4-TH (FINAL)

SEMESTER
(PGDM FINANCE)
PROJECT APPRAISAL
&
FINANCE

FULL NOTES
SYLLABUS
UNIT-I
1. IDENTIFICATION OF INVESTMENT OPPORTUNITIES
2. INDUSTRY ANALYSIS REVIEW OF PROJECT
3. PROFILES FEASIBILITY STUDY

UNIT-II
1. PROJECT APPRAISAL
2. TECHNIQUES OF APPRAISING COMMERCIAL AND SOCIAL PROJECTS
3. DCF AND NON-DCF METHODS
4. SENSITIVITY ANALYSIS

UNIT–III
1. PROJECT RISK ASSESSMENT
2. PROBABILISTIC CASH FLOW APPROACHES
3. APPLICATION OF SIMULATION TECHNIQUES

UNIT–IV
1. SOCIAL COST BENEFIT ANALYSIS
2. VALUE ADDED CONCEPT
3. SOCIAL SURPLUS INDIRECT IMPACT OF PROJECTS
4. FINANCIAL STRUCTURING
5. INNOVATIVE FINANCING ALTERNATIVES
6. COLLABORATION
7. LEASEFINANCING
8. EQUITY PARTICIPATION
9. PROJECT FINANCE VIS-À-VIS CORPORATE FINANCE

UNIT–V
1. EVALUATION OF INTERNATIONAL PROJECTS

UNIT–VI
1. PROJECT APPRAISAL PARAMETERS OF SELECT FINANCIAL INSTITUTIONS

UNIT–VII
1. PREPARATION OF PROJECT REPORT– CASE ANALYSIS
 UNIT-I

Topics:-
 IDENTIFICATION OF INVESTMENT OPPORTUNITIES
 INDUSTRY ANALYSIS REVIEW OF PROJECT
 PROFILES FEASIBILITY STUDY

IDENTIFICATION OF INVESTMENT OPPORTUNITIES

An investment decision in a country is based on discovering relations between the macroeconomic

development of countries and the investment attractiveness of their government regulation.
Macroeconomics refers to a branch of economics that studies how an overall economy, the market
systems that operate on a large scale behaves. Macroeconomics studies economy-wide phenomena
such as inflation, price levels, rate of economic growth, national income, gross domestic product
(GDP), and changes in unemployment.

Investment opportunities have to be identified or created they do not occur automatically. Investment
proposals of various types may originate at different levels within a firm. Most proposals of various
types may originate at different levels within a firm. Projects have a major role to play in the economic
development of a country. Since the introduction of planning in our economy, we have been investing
large amount of money in projects related to industry, minerals, power, transportation, irrigation,
education etc. with a view to improve the socio-economic conditions of the people. These projects are
designed with the aim of efficient management, earning adequate return to provide for future
development with their own resources.

Most proposals, in the nature of cost reduction or replacement or process or product improvements
take place at plant level. The contribution of top management in generating investment ideas is
generally confined to expansion or diversification projects. The proposals may originate
systematically or haphazardly in a firm. The proposal for adding new product may estimate from the
marketing department or from the plant manager who thinks be a better way of utilizing idle capacity.
Suggestions for replacing an old machine or improving the production techniques may arise at the
factory level. In view of the fact that enough investment proposals should be generated to employ the
firm’s funds fully well and efficiency, a systematic procedure for generating proposals may be evolved
by a firm.

In a number of companies, the investment ideas are generated at the plant level. The contribution of
the broad in idea generation is relatively insignificant. However, some companies depend on the
board for certain investment ideas, particularly those that are strategic in nature.
COMPANIES USE A VARIETY OF METHODS ARE:

Management sponsored studies for project identification, Formal suggestion schemes, Consulting
advice. Most companies use a combination of methods. The offer of financial incentives for
generating investment idea is not a popular practice. Other efforts employed by companies in
searching investment ideas are review of researches done in the country or abroad, conducting
market surveys, deputing executives to international trade fairs for identifying new products and
technology. Once the investment proposals have been identified, they are be submitted for scrutiny.
Many companies specify the time for submitting the proposals for scrutiny.

Project Evaluation

The evaluation of projects should be performed by a group of experts who have no axe to grind. For
example, the production people may generally interested in having the most modern type of
equipments and increased production even if productivity is expected to be low and goods cannot be
sold. This attitude can bias their estimates of cash flows of the proposed projects. Similarly, marketing
executives may be too optimistic about the sales prospects of goods manufactures and overestimate
the benefits of a proposed new product. It is, therefore, necessary to ensure that projects are
scrutinized by an impartial group and that objectivity is maintained in the evaluation process.

A company in practice should take all care in selecting a method or methods of investment
evaluation. The criterion selected should a true measure of the investments profitability (in terms of
cash flows), and it should lead to the net increase in the companies wealth (that is, its benefits should
exceed its cost adjusted for time value and risk). It should also be seen that the evaluation criteria do
not discriminate between the investment proposals. They should be capable of ranking projects
correctly in terms of profitability. The net present value method is theoretically most desirable criterion
as it is a true measure of profitability; it generally ranks projects correctly and is consistent with the
wealth maximization criterion. In practice, however, managers’ choice may be governed by other
practical considerations also.

A formal financial evaluation of proposed capital expenditures has become a common practice
among companies. A number of companies have a formal financial evaluation of almost three froths
of their investment projects. Most companies subject more than 50% of the projects to some kind of
formal evaluation. However, projects, such as replacement or worn-out equipment, welfare and
statutorily required projects below certain limits, small value items like office equipment or furniture,
replacement of assets of immediate requirements, etc., are not often formally evaluated.

Methods of Project Evaluation

(1) Payback Method

(2) Internal Rate of Return (IRR)
(3) Net Present Value (NPV)
(4) Accounting Rate of Return (ARR)

The major reason for payback to be more popular than the discounted cash flow method techniques
is the executives’ lack of familiarity with discounted cash flow techniques. Other factors are lack of
technical people and sometimes unwillingness of top management to use the discounted cash flow
techniques. One large manufacturing and marketing organization, for example, thinks that conditions
of its business are such that the discounted cash flow techniques are not needed. By business
conditions the company perhaps means its marketing nature, and its products being in seller’s
markets. Another company feels that replacement projects are very frequent in the company, and
therefore, it is not necessary to use the discounted cash flow techniques for such projects. Both these
companies have fallacious approaches towards investment analysis. They should subject all capital
expenditures to formal evaluation.

The practice of companies in Asian countries regards the use of evaluation criteria is similar to that in
USA. Almost four-fifths of US firms use either the internal rate of return or net present value models,
but only about one-fifth use such discounting techniques without using the payback period or average
rate of return methods. The tendency of US firms to use native techniques as supplementary tools
has also been reported in recent studies. However, firms in USA have come to depend increasingly
on the discounted cash flow techniques, particularly internal rate of return. The British companies use
both discounted cash flow techniques and return on capital, sometimes in combination sometimes
solely, in their investment evaluation; the use of payback is widespread. In recent years the use of
discounted cash flow methods has increased in UK, and net present value (NPV) is more popular
than internal rate of return (IRR). However, this increase has not reduced the importance of traditional
methods such as payback and return on investment. Payback continuous to be employed by almost
all companies. One significant difference between practice in Asian countries and USA is that
payback is used in Asian countries as a “primary” method and IRR/NPV as a “secondary” method,
while it is just reverse in USA. Asian countries managers feel that payback is a convenient method of
communicating on investment’s desirability, and it best protects the recovery of capital-a secure
commodity in the developing countries.

Under payback method, an investment project is accepted or rejected on the basis of payback period.
Payback period means the period of time that a project requires to recover the money invested in it. It
is mostly expressed in years.

Unlike net present value and internal rate of return method, payback method does not take into
account the time value of money.

According to payback method, the project that promises a quick recovery of initial investment is
considered desirable. If the payback period of a project is shorter than or equal to the management’s
maximum desired payback period, the project is accepted, otherwise rejected. For example, if a
company wants to recoup the cost of a machine within 5 years of purchase, the maximum desired
payback period of the company would be 5 years. The purchase of machine would be desirable if it
promises a payback period of 5 years or less.

Payback Period Method

Formula

The formula to calculate the payback period of an investment depends on whether the periodic cash
inflows from the project are even or uneven.

If the cash inflows are even the formula to calculate payback period is:

Initial Investment
Payback Period =
Net Cash Flow per Period
When cash inflows are uneven, we need to calculate the cumulative net cash flow for each period
and then use the following formula:

B
Payback Period = A +
C

Where,
A is the last period number with a negative cumulative cash flow;
B is the absolute value (i.e. value without negative sign) of cumulative net cash flow at the end of the
period A; and
C is the total cash inflow during the period following period A

Cumulative net cash flow is the sum of inflows to date, minus the initial outflow.

Both of the above situations are explained through examples given below.

Example 1: Even Cash Flows

Company Vector is planning to undertake a project requiring initial investment of Rs.105 million. The
project is expected to generate Rs.25 million per year in net cash flows for 7 years. Calculate the
payback period of the project.

Solution

Payback Period
= Initial Investment ÷ Annual Cash Flow
= Rs.105 M ÷ Rs.25 M
= 4.2 years

Example 2: Uneven Cash Flows

Company Vector is planning to undertake another project requiring initial investment of Rs.50 million
and is expected to generate Rs.10 million net cash flow in Year 1, Rs.13 million in Year 2, Rs.16
million in year 3, Rs.19 million in Year 4 and Rs.22 million in Year 5. Calculate the payback value of
the project.

Solution

(CASH FLOWS IN MILLIONS)

Year Annual Cumulative
Cash Flow Cash Flow
0 -50 -50
1 10 -40
2 13 -27
3 16 -11
4 19 8
5 22 30
Payback Period = 3 + 11/19 = 3 + 0.58 ≈ 3.6 years

Decision Rule

The longer the payback period of a project, the higher the risk. Between mutually exclusive
projects having similar return, the decision should be to invest in the project having the shortest
payback period. The decision whether to accept or reject a project based on its payback period
depends upon the risk appetite of the management.

Management will set an acceptable payback period for individual investments based on whether the
management is risk averse or risk taking. This target may be different for different projects because
higher risk corresponds with higher return thus longer payback period being acceptable for profitable
projects. For lower return projects, management will only accept the project if the risk is low which
means payback period must be short.

Advantages of payback period are:

1. Payback period is very simple to calculate.

2. It can be a measure of risk inherent in a project. Since cash flows that occur later in a
project's life are considered more uncertain.

3. For companies facing liquidity problems, it provides a good ranking of projects that would
return money early.

Disadvantages of payback period are:

1. Payback period does not take into account the time value of money which is a serious
drawback since it can lead to wrong decisions.

