PROJECT FINANCING

1

• PROJECT FINANCING

PROJECT APPRAISAL Satyajit Dwivedi CAB, Pune
2
PROJECTS - DEFINITION

• CUTTING EDGE OF DEVELOPMENT GITTINGER
• A SET OF ACTIVITIES LARGE ENOUGH TO REQUIRE
  PROPER PLANNING ETC.

3
PROJECTS - DEFINITION

• PROJECT IS AN ECONOMIC ACTIVITY IN WHICH
• FINANCIAL RESOURCES ARE EXPENDED TO
• CREATE CAPITAL ASSESTS THAT PRODUCE
• BENEFITS OVER A PERIOD OF TIME AND WHICH
• LOGICALLY LENDS ITSELF TO PLANNING,
• FINANCING AND IMPLEMENTING AS A UNIT.

4
CHARACTERISTICS

• P PRODUCT OF GOODS AND SERVICES
• R RESOURCES MAN, MATERIAL, MONEY
• O ORGANISATION
• J JUSTIFICATION SOCIAL BENEFITS, WEALTH
• E ECONOMIC FINANCIAL VIABILITY
• C CONTINUITY PLANNING, RESEARCH DEV.
• T TIME BOUND IMPLEMENTATION

5
WHY PROJECT APPROACH ?

• Integrated approach for systematic exploitation
  of resources
• Gives an idea of costs year by year Helps in
  resources planning
• Impact of investment on the stakeholders
• Better judgment of administrative
  organisational problems
• Encourage examination of alternatives
  

6
ESSENCE OF PROJECT APPRAISAL

• A COMPREHENSIVE SYSTEMATIC REVIEW OF ALL
  ASPECTS OF PROJECT
• A SECOND LOOK TO THE PROJECT BY ONE NOT INVOLVED
  IN PRJECT FORMULATION
• HIGHLIGHT THE WEAK AREAS OF THE PROJECT FOR DUE
  RECTIFICATION

7
ESSENCE OF PROJECT APPRAISAL

• AN EXERCISE FOR FUTURE ASSESSMENT
• A JOINT ASSESSMENT BY THE PROMOTER FINANCIAL
  INSTITUTION
• ENFORCEMENT OF A TIME BOUND PROGRAMME TO AVOID
  DISTORTION

8
TYPES OF PROJECTS
FARM SECTOR
NON FARM SECTOR

OTHERS
9
PROJECT CYCLE

• IDENTIFICATION
• FORMULATION
• APPRAISAL
• IMPLEMENTATION
• MONITORING
• EVALUATION

10
IDENTIFICATION
EVALUATION
FORMULATION
PROJECT CYCLE
MONITORING
APPRAISAL
IMPLEMENTATAION
11
APPRAISAL

• TECHNICAL
• COMMERCIAL
• MANAGERIAL / BORROWER
• ORGANISATIONAL
• SOCIAL
• ECONOMIC
• FINANCIAL

12
OBJECTIVES OF FINANCIAL APPRAISAL

• To assess the financial effect on the farmers and
  bank/financial institution
• To asses overall return on the investment as well
  as return to farmer after repayment of
  installments
• To know whether incremental benefits are
  attractive enough for farmer
• To work out a plan that projects financial
  situations and sources of funds and to determine
  timing of investments

13
CASH FLOW STATEMENT

• Cash flow prepared on an annual basis over the
  economic life of assets
• Identify the costs and benefits
• Compare incremental benefits with incremental
  costs
• Income and expenditure pertaining to the
  investment alone to be reckoned
• For deciding the price price paid or received
  at the farm-gate to be taken
• Constant price principle is applied
• Interest on borrowed capital is not included

14
CASH FLOW STATEMENT CONTD..

• Identification of costs
• Investment
• Expenditure made before the production starts and
  replacement of machineries
• Production
• All recurring expenditure during the project life
• Pre-Development Income
• Pre-developmental income to be taken as cost
• Cost not to be reduced with subsidy/margin

15
Identification of Benefits

• Increase in production
• Cost reduction
• Improvement in quality
• Grading
• Prevention of loss
• Consumed part of production
• Scrap/residual value of investments

16
METHODS OF APPRAISAL

• Two well known methods
• PAYBACK METHOD (Undiscounted)
• TIME ADJUSTED RATE OF RETURN (Discounted)

