Project

Of

Project Management
ON

Feasibility Study (Finance)

SUBMITTED TO: Prof. S.R. Prasad

SUBMITTED BY: Hari Mohan Dwivedi PGDM 2010-12 Reg. no. 6106

Declaration

I Hari Mohan Dwivedi, hereby declare that the Project Title Financing the Manufacturing Industry is an original work carried out under the guidance of Prof. S.R.Prasad. The report submitted is a bonafide work of my own effort and has not been submitted to any institute or published before.

Signature of the Student

(Hari Mohan Dwivedi) DATE: 20th Jan, 2012 PLACE: Hyderabad

Faculty Guide Certificate

I Prof. S.R. Prasad certify Mr. Hari Mohan Dwivedi that the work done and the training undertaken by him is genuine to the best of my knowledge and acceptable.

Signature of the faculty

(Prof. S.R. Prasad) DATE: PLACE: Hyderabad

Acknowledgement

I would like to express our gratitude to all those who gave us the possibility to complete this project. I am very much thankful to our Faculty guide Prof. S.R. Prasad, for showing us the path to commence this project in the first instance, to do the necessary research work and to help for using departmental data. He looked closely at the final version of the project for correction and offered suggestion for improvement.

Signature of the Student

(Hari Mohan Dwivedi) DATE: 20th Jan, 2012 PLACE: Hyderabad

INDEX

Chapter 1

Executive Description.. Limitation of study.

Chapter 2

Industry Profile Company profile..

Chapter 3

Analysis & Calculation..

Chapter 4

Finding, Suggestion & Recommendations

Chapter 5

Conclusion & Bibliography

CHAPTER- 1

EXECUTIVE DESCRIPTION

Executive Description:As a part of curriculum, every student studying PGDM has to undertake a project on a particular subject assigned to him/her. Accordingly I have been assigned the project work on the study of Project Financing in Banking Sector. As it is rightly said that finance is the life blood of every business so every business need funds for smooth running of its activities and bank is the one of the source through which the business get funds, before financing the bank appraise the projects and if the projects meet the requirement of the bank rules than only they will finance. Project financing is commonly used as a financing method in capital-intensive industries for projects requiring large investments of funds, such as the construction of Power plants, Pipelines, Transportation Systems, Mining Facilities, Industrial Facilities and Heavy Manufacturing Plants.

The core area of this project focuses on the financial appraisal of SL flow controls, which has started Manufacturing of industrial valves. Financial appraisal which mainly leads to the feasibility study consisting of capital budgeting calculations.

Objective Financial appraisal of project Sub Objectives 1. To know the risks involved in projects financing. 2. To appraise the projects using financial tools. 3. The payback period is within the debt life of the project. 4. The net present value of the project is positive, The positive net present value will result only if the project generates cash inflows at a rate higher than the opportunity cost of capital . Since the Net Present Value of the above project is positive, the proposal can be accepted. 5. The internal rate of the return is higher than what accepted so the project is accepted.

Limitation of the study:Some of the information is confidential in nature that could not divulge for study.

Rationale behind choosing this topic:

Project financing is a comparatively new field for Indian banks,at present scenario India is becoming developed country so because of that many projects are going on that may be infrastructure, power generation, mining etc. considering all these the projects must need finance, to fulfill these objectives the project undertaken

companies raise the funds through capital market, debt market and through banks. Whenever bank wants to finance these types of projects it must study the feasibility of the project and then it will go for financing that project. Because of this it is very necessary to study the process of project financed by the bank so I choose this topic to study how SBI study the projects and the method of financing the projects.

CHAPTER -2

INDUSTRY AND COMPANY PROFILE

Industry profile:
The manufacturing industry in India has all the qualities which enhance economic development, increase the productivity of the manufacturing industry and face competition from the global markets. The Manufacturing industry in India is believed to have the potential of improving the economic condition of India.

Company profile:
We are pleased to introduce our M/S SL Flow Control Group and the

company is commenced its business in the year 2012 and the ISO 9001:2008 certified as one of manufacturer and exporter of Industrial Valves for specialized fields like : Oil & Gas, Marine, Offshore, Petrochemical, Textiles, Chemicals, Pharmaceuticals, Engineering, Power, and General Industry in India. We are providing complete solutions for any difficult application. We are supplying quality valves to many countries as well as to domestic market. SL valves reflect our job to satisfy customers requirements.

