Assesment of Cost of Project

Initial Investment

1 Land and site development

2 Building
3 Plant and machinery
4 Other FA
5 Provision for contigency
6 Preliminary exp
7 Utility based exp
8 Pre-Operative exp
9 Tecnical know hows
10 Margin money required for WC

Financial Appraisal [Session:3]

1 Promoter's assessment (when the % of internal equity is higher, then the cost of the project is bound to be
2 Market analysis (estimation of demand, capacity and pricing)
3 Technical analysis
4 Infrastructure Facilities (what will be the cost of project, time, future plans, etc)

Financial Appraisal
1 Estimated Investment
2 Structure your sources of finance
3 Cost of project
4 Projected Financial Statement
5 Financial evaluation
6 Risk management
7 Evaluation of past performance
t of the project is bound to be higher)
 1 Capital Restructuring
a) Lending Institution Norms
Promoter's contribution
Form
Quantum 25 to 30% where 15% is from core promoters
Core Promoters
Non-Core Promoters
SEBI guidelines related to promoter contribution
b) D/E
c) Security Cover
d) DSCR

Example 1:
Project cost 50
D/E 1:01
Promoter cont. 30% of 15% of project cost (i.e 2.25 cr)
Capital subsidy 3

Project cost 50
Total equity required 25
Minimum Promoter cont. 15
Rest Equity 10
Core promoter cont. 7.5
Capital subsidy 3
Required core pro. 4.5
Industrial body (IB) 2 Assumption
Equity required 2.5
Non-core promoter cont. 7.5

Final capital structure

equity
promoter 2.5
IB 2
Non-core promoter 7.5
Capital subsidy 3
Public issue 10
Term loan 25

Example 2:
Project cost 150
Promoter cont. 25% 37.5
J.V with HSIDC 12.5
Friend (equity) 15 27.5
Core promoter cont. ? 10
Money left over 112.5
 Notes: For security cover
FACR with 40% marging
Term loan req. 100
Fixed assest 140
Security cover 1.4
Margin 40

DSCR: (Cash accruals/ Debt service)

Cash accruals PAT+ Dep. + Int. On tern loan
Debt service Interest payment + Principal Amt paid

Requirements of SEBI for raising EE through IPO/offer for sale

1 Net tangible asset
2 Pre tax operating profit
3 Net worth
4 Name change (if done)
5 Aggregate of Public Issue
atleast 3cr in the last preceeding years ( out of this 3cr not more then 50% should
min 15cr during the most profitable 3years of preceeding 5yrs
atleast 1cr in each of the preceeding full 3years
50% of the rev. In the last preceeding year should come from the activities sugges
should not exceed 5 times its pre issue net worth as per the latest audited B/S.

For unlisted firms:

1 Book building process
2 75% of the issue to be alloted to QIBs ( Qualified Institutional buyers)
3 if the firm is unable to give the min allotment QIBs then full refund has to be made
 Example 3:
1 2 3
EBIT 101.44 127.03 137.27
Int. On term loan 13.8 12.32 10.35
Int. On bank borrowing 24.76 31.14 36.41
Dep. 20.44 20.44 20.44
Preliminary exp. 5 5 5
PBT 37.44 58.13 65.07
TAX 8.24 12.79 14.32
PAT 29.2 45.34 50.75

Details of loan repayment

1 2
8.57 17.14
Compute DSCR
Avg. DSCR
MIN and MAX DSCR
Dose it satisfies the norms? (i.e 1.5 to 2)
Solution:
A. Cash Accruals 1 2
PAT 29.2 45.34
dep. 20.44 20.44
Int. On term loan 13.8 12.32
Preliminary exp. 5 5
68.44 83.1
B. Debt service
Int. 13.8 12.32
Principal installment 8.57 17.14
22.37 29.46
DSCR (A/B) 3.059455 2.820774
3cr not more then 50% should be held in the monetary assets in the laAVG DSCR 3.59859
MAX 6.551839
MIN 2.820774
ome from the activities suggested by the new name.
per the latest audited B/S.
 4 5 6 7 8
132.89 126.94 120.85 115.68 106.34
8.38 6.41 4.44 2.46 0.4
36.65 36.7 36.75 36.81 36.87
20.44 20.44 20.44 20.44 20.44
5 5
62.42 58.39 59.22 55.97 48.63
13.73 12.85 13.03 12.31 10.7
48.69 45.54 46.19 43.66 37.93

3 4 5 6 7 8
17.14 17.14 17.14 17.14 17.14 8.57

3 4 5 6 7 8
50.75 48.69 45.54 46.19 43.66 37.93
20.44 20.44 20.44 20.44 20.44 20.44
10.35 8.38 6.41 4.44 2.46 0.4
5 5 5 0 0 0
86.54 82.51 77.39 71.07 66.56 58.77

10.35 8.38 6.41 4.44 2.46 0.4

17.14 17.14 17.14 17.14 17.14 8.57
27.49 25.52 23.55 21.58 19.6 8.97
3.148054 3.23315 3.2862 3.293327 3.395918 6.551839
 1000
Projection of FS MS 20% 200

1 General institutional norms Qty p Revenue

a) Capacity utilization (400 units)
b) SP
c) RM prices
Operating cost
d) (5-10% increase should be provided every year)
e) Implementation cost

2 Assumptions:
Promoters Analysis Gearing structure Debt treatment
Market Analysis
Technical Analysis
Financial Aspects per se

Steps
1 To know the total cost
2 Preparation of Projected Profitability estimates IS BS and CF
Revenue a) Balance sheet at the end of
COGS b) Projected BS from 1 operati
Opex
Dep. CF
Preliminary and public issue exp. After completion of gestatio
Interest Projected
PBT
Carried forward un-absorbed loss
Deductions as per IT act (such as 10AA, 35D and 80S
Book profits
Tax rate
Dividend (inclusive taxs)
RE
 Example: Milkmen India pvt. Ltd

Installed capacity
Balance sheet at the end of Gestation period Capacity utiliation
Projected BS from 1 operating year Production (MT)
Add: Opening inventory-
WIP
After completion of gestation period Finished goods
Total
Less: Closing inventory
WIP
Finished goods
Qty sold
Sp
Projected revenue
 Solution Example 2: Devedra cotton yarn
1 2 3 4 5
3000 3000 3000 3000 3000 Sales
70% 80% 90% 90% 90% Rm
2100 2400 2700 2700 2700 Cost of production
Purchase
0 17.5 20 22.5 22.5
0 87.5 100 112.5 112.5
2100.00 2505.00 2820.00 2835.00 2835.00 Book debt
RM
17.5 20 22.5 22.5 22.5 WIP
87.5 100 112.5 112.5 112.5 FG
1995 2385 2685 2700 2700 TC
2.25 2.25 2.25 2.25 2.25
4488.75 5366.25 6041.25 6075 6075 Margin money for WC to be provided on 2
Int. On bank finance for WC is 14% pa

solution:

A. Current Assets
Raw materials
WIP
FG
Book debts
TCA
B. less: margin (25%)
TCL (A-B)
C. Less: Trade credit
Bank finace (A-B-C)
Interest (14%)
WC (A-C)
Devedra cotton yarn
1 2 3 4 5
1184.22 1283.13 1556.02 1556.02 1556.02
808.5 924 1039.5 1039.5 1039.5
880.76 1004.63 1128.8 1132.66 1136.89
875.88 933.63 1049.13 1039.5 1039.5

1/2 months
1 month
two by thirty
1/2 months
1/2 months

ey for WC to be provided on 25% of CA

finance for WC is 14% pa

1 2 3 4 5
Conditions
0.08 67.375 77 86.625 86.625 86.625
0.01 4.893111 5.581278 6.271111 6.292556 6.316056
0.04 36.69833 41.85958 47.03333 47.19417 47.37042
0.04 49.3425 53.46375 64.83417 64.83417 64.83417
158.3089 177.9046 204.7636 204.9459 205.1456
0.25 39.57724 44.47615 51.1909 51.23647 51.28641
118.7317 133.4285 153.5727 153.7094 153.8592
0.04 36.495 38.90125 43.71375 43.3125 43.3125
 82.23671 94.52721 109.859 110.3969 110.5467
14% 11.51314 13.23381 15.38025 15.45557 15.47654
121.8139 139.0034 161.0499 161.6334 161.8331
Example 3: Rita jewelers ltd. Example 4:

Gross block Depreciation

Land
Buildin
P&M

Dep. Buildings
P&M

Term loan

Term loan in the begining

Less repayment of loan
Term loan at the end
Interest

Bank borrowings

Provision for income tax

PPBT
SLM (add) (dep.)

Less: dep(WDV)
Taxable income

WDV DEP.
Gross block

Dep.
 Income statement
Y1 Y2
Year 1 year 2 Sales 4000 4400
50 50 cogs 3600 3950
200 200 Gp 400 450
800 800 SLM Dep. 44.68 44.68
Pre. Exp 3 3
6.68 6.68 Int.1 0
38 38 Int.2
44.68 44.68 PBT
Income tax
PAT
700 Dividend
Y1 Y2
700 630
70 70
630 560

Y1 Y2
0
 44.68

140

Depreciati Year 1 Year 2

Land 50 50
Buildin 200 200
P&M 800 800

Buildings 20 18
P&M 120 99
140 117
Net block
Buildings 180
P&M 660
Balance sheet Cash Flow
GP Y1 Y2
Equity
MIRR
Year 0 120
1 -80
2 20
3 60
4 80
5 100
6 120

Cost of capital 15%

Step 1 PV of cost 120 69.56522

Step 2 TV of CF expexted
20 34.98013
60 91.2525
80 105.8
100 115
120 120
467.0326
Step 3
PVC= TV/(1+ MIRR)^n

Compute the
terminal value
MNPV Step 1 of cash inflows
Step 2 MNPV

X Y TV X
0 110000 110000
1 31000 71000 125400
2 40000 40000
3 50000 40000
4 70000 20000
Reinvested rates 14% 14%
Cost of capital 10% 10%