2. It does not take into account, the cash flows that occur after the payback period. This
means that a project having very good cash inflows but beyond its payback period may be
ignored.

Internal Rate of Return (IRR)

Question:
Safeco Company and RiscoInc are identical in size and capital structure. However, the riskiness of
their assets and cash flows are somewhat different, resulting in Safeco having a WACC of 10% and
Risco a WACC of 12%. Safeco is considering Project X, which has an IRR of 10.5% and is of the
same risk as a typical Safeco project. Risco is considering Project Y, which has an IRR of 11.5% and
is of the same risk as a typical Risco project. Now assume that the two companies merge and form a
new company, Safeco/Risco Inc. Moreover, the new company's market risk is an average of the pre-
merger companies market risks, and the merger has no impact on either the cash flows or the risks of
Projects X and Y. What is true?

IRR:
This question calls for an awareness of the capital budgeting technique known as the internal rate of
return (IRR) evaluation. The IRR evaluation guides investment decisions by facilitating the
acceptance of projects that have IRRs that exceed their hurdle rates and rejecting projects that have
IRRs that fall short of their hurdle rates.

WACC:
The weighted average cost of capital (WACC) is the rate that a company is expected to pay on
average to all its security holders to finance its assets. The WACC is commonly referred to as the
firm's cost of capital. Importantly, it is dictated by the external market and not by management.

Answer and Explanation:

The thought process for answering this question is outlined below.

- We know the average project at Risco is riskier than the average project at Safeco, because Risco's
WACC is higher (12.0% vs. 10.0%).

- We know the decision rule for the IRR evaluation is as follows: accept projects where IRR >
discount rate and reject projects where IRR < discount rate.

- Project X should be evaluated using a discount rate of 10.0% (Safeco's old WACC), because it is a
relatively low risk project. Since it has an IRR of 10.5% (> 10.0%), it will be accepted by the new
company.

- Project Y should be evaluated using a discount rate of 12.0% (Risco's old WACC), because it is a
relatively high risk project. Since it has an IRR of 11.5% (< 12.0%), it will be rejected by the new
company.

Net Present Value (NPV)

What is Net Present Value (NPV)?

Net present value (NPV) is the difference between the present value of cash inflows and the
present value of cash outflows over a period of time. NPV is used in capital budgeting and investment
planning to analyze the profitability of a projected investment or project.

The following formula is used to calculate NPV:

A positive net present value indicates that the projected earnings generated by a project or
investment - in present dollars - exceeds the anticipated costs, also in present dollars. It is assumed
that an investment with a positive NPV will be profitable, and an investment with a negative NPV will
result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that only
investments with positive NPV values should be considered.

How to Calculate Net Present Value (NPV)

Money in the present is worth more than the same amount in the future due to inflation and to
earnings from alternative investments that could be made during the intervening time. In other words,
a dollar earned in the future won’t be worth as much as one earned in the present. The discount rate
element of the NPV formula is a way to account for this.

For example, assume that an investor could choose a $100 payment today or in a year. A rational
investor would not be willing to postpone payment. However, what if an investor could choose to
receive $100 today or $105 in a year? If the payer was reliable, that extra 5% may be worth the wait,
but only if there wasn’t anything else the investors could do with the $100 that would earn more than
5%.

An investor might be willing to wait a year to earn an extra 5%, but that may not be acceptable for all
investors. In this case, the 5% is the discount rate which will vary depending on the investor. If an
investor knew they could earn 8% from a relatively safe investment over the next year, they would not
be willing to postpone payment for 5%. In this case, the investor’s discount rate is 8%.

A company may determine the discount rate using the expected return of other projects with a similar
level of risk or the cost of borrowing money needed to finance the project. For example, a company
may avoid a project that is expected to return 10% per year if it costs 12% to finance the project or an
alternative project is expected to return 14% per year.

Imagine a company can invest in equipment that will cost $1,000,000 and is expected to generate
$25,000 a month in revenue for five years. The company has the capital available for the equipment
and could alternatively invest it in the stock market for an expected return of 8% per year. The
managers feel that buying the equipment or investing in the stock market are similar risks.

STEP ONE: NPV OF THE INITIAL INVESTMENT

Because the equipment is paid for up front, this is the first cash flow included in the calculation. There
is no elapsed time that needs to be accounted for so today’s outflow of $1,000,000 doesn’t need to be
discounted.

Identify the number of periods (t)

The equipment is expected to generate monthly cash flow and last for five years, which means there
will be 60 cash flows and 60 periods included in the calculation.
Identify the discount rate (i)

The alternative investment is expected to pay 8% per year. However, because the equipment
generates a monthly stream of cash flows, the annual discount rate needs to be turned into a periodic
or monthly rate. Using the following formula, we find that the periodic rate is 0.64%.

STEP TWO: NPV OF FUTURE CASH FLOWS

Assume the monthly cash flows are earned at the end of the month, with the first payment arriving
exactly one month after the equipment has been purchased. This is a future payment, so it needs to
be adjusted for the time value of money. An investor can perform this calculation easily with a
spreadsheet or calculator. To illustrate the concept, the first five payments are displayed in the table
below.

The full calculation of the present value is equal to the present value of all 60 future cash flows, minus
the $1,000,000 investment. The calculation could be more complicated if the equipment was
expected to have any value left at the end of its life, but, in this example, it is assumed to be
worthless.
In this case, the NPV is positive; the equipment should be purchased. If the present value of these
cash flows had been negative because the discount rate was larger, or the net cash flows were
smaller, the investment should have been avoided.

Accounting Rate of Return – ARR

What Is the Accounting Rate of Return – ARR?

The accounting rate of return (ARR) is the percentage rate of return expected on investment or asset
as compared to the initial investment cost. ARR divides the average revenue from an asset by the
company's initial investment to derive the ratio or return that can be expected over the lifetime of the
asset or related project. ARR does not consider the time value of money or cash flows, which can be
an integral part of maintaining a business.

How to Calculate the Accounting Rate of Return – ARR

Calculate the annual net profit from the investment, which could include revenue minus any annual
costs or expenses of implementing the project or investment.

If the investment is a fixed asset such as property, plant, or equipment, subtract any depreciation
expense from the annual revenue to achieve the annual net profit.

Divide the annual net profit by the initial cost of the asset, or investment. The result of the calculation
will yield a decimal. Multiply the result by 100 to show the percentage return as a whole number.
What Does ARR Tell You?

The accounting rate of return is a capital budgeting metric useful for a quick calculation of an
investment's profitability. ARR is used mainly as a general comparison between multiple projects to
determine the expected rate of return from each project.

ARR can be used when deciding on an investment or an acquisition. It factors in any possible annual
expenses or depreciation expense that's associated with the project. Depreciation is an accounting
process whereby the cost of a fixed asset is spread out, or expensed, annually during the useful life
of the asset.

Depreciation is a helpful accounting convention that allows companies not to have to expense the
entire cost of a large purchase in year one, thus allowing the company to earn a profit from the asset
right away, even in its first year of service. In the ARR calculation, depreciation expense and any
annual costs must be subtracted from annual revenue to yield the net annual profit.

Example of How to Use the Accounting Rate of Return – ARR

A project is being considered that has an initial investment of $250,000 and it's forecasted to generate
revenue for the next five years. Below are the details:

 Initial investment: $250,000

 Expected revenue per year: $70,000

 Time frame: 5 years

 ARR calculation: $70,000 (annual revenue) / $250,000 (initial cost)

 ARR =0.28 or 28% (0.28 * 100)

What is Industry Analysis?

Industry analysis is a market assessment tool used by businesses and analysts to understand the
competitive dynamics of an industry. It helps them get a sense of what is happening in an industry,
i.e., demand-supply statistics, degree of competition within the industry, state of competition of the
industry with other emerging industries, future prospects of the industry taking into account
technological changes, credit system within the industry, and the influence of external factors on the
industry.

Industry analysis, for an entrepreneur or a company, is a method that helps it to understand its
position relative to other participants in the industry. It helps them to identify both the opportunities
and threats coming their way and gives them a strong idea of the present and future scenario of the
industry. The key to surviving in this ever-changing business environment is to understand the
differences between yourself and your competitors in the industry and using it to your full advantage.
Types of Industry Analysis

There are three commonly used and important methods of performing industry analysis. The three
methods are:

1. Competitive Forces Model (Porter’s 5 Forces)

2. Broad Factors Analysis (PEST Analysis)
3. SWOT Analysis

COMPETITIVE FORCES MODEL (PORTER’S 5 FORCES)

One of the most famous models ever developed for industry analysis, famously known as Porter’s 5
Forces, was introduced by Michael Porter in his 1980 book “Competitive Strategy: Techniques for
Analyzing Industries and Competitors.”

According to Porter, analysis of the five forces gives an accurate impression of the industry and
makes analysis easier. In our Corporate & Business Strategy course, we cover these five forces and
an additional force — power of complementary good/service providers.

1. Intensity of Industry Rivalry

The number of participants in the industry and their respective market shares are a direct
representation of the competitiveness of the industry. These are directly affected by all the factors
mentioned above. Lack of differentiation in products tends to add to the intensity of competition. High
exit costs like high fixed assets, government restrictions, labor unions, etc. also make the competitors
fight the battle a little harder.
2. Threat of Potential Entrants

This indicates the ease with which new firms can enter the market of a particular industry. If it is easy
to enter an industry, companies face the constant risk of new competitors. If the entry is difficult,
whichever company enjoys little competitive advantage reaps the benefits for a longer period. Also,
under difficult entry circumstances, companies face a constant set of competitors.

3. Bargaining Power of Suppliers

This refers to the bargaining power of suppliers. If the industry relies on a small number of suppliers,
they enjoy a considerable amount of bargaining power. This can affect small businesses because it
directly influences the quality and the price of the final product.

4. Bargaining Power of Buyers

The complete opposite happens when the bargaining power lies with the customers. If
consumers/buyers enjoy market power, they are in a position to negotiate lower prices, better quality,
or additional services and discounts. This is the case in an industry with more competitors but with a
single buyer constituting a large share of the industry’s sales.

5. Threat of Substitute Goods/Services

The industry is always competing with another industry in producing a similar substitute product.
Hence, all firms in an industry have potential competitors from other industries. This takes a toll on
their profitability because they are unable to charge exorbitant prices. Substitutes can take two forms
– products with the same function/quality but lesser price, or products of the same price but of better
quality or providing more utility.