ISI & IBR CERTIFIED VALVES ARE AVAILABLE HERE.

y We can provide Third Party inspection from Lloyds, TUV, EIL, PDIL, SGS, H & G, and Tata Projects etc. y Working on CE.

y Well documented and implemented Quality Plan. y Process parameters well controlled.
y

Various tests facilities available in house.

Name Address

: M/S SL Flow Control : 98/A, 2A1, Sri Laxmi Business house near Airport road Gokul road, Secundrabad.

Nature of Business Status Name of the promoter Cost of the project Employment potential

: Manufacturing of industrial valves. : Proprietary Concern. : Sri Verendra.B.Koujalagi. : Rs 221.41 lakhs : 30 employees

Our Infrastructure
Our company have a state-of-the-art manufacturing unit, which helps in delivering qualitative range of industrial valves. Our manufacturing unit is also helpful in product development and production. our company is committed to offer new age concept-to-application solutions to our esteemed clients, with continuous upgrades in our design, prototypic, testing, quality assurance and foundry operations. Our manufacturing unit also has in house latest state of the art equipments for manufacturing, measuring & testing in accordance to international standards.

Our Manufacturing Unit

Our company have a state-of-the-art manufacturing unit, which helps in delivering qualitative range of industrial valves. Our manufacturing unit is also helpful in product development and production. our company is committed to offer new age concept-to-application solutions to our esteemed clients, with continuous upgrades in our design, prototypic, testing, quality assurance and foundry operations. Our manufacturing unit also have in house latest state of the art equipments for manufacturing, measuring & testing in accordance to international standards.

Our Efficient Team

We have a team of self-motivated employees, who are dedicatedly engaged in the manufacturing of industrial valves. Our team is the most important strength of our company, who works towards meeting various operations of the company.

Warehousing & Packing Facility:

Wide range of industrial valves. Dedicated work force. International quality standards. Use of advanced technology. Use of qualitative raw material. Prompt Delivery. Safe packaging. Customization facilities. Ethical business policies. R & D.

Offer market-leading prices. Wide network areas.

Theoretical Background For The Project Work

Project Financing INTRODUCTION: Project financing is an innovative and timely financing technique that has been used on many high-profile corporate projects, including Euro Disneyland and the Euro tunnel. Employing a carefully engineered financing mix, it has long been used to fund large-scale natural resource projects, from pipelines and refineries to electric-generating facilities and hydroelectric projects. Increasingly, project financing is emerging as the preferred alternative to conventional methods of financing infrastructure and other large-scale projects worldwide. MEANINGProject financing involves non-recourse financing of the development and construction of a particular project in which the lender looks principally to the revenues expected to be generated by the project for the repayment of its loan and to the assets of the project as collateral for its loan rather than to the general credit of the project sponsor. RATIONALEProject financing is commonly used as a financing method in capital-intensive industries for projects requiring large investments of funds, such as the construction of power plants, pipelines, transportation systems, mining facilities, industrial facilities and heavy manufacturing plants. The sponsors of such projects frequently are not sufficiently creditworthy to obtain traditional financing or are unwilling to take the risks and assume the debt obligations associated with traditional financings. Project financing permits the risks associated with such

projects to be allocated among a number of parties at levels acceptable to each party. PRINCIPLE ADVANTAGE AND OBJECTIVESNON RECOURSE The typical project financing involves a loan to enable the sponsor to construct a project where the loan is completely "non-recourse" to the sponsor, i.e., the sponsor has no obligation to make payments on the project loan if revenues generated by the project are insufficient to cover the principal and interest payments on the loan. In order to minimize the risks associated with a nonrecourse loan, a lender typically will require indirect credit supports in the form of guarantees, warranties and other covenants from the sponsor, its affiliates and other third parties involved with the project MAXIMIZE LEVERAGE In a project financing, the sponsor typically seeks to finance the costs of development and construction of the project on a highly leveraged basis. Frequently, such costs are financed using 80 to 100 percent debt. High leverage in a non-recourse project financing permits a sponsor to put less in funds at risk, permits a sponsor to finance the project without diluting its equity investment in the project and, in certain circumstances, also may permit reductions in the cost of capital by substituting lower-cost, tax-deductible interest for higher-cost, taxable returns on equity. DISADVANTAGES-

Project financings are extremely complex. It may take a much longer period of time to structure, negotiate and document a project financing than a traditional financing, and the legal fees and related costs associated with a project financing can be very high. Because the risks assumed by lenders may be greater in a nonrecourse project financing than in a more traditional financing, the cost of capital may be greater than with a traditional financing.

