Project Report and Appraisal

Preparation of a Project Report and appraisal thereof

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Introduction

Project finance is providing finance for particular projects, which is later repaid from cash flows generated by those specific projects.
Importance of risk management in project finance

CA Debasish Banerjee

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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

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

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) PERT or CPM method

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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 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

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 in the area and / or cost of construction

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Plant & 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

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

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Miscellaneous Fixed 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-how fees

Fees for technical consultancy

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Interest during construction period

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 & preoperative expenses

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 working capital

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

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 Repayment capacity

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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 accruals
By 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 financial statement

for 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 financial statement for existing Units

for the period of atleast the tenure of the term loan Cost of production and profitability
Increase in Sale above 20% should be properly explained

Cash Flow Statement Balance Sheet

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Performance Ratios
Share Capital Reserve NET WORTH Profitability ratios Analysis of Cash Accruals Analysis of Sales Analysis of the Working Capital Analysis of Debtors

more than 6 months may be considered not recoverable

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Break Even Point

Fixed Cost Variable Cost Contribution Break Even Point

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Internal 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 Return

Internal Rate of return

The cash flow are total ( Rs 35,000) The average cash flow calculated ( Rs 35000/5= Rs 7000) 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 the closed 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

For project financing, the financier essentially looks at the revenue generating capacity of the project for which a loan is sought.

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Additional Formats
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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More Information

For those who love to read

Guide to Project Finance enclosed in CD (downloaded from Net)

Project Reports and Appraisals by H.P.S.Pahwa (Bharat Law House Pvt Ltd) Credit Appraisal of any Bank

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