BROAD FACTORS ANALYSIS (PEST ANALYSIS)

Broad Factors Analysis, also commonly called the PEST Analysis stands for Political, Economic,
Social and Technological. PEST analysis is a useful framework for analyzing the external
environment.
To use PEST as a form of industry analysis, an analyst will analyze each of the 4 components of the
model. These components include:

1. Political

Political factors that impact an industry include specific policies and regulations related to things
thing like
taxes, environmental regulation, tariffs, trade policies, labor laws, ease of doing business, and the
overall political stability.

2. Economic
The economic forces that have an impact include inflation, exchange rates (FX), interest rates, GDP
growth
h rates, conditions in the capital markets (ability to access capital), etc.

3. Social
The social impact on an industry refers to trends among people and includes things such as
population growth, demographics (age, gender, etc), and trends in behavior such
su as health, fashion,
and social movements.

4. Technological
The technological aspect of PEST analysis incorporates factors such as advancements and
developments that change the way a business operates and the ways in which people live their lives
(i.e. advent of the internet).

SWOT ANALYSIS

SWOT Analysis stands for Strengths, Weaknesses, Opportunities, and Threats. It can be a great
way of summarizing various industry analysis methods and determining their implications for the
business in question.
1. Internal

Internal factors that already exist and have contributed to the current position and may continue to
exist.

2. External

External factors which are contingent events. Assess their importance based on the likelihood of them
happening and their impact on the company. Also, consider whether management has the intention
and ability to take advantage of the opportunity/avoid the threat.

Importance of Industry Analysis

Industry analysis, as a form of market assessment, is crucial because it helps a business understand
market conditions. It helps them forecast demand and supply and consequently, financial returns from
the business. It indicates the competitiveness of the industry and costs associated with entering and
exiting the industry. It is very important when planning a small business. Analysis helps to identify
which stage an industry is currently in; whether it is still growing and there is scope to reap benefits,
or has it reached its saturation point.
With a very detailed study of the industry, entrepreneurs can get a stronghold on the operations of the
industry and may discover untapped opportunities. It is also important to understand that industry
analysis is a very subjective method and does not always guarantee success. It may happen that
incorrect interpretation of data leads entrepreneurs to a wrong path or into making wrong decisions.
Hence, it becomes important to understand one’s motive and collect data accordingly.

What is a Feasibility Study?

As the name implies, a feasibility analysis is used to determine the viability of an idea, such as
ensuring a project is legally and technically feasible as well as economically justifiable. It tells us
whether a project is worth the investment—in some cases, a project may not be doable. There can be
many reasons for this, including requiring too many resources, which not only prevents those
resources from performing other tasks but also may cost more than an organization would earn back
by taking on a project that isn’t profitable. A well-designed study should offer a historical background
of the business or project, such as a description of the product or service, accounting statements,
details of operations and management, marketing research and policies, financial data, legal
requirements, and tax obligations. Generally, such studies precede technical development and
project implementation.

Types of Feasibility Study

A feasibility analysis evaluates the project’s potential for success; therefore, perceived objectivity is
an essential factor in the credibility of the study for potential investors and lending institutions. There
are five types of feasibility study—separate areas that feasibility study examines, described below.

Technical Feasibility

This assessment focuses on the technical resources available to the organization. It helps
organizations determine whether the technical resources meet capacity and whether the technical
team is capable of converting the ideas into working systems. Technical feasibility also involves the
evaluation of the hardware, software, and other technical requirements of the proposed system. As
an exaggerated example, an organization wouldn’t want to try to put Star Trek’s transporters in their
building—currently, this project is not technically feasible.

Economic Feasibility

This assessment typically involves a cost/ benefits analysis of the project, helping organizations
determine the viability, cost, and benefits associated with a project before financial resources are
allocated. It also serves as an independent project assessment and enhances project credibility—
helping decision-makers determine the positive economic benefits to the organization that the
proposed project will provide.

Legal Feasibility

This assessment investigates whether any aspect of the proposed project conflicts with legal
requirements like zoning laws, data protection acts or social media laws. Let’s say an organization
wants to construct a new office building in a specific location. A feasibility study might reveal the
organization’s ideal location isn’t zoned for that type of business. That organization has just saved
considerable time and effort by learning that their project was not feasible right from the beginning.

Operational Feasibility

This assessment involves undertaking a study to analyze and determine whether—and how well—the
organization’s needs can be met by completing the project. Operational feasibility studies also
examine how a project plan satisfies the requirements identified in the requirements analysis phase of
system development.

Scheduling Feasibility

This assessment is the most important for project success; after all, a project will fail if not completed
on time. In scheduling feasibility, an organization estimates how much time the project will take to
complete.
When these areas have all been examined, the feasibility analysis helps identify any constraints the
proposed project may face, including:
 Internal Project Constraints: Technical, Technology, Budget, Resource, etc.
 Internal Corporate Constraints: Financial, Marketing, Export, etc.
 External Constraints: Logistics, Environment, Laws, and Regulations, etc.

Importance of Feasibility Study

The importance of a feasibility study is based on organizational desire to “get it right” before
committing resources, time, or budget. A feasibility study might uncover new ideas that could
completely change a project’s scope. It’s best to make these determinations in advance, rather than
to jump in and to learn that the project won’t work. Conducting a feasibility study is always beneficial
to the project as it gives you and other stakeholders a clear picture of the proposed project.
Below are some key benefits of conducting a feasibility study:
  Improves project teams’ focus
 Identifies new opportunities
 Provides valuable information for a “go/no-go” decision
 Narrows the business alternatives
 Identifies a valid reason to undertake the project
 Enhances the success rate by evaluating multiple parameters
 Aids decision-making on the project
 Identifies reasons not to proceed

Apart from the approaches to feasibility study listed above, some projects also require other
constraints to be analyzed-

 Internal Project Constraints: Technical, Technology, Budget, Resource, etc.

 Internal Corporate Constraints: Financial, Marketing, Export, etc.
 External Constraints: Logistics, Environment, Laws and Regulations, etc.
 UNIT-II

Topics:-

 PROJECT APPRAISAL
 TECHNIQUES OF APPRAISING COMMERCIAL AND SOCIAL PROJECTS
 DCF AND NON-DCF METHODS
 SENSITIVITY ANALYSIS

PROJECT APPRAISAL

Definition: Project appraisal is the structured process of assessing the viability of a project or
proposal. It involves calculating the feasibility of the project before committing resources to it. It is a
tool that company’s use for choosing the best project that would help them to attain their goal. Project
appraisal often involves making comparison between various options and this done by making use of
any decision technique or economic appraisal technique.

Project appraisal is a tool which is also used by companies to review the projects completed by it.
This is done to know the effect of each project on the company. This means that the project appraisal
is done to know, how much the company has invested on the project and in return how much it is
gaining from it.

Process of Project Appraisal

The process of project appraisal consists of five steps and they are – initial assessment, defining
problem and long-list, consulting and short-list, developing options, and comparing and selecting
project. The process of appraisal generally starts from the initial phase of the project. If the appraisal
process starts from an early stage, then the company will be in a better position to decide how capital
should be spend in the project and also it will help them to make the decision of not spending too
much or stopping a project that is not economically viable.

Types of Project Appraisal

Appraisal of projects can be done by many ways, but the most common of them are financial and
economic appraisal. In case of financial project appraisal, the company reviews the cost of the project
and the expected revenues that will be generated by the project. This type of appraisal helps the
company to prevent overspending on a project. It also helps in finding certain areas where alterations
can be done for generating higher revenues. Under economic appraisal, the company mainly focuses
on the total benefit of the project and less on the costs spent on the project. Other than these two
types of appraisal, there are also other types of project appraisal which include technical appraisal,
management or organizational appraisal and marketing and commercial appraisal.

5 METHODS OF PROJECT APPRAISAL

Economic Analysis:

Under economic analysis, the project aspects highlighted include requirements for raw material, level
of capacity utilization, anticipated sales, anticipated expenses and the probable profits. It is said that a
business should have always a volume of profit clearly in view which will govern other economic
variables like sales, purchases, expenses and alike.
It will have to be calculated how much sales would be necessary to earn the targeted profit.
Undoubtedly, demand for the product will be estimated for anticipating sales volume. Therefore,
demand for the product needs to be carefully spelled out as it is, to a great extent, deciding factor of
feasibility of the project concern.

In addition to above, the location of the enterprise decided after considering a gamut of points also
needs to be mentioned in the project. The Government policies in this regard should be taken into
consideration. The Government offers specific incentives and concessions for setting up industries in
notified backward areas. Therefore, it has to be ascertained whether the proposed enterprise comes
under this category or not and whether the Government has already decided any specific location for
this kind of enterprise.

Financial Analysis:

Finance is one of the most important pre-requisites to establish an enterprise. It is finance only that
facilitates an entrepreneur to bring together the labour of one, machine of another and raw material of
yet another to combine them to produce goods.

In order to adjudge the financial viability of the project, the following aspects need to be
carefully analyzed:

1. Fixed capital and working capital need to be properly made. You might be knowing that fixed
capital normally called ‘fixed assets’ are those tangible and material facilities which purchased once
are used again and again. Land and buildings, plants and machinery, and equipment’s are the
familiar examples of fixed assets/fixed capital. The requirement for fixed assets/capital will vary from
enterprise to enterprise depending upon the type of operation, scale of operation and time when the
investment is made. But, while assessing the fixed capital requirements, all items relating to the asset
like the cost of the asset, architect and engineer’s fees, electrification and installation charges (which
normally come to 10 per cent of the value of machinery), depreciation, pre-operation expenses of trial
runs, etc., should be duly taken into consideration. Similarly, if any expense is to be incurred in
remodeling, repair and additions of buildings should also be highlighted in the project report.

2. In accounting, working capital means excess of current assets over current liabilities. Generally, 2:
1 is considered as the optimum current ratio. Current assets refer to those assets which can be
converted into cash within a period of one week. Current liabilities refer to those obligations which can
be payable within a period of one week. In short, working capital is that amount of funds which is
needed in day today’s business operations. In other words, it is like circulating money changing from
cash to inventories and from inventories to receivables and again converted into cash.

This circle goes on and on. Thus, working capital serves as a lubricant for any enterprise, be it large
or small. Therefore, the requirements of working capital should be clearly provided for. Inadequacy of
working capital may not only adversely affect the operation of the enterprise but also bring the
enterprise to a grinding halt.

The activity level of an enterprise expressed as capacity utilization, needs to be well spelt out in the
business plan or project report. However, the enterprise sometimes fails to achieve the targeted level
of capacity due to various business vicissitudes like unforeseen shortage of raw material, unexpected
disruption in power supply, inability to penetrate the market mechanism, etc.

Then, a question arises to what extent and enterprise should continue its production to meet all its
obligations/liabilities. ‘Break-even analysis’ (BEP) gives an answer to it. In brief, break-even analysis
indicates the level of production at which there is neither profit nor loss in the enterprise. This level of
production is, accordingly, called ‘break-even level’.