PROCESS OF PROJECT FINANCING:

Feasibility Study As one of the first steps in a project financing is hiring of a technical consultant and he will prepare a feasibility study showing the financial viability of the project. Frequently, a prospective lender will hire its own independent consultants to prepare an independent feasibility study before the lender will commit to lend funds for the project. Contents The feasibility study should analyze every technical, financial and other aspect of the project, including the time-frame for completion of the various phases of the project development, and should clearly set forth all of the financial and other assumptions upon which the conclusions of the study are based, Among the more important items contained in a feasibility study are: 1. Description of project 2. Description of sponsor(s). 3. Sponsors' Agreements. 4. Project site.

5. Governmental arrangements. 6. Source of funds. 7. Feedstock Agreements. 8. Construction Contract. 9. Management of project. 10. Capital costs. 11. Working capital. 12. Equity sourcing. 13. Debt sourcing. 14. Financial projections. 15. Market study. 16. Assumptions.

Principal Agreements in a Project Financing Construction:- These are follows

y Project Description- The construction contract should set forth a detailed description of all the Work necessary to complete the project y Price:- Most project financing construction contracts are fixed-price

contracts although some projects may be built on a cost-plus basis. If the contract is not fixed-price, additional debt or equity contributions may be necessary to complete the project, and the project agreements should clearly indicate the party or parties responsible for such contributions.

y Payment- Payments typically are made on a "milestone" or "completed work" basis, with a retain age. This payment procedure provides an incentive for the contractor to keep on schedule and useful monitoring points for the owner and the lender. y Completion Date- The construction completion date, together with any time extensions resulting from an event of force majeure, must be consistent with the parties' obligations under the other project documents. If construction is not finished by the completion date, the contractor typically is required to pay liquidated damages to cover debt service for each day until the project is completed. If construction is completed early, the contractor frequently is entitled to an early completion bonus. y Performance Guarantees- The contractor typically will guarantee that the project will be able to meet certain performance standards when completed. Such standards must be set at levels to assure that the project will generate sufficient revenues for debt service, operating costs and a return on equity. Such guarantees are measured by performance tests conducted by the contractor at the end of construction. If the project does not meet the guaranteed levels of performance, the contractor typically is required to make liquidated damages payments to the sponsor. If project performance exceeds the guaranteed minimum levels, the contractor may be entitled to bonus payments. Feedstock Supply Agreements. The project company will enter into one or more feedstock supply agreements for the supply of raw materials, energy or other resources over the life of the project. Frequently, feedstock supply agreements are structured on a "put-or-pay" basis,

which means that the supplier must either supply the feedstock or pay the project company the difference in costs incurred in obtaining the feedstock from another source. The price provisions of feedstock supply agreements must assure that the cost of the feedstock is fixed within an acceptable range and consistent with the financial projections of the project. Operations and Maintenance Agreement The project company typically will enter into a long-term agreement for the day-to-day operation and maintenance of the project facilities with a company having the technical and financial expertise to operate the project in accordance with the cost and production specifications for the project. The operator may be an independent company, or it may be one of the sponsors . The operator typically will be paid a fixed compensation and may be entitled to bonus payments for extraordinary project performance and be required to pay liquidated damages for project performance below specified levels. Loan and Security Agreement. The borrower in a project financing typically is the project company formed by the sponsor(s) to own the project. The loan agreement will set forth the basic terms of the loan and will contain general provisions relating to maturity, interest rate and fees. The typical project financing loan agreement also will contain provisions such asDisbursement Controls. These frequently take the form of conditions precedent to each drawdown, requiring the borrower to present invoices, builders certificates or other evidence as to the need for and use of the funds.