17
PAYBACK METHOD

• LENTH OF TIME FROM BEGINNING OF THE PROJECT TILL
  THE INCREMENTAL BENEFITS REACHES THE CAPITAL
  INVESTMENT
• FAILS TO CONSIDER EARNINGS AFTER THE PAYBACK
  PERIOD
• DOES NOT CONSIDER TIMIMGS OF OCCURRENCE OF CASH
  INFLOWS AND OUTFLOWS OF THE PROJECT

18
DISCOUNTED CASH FLOW METHOD

• TAKES INTO ACCOUNT TIME VALUE OF MONEY
• COSTS AND BENFITS OCCUR AT DIFFRENT TIMINGS AND
  IN DIFFERENT AMOUNT
• DISCOUNT FACTOR IS USED TO BRING COSTS AND
  BENEFITS TO THEIR PRESENT VALUE
• BY DISCOUNTING AT A GIVEN RATE WE OVERCOME THE
  TIME DIMENSION

19
DISCOUNTED CASH FLOW METHOD

• DISCOUNTED MEASURES OF PROJECT WORTH
• BENEFIT COST RATIO (BCR)
• NET PRESENT WORTH (NPW)
• ITERNAL RATE OF RETURN (IRR)

20
STEPS METHODOLOGY FOR APPRAISAL

• COST AND BENEFIT STREAM IN THE CASH FLOW TO BE
  DISCOUNTED SEPARATELY
• TOTAL OF DISCOUNTED COST GIVES PRESENT WORTH OF
  COSTS (PWC)
• TOTAL OF DISCOUNTED BENEFIT IN CASH FLOW GIVES
  PRESENT WORTH OF BENEFITS (PWB)

21
STEPS METHODOLOGY FOR APPRAISAL

• BENEFIT COST RATIO RATIO OF PWB TO PWC
• NET PRESENT WORTH DIFFERENCE BETWEEN PWB AND
  PWC
• IF BCR IS gt 1 AND NPW IS VE AT THE DISCOUNTED
  RATE, THEN THE PROJECT IS VIABLE

22
Benefit Cost Ratio
Year Investment cost Benefits DF _at_15 PW of costs ( 2x4) PW of benefits (3x4)
1 2 3 4 5 6
0 1000 - 1.000 1000 -
1 - 400 0.870 - 348
2 - 500 0.756 - 378
3 - 500 0.658 - 329
Total 1000 1400 1000 1055
BC Ratio 1055 - 1000 1.055 1

23
Net Present Worth
Year Investment cost Benefits DF _at_15 PW of costs ( 2x4) PW of benefits (3x4)
1 2 3 4 5 6
0 1000 - 1.000 1000 -
1 - 400 0.870 - 348
2 - 500 0.756 - 378
3 - 500 0.658 - 329
Total 1000 1400 1000 1055
NPW 1055 - 1000 55

24
Net Present Worth
Year Investment cost Benefits DF _at_ 20 PW of costs ( 2x4) PW of benefits (3x4)
1 2 3 4 5 6
0 1000 - 1.000 1000 -
1 - 400 0.833 - 333
2 - 500 0.694 - 347
3 - 500 0.579 - 289
Total 1000 1400 1000 969
NPW 969 - 1000 (-) 31

25
Internal Rate of Return

• Internal Rate of Return ( IRR )
• Lower of the two discount rates ( ) Difference
  between two discount rates x (NPW _at_ lower
  discount rate - Absolute difference between
  NPWs at two discount rates )
• IRR
• 15 5 x ( multiplied by )
• 55 - 86 ( 55-31)
• 18 ( 18.2 )
• IRR determined by trial and error
• Represents return for resources over life of
  project
• Earning power of money used in project
• IRR not estimated beyond 50
• Present cut off IRR 15

26
Appraisal of Projects- Techniques-contd.
27
TREATMENT OF DEPRECIATION AND INTEREST

• Depreciation and interest on borrowed capital
  not treated as cost
• In DCF approach
• return of capital is ensured and hence no
  depreciation of investment
• return to capital i.e interest on investment is
  also ensured

28
SENSITIVITY ANALYSIS

• Studies the changes in the scenario in case
  either price structure or timeframe undergoes
  change
• Studies ability of the project to bear
  adversities

29
REPAYMENT SCHEDULE

• Three issues to be seen
• Instalments to be fixed in relation to surplus so
  that sufficient is available with the farmer
  after repayment
• Period of loan to be within economic life of the
  assets
• Instalments are fixed when surplus is available

30

THANK
YOU