Project Appraisal: Project and Capital Budgeting? Importance of Capital Budgetting

PROJECT APPRAISAL
 Project and Capital budgeting?

 Importance of Capital budgetting
 Long-Term Effects
 Irreversibility
 Substantial Outlays
 Phases of capital budgeting

 Planning
 Analysis
 Selection
 Implementation
 Review
PROJECT APPRAISAL
Demand and market

Market Analysis share
Technical
and Technical Analysis
Engineering
aspects of the
project Repayment
capability,
Financial Analysis investor
expectations
Project viability from a

Economic Analysis
social point of view
MARKET ANALYSIS
 Market analysis is concerned primarily with two questions:
 What would be the aggregate demand of the proposed

product/service in future?
 What would be the market share of the project under appraisal?

MARKET ANALYSIS
 To answer the above questions, the market analyst requires a wide variety of
information
 Consumption trends in the past and the present consumption level
 Growth rate in consumption
 Past and present supply position
 Production possibilities and constraints
 Imports and exports
 Structure of competition
 Cost structure
 Elasticity of demand
 Consumer behavior, intentions,, motivations, attitudes, preferences, and
requirements
 Distribution channels and marketing policies in use
 Administrative, technical and legal constraints
MARKET ANALYSIS
 Sources of information
 Primary research
 Secondary research
 Delphi techniques
 Surveys
 Survey of consumers
 Survey of dealers
 Survey of manufacturers
MARKET ANALYSIS- Report Structure
• Product and End users

• Demand and growth rates
• Market segments and characteristics
• Substitutes
• Competition
• Market Shares
• Product strategies
• Pricing Strategies
• Distribution Strategies
• Promotion Strategies
• Distribution and sales promotion
• Unit’s marketing strategy
• Sources of information
• Market survey
MARKET APPRAISAL
Product and End Market segments and Competitors/

users characteristics MNC’s
Choice of segment/ Product

customers specifications
Distribution sales promotion

choices choices
Unit’s marketing strategy
Product Mix, sales projections, price, marketing expenses

TECHNICAL ANALYSIS
 Analysis of the technical and engineering aspects of a project needs to be done

continually when a project is formulated.
 Technical analysis seeks to determine whether the prerequisites for the

successful commissioning of the project have been considered and reasonably
good choices have been made with respect to location, size, process, etc.
 The important questions raised in technical analysis are:

TECHNICAL ANALYSIS- Key Questions
 Whether the preliminary tests and studies have been done or provided for?
 Whether the production process chosen is suitable?
 Whether the selected scale of operation is optimal?
 Whether the equipment and machines chosen are appropriate?
 Whether the auxiliary equipments and supplementary engineering works have
been provided for? Whether the availability of raw materials, power, and other
inputs has been established?
 Whether provision has been made for the treatment of effluents?
 Whether the proposed layout of the site, buildings, and plant is sound?
 Whether work schedules have been realistically drawn up?
 Whether the technology proposed to be employed is appropriate from the
social point of view?
TECHNICAL APPRAISAL
Process, know-how, technology Size of the project-

level choice-Collaboration/ joint economy of size Is it
venture? Process flow applicable?
Capacity-Licensed, installed & achievable- Critical facility

deciding the capacity ?
Machinery required-Production, service (Generator/Boiler

etc..,,), tool making ( forging’ Plastic processing) etc..,
Location, site , infrastructure requirements (power, water,

skilled labour, Effluent disposal etc..,)
TECHNICAL APPRAISAL
Raw Materials, packing materials and other

materials Required type, availability,
imported/indigenous, shelf life, quantity required,
lead time for procurement, and material handling
requirements
Building requirements- Layout of machinery
Man power requirements -production,

maintenance, tool room, office etc..,
Sub contract requirements, availability and rate
Quality spec-BIS or other standards, Testing

facilities / type test, field test
TECHNICAL APPRAISAL
• Construction activities- erection and commissioning and period

• Training of staff and workmen
• Organization during commissioning and regular production
• Trial Production and commercialization
• Systems and procedures
TECHNICAL ANALYSIS- Report Structure
• Land and Location

• Choice of Process/Technology
• Product Mix/Capacity
• Equipments/ Line balancing
• Auxiliary Equipments
• Layouts
• Building/ Civil works
• Man power Requirements
• Pollution Control measures
• Raw materials and consumables

• Project schedules
FINANCIAL ANALYSIS
 Financial analysis seeks to ascertain whether the proposed project will

be financially viable
 in the sense of being able to meet the burden of servicing debt
 whether the proposed project will satisfy the return expectations of
those who provide the capital.
FINANCIAL ANALYSIS
 Investment outlay and cost of project

 Means of financing
 Cost of capital
 Projected profitability
 Break-even point
 Cash flows of the project
 Investment worthwhileness judged in terms of various criteria of merit
 Projected financial position
 Level of risk.
FINANCIAL APPRAISAL
Cost of the project

Fixed Assets
• Land and site development
• Building & civil work
• Plant & machinery, spares
• Misc.. fixed assets
• Preoperative expenses
• Contingencies
Intangible Assets
• Know-how fees and expenses on drawings
• Visit of foreign technicians & training of technicians
abroad
• Preliminary & capital issue expenses
Current Assets
• Materials
• Bills
• Cash and bank and other advances to be paid
FINANCIAL APPRAISAL
Means of financing
• Equity
• Soft loan
• Term loan
• Working capital Loan
• Others
Capital structure of the company
Debt/ Equity
FINANCIAL PROJECTIONS
Projection of Sales
Profitability projections Projection of Cost of Production
Tax and dividend projections
Projection Current Assets

working Capital projections Projection of Current Liabilities
Cash in flow- sales and other