1. Progress Reports.:- The lender may require periodic reports certified by an independent consultant on the status of construction progress. 2. Covenants Not to Amend:- The borrower will covenant not to amend or waive any of its rights under the construction, feedstock, off take, operations and maintenance, or other principal agreements without the consent of the lender. 3. Completion Covenants:-These require the borrower to complete the project in accordance with project plans and specifications and prohibit the borrower from materially altering the project plans

without the consent of the lender. 4. Dividend Restrictions. These covenants place restrictions on the payment of dividends or other distributions by the borrower until debt service obligations are satisfied. 5. Debt and Guarantee Restrictions. The borrower may be prohibited from incurring additional debt or from guaranteeing other obligations 6. Financial Covenants. Such covenants require the maintenance of working capital and liquidity ratios, debt service coverage ratios, debt service reserves and other financial ratios to protect the credit of the borrower. 7. Subordination. Lenders typically require other participants in the project to enter into a subordination agreement under which certain payments to such participants from the borrower under project agreements are restricted (either absolutely or partially) and made subordinate to the payment of debt service. 8. Security. The project loan typically will be secured by multiple forms of collateral, including:----

y y y y y y y y y y

Mortgage on the project facilities and real property. Assignment of operating revenues. Pledge of bank deposits Assignment of any letters of credit or performance or completion bonds relating to the project. Project under which borrower is the beneficiary. Liens on the borrower's personal property Assignment of insurance proceeds Assignment of all project agreements Pledge of stock in Project Company or assignment of partnership interests. Assignment of any patents, trademarks or other intellectual property owned by the borrower.

1. Site Lease Agreements.

The project company typically enters into long- term lease for the life of the project relating to the real property on which the project is to be located. Rental payments may be set in advance at a fixed rate or may be tied to project performance.

2. Insurance.
The general categories of insurance available in connection with project financings are: Standard Insurance- The following types of insurance typically are obtained for all project financings and cover the most common types of losses that a project may suffer. 1. 2. 3. 4. 5. Property Damage, including transportation, fire and extended casualty. Boiler and Machinery. Comprehensive General Liability. Worker's Compensation. Automobile Liability and Physical Damage.

6. Excess Liability. Optional Insurance. The following types of insurance often are obtained in connection with a project financing. Coverages such as these are more expensive than standard insurance and require more tailoring to meet the specific needs of the project 1. 2. 3. 4. 5. 6. Business Interruption. Performance Bonds. Cost Overrun/Delayed Opening. Design Errors and Omissions System Performance (Efficiency). Pollution Liability.

Project Risks Project finance is finance for a particular project, such as a mine, toll road, railway, pipeline, power station, ship, hospital or prison, which is repaid from the cash-flow of that project. Project finance is different from traditional forms of finance because the financier principally looks to the assets and revenue of the project in order to secure and service the loan. In contrast to an ordinary borrowing situation, in a project financing the financier usually has little or no recourse to the nonproject assets of the borrower or the sponsors of the project. In this situation, the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project. The following details shows the manner in which risks are approached by financiers in a project finance transaction. Such risk minimization lies at the heart of project finance.

In a no recourse or limited recourse project financing, the risks for a financier are great. Since the loan can only be repaid when the project is operational, if a major part of the project fails, the financiers are likely to lose a substantial amount of money. The assets that remain are usually highly specialized and possibly in a remote location. If saleable, they may have little value outside the project. Therefore, it is not surprising that financiers, and their advisers, go to substantial efforts to ensure that the risks associated with the project are reduced or eliminated as far as possible. It is also not surprising that because of the risks involved, the cost of such finance is generally higher and it is more time consuming for such finance to be provided. Risk minimization process Financiers are concerned with minimizing the dangers of any events which could have a negative impact on the financial performance of the project, in particular, events which could result in: 1) The project not being completed on time, on budget, or at all; 2) The project not operating at its full capacity; 3) The project failing to generate sufficient revenue to service the debt; or 4) The project prematurely coming to an end. The minimization of such risks involves a three step process. 1) The first step requires the identification and analysis of all the risks that may bear upon the project. 2) The second step is the allocation of those risks among the parties. 3) The last step involves the creation of mechanisms to manage the risks.

If a risk to the financiers cannot be minimized, the financiers will need to build it into the interest rate margin for the loan. If the proposal involves financing of a new project, the commercial, economic and financial viability and other aspects are to be examined as indicated below Statutory clearance from various government depts/agencies  License/ clearance /permits as applicable  Details of sources of energy requirements, power, fuel etc..  Pollution control clearance  Cost of project and source of finance  Buildup of fixed assets.  Arrangements proposed for raising debt and equity  Capital structure  Feasibility of arrangements to access capital market  Feasibility of the projections/estimates of sales cost of production and profit covering the period of repayment.  Break-even point in terms of sales value and percentage of installed capacity under a normal production year.  Cash flows and fund flows  Whether profitability is adequate to  Industry profile and prospectus  Critical factors of industry and whether the assessment of these and management plans in this regard are acceptable  Technical feasibility with reference to report of technical consultants, if available meet stipulated repayments with reference to Debt Service Coverage Ratio, Return on Investment.

