! i t : } i i : i a value is assunwd be 2erw. The hi the market rave, at the lime at which the projcl ls fen Another pivblem in financlal analysis te with the This discount rate is the opportunity cual capita, mum rate of teturn for justifying, the inves tuneu ff a project fails to earn Dus minuncon rate ay Ue said project aad land values of Ue pa alternatise pio 4f capita is to be borrowed Jor investawnt on the Shosen should be higher than the ost of bovtuea cap discount rate is to be equalled lo the Projects Of equal risk. Many problems are involved tn dy jest unt in Project evaluation partculily when te sted to the ris Broadly there are sxpecteal rate two methous uf project appraisal, gnd discounted measures. In die wndiscounted men by inspection, proceeds per rupees uf oullay, os lay, ee, ace important. Under discounted! ine Benefit-Cost Ratio (UC ratio), luteraal Rate are prominent vf Return, it UNDISCOUNTED Mrasunes The undiscounted measure native projects. The aicthods iis of the projects and hei ue the naive methods ui ted under 2 choices go wrong. Ranking by Inspection Wis based on the size of costs anal length of cashele Projects are with the same investment arul tie same, With dilference in the Length ut the petiod, thea the pe referred to the one with Shorter time period. This hoes Susiy due to the absence of ive elaborate and appre Payback Period Another simple wetlod of cay back the investinetst on the pe The pay 16 4 project is the i. bjest Project is estiniated by ack petal of the Where, P = Payback period af the project in yours, 1 = lnvestineat of the project in Rs, arat E= Annual nei cash revenue ia Rs The prefer is shown in Table of a particulas project is based! un the su pbieet, then the discount rate wets should Ly estimated at inated, station of discount ate HE! veuch weprsent the mune PEE peopysed investinent in the Pi i pl shld nr be He be chosen a worthy a BLE Beh Under tisk situations, the return from the alternative ‘siding upon the actual rate discount rate is to be ade “. undiscounted measures > payback period, ranking ‘al proceeds of rupee out Net Present Worth (NPW), sW), and Profitability Index choosing ammung the alter: ' olten misleas in ranking streain, Suppose if the two ‘value of production, but twith longer duration is vw) bias im the chy We analysis. 6 Of tiny required tw yet sig the staight forward 65) ‘ee payback period. Thisshould be estimated at ‘TADLE 414 Estimation of Payback Period. ted Initial investment = Rs. 20,000 ation of discount rate, Ge ae n represents the mini« Year feat ae Ont) sed investment in the “Proje "8 Project 8 ject “K eject apital should not be Te oe ae oe ee © chosen as worthy of ° + 20000 ana 1 5.000 4.000 then the discount ate 2 Soo Soo «der risk situations, the : oe 00 1 from the alternative ‘ He 600 in th 5 500 400 & upon the actual rate é 5.00 4000 Ount rate is to be ad- —__——&_—- ndiscounted measures Project *A’= R200 4 sanie yback period, ranking Betas noceeds of rupee cute : y = Rs. 20,000 seseat Worth (NEW), Proce Oe pe Ye 1d Profitavility Index It is inadequate to exercise the option among she alternatives, because it fails to Sonsider very important points like, consistency of running, timing of the proceeds, Teturns after the payback period and whether the cash-flows would be positive or negative in futur. 19g among the alter- e : # misiead i ranking Proceeds Per Rupee of Outlay This is worked out by dividing the total proce ment, and a given project is ranked based on the h with the total amount of invest- est magnitude of the parameter. + Suppose if the two © oF production, but th fonger duration is sin the choice obvi- Average Annual Proceeds of Rupee Outlay This is another simple choice criterion and in this procedure, total receipts are first divided by the project life span and the average proceeds obtained per year are divided by the initial investment on the project. ere too, ranking is given to the Projects, based on the highest magnitude of the estimate The major drawback with undiscounted measures is that for the same data of the Project we get diferent rankings, hence, choice process becomes useless. Rankings by these methods are inconsistent and incompatible alysis, me requited to get aight forward DISCOUNTED MEASURES Cash flows are the yearly net benclits accrued fein the project. If they are weighed by discount sate, they become discounted eash flows. These discounted cash hows (65) are the best stisnates to decide on the worlh of the project. This approach will give the net preset worth of the project. The present wont of the coats ie vobtesceed from the provery worth ofthe benefits in onder wo arrive atthe net present wef at the project every year. Measurement of the Cash Flow of tie Project cis This From the annual stream of gross bc nefits ofthe projet, the capital invested and the other input ceses like labour, machinery, fertilirers, pesticides, management, ele j476 Gut Geducted. From the residual, the return of evita. and return on capital or return PP apital te, investment made in the project (depreciation! and compensation for the use of money (interest) are computed. This residual is called cash flow of (re Project, In financial analysis the cash flow is the net inciemental benefits of the Foose ey, tecounting, the terns iniplies the sian of cash flows of projects plus depreciation allowance. The concept of cash flow in the financial analysis includes, both return of capital and return to capilal, We gsierally do not resort to dudacney Of depreciation, i, allowance of return of eapital cr interest in the econenee analy- sis, because our analytical technique automatically takes eare of return of capital in determining the worth of the project. In