Market Analysis:

Before the production actually starts, the entrepreneur needs to anticipate the possible market for the
product. He/she has to anticipate who will be the possible customers for his product and where and
when his product will be sold. There is a trite saying in this regard: “The manufacturer of an iron nails
must know who will buy his iron nails.”

This is because production has no value for the producer unless it is sold. It is said that if the proof of
pudding lies in eating, the proof of all production lies in marketing/ consumption. In fact, the potential
of the market constitutes the determinant of probable rewards from entrepreneurial career.

Thus, knowing the anticipated market for the product to be produced becomes an important element
in every business plan. The various methods used to anticipate the potential market, what is named
in ‘Managerial Economics’ as ‘demand forecasting’, range from the naive to sophisticated ones.

Technical Feasibility:

While making project appraisal, the technical feasibility of the project also needs to be taken into
consideration. In the simplest sense, technical feasibility implies to mean the adequacy of the
proposed plant and equipment to produce the product within the prescribed norms. As regards know-
how, it denotes the availability or otherwise of a fund of knowledge to run the proposed plants and
machinery.
It should be ensured whether that know-how is available with the entrepreneur or is to be procured
from elsewhere. In the latter case, arrangement made to procure it should be clearly checked up. If
project requires any collaboration, then, the terms and conditions of the collaboration should also be
spelt out comprehensively and carefully.

In case of foreign technical collaboration, one needs to be aware of the legal provisions in force from
time to time specifying the list of products for which only such collaboration is allowed under specific
terms and conditions. The entrepreneur, therefore, contemplating for foreign collaboration should
check these legal provisions with reference to their projects.

While assessing the technical feasibility of the project, the following inputs covered in the
project should also be taken into consideration:

1. Availability of land and site.

2. Availability of other inputs like water, power, transport, communication facilities.
3. Availability of servicing facilities like machine shops, electric repair shop, etc.
4. Coping-with anti-pollution law.
5. Availability of work force as per required skill and arrangements proposed for training-in-plant
and outside.
6. Availability of required raw material as per quantity and quality.
DISCOUNTED CASH FLOW (DCF)

Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment based
on its future cash flows. DCF analysis attempts to figure out the value of an investment today, based
on projections of how much money it will generate in the future. This applies to both financial
investments for investors and for business owners looking to make changes to their businesses, such
as purchasing new equipment.

1. Discounted cash flow (DCF) helps determine the value of an investment based on its future
cash flows.
2. The present value of expected future cash flows is arrived at by using a discount rate to
calculate the discounted cash flow (DCF).
3. If the discounted cash flow (DCF) is above the current cost of the investment, the opportunity
could result in positive returns.
4. Companies typically use the weighted average cost of capital for the discount rate, as it takes
into consideration the rate of return expected by shareholders.
5. The DCF has limitations, primarily that it relies on estimations on future cash flows, which
could prove to be inaccurate.

How Discounted Cash Flow Works

The purpose of DCF analysis is to estimate the money an investor would receive from an investment,
adjusted for the time value of money. The time value of money assumes that a dollar today is worth
more than a dollar tomorrow because it can be invested. As such, a DCF analysis is appropriate in
any situation where a person is paying money in the present with expectations of receiving more
money in the future.

For example, assuming a 5% annual interest rate, $1.00 in a savings account will be worth $1.05 in a
year. Similarly, if a $1 payment is delayed for a year, its present value is $.95 because it cannot be
put in your savings account to earn interest.

DCF analysis finds the present value of expected future cash flows using a discount rate. Investors
can use the concept of the present value of money to determine whether future cash flows of an
investment or project are equal to or greater than the value of the initial investment. If the value
calculated through DCF is higher than the current cost of the investment, the opportunity should be
considered.

In order to conduct a DCF analysis, an investor must make estimates about future cash flows and the
ending value of the investment, equipment, or other asset. The investor must also determine an
appropriate discount rate for the DCF model, which will vary depending on the project or investment
under consideration. If the investor cannot access the future cash flows, or the project is very
complex, DCF will not have much value and alternative models should be employed.

Discounted Cash Flow Formula

The formula for DCF is:

DCF = CF1/(1+r)1 + CF2/(1+r)2 + CFn/(1+r)n

Where:
  CF = the cash flow for the given year. CF1 is for year one, CF2 is for year two, CFn is for
additional years
 r = the discount rate

Example of Discounted Cash Flow

When a company looks to analyze whether it should invest in a certain project or purchase new
equipment, it usually uses its weighted average cost of capital (WACC) as the discount rate when
evaluating the DCF. The WACC incorporates the average rate of return that shareholders in the firm
are expecting for the given year.
You are looking
ng to invest in a project and your company's WACC is 5%, so you will use 5% as your
discount rate. The initial investment is $11 million and the project will last for five years, with the
following estimated cash flows per year:

If we sum up all of the discounted

scounted cash flows, we get a value of $13,306,749. Subtracting the initial
investment of $11 million, we get a net present value (NPV) of $2,306,749. Because this is a positive
number, the cost of the investment today is worth it as the project will gener
generate
ate positive discounted
cash flows above the initial cost. If the project had cost $14 million, the NPV would have been -
$693,251, indicating that the cost of the investment would not be worth it.

WHAT IS A NON-DISCOUNT
DISCOUNT METHOD IN CAPITAL BUDGETING?

A non-discount
discount method of capital budgeting does not explicitly consider the time value of money. In
other words, each dollar earned in the future is assumed to have the same value as each dollar that
was invested many years earlier. The payback method is one of the techniques used in capital
budgeting that does not consider the time value of money.

The payback method simply computes the number of years it will take for an investment to return
cash equal to the amount invested. For example, if an investment ooff $100,000 is made and it
generates cash of $50,000 for two years followed by $10,000 per year for four additional years, its
payback is two years ($50,000 + $50,000). If another investment of $100,000 generates cash of
$20,000 per year for two years and then provides cash of $40,000 per year for six additional years, its
payback is approximately 3.5 years ($20,000 + $20,000 + $40,000 + 0.5 times $40,000).

As you can see in the examples, payback only answers one question: How long before the cash
invested is returned? Payback does not address which investment is more profitable. Payback not
only ignored the time value of money, it ignored all of the cash received after the payback period.

The accounting rate of return or return on investment (ROI) are two more examples of methods used
in capital budgeting that does not involve discounting future cash amounts.

To overcome the shortcomings of payback, accounting rate of return, and return on investment,
capital budgeting should include techniques that consider the time value of money. Two of these
methods include

(1) the net present value method, and

(2) the internal rate of return calculation. Under these techniques, the future cash flows are
discounted. This means that each dollar in the distant future will be less valuable than each dollar in
the near future, and both of these will have less value than each dollar invested in the present.

Sensitivity Analysis

What Is Sensitivity Analysis?

A sensitivity analysis determines how different values of an independent variable affect a particular
dependent variable under a given set of assumptions. In other words, sensitivity analyses study how
various sources of uncertainty in a mathematical model contribute to the model's overall uncertainty.
This technique is used within specific boundaries that depend on one or more input variables.
Sensitivity analysis is used in the business world and in the field of economics. It is commonly used
by financial analysts and economists, and is also known as a what-if analysis.

1. A sensitivity analysis determines how different values of an independent variable affect a

particular dependent variable under a given set of assumptions.
2. This model is also referred to as a what-if or simulation analysis.
3. Sensitivity analysis can be used to help make predictions in the share prices of publicly-traded
companies or how interest rates affect bond prices.
4. Sensitivity analysis allows for forecasting using historical, true data.

How Sensitivity Analysis Works

Sensitivity analysis is a financial model that determines how target variables are affected based on
changes in other variables known as input variables. This model is also referred to as what-if or
simulation analysis. It is a way to predict the outcome of a decision given a certain range of variables.
By creating a given set of variables, an analyst can determine how changes in one variable affect the
outcome.

Both the target and input—or independent and dependent—variables are fully analyzed when
sensitivity analysis is conducted. The person doing the analysis looks at how the variables move as
well as how the target is affected by the input variable.
Sensitivity analysis can be used to help make predictions in the share prices of public companies.
Some of the variables that affect stock prices include company earnings, the number of shares
outstanding, the debt-to-equity ratios (D/E), and the number of competitors in the industry. The
analysis can be refined about future stock prices by making different assumptions or adding different
variables. This model can also be used to determine the effect that changes in interest rates have on
bond prices. In this case, the interest rates are the independent variable, while bond prices are the
dependent variable.

Sensitivity analysis allows for forecasting using historical, true data. By studying all the variables and
the possible outcomes, important decisions can be made about businesses, the economy, and about
making investments.

Example of Sensitivity Analysis

Assume Sue is a sales manager who wants to understand the impact of customer traffic on total
sales. She determines that sales are a function of price and transaction volume. The price of a widget
is $1,000, and Sue sold 100 last year for total sales of $100,000. Sue also determines that a 10%
increase in customer traffic increases transaction volume by 5%. This allows her to build a financial
model and sensitivity analysis around this equation based on what-if statements. It can tell her what
happens to sales if customer traffic increases by 10%, 50%, or 100%. Based on 100 transactions
today, a 10%, 50%, or 100% increase in customer traffic equates to an increase in transactions by
5%, 25%, or 50% respectively. The sensitivity analysis demonstrates that sales are highly sensitive to
changes in customer traffic.
 UNIT-III

Topics:-

 PROJECT RISK ASSESSMENT

 PROBABILISTIC CASH FLOW APPROACHES
 APPLICATION OF SIMULATION TECHNIQUES

Risk Assessment in Project Management

The last thing that any project will want to face is risks. Projects are designed to take advantage of
resources and opportunities and with these, come uncertainty, challenges and risk. Hence risk
management becomes a very important key to all project success. The project risk management plan
addresses the process behind risk management and the risk assessment meeting allows the project
team to identify, categorize, prioritize, and mitigate or avoid these risks ahead of time. Risk
assessment is a step in a risk management procedure. Risk assessment is the determination of The
project risk management plan addresses the process behind risk management and the risk
assessment meeting allows the project team to identify, categorize, prioritize, and mitigate or avoid
these risks ahead of time. Risk assessment is a step in a risk management procedure. Risk
assessment is the determination of quantitative or qualitative value of risk related to a concrete
situation and a recognized threat. Risk assessment involves measuring the probability that a risk will
become a reality. But in any project, risk assessment is not a project manager's sole responsibility. A
special meeting has to be conducted to bring in the ideas of the entire team or at a minimum the
following –

 Project Manager: acts as the chairperson and facilitates the risk assessment meeting
 Project Team: the project manager must assign members of the project team the roles of
recorder and timekeeper
 Key Stakeholders: those identified that may bring value in the identification of project risks
and/or mitigation and avoidance strategies
 Subject Matter Experts: those identified that may specialize in a certain project activity but are
not formally assigned to the project but may add value
 Project Sponsor: may participate depending on the size and scope of the project

Common Phases of Risk Assessment

In many projects, risks are identified and analyzed in a random, brainstorming, fashion. This is often
fatal to the success of the project, as unexpected risks arise, which have not been assessed or
planned for and have to be dealt with on an emergency basis, rather than be prepared for and
defended against in a planned, measured, manner. It is essential that potential risks are identified,
categorized, evaluated & documented. Rather than look at each risk independently and randomly, it is
much more effective to identify risks and then group them into categories, or, to draw up a list of
categories and then to identify potential risks within each category. In general, the following are the
usually followed phases in Risk Assessment.

Risk Identification

Before plunging into risk assessment, the project manager will have compiled a list of risks from
previous project experiences. These will be reviewed at the beginning of the project as a way to
identify some common risks. This will also give an insight to the members to predict possible risks.
While there are many methods for identifying risks, the Crawford Slip method is very common and
effective. Each risk identified and discussed should be stated in a complete sentence which states the
cause of the risk, the risk, and the affect that the risk has on the project.

Categorize and Group Duplicates

Categorizing risks is a way to systematically identify the risks and provide a foundation for
awareness, understanding and action. Each project will have its own structure and differences.
Categorization makes it easy to identify duplicate risks and acts as to trigger for determining
additional risks. The most common, easy and the most effective method for this is to post the sticky
notes on a large board where the manager has posted categories. The participants then put their
risks on the board beneath the appropriate category. As they identify duplicate risks they stick the
duplicates on top of the other. The project manager then discusses the risks identified under each
category with the participants. All the risks identified, categorized should be documented for the
approval of all stakeholders.

Qualify Risks (Assign Probability and Impact to Each Risk)

The key questions to assess any risk in projects are:

 What is the risk – how will I recognize it if it becomes a reality?

 What is the probability of it happening – high, medium or low?
 How serious a threat does it pose to the project – high, medium or low?
 What are the signals or triggers that we should be looking out for? A risk assessed as highly
likely to happen and as having a high impact on the project will obviously need closer attention
than a risk that is low in terms of both probability and impact.

PROBABILISTIC CASH FLOW APPROACHES

SOLUTION:
 APPLICATION OF SIMULATION TECHNIQUES

A simulation model is a computer model that imitates a real-life situation. When applicable in
capital budgeting, the simulation approach generally is more feasible for analyzing large
projects because the technique requires estimates to be made of the probability distribution of
each cash flow element.

Monte Carlo simulation performs risk analysis by building models of possible results by
substituting a range of values—a probability distribution—for any factor that has inherent
uncertainty. It then calculates results over and over, each time using a different set of random
values from the probability functions.

SIMULATION ANALYSIS

The Monte Carlo simulation or simply the simulation analysis considers the interactions among
variables and probabilities of the change in variables. It computes the probability distribution of NPV.

The simulation analysis involves the following steps:

 First, you should identify variables that influence cash inflows and outflows.

 Second, specify the formulae that relate variables.

Third, indicate the probability distribution for each variable.  Fourth, develop a computer programme
that randomly selects one value from the probability distribution of each variable and uses these
values to calculate the project’s NPV.

 Simulation Analysis: Shortcomings

 The model becomes quite complex to use.

 It does not indicate whether or not the project should be accepted.

 Simulation analysis, like sensitivity or scenario analysis, considers the risk of any project in
isolation of other projects.
 UNIT-VI

Topics:-

 SOCIAL COST BENEFIT ANALYSIS

 VALUE ADDED CONCEPT
 SOCIAL SURPLUS INDIRECT IMPACT OF PROJECTS
 FINANCIAL STRUCTURING
 INNOVATIVE FINANCING ALTERNATIVES
 COLLABORATION
 LEASEFINANCING
 EQUITY PARTICIPATION
 PROJECT FINANCE VIS-À-VIS CORPORATE FINANCE

SOCIAL COST BENEFIT ANALYSIS (SCBA)

A social cost benefit analysis is a good method to show the differences between project alternatives
and provides information to make a well informed decision. Presentation of the uncertainties and
risks. A social cost benefit analysis has several methods to take economic risks and uncertainties into
account.

The foremost aim of all the individual firm or a company is to earn maximum possible return from the
investment on their project. In this aspect project promoters are interested in wealth maximization.
Hence the project promoters tend to evaluate only the commercial profitability of a project. There are
some projects that may not offer attractive returns as for as commercial profitability is concerned but
still such projects are undertaken since they have social implications. Such projects are public
projects like road, railway, bridge and other transport projects, irrigation projects, power projects etc.
for which socio-economic considerations play a significant part rather than mere commercial
profitability. Such projects are analysed for their net socio economic benefits and the profitability
analysis which is nothing but the socio-economic cost benefit analysis done at the national level.

All the projects imposes certain costs to the nation and produces certain benefits to the nation. The
cost may be of two types i.e. direct cost and indirect cost. In this respect the benefit derived from any
project will also be of two types i.e. direct benefits and indirect benefits.

The social cost benefit analysis is a tool for evaluating the value of money, particularly of public
investments in many economies. It aids in decision making with respect to the various aspects of a
project and the design programmes of closely interrelated project. Social cost benefit analysis has
become important among economists and consultants in recent years.

Features of Social Cost Benefit Analysis

1. Assessing the desirability of projects in the public as opposed to the private sector
2. Identification of costs and benefits
3. Measurement of costs and benefits
4. The effect of (risk and uncertainty) time in investment appraisal
5. Presentation of results – the investment criterion.
Stages of Social Cost Benefit Analysis of a Project

1. Determine the financial profitability of the project based on the market prices.
2. Using shadow prices for the resources to arrive at the net benefit of the project at economic
process.
3. Adjustment of the net benefit for the project’s impact on savings and investment.
4. Adjustment of the net benefit for the project’s impact on income distribution.
5. Adjustment of the net benefit for the goods produced whose social values differ from their
economic values.

Limitations of Social Cost Benefit Analysis

1. The problems of qualification and measurement of social costs and benefits are formidable.
This is because many of these costs and benefits are intangible and their evaluation in terms
of money is bound to be subjective.
2. Evaluation of social costs and benefits has been completed for one project, it may be difficult
to judge whether any other project would yield better results from the social point of view.
3. The nature of inputs and outputs of projects involving very large investment and their impact
on the ecology and people of the particular region and the country as a whole are bound to be
differing from case to case.

VALUE ADDED CONCEPT

Meaning and Definitions of Value Added

The traditional basic financial statements are balance sheet and Profit & Loss account. These
statements generate and provide data related to financial performance only. They do not provide any
information which shows the extent of the value or the wealth created by the company for a particular
period. Hence, there arose a need to modify the existing accounting and financial reporting system so
that the business unit is able to give importance to judge its performance by indicating the value or
wealth created by it. To this direction inclusion of Value Added statement in financial reporting system
is useful. The Value Added concept is now a recognized part of the accountant’s repertoire.

However, the concept of Value Added (VA) is not new. Value Added is a basic and broad measure of
performance of an enterprise. It is a basic measure because it indicates the net output produced or
wealth created by an enterprise. The Value Added of an enterprise may be described as the
difference between the revenues received from the sale of its output, and the costs which are
incurred in producing the output after making necessary stock adjustments.

Some definitions of Value Added are following;

 E.S.Hendriksen has defined Value-added as: “The market price of the output of an enterprise
less the price of the goods and services acquired by transfer from other firms.”
 Morely has defined Value-added as:”The value, which the entity has added in a period that
equals its sales less bought-in-goods and services.” i.e. This definition can be expressed in
terms of equation as follows: Value-added = (Sales) – (bought-in-goods &services)
 The annual service of industries (ASI,1964) defines Value Added as: “Value Added (VA) =
(gross ex factory value of output)-(gross value of input) “. The term Value Added may simply
be defined in economics as the difference between the value of output produced by a firm in a
period, and the value of the inputs purchased from other firms.
 According to John Sizer “Value Added is the wealth the company has been able to create by
its own and its employees efforts during a period. “
 According to E.F.L Berch, “The added value of a firm or for any other organization is the Value
Added to materials by the process of production. It also includes the gross margin on any
merchanted or factored goods sold. “
 According to Kohler, Value Added has been defined as: “That part of the costs of a
manufactured or semi manufactured product attributable to work performed on constituent raw
material. The value is arrived by deducting from the total value of the output of a firm and other
incomes, the cost of raw materials, power and fuel, water, etc, which are bought from other
firms.” i.e, Value Added = (value of output + income from other sources) – (cost of material and
services purchased from outside)
 According to Evraert and Riahi Belkaoui, “Value Added is said to represent the total wealth of
the firm that could be distributed to all capital providers, employees and the government.”
 According to Central Statistical Organization (CSO), India “Value Added represents the part of
the value of the products which are created in the factory and is computed by deducting from
the gross ex factory value of output, the gross value of input”
Concept of Value Added

The concept of value addition has been derived out from the very manufacturing process in which the
firm’s raw materials are converted into finished goods. A company can add value by the efficient use
of the resources available to it. These resources can be in the form of manual skills, technical skills,
know-how, special purpose machines, factory lay-out, etc. The process of manufacturing begins with
a certain quantum of raw material and goes through a conversion process to yield an output. This
output is a product with new utility and market value which is different from the original cost of
materials. The excess of such market value over the cost of materials is defined as Value Added.

The concept of Value Added is considerably old. It originated in the US treasury in the 18th century
and periodically accountants have deliberated upon whether the concept should be incorporated in
financial accounting practices. The preparation, presentation and disclosure of Value Added
statements (VAS) have come to be seen with greater frequency in most countries of Europe more
particularly in Britain.

Value Added is the wealth created by the business during a particular period of time and the wealth or
the value so created or added is distributed amongst different stake holders who created it. The
discussion paper `corporate report’ published in 1975 by the then Accounting Standards Steering
Committee (now known as Accounting Standards Board) of UK advocated the publication of Value
Added statement along with the conventional annual corporate report.