CHAPTER-3

ANALYSIS AND CALCULATION OF PROJECT

The further part has been dealt with respect to the project of SL flow controls.
Cost of the project
Cost of the project Building Land Machinery Electrification Electricity Deposit Preliminary Expenses - Technical know how 5.00 - Personnel training -Patterns Net Working Captial Total 2.00 5.00 12.00 67.53 221.41 Amount(Lakhs) 25.00 22.00 83.38 6.50 5.00

Means of finance Amounts in lakhs

Term loan Working Captial loan Own Contribution 102.50 50.00 51.38

Margin Money for working Capital 17.53 Total 221.41

Repayment Period and debt service coverage A) Projections of performance and profitability
Particulars A) Sales Less: Excise 2012 300.00 34.51 265.49 2013 330.00 37.96 292.04 2014 363.00 41.76 321.24 2015 399.30 45.94 353.36 2016 439.23 50.53 388.70

Net sales
B) cost of Production 1.Raw material consumed 2.Power & Fuel 3.Direct labor & wages 4.consumable stores 5.Repair & Maintenance 6.Other manufacturingexpences 7.Depreciation 8.Preliminary expenses w/off

185.84 6.00 12.24 0.60 1.20 0.72 24.97 2.40 233.47 0.00 4.50 229.47 36.02

204.42 6.60 13.46 0.66 1.32 0.79 19.10 2.40 248.76 4.50 4.78 248.78 43.56

224.87 7.26 14.81 0.73 1.65 1.11 14.66 2.40 267.49 4.78 5.14 267.13 54.11

247.35 7.99 16.29 0.80 2.48 1.55 11.30 2.40 290.16 5.14 5.58 289.72 63.64

272.09 8.78 17.92 0.88 3.47 2.17 8.75 2.40 316.46 5.58 6.09 315.96 72.74

Total Cost of Production

Add: Opening stock Less: Closing Stock D)Cost of goods sold E) Gross Profit (B-D) F) Interest on 1) Term Loan 2) Working Captial Total G) Selling, administration Exp

12.80 6.75 19.55 1.20

10.03 6.75 16.78 1.32 25.45

7.26 6.75 14.01 1.45 38.65

4.50 6.75 11.25 1.60 50.80

1.73 6.75 8.48 1.76 62.51

H)Profit

Before

Taxation(E- 15.27

(F+G)) I) Provision for Taxation J) Profit after tax (H-I) K) Depreciation L) Net Cash accruals( J+K) 4.58 10.69 24.97 35.66 7.64 17.82 19.10 36.92 11.59 27.05 14.66 41.72 15.24 35.56 11.30 46.86 18.75 43.75 8.75 52.5

B) Projected Cash Flow Statement

SL.NO A) Particulars Sources of funds 1.Net profit before interest and tax 2. Depreciation 3.Promoters capital 4.own contribution towards 5.term loan 6.working capital loan 7.Sundry creditior 8.Amortisationofpreliminaryexpences Total: 34.82 24.97 51.38 5.00 102.50 50.00 7.74 2.40 278.8 0.77 2.40 64.52 0.85 2.40 70.58 0.94 2.40 76.68 1.03 2.40 83.17 42.24 19.10 52.66 14.66 62.04 11.30 70.99 8.75 2012 2013 2014 2015 2016

B)

Application of funds 1. Buldings 2. Land 3.Macinary 4.Electrification 5.Electricity Deposit 6.Preliminary Expenditure 6. Increase in receivables 44.25 4.42 4.87 5.35 5.89 25.00 22.00 83.38 6.50 5.00

7.incerase in stock of material 9.increase in stock of finished goods 10.Drawing/ Dividend 11.interest on loans 12.income tax 13.Repayment of term loans Total Surplus/deficit Opening Balance Add: surplus/ deficit Closing Balance