econoinie analysis, income teen calen {axes, custom duties, ec, are only the ininsfer payments, but ot paysients esed ty the production process. Hence, from the gross telurns these are mot deducted: Bex ia the financial analys:s tases are the costs which individuals must pay for the use of capital By fit; financial analysis aims at the estinotion of return to all resources em: Ployed in the project. Hence, borrowed capita! is considered as benei.te received, while, ils interest is considered as cost and it is ieducted from the gross returns, In economic analysis, this consideration is ruled out because of the assumption, that all the resources employed in the project belong tv someone or the other within the society. In the economic analysis, it is important that the price of some of the inputs must be the shadow prices. in financial analysis oil prices are market prices and they must include taxes and subsidies. For clear distinction between cash inflows the economic analysis vis-A-vis financiol avalysis (Gittinger, 1976) may be referred, Net Present Worth (NP) "This is simply the p-escat worth of the cash fl. v siteam, Sometiaws, itis referred to as Net Present Value (NPV). The selection <'verion of the project depends on Positive value of NPW when discounted at the opportunity cost of the capital. This could be satisfactorily dong, provided there is a :crreet estimate of opportunity cost of capital. NPW is an absuiute measure, but not ivlative NEW of the project is estimated using the bowing equation: r asa Where, i P,= Net i = Disco (= Time period, and C = Imiial cost of the investment. Project with positive NPWs are given weigtiw ge in the selection compared to NeW 66) those with negative pscsent values, while zero Nit makes the investor indifferent. sintions for two projects. ~ Here, we compare the present worth of cos! with present worth of benefits, Absoluty value of the benefit-cost ratio will chan,:'b ced on dhe interest rate choosen. While «. depending spon the“ \ cativ, the avast common proce- dure of seivet to chuose the proje” Having 6-C ratio of more than any the projecs 1 projecté Be “tien bn capital or return ion) and compensation for is called cash flow of the Jeremental benefits of the ash flows of projets plus inancial analysis includes, 40 not resort to deduction ‘st in the economic analy- ae of return of capital in Ys, ancome taxes. sales vut not payments used in se are not deducted. But als must pay for the use im to all resources em- vd as benefits received, , om the gross returns. In assumption, that all 2: the other within the © of some of o>. itis referred voject depends on of the capital. This opportunity cost (56) compared io , zy TABLE 41.2 Estimation of NPW for Two Projects Gtypotheticat, Mango Orchard (one hay riculture (one ha) Se za i i a z~ ft 38 ia aa os Bd | 2588 2s |&3a8 © lines ielseee ZESPSRES Ba7(EESS g? | 38ngg 713.78 3 3.67073 0.257 21.470 7487 7 NEW 7702'€60 ¥2 9 Lis'P9 ‘sw onesaseo-njeueg.” - BTER0'tS nog pOreeT TE amma ss #6 eeoe7's 07'020'S sate saree acouss seis curse 6x6 ot (38) suanyas $5028 JO yuiom auasald 1 eee Se aon GqeanaypodAy) spaford 2208 (HM279 pees 7246 55: 5531 1897 06 2403 35 ” cont of capital. Finally, the given projet is me nen on anh ae ‘ tied con the highest B-C ratio. Fot- ing mls arpon ie cae a we $8 BC Ratio = aL Ce 67 ar The estimation procedure of BC rato is embodied in Table 41.3 aalernal RIB. oF" Prsattle ot nein anes 3] BEE compiation intial te of Roum, te ne ‘ale of money is ale 8 Sunted. The method of working IRR previies the kava! sige of actual rate of ay Lom thes different projects. Thus IRR is known ve “marginal efficiency’ of Ft Yield om the investment its the discount ate at we the present values 4 ash Rows are just egal to zema,ie, NOW eas The IRR must be found Y tial and error with some approximation ‘The Provedure is elucidated for the Hts om sericulture and manga in Tables ThA oh 415 respectively, sryihe Working procedure, an arbiuaty disgust sat is assumed and its,corre- Bis NEW 18 arvived at. The positive NIW ealee the project indicates that er than iBher and the next sssamed arbitrary IRR vooe ‘must be comparatively by an the intial level. This process is contac until NPW becomes negative BY interpolation method the exaet IRR is found cnt Using the f following equa 1 Present worth of the Lower 1 [itterence : | + [acum et | S29 flow at the lower “discount rate fore J |aicount rte” |"| Abiola afeanee ee | Present worths of the cash flow at | the two discount cates Gross Net Prope Ne Diperudt” UN prlsene tay ene ae face pres Ce worth HEE) gles eat Means 20 a 6) Gin Rs) (in Rs) Gang 27627 ash —aramagh G52 gata oso, Bae? Gio toms gang ae Cae asia gage 83 S18 500889 alee sone 1202.69 Wespan of manyo orchard shuld be considered for working out Fat want of dota swe considvied here only 4 for seven years for illustestion© ye 5 > vr NI foo sm Is =A mol 10 + 30.9083) 40 + 27249 s2.7249% 427% TABLE 415 Estimas 1202.69 Ee 120269 13g | J H OF IRE fut Mange Ox salva aa = Profitability L Here we re required (Cf fet present val that alt the ea) iS as follows | Ney aN © Sana 4 (One Hedave) ty pu ad eo el Utypateican, ER (Rs MS Gam Rae By tality te Nh, PE oat na mea Hsiorprestat Macoryresa fay Non Gy at i ins) iris A of6" 35,000 ae ae 2500 07624530 1750 od i ee ee ee ey End a nd a a year End ofl 597516275830 auRAe ours 7590 year SENSITIVITY End Pruject appt et GaSe 193 AWD uw aod tie res | year OF ihe prose = emai wigs 7x7 a7 28a HHESD UK OLLI tion because © cag grcultural pe ee ane con 35.458 ae 1328 ee ee un «2505 we a £25 « 50586) 225.6293 = 2790% praisal Its als Eppraisal ems any analysis 3s “sesitivity And prices 18 policy @ahers tivity analysisProfitability Index vