plotLaying of the internal roadLaying of the approach roadConstruction of the Boundary WallsConstruction of the main gateTube-well digging cost


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Building and civil works

Main factory BuildingAllied civil structure

There is a tendency of over stating this costThere is a tendency for over-run due to increase in

the area and / or cost of construction


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Plant & Machinery

Evaluation of technologiesIncreased Profitability

Saving of labourBetter consumption normsLesser requirement of PlantsEase in availability of raw material

Selection of plant & machinery



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Escalation and contingencies

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



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Miscellaneous Fixed Assets

There are other items of machinery whichdo not form part of the direct

manufacturing process

These should be supported with quotations



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Technical know-how fees

Fees for technical consultancy



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Interest during construction

periodThe promoter is required to pay the interestduring the period and depends on

Quantum of loanDuration for which the loan will remain

outstanding


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Preliminary & preoperative

expensesExpenses which are not directly relatedwith any of the above expenses and are

required to be incurred


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Margin money for working

capitalEssential requirement of any project is theWorking Capital

Assessment of W.C. requirement20% of TurnoverCA-CL=WC & then 25% margin

MPBF (Maximum Permissible BankFinance)


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Fixation of Means of Financing

Debt Equity Ratiomaximum permissible is 3:1 for small scale unit

And 2:1 for other unitsPromoters contribution Unsecured Loan

Debt Service Coverage Ratio Repaymentcapacity


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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 UtilizationMore Pessimistic Approach

Altering the Interest

Increasing the Instalment of the loanLow DSCR can be reviewed alternatively byreversed remedy


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Preparation of financial

statementfor the period of atleast the tenure of the term

loan

Cost of production and profitabilityCash Flow StatementBalance Sheet


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Preparation of financial

statement 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 StatementBalance Sheet


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Performance Ratios

Share Capital Reserve NET WORTHProfitability ratios

Analysis of Cash AccrualsAnalysis of SalesAnalysis of the Working CapitalAnalysis of Debtorsmore than 6 months may be considered not

recoverable


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Break Even Point

Fixed CostVariable Cost

ContributionBreak Even Point


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Internal Rate of Return

Return on Investment methodPay back method criteria

Net present value criteria ( discounted)Internal Rate of return


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Internal Rate of Return

Internal Rate of returnThe 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 whichthe project is expected to have economic life isevaluated. It works out to 22.1%


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Additional Formats

Preparation of a Project ReportPreparation of the CMA Data for the Bank

(Format enclosed)Appraisal Report of the Banker (Formatenclosed)

Credit rating Norms ( details enclosed )Preparation of Schemes ( Format enclosed)


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More Information

For those who love to readGuide 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

Documents

Project Report and Appraisal