Cash Flow projections revenues
Cash outflow- operational expenses,
repayments, dividend
Assets and liabilities- changes due

Projection of Balance Sheet to depreciation, current assets and
current liabilities level and profit/
Loss
COST OF PRODUCTION
Material Cost: Raw material, Packing material, Bought out items

• Quantity Required x rate at factory
• Quantity Required Consumption norm, Annual production,
Inventory policy
• Rate Fluctuates
Production Expenses
• Utilities: Power, water, Fuel
• Power-Connected load x load factor x hours run
• Power tariff- Demand charges+unit charges
• Water mostly own sources
• Fuel- coal/oil
• Quantity required
• rate
• Labour Wages/ salary structure , benefits
• Repairs & maintenance
• Rent, insurance & other factory expenses
• Depreciation
PROFITABILITY PROJECTIONS
Administrative expenses
Selling expenses
Interest- Term loan
Profit before tax
Tax
Profit after tax
Dividend
working capital iteration based on working capital assessment
Break even
Working Capital projections

CASH FLOW
INFLOW OUT FLOW

Net profit Tax
Depreciation Increase in current assets
Increase in working capital borrowings Repayment of term loan
Increase in advance from customers Dividend
Increase in credit from the suppliers
Increase in equity
Sales tax deferred
Projected Balance Sheets

Assets
Additional fixed assets, reduction due to depreciation
Change in working capital
Liabilities
Changes due to change in loan levels due to addition and reduction due to repayment
Profit retained
Economic analysis
Return on investment IRR/ NPV/ Benefit cost ratio(NPV/Investment)

DSCR
ECONOMIC ANALYSIS
 Economic analysis, also referred to as social cost benefit analysis is

concerned with judging a project from the larger social point of view.
 In such an evaluation the focus is on the social costs and benefits of a

project which may often be different from its monetary costs and
benefits.
ECONOMIC ANALYSIS
 What are the direct economic benefits and costs of the project
measured in terms of shadow (efficiency )prices and not in terms of
market prices?
 What would be the impact of the project on the distribution of income
in the society?
 What would be the impact of the project on the level of savings and
investment in the society?
 What would be the contribution of the project towards the fulfillment of
certain merit wants like self- sufficiency, employment, and social
order?
ECOLOGICAL ANALYSIS
 Ecological analysis should be done particularly for major projects which

have significant ecological implications like power plants and irrigation
schemes, and environmental—polluting industries (like bulk drugs,
chemicals, and leather processing).
The key questions raised in ecological analysis are:
 What is the likely damage caused by the project to the environment?
 What is the cost of restoration measures required to ensure that the
damage to the environment is contained within acceptable limits?
KEY ISSUES IN PROJECT ANALYSIS
 Market Analysis 1.Potential Market

2.Market Share
• Technical Analysis 1.Technical Viability

2.Sensible Choices
• Financial Analysis 1.Risk

2.Return
• Economic Analysis 1.Benefits and costs in Shadow
2.Other Impacts
• Ecological Analysis 1.Ennvironment damage

2.Restoration Measures

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PROJECT APPRAISAL

 Project and Capital budgeting?

 Phases of capital budgeting

Demand and market

Project viability from a

 Market analysis is concerned primarily with two questions:

 What would be the aggregate demand of the proposed

 What would be the market share of the project under appraisal?

• Product and End users

Product and End Market segments and Competitors/

Choice of segment/ Product

Distribution sales promotion

Unit’s marketing strategy

Product Mix, sales projections, price, marketing expenses

 Analysis of the technical and engineering aspects of a project needs to be done

 Technical analysis seeks to determine whether the prerequisites for the

 The important questions raised in technical analysis are:

Process, know-how, technology Size of the project-

Capacity-Licensed, installed & achievable- Critical facility

Machinery required-Production, service (Generator/Boiler

Location, site , infrastructure requirements (power, water,

Raw Materials, packing materials and other

Building requirements- Layout of machinery

Man power requirements -production,

Sub contract requirements, availability and rate

Quality spec-BIS or other standards, Testing

• Construction activities- erection and commissioning and period

• Land and Location

• Raw materials and consumables

 Financial analysis seeks to ascertain whether the proposed project will

 Investment outlay and cost of project

Cost of the project

Capital structure of the company

Projection Current Assets

Cash in flow- sales and other

Assets and liabilities- changes due

Material Cost: Raw material, Packing material, Bought out items

working capital iteration based on working capital assessment

Working Capital projections

INFLOW OUT FLOW

Projected Balance Sheets

Return on investment IRR/ NPV/ Benefit cost ratio(NPV/Investment)

 Economic analysis, also referred to as social cost benefit analysis is

 In such an evaluation the focus is on the social costs and benefits of a

 Ecological analysis should be done particularly for major projects which

 Market Analysis 1.Potential Market

• Technical Analysis 1.Technical Viability

• Financial Analysis 1.Risk

• Economic Analysis 1.Benefits and costs in Shadow

• Ecological Analysis 1.Ennvironment damage

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