Professional Documents
Culture Documents
Decisions
Sem1
FM 1
Preliminary Screening
The list of prospective investment opportunities are now subject to
screening.
Compatibility with promoter
Compatibility with Governmental Priorities
Availability of Raw material and utilities
Size of potential market
Cost
Risk of the project
Feasibility Study
Once the project opportunity is chosen and it is considered acceptable
after the preliminary screening, a feasibility study is to be conducted .
Performance Review
Project Appraisal
Market & Demand Appraisal: total market and market share of the project
Technical Appraisal: technical aspects like project design, quality and quantity
of raw materials, scale of operations etc
Financial Projections: project cash flow projections
Project Valuation: Valuing the viability of a project
Economic Appraisal: impact of project on social life of people around,
employment, distribution of income in society, pollution etc.
Social Cost Benefit analysis: keeping in mind the national objectives
Risk analysis: the study of the inherent risks in the project
Financial appraisal
Basic 2 steps involved:
Define stream of cash flows (inflows and outflows) associated.
Appraise the cash flow stream to determine whether the project is
financially viable
Assumptions
Cash flows occur only once in a year
Risk of the project is same as that of other projects of the firm.
PAT. It is because the WACC used includes post tax cost of long
term funds. Hence if Interest on LT funds are considered it will
be double counting.
But interest on ST funds like Working capital and short term
bank finance are considered.
Example
Following are the extracts of a project in Company A:
Assets required
lakh
Project is financed by
lakh
Land
80
500
Building
100
250
500
300
Other FA
100
340
160
Gross WC
450
Example Continued
The company is expected to generate sales value of Rs 10 crore in 1 st,
12 crore in 2nd and 15 crore in next 3 years. Cost of production
repaid after 5 years when the project is sold. Tax rate is 30% and COC
is 20%.
Non Discounting
Discounting
NPV
Benefit Cost Ratio
Example 2
Following data is available for two projects A and B.
Years
Project A
Project B
Project A
Project B
10
10
15
15
15
25
20
12
40
10
50
--
--
Calculate:
1. NPV;
2. IRR;
3. Payback period;
4. BCR;