Value Added indicates the `new value’ or `wealth’ created by the enterprise during a specified period.
No enterprise can grow if it fails to generate wealth. Thus, Value Added is a form of wealth. However,
things like land, minerals, metals, coal, oil, timber, water and similar sort of things are wealth but they
are provided by nature. Value Added is the kind of wealth that is generated by the efforts and
ingenuity of mankind. This can be understood from following examples:

At the primitive level a man goes into the forest and cuts down a tree. He converts it into a house,
furniture and other articles for his own use. In doing so he `adds value’ to the raw material provided
by nature.
In the complex industrial society, a manufacturing business buys raw materials, components, fuel and
other services. It converts these into products which can be sold for more than the cost of the raw
materials and other purchases. In doing so, the business `adds value’ to the materials by the process
of production.
A farmer generated wealth by growing crops and breeding animals, then selling them for more than
the cost of seeds, fertilizers, food stuffs and other materials used.
Value Added may be generated even when little or no material is involved. The gap between what the
consumer pays and what the manufacturer or supplier has to pay for the raw material, and other
bought in items, is the Value Added that has been generated.

VALUE ADDED = GROSS VALUE OF OUTPUT — GROSS VALUE OF INPUT

Where,

Output = Aggregate value of product*+ work done for customers + sale value of goods sold in the
same condition as bought + stock of semi finished goods (i.e. closing and opening).

*Value of Products= value of product manufactured for sale during a year where value is ex-factory,
exclusive of any incidental expenses on sale.

Input= Gross value of materials, fuels, etc + work done by other concerns for the firms+ non industrial
services done + depreciation + purchase value of goods sold in the same condition as bought.
Thus,

VALUE ADDED = VALUE OF PRODUCTION – COST OF MATERIALS, POWER, ETC

WHERE, THE VALUE OF PRODUCTION = SALES VALUE + VALUE OF INCREASE OR

DECREASE IN FINISHED AND SEMI FINISHED GOODS.

SOCIAL SURPLUS INDIRECT IMPACT OF PROJECTS

Social Surplus is the sum of consumer surplus and producer surplus. Total surplus is larger at the
equilibrium quantity and price than it will be at any other quantity and price. Dead-weight loss is loss
in total surplus that occurs when the economy produces at an inefficient quantity.
FINANCIAL STRUCTURE
What Is Financial Structure?
Financial structure refers to the mix of debt and equity that a company uses to finance its operations.
This composition directly affects the risk and value of the associated business. The financial
managers of the business have the responsibility of deciding the best mixture of debt and equity for
optimizing the financial structure.

In general, the financial structure of a company can also be referred to as the capital structure. In
some cases, evaluating the financial structure may also include the decision between managing a
private or public business and the capital opportunities that come with each.

Understanding Financial Structure

Companies have several choices when it comes to setting up the business structure of their business.
Companies can be either private or public. In each case, the framework for managing the capital
structure is primarily the same but the financing options differ greatly.

Overall, the financial structure of a business is centered around debt and equity.

Debt capital is received from credit investors and paid back over time with some form of interest.
Equity capital is raised from shareholders giving them ownership in the business for their investment
and a return on their equity that can come in the form of market value gains or distributions. Each
business has a different mix of debt and equity depending on its needs, expenses, and investor
demand.

Private versus Public

Private and public companies have the same framework for developing their structure but several
differences that distinguish the two. Both types of companies can issue equity. Private equity is
created and offered using the same concepts as public equity but private equity is only available to
select investors rather than the public market on a stock exchange. As such the equity fundraising
process is much different than a formal initial public offering (IPO). Private companies can also go
through multiple rounds of equity financing over time which affects their market valuation. Companies
that mature and choose to issue shares in the public market do so through the support of an
investment bank that helps them to pre-market the offering and value the initial shares. All
shareholders are converted to public shareholders after an IPO and the market capitalization of the
company is then valued based on shares outstanding times market price.
Debt capital follows similar processes in the credit market with private debt primarily only offered to
select investors. In general, public companies are more closely followed by rating agencies with
public ratings helping to classify debt investments for investors and the market at large. The debt
obligations of a company take priority over equity for both private and public companies. Even though
this helps debt to come with lower risks, private market companies can still usually expect to pay
higher levels of interest because their businesses and cash flows are less established which
increases risk.

Debt versus Equity

In building the financial structure of a company, financial managers can choose between either debt
or equity. Investor demand for both classes of capital can heavily influence a company’s financial
structure. Ultimately, financial management seeks to finance the company at the lowest rate possible,
reducing its capital obligations and allowing for greater capital investment in the business.

Overall, financial managers consider and evaluate the capital structure by seeking to optimize the
weighted average cost of capital (WACC). WACC is a calculation that derives the average
percentage of payout required by the company to its investors for all of its capital. A simplified
determination of WACC is calculated by using a weighted average methodology that combines the
payout rates of all of the company’s debt and equity capital.

Metrics for Analyzing Financial Structure

The key metrics for analyzing the financial structure are primarily the same for both private and public
companies. Public companies are required to file public filings with the Securities and Exchange
Commission which provides transparency for investors in analyzing financial structure. Private
companies typically only provide financial statement reporting to their investors which makes their
financial reporting more difficult to analyze.

Data for calculating capital structure metrics usually come from the balance sheet. A primary metric
used in evaluating financial structure is a debt to total capital. This provides quick insight on how
much of the company’s capital is debt and how much is equity. Debt may include all of the liabilities
on a company’s balance sheet or just long-term debt. Equity is found in the shareholders’ equity
portion of the balance sheet. Overall, the higher the debt to capital ratio the more a company is
relying on debt.
Debt to equity is also used to identify capital structuring. The more debt a company has the higher
this ratio will be and vice versa.

INNOVATIVE FINANCING ALTERNATIVES

Innovative Financing refers to a range of non-traditional mechanisms to raise additional funds for
development aid through "innovative" projects such as micro-contributions, taxes, public-private
partnerships and market-based financial transactions.

Innovative financing mechanisms can be assessed regarding the following principles:

 Scaling-up: Innovative financing mechanisms should significantly increase funding in order to
bridge the financing gap necessary to achieve the MDGs.
 Additionality: Since these mechanisms were created to fill this gap, innovative financing
mechanisms cannot replace Official Development Assistance nor will they be sufficient if
certain countries decide to renounce the commitments that they have made.
 Complementarity: The role of innovative financing mechanisms is to raise new funds for
existing organizations and not to add new actors and complexities to the development
landscape.
 Sustainability: In order to have a significant and sustainable impact on the MDG's, innovative
financing mechanisms should have the objective and ability to finance long-term programs in
coordination with other countries. Finally, innovative financing mechanisms should be
designed to comply with the other principles of the 2005 Paris Declaration on Aid
Effectiveness and the 2008 Accra Agenda for Action.

COLLABORATION
Project collaboration is a method by which teams and team leaders plan, coordinate, control and
monitor the project they are working on. This collaborative process works across departmental,
corporate and national boundaries and helps especially with projects as they grow in complexity.

To understand project collaboration as it relates to project management, then we must first have a
firm handle on what project management is. Traditional project management is the process by which
one plans, monitors and reports on getting something done over a set period of time. It usually
involves scheduling tasks and milestones with set business goals to achieve a specific outcome, all
led by a project manager. That could all be accomplished without collaborating in this new meaning of
the term. That is to say, traditional top-down processes can, in many cases, get in the way of
collaboration, prevent the sharing of ideas and lock-down individual and cross-team communications.
This is not good for a project.

As a project manager you want to encourage collaboration among your team because it’s good for
the project and good for your team. Yes, you are the one who is in control of the process, but it’s also
important not to squash communication and not to micromanage and give the team you picked for
their expertise the opportunity to do what you hired them to do.
Benefits of Collaboration?
Some of the benefits of project collaboration are included below.
 Increases productivity. By distributing tasks to team members who have the time and skills
to complete them, rather than burdening one team member with too much work and neglecting
others, you work more efficiently.
 Better problem-solving. Giving team members the autonomy to work together to solve
problems offers more avenues to success, as well as building team loyalty and morale.
 Boosts communication. The lines of communication need constant maintenance or
misdirection can sidetrack a project. Collaboration facilitates clear communication and provides
a solution to communicate effectively among even remote teams.
 Lowers overhead. One of the bigger costs in any organization is renting or buying a physical
space in which everyone can work. With collaboration, however, team members don’t need to
be in the same place.
 Improves human resources. Be fostering collaboration between your team members you’re
not only building relationships but creating loyalty that helps with employee retention.
 LEASE FINANCING
Lease financing is one of the important sources of medium- and long-term financing where the owner
of an asset gives another person, the right to use that asset against periodical payments. The owner
of the asset is known as lessor and the user is called lessee.

The periodical payment made by the lessee to the lessor is known as lease rental. Under lease
financing, lessee is given the right to use the asset but the ownership lies with the lessor and at the
end of the lease contract, the asset is returned to the lessor or an option is given to the lessee either
to purchase the asset or to renew the lease agreement.

Lease Financing: Types

Depending upon the transfer of risk and rewards to the lessee, the period of lease and the number of
parties to the transaction, lease financing can be classified into two categories. Finance lease and
operating lease.

Finance Lease: It is the lease where the lessor transfers substantially all the risks and rewards of
ownership of assets to the lessee for lease rentals. In other words, it puts the lessee in the same
con-dition as he/she would have been if he/she had purchased the asset.

Finance lease has two phases:

1. Primary Period. This is non-cancellable period and in this period, the lessor recovers his total
investment through lease rental. The primary period may last for indefinite period of time.
2. Secondary Period is much smaller than that of primary period.

Features of Finance Lease:

1. A finance lease is a device that gives the lessee a right to use an asset.

2. The lease rental charged by the lessor during the primary period of lease is sufficient to recover
his/her investment.

3. The lease rental for the secondary period is much smaller. This is often known as peppercorn
rental.

4. Lessee is responsible for the maintenance of asset.

5. No asset-based risk and rewards is taken by lessor.

6. Such type of lease is non-cancellable; the lessor’s investment is assured.

Operating Lease: Lease other than finance lease is called operating lease. Here risks and rewards
incidental to the ownership of asset are not transferred by the lessor to the lessee. The term of such
lease is much less than the economic life of the asset and thus the total investment of the lessor is
not recovered through lease rental during the primary period of lease. In case of operating lease, the
lessor usually provides advice to the lessee for repair, maintenance and technical knowhow of the
leased asset and that is why this type of lease is also known as service lease.

Features of Operating Lease:

1. The lease term is much lower than the economic life of the asset.

2. The lessee has the right to terminate the lease by giving a short notice and no penalty is charged
for that.

3. The lessor provides the technical knowhow of the leased asset to the lessee.

4. Risks and rewards incidental to the ownership of asset are borne by the lessor.

5. Lessor has to depend on leasing of an asset to different lessee for recovery of his/her investment.

Advantages of Lease Financing:

1. Assured Regular Income: Lessor gets lease rental by leasing an asset during the period of
lease which is an assured and regular income.

2. Preservation of Ownership: In case of finance lease, the lessor transfers all the risk and
rewards incidental to ownership to the lessee without the transfer of ownership of asset hence
the owner-ship lies with the lessor.

3. Benefit of Tax: As ownership lies with the lessor, tax benefit is enjoyed by the lessor by way
of depreciation in respect of leased asset.

4. High Profitability: The business of leasing is highly profitable since the rate of return based
on lease rental, is much higher than the interest payable on financing the asset.

5. High Potentiality of Growth: The demand for leasing is steadily increasing because it is one
of the cost efficient forms of financing. Economic growth can be maintained even during the
period of depression. Thus, the growth potentiality of leasing is much higher as compared to
other forms of business.

6. Recovery of Investment: In case of finance lease, the lessor can recover the total investment
through lease rentals.

7. Use of Capital Goods: A business will not have to spend a lot of money for acquiring an asset
but it can use an asset by paying small monthly or yearly rentals.
 8. Tax Benefits: A company is able to enjoy the tax advantage on lease payments as lease
payments can be deducted as a business expense.

9. Cheaper: Leasing is a source of financing which is cheaper than almost all other sources of
financing.

10. Technical Assistance: Lessee gets some sort of technical support from the lessor in respect
of leased asset.

11. Inflation Friendly: Leasing is inflation friendly, the lessee has to pay fixed amount of rentals
each year even if the cost of the asset goes up.

12. Ownership: After the expiry of primary period, lessor offers the lessee to purchase the
assets— by paying a very small sum of money.

Disadvantages of Lease Financing:

1. Unprofitable in Case of Inflation: Lessor gets fixed amount of lease rental every year and
they cannot increase this even if the cost of asset goes up.

2. Double Taxation:

3. Sales tax may be charged twice: First at the time of purchase of asset and second at the
time of leasing the asset.

4. Greater Chance of Damage of Asset: As ownership is not transferred, the lessee uses the
asset carelessly and there is a great chance that asset cannot be useable after the expiry of
primary period of lease.

5. Compulsion: Finance lease is non-cancellable and even if a company does not want to use
the asset, lessee is required to pay the lease rentals.

6. Ownership: The lessee will not become the owner of the asset at the end of lease agreement
unless he decides to purchase it.

7. Costly: Lease financing is more costly than other sources of financing because lessee has to
pay lease rental as well as expenses incidental to the ownership of the asset.

8. Understatement of Asset: As lessee is not the owner of the asset, such an asset cannot be
shown in the balance sheet which leads to understatement of lessee’s asset.
 EQUITY PARTICIPATION

What Is Equity Participation?

Equity participation refers to the ownership of shares in a company or property. Equity

participation may involve the purchase of shares through options or by allowing partial
ownership in exchange for financing. The greater the equity participation rate, the higher the
percentage of shares owned by stakeholders.

Allowing stakeholders to own shares ties the stakeholders' success with that of the company or
real estate investment. In this case, a more profitable company will provide stakeholders with
greater gains.

Companies can use different types of equity to create an equity participation program, such as
options, reserve, phantoms stock, preferred stock, or common stock.
How Equity Participation Works
Equity participation is used in many investments for two primary reasons. First, it is used to tie
the financial rewards of executives to the fate of the company, increasing the likelihood that
executives will make decisions that will improve company profitability.

This type of compensation may be delayed, reducing the possibility of executives making
short-term decisions to boost the share price. Workers, not just executives, can also be offered
equity by companies as a form of employee retention and work incentive. This typically is in
addition to base pay and bonuses they receive.

The second reason for equity participation is it can be used by companies operating in
emerging economies in which local governments want to reap the rewards brought on by
development.

Benefits of Equity Participation

As with executives who receive equity, the intent is to encourage employees to contribute their
best efforts toward the long-term growth and prosperity of the organization. The equity held by
executives and employees can come with additional stipulations regarding how the shares
may be converted, sold, or transferred. Even with those potential benefits, the way a company
makes equity participation available can have unintended consequences, such as exposing
employees to new tax liabilities.

Equity participation also allows local governments a say in company decisions. Residents of a
municipality might also be offered equity stakes in the development or redevelopment of their
hometown.

 Equity participation represents the ownership in an asset, such as a company or

property.
 Equity participation effectively ties the stakeholder’s success to that of the company’s
success.
 Equity participation is primarily used as a form of employee compensation or by
companies doing business in emerging economies.
Example of Equity Participation

 As an example, after New Orleans was devastated by Hurricane Katrina and the
ensuing floods, there were proposals to grant displaced residents equity in the revenue
generated from the redevelopment of their neighborhoods. The intent was to give
people who lost their homes and livelihood a chance to reap the benefits of new
business and wealth that would come to the city thanks to the rebuilding efforts. This
would also make those residents more participatory in the decision-making process for
the revitalization of their areas.

 An employee stock ownership plan (ESOP) is an employee benefit plan that gives
workers ownership interest in the company. ESOPs give the sponsoring company, the
selling shareholder, and participants receive various tax benefits, making them qualified
plans. Companies often use ESOPs as a corporate-finance strategy to align the
interests of their employees with those of their shareholders.
 PROJECT FINANCE VS. CORPORATE FINANCE

In traditional or corporate finance, the sponsoring company (the company building the project)
typically procures capital by demonstrating to lenders that it has sufficient assets on its balance
sheets, to use as collateral in the case of default. The lender will be able to foreclose on the sponsor
company’s assets, sell them, and use the proceeds to recover its investment. In project finance, the
repayment of debt is not based on the assets reflected on the sponsoring company’s balance sheet,
but on the revenues that the project will generate once it is completed.

The sponsoring company must consider several factors when determining whether to use a corporate
or project finance structure. Such considerations include the amount of capital needed, the risks
involved (political risks, currency risks, access to materials, environmental risks, etc.) and the identity
of the participants (government, multilateral institution, regional bank, bilateral institution, etc.).

Project finance greatly minimizes risk to the sponsoring company, as compared to traditional
corporate finance, because the lender relies only on the project revenue to repay the loan and cannot
pursue the sponsoring company’s assets in the case of default. However, a sponsoring company can
only use project finance where it can demonstrate that revenue streams from the completed project
will be sufficient to repay the loan.
 UNIT-V

EVALUATION OF INTERNATIONAL PROJECTS

In evaluating projects that cut across national boundaries, firms must deal with a variety of issues
seldom encountered within a single country that affect the distribution of net operating cash flows
available to the parent, as well as the valuation of these cash flows.1 Factors influencing the
statistical distribution of net operating cash flows, in addition to differences in fundamental economic
and political conditions in various countries, include differing rates of inflation and volatile exchange
rates that may or may not cancel each other, differences in tax rules and tax rates, and restrictions or
taxes on cross-border financial transactions. Factors that may influence the valuation of operating
cash flows with a given statistical distribution include incomplete and often segmented capital markets
that result from controls on financial transactions both within and among countries; the dependence of
net of tax cash flows available to the parent on the firm’s overall tax and cash-flow position in various
countries; the availability of project-specific concessional finance—loans, guarantees, or insurance
against commercial or political risks; and, on occasion, requirements to issue securities—especially
equity—within markets partially or totally isolated by barriers to internal or cross-border financial
transactions. Further, the available cash flows and their value to the firm often depend on the specific
financing of the project, not only because of concessional financing opportunities, but also because
the costs or limits on cross-border transfers often depend on the nature of the financial transaction
involved, e.g., interest or principal, fees, dividends, or payment for goods.

CONCEPT OF PROJECT EVALUATION:- EVALUATION AS PART OF MANAGING FOR IMPACT

Design, monitoring and evaluation are all part of results-based project management. The key idea
underlying project cycle management, and specifically monitoring and evaluation, is to help those
responsible for managing the resources and activities of a project to enhance development results
along a continuum, from short-term to long-term. Managing for impact means steering project
interventions towards sustainable, longer-term impact along a plausibly linked chain of results: inputs
produce outputs that engender outcomes that contribute to impact.
Outcomes are defined as medium-term effects of project outputs. Outcomes are observable changes
that can be linked to project interventions. Usually, they are the achievements of the project partners.
They are logically linked to the intended impact. Outcomes are the results that link to the immediate
objectives as described in the project document. Impact is defined as the positive and negative,
primary and secondary long-term effects produced by a development intervention, directly or
indirectly, intended or unintended.2 Impact is the result that links to the development objective as
described in the project document. It is often only detectable after several years and usually not
attained during the life cycle of one project. For this reason, there is a need to plan for impact,
recognizing that the project will likely achieve outcomes. A project is accountable for achieving
outcomes and contributing to development impact. Since the achievement of broad, long-term
development changes depends on many factors, it is usually not possible to attribute impact to one
project. All outcomes of a project should contribute to the intended impact. Along the chain of results
of a project, the relative influence of the project decreases while the relative influence of the project
partners increases as they develop capacity and take over ownership of the project. Only when the
project is gradually handed over to the local partners can it achieve broader, longterm, sustainable
impact. This process also implies a shift in responsibilities during the course of the project.

Impact is being done during the project cycle. Because projects are collaborative efforts, partners
have co-responsibility for achieving outcomes and, ultimately, impact. During the course of the
project, the local partners ideally take on increasing responsibility for converting the project’s outputs
into outcomes and, often after the project itself has ended, for making the outcomes contribute to
broader, long-term impacts (for example, passing and

GOLDEN RULE:- During the course of the project, the local partners should ideally take on
increasing responsibility for converting the project’s Evaluation assesses how well planning and
managing for future outputs into outcomes.

FINANCING FOR PROJECT EVALUATIONS

Project reviews and evaluations should be financed from project resources. The responsible official
should ensure that an adequate budget exists to implement the relevant monitoring and evaluation
plan and that it is indicated in the original project proposal. Funds should be reserved for setting up a
monitoring and evaluation system including self evaluations and internal evaluations. A minimum of
5% of the total project budget should be assigned to the budget line for this purpose. Within this
budget line, a minimum of 2% of the total project funds should be reserved for independent
evaluations, which should be assigned to budget line. In contrast to other budget lines, the resources
under budget line are under the control of the evaluation manager and not the project manager.
TYPES OF EVALUATIONS

All technical cooperation projects are subject to evaluation. Depending on the project evaluation
plan, evaluations can take different forms - self-evaluation, internal, independent and external.

1. Self Evaluation is managed and conducted by staff members, including project management,
technical specialists and back stoppers.

2. Internal Evaluation is managed and conducted by independent officials, i.e., staff members
who have not been involved in the design, management or back stopping of the project they
are evaluating.

3. Independent Evaluation is managed by independent officials and conducted and led by

external evaluators who have no previous links to the project. Other independent officials may
participate as team members in the evaluation.