30.97 4.50 3.00 19.55 0.00 20.5 276.65 2.15 0.00 2.15 2.15

3.10 0.28 10.00 16.78 4.58 20.5 59.67 4.85 2,15 4.85 7.00

3.41 0.36 15.00 14.01 7.64 20.5 65.79 4.79 7.00 4.79 11.80

3.75 0.44 15.00 11.25 11.59 20.5 67.88 8.80 11.80 8.80 20.6

4.12 0.51 20.00 8.48 15.24 20.5 74.74 8.43 20.6 8.43 29.03

Projectd Balance Sheet

SL.NO Particulars A Captial & Liability Promoter captial Own contribution Less Drawings Equity Retained Earning 0.00 56.38 3,00 53.38 10.69 64.07 Term loan(Debt) Sundry creditors Working Captial loan Provision for tax Grand Total Assets: Fixed assets 89.91 70.81 56.14 44.84 36.09 82.00 7.74 50.00 4.58 64.07 0.00 10.00 54.07 17.82 71.88 61.50 8.52 50.00 7.64 71.88 0.00 15.00 56.88 27.05 83.94 41.00 9.37 50.00 11.59 83.94 0.00 15.00 68,94 35.56 104.49 0.00 20.00 84.49 43.75 2012 2013 2014 2015 2016

104.49 128.25 20.50 10.31 50.00 15.24 0.00 11.34 50.00 18.75

203.39 199.54 195.90 200.54 208.34

Land Electricity deposit Cash & Bank Balances Receivables Stock of material Stock of finished goods

22.00 5.00 2.15 44.25 30.97 4.50

22.00 5.00 7.00 48.67 34.07 4.78 7.20

22.00 5.00 11.80 53.54 37.48 5.14 4.80

22.00 5.00 20.6 58.89 41.23 5.58 2.40

22.00 5.00 29.03 64.78 45.35 6.09 0.00

Preliminary expences not w/off 9.60 Grand Total

208.39 199.54 195.9

200.54 208.34

Capital investment evaluation methods Successful completion of a project mainly depends on the selection criteria adopted while choosing the project in the initial phases itself and the choice of a project must be based on a sound financial assessment and not based on impressions. Among the several criteria available for financial assessment of projects, Discounted Cash Flow (DCF) techniques are being widely used in both public and private sectors. Usually the basic criterion used in project appraisal is Internal Rate of Returns (IRR), which is the most popular DCF technique used in the country. Therefore, an attempt is made to analyse other alternative project appraisal methods available for catering to the requirements of vivid circumstances. Emphasis is given for DCF techniques as they were proved to be the best techniques for project appraisal all over the world. 1) Pay Back Period (PBP) Method: Pay back period is the minimum period required to cover the initial cost and a project with minimum PBP is acceptable in this model. This is a very useful tool

to decide rapidly if it is worth to do a small investment by a local manager and also helps to reduce the risk of bad choices. But the basic economic principles involved in PBP method are not as reliable as the other methods like NPV etc. The most important drawback of PWP method is, it is insensitive to changes in timing with in the payback period and ignores the cash flows beyond the PBP. This method also lacks a natural bench mark against which comparisons can be made among various projects. Discounted PBP method gives a more accurate period to cover the initial cost but doesnt overcome the above drawbacks. However this is a very good method to use in combination with other methods. Year Cash Flows (in lakhs) Cumulative cash flows 2004 35.66 2005 36.92 2006 41.72 2007 46.86 2008 52.50 35.66 72.58 114.3 161.16 213.66

Payback Period = Total cashoutflow/ Annual cash inflow The recovery of the investment is in the 3rd year and 0.64 month. InterpretationThe Pay back period is a measure of liquidity of investments rather than their profitability. Since the period within which the total cost of the period is less than the completion period, the project can be accepted. It means that the firm will be

able to pay the dues out of their inflows. Therefore the project is said to be feasible. 2) Average Rate of ReturnThe average rate of return (ARR) method of evaluating proposed capital expenditure is also known as the accounting rate of return method. It is also known as Return on Investment, as it uses the information revealed by financial statements, to measure the profitability of an investment. The accounting rate of return can be found out by dividing the average after-tax profit by the average investment. It is given by the formula Average Rate Of Return= Avg annual profit after tax/ Avg investment(100) Average rate of return = 213.66/ 5* 100 152.5/ 2 Average rate of return = 42.732 * 100 76.25 Average rate of return = 56.04%.

InterpretationHere the ARR is more consistent as the ARR is quite higher ( more than average) and the project can be accepted. 3) Net Present value-

It is calculated by discounting the future cash flows of the project to the present value with the required rate of return to finance the cost of capital. A project is acceptable if the capital value of the project is less than or equal to the net present value of cash flows over the operating life cycle of the project. This method is highly useful when selection has to be made among many projects, which are mutually exclusive, and there are no budgetary constraints. Selection of projects with the largest positive NPV will yield highest returns. But this method is useful only to determine whether a project is acceptable or not but doesnt indicate which project is best under budgetary constraints. It is difficult to rank different compatible projects with NPV as there is no account for scale of investment while calculating NPV.

Year

Cash Flows(lakhs)

PV factor @10% 0.909 0.826 0.751 0.683 0.621 -

Total present value

1 2 3 4 5 Total PV Less- Initial outlay Net Present Value

35.66 36.92 41.72 46.86 52.50

32.414 30.495 31.290 32.005 32.603 158.807 152.5

6.307

InterpretationThe acceptance rule using NPV method is to accept the investment proposal if its net present value is positive (NPV > 0) and to reject it if the NPV is negative (NPV<0). Positive NPVs contribute to the net wealth of the shareholders which should result in the increased price of a firms share. The positive net present value will result only if the project generates cash inflows at a rate higher than the opportunity cost of capital . Since the Net Present Value of the above project is positive, the proposal can be accepted. 4)Profitability IndexIt is also known as Benefit Cost Ratio. It is similar to NPV approach. The profitability index approach measures the present value of returns per rupee invested, While the NPV is based on the difference between the present value of the future cash inflows and the present value of cash outlays. It may be defined as the ratio which is obtained dividing the present value of cash inflows by the present value of cash outlays. It is given by the formula: Present value of cash inflows Profitabillity Index = Present value of cash outflows

Profitabillity Index =158.807/152.5 = 1.041 Interpretation-

Using the profitability index, a project will qualify for acceptance if its PI exceeds one (PI>1). When PI is greater than or equal to or less than 1, the net present value is greater than or equal to or less than zero respectively. Since the Profitability Index of the above project shows the PI greater than 1 and hence the project should be accepted.

CHAPTER-4

FINDINGS, SUGGESTIONS AND RECOMMENDATIONS

Findings and Suggestions:
This analysis part is related to the financial viability of the project SL Flow Controls:-

Through ratio analysis I analyzed that the liquidity position of the firm is good and it is maintaining the standard ratio.. Debt Equity ratio is in decreasing trend, it shows that the firm is reducing its liability portion by paying the loan year on year so the financial risk less. Profitability ratios related to sales and capital employed are in increasing trend, it shows that the sales are increasing and the firm using its resources efficiently. Debt Service Coverage Ratio is also in increasing trend, it shows that the firms ability to make the loan repayments on time over the debt life of the project. The payback period is within the debt life of the project. The net present value of the project is positive, The positive net present value will result only if the project generates cash inflows at a rate higher than the opportunity cost of capital . Since the Net Present Value of the above project is positive, the proposal can be accepted. The internal rate of the return is higher than what accepted so the project is accepted The bank finances the projects only through term loans.

Interest rates are fixed depending upon the projects which is known as State Bank advance rate. When the clients fail to pay the interest, 3 months from the due date the term loan granted will be treated as Non Performing Assets. Every firm starting up a new project should make an insurance policy with the same bank itself.

Recommendations:Bank check only financial, technical and commercial feasibility of the project and it should not consider sensitivity analysis and social cost benefit analysis of the project so bank should consider this because these are also important from the point of view of risk and economy growth. Bank should be caution about the availability of security and ensure honesty of both borrower and guarantor so as to avoid the account becoming the loss assets.

CHAPTER-5

CONCLUSION AND BIBLIOGRAPHY

Conclusion:The project undertaken has helped a lot in understanding the concept of project financing in nationalized bank with reference to state bank of India. The project financing is an important aspect which helps in increasing the profit of the banks. Project financing is a vast subject and it is very difficult to apply all the aspect in all type of project when bank want to finance, and it is very difficult to cover all aspect in this project. To sum up it would not be out of way to mention here that the state bank of India has given a special impetus on Project Financing .the concerted efforts of the management and staff of state bank of India has helped the bank in achieving remarkable progress in almost all important aspects. Finally the success of project financing would mostly depend on the proper analysis of the projects before financing.

Bibliography
The data is collected from the list of books and web site given below www.sbi.com. www.Google.com