4. External Evaluation is managed from outside the and conducted by external evaluators who
have no previous links to the project being evaluated. External evaluations are usually initiated,
led and financed by a donor agency. As with any evaluation, project and line management are
accountable for follow-up.

EVALUATION MANAGER

The evaluation manager is responsible for managing all independent and internal evaluations. He/she
should be in the sector or region in which the project is being implemented and have knowledge and
experience in the management and evaluation of technical cooperation projects. The evaluation
manager should have no links to the project decision-making and hence should not be the technical
or administrative back stopper of the project. The sector or region decides on the organization of the
evaluation management functions. There can be more than one evaluation manager per sector or
region. During project implementation, the evaluation manager ensures that evaluations take place in
a timely manner. In preparing for an independent evaluation, the evaluation manager is required to:

 Determine the target audience for the evaluation and the key evaluation questions the
evaluation should answer.

 Prepare the draft for the evaluation (final approval is given by the evaluation focal person) and
send a copy of the approved for information.

 Identify the evaluation consultant and obtain final approval for their recruitment from the
evaluation focal person.

 Ensure smooth organization of the evaluation process and proper support to the evaluation
team.
  Ensure proper stakeholder involvement in the entire evaluation process.

 Ensure that gender issues are considered throughout the evaluation process.

 Manage the process of preparing the evaluation report.

 Submit the final evaluation report to the evaluation focal person for final review.

 Send the final reviewed and approved report for submission to the donor and send copies to all
other relevant evaluation stakeholders, including the key national partners.

 Ensure proper follow-up on the recommendations and dissemination of lessons learned.

EVALUATOR

The evaluator carries out the evaluation and prepares the evaluation report. The team leader of an
independent evaluation is always the external evaluation consultant. The evaluator should:

1. Adhere to internationally-accepted good practices and solid ethical principles.

2. Be skilled in implementing diverse evaluation methodologies.
3. Ensure the evaluation is an inclusive and participatory learning exercise.
4. The evaluator reports to the evaluation manager and submits the draft and final report to
him/her. In finalizing the report, the evaluator should not only be receptive to comments from
any of the stakeholders concerning factual inaccuracies in the report but also maintain total
independence.
5. The evaluator has sole responsibility for the final content of the report and recommendations.
 UNIT–VI

PROJECT APPRAISAL PARAMETERS OF SELECT FINANCIAL INSTITUTIONS

Basic Appraisal Parameters:

Technical:

 Selection of process knowhow

 Fixation of the capacity of the plant as a whole

 Selection of plant and equipment

 Process description and plant layout

 Evaluation of the existing transport and other service facilities for a brown field project

 General layout, material flow chart and location

 Construction schedule (work schedule)

 Study of material inputs and utilities

 Product mix

 Techno-economic norms and yields of various production shops

 Structures and civil works, etc.

Commercial:

 Demand and availability of the product on global basis

 Site selection

 Requirement and sources of raw materials

 Banking facilities, etc.

Economic Aspects:

A proposal has to be viable from the national point of view also. The economy of the country should
improve on the execution of the proposal. If a proposal is for substitution of the existing imports of an
essential product of national consumption or defence materials and oils, the proposal may be viewed
more favorable from national economic considerations. Sometimes such proposal may not yield any
financial gain on tangible basis, still this may be considered to be implemented from national point of
view.
Financial Aspects:

 Capital cost

 Financing of the proposal

 Production costs

 Profitability analysis.

Success of the proposal is very much dependent upon the financial viability. A proposal with a least
payback period and high rate of return on investment shall only be accepted.

All the related indices such as:

a. Payback period

b. Discounted payback period

c. Rate of return on investment

d. Accounting rate of return

e. Discounted cash flow method

f. Non-discounted cash flow method

g. Net present value

h. Social costs and benefits analysis

i. Internal rate of return

j. Economic rate of return

k. Benefit cost ratio (BCR)

l. Average rate of return

m. Annual capital charge

Appraisal and Evaluation of Organisation:

One is the study of organisational strength for the project execution and another is from the angle of
financial assistance being considered by the financial institutions or banks.

(i) Total organisational structure of the company, where project is being executed.

(ii) Organisation structure of project department, whether matches with the needs of project.

(iii) Whether organisation is fully equipped and staffed with the qualified and experienced managers in
all departments including the areas of project execution such as design, purchase, personnel,
construction, finance, monitoring and control etc.

(iv) Whether the project organisation has a good project head, competent, qualified, experienced and
efficient in execution of such large projects.

(v) Whether the organisation has all types of construction equipment such as earth moving machines,
excavators, heavy duty cranes, vehicles and various other equipment required for construction
purpose either in its own stock or these are available with the contractors, who would be executing
the project.

(vi) Design-organisation/consultants:

All these aspects are examined suiting the requirements of project execution in order to ascertain the
need of project and the availability of the same either from within the organisation or from outside by
contractual means.

However, when project is going to be executed through contractors on turnkey or on EPC or on other
concessional contracts basis, the above organisational need may not be necessary as a big project
organisation.

Needs of banks and Financial Institutions:

While providing financial assistance by the banks or financial institutions, the banks or financial
institutions will try to know about the organisation (borrower), its past performance for at least three
years prior to the current year or projected performance for the future.

These examinations shall be in the areas of:

Profitability, cash flow, fund flow statements, profit and loss statement, ratio analysis, etc.

 Production

 Sales

 Stock position
  Trend of profit

 Trend of production and sales

 Industrial relations.

 Projects executed in the past with details of:

 Types of projects

 Cost of projects

 Time overruns or cost overruns, if any

 Details of total organisational structure including project department.

Appraisal and Evaluation of Managerial Strength:

Managerial feasibility shall be examined by both, i.e., organisation executing the project as well as
lending organisation, i.e., banks or financial institutions providing financial assistance.

(i) Sound project organisation

(ii) Competent, qualified, experienced project head/leader

(iii) Sound organisation setup, well staffed, with managerial effectiveness and stability.

Appraisal of Environmental Management and Control:

Appraisal of environmental management and control would be to know the level of pollution arising
due to proposed project and needs to manage and control the same as well as measures taken,
facilities provided in the project under consideration for controlling the pollution.

Options and Flexibilities:

When investment proposals are examined, various alternatives and flexibilities are also kept under
consideration, while taking the final decision. There may be various alternatives, with cost
differentials, time differentials, with different advantages and disadvantages, etc. All these options are
examined and reviewed to facilitate the appropriate investment decision.

Qualitative Analysis:

Various parameters to be examined and evaluated involve quantitative as well as qualitative

improvements. Quantitative improvements may be towards increase in the volume of production,
increase in efficiency, reduction in operating costs, etc.
Whereas, qualitative improvements may result in improvement in quality of product or services
benefiting the organisation indirectly, improving the safety conditions, improving the working
conditions, improving the customer’s satisfaction, etc. Thus, all these aspects are reviewed and report
given to the management for finalizing the investment decision.

Tax Burden and Appraisal of Project:

Tax burden may be in the form of excise duty, customs duty, sales-tax, or value added tax entry tax,
service tax, works contract tax and income tax.

(i) Place/State where project is being set up. There may be various concessions, besides the
differential rates in various States.

(ii) Certain projects carry concessional duties and taxes, such as infrastructural projects, hundred per
cent export oriented projects, Special Economic Tax (SET) projects being set up in hill areas and
backward areas.

(iii) Tax impact due to financing mix of the project, i.e., more equity internal resources or more debt. If
project is financed more by debt, interest impact would be more and tax impact would be less.
Similarly, when financing is done more by equity capital and internal resource, there will be less
interest impact and hence, higher impact of income tax.

Thus, these aspects in assessing the tax burden in the project are examined, while making the
appraisal and evaluation of project.
 UNIT-VII

PREPARATION OF PROJECT REPORT– CASE ANALYSIS

1. Decide the Objective

Take some time to think about the purpose of the report. Do you need to describe, explain,
recommend, or persuade? Having a clear purpose from the outset ensures that you stay
focused, which makes it easier to engage your reader.

2. Understand Your Audience

Writing a formal annual report for your stakeholders is very different from a financial review.
Tailor your language, use of data, and supporting graphics to the audience. It is also useful to
consider the personal communication style of the reader, for example, how do they write
emails or structure documents? Reflect their preferences where possible. You may need to
develop a more formal or informal tone to your own natural style. Adopting this technique will
build rapport and make the reader more receptive to your ideas

3. Report Format and Type

Before you start, check the report format and type. Do you need to submit a written report or
deliver a presentation? Do you need to craft a formal, informal, financial, annual, technical,
fact-finding, or problem-solving report. You should also confirm if any templates are available
within the organization.

4. Gather the Facts and Data

Including engaging facts and data will solidify your argument. Start with your collaborative
project site and work out as needed. Remember to cite sources such as articles, case studies,
and interviews.

5. Structure the Report

A report typically has four elements:

Executive Summary. Your report will begin with the summary, which is written once
the report is finished. As the first item the reader encounters, this is the most
important section of the document. They will likely use the summary to decide how
much of the report they need to read so make it count.

Introduction: Provide a context for the report and outline the structure of the contents.
Identify the scope of the report and any particular methodologies used.

Body: It’s now time to put your writing skills to work! This is the longest section of the
report and should present background details, analysis, discussions, and
recommendations for consideration. Draw upon data and supporting graphics to support
your position.

Conclusion: Bring together the various elements of the report in a clear and concise
manner. Identify the next steps and any actions that your reader needs to take.
6. Readability
Spend some time making the report accessible and enjoyable to read. If working in Word, the
Navigation pane is a great way to help your reader work through the document. Use
formatting, visuals, and lists to break up long sections of text.

7. Edit
The first draft of the report is rarely perfect so you will need to edit and revise the content. If
possible, set the document aside for a few days before reviewing or ask a colleague to review.

PROJECT REPORT FORMAT FOR BANK LOAN

A good project report may contain the following details. You can use our sample report for
having a better understanding click here to see the sample report.

 Introductory Page – The potential, need ,possibility , fund needed etc

 Scope of the project- It will be a snapshot of the whole activity that you are going to do
 Details about the Promoters- their educational qualifications, work experience, etc.
 Product /services – What is your offering to the public
 Location details – Were you are going to start the unit, its specialty etc
 Plant & machinery details – Details of your plant and machinery used
 Raw materials (if any) – Details of raw material used
 Market potential and marketing strategy – How big is your market?, How you are
planning to sell the product
 Employees details –details of employees, their educational qualifications, work
experience, etc.
 Project cost – Total money (including your share) for building your project
 Application of fund – How you allocate funds in your project
 Means of Financing – From where you source the fund
 Balance Sheet
 Profit and Loss Statements
 cash Flow Statement
 general Ratios
 Break Even Point Evaluations
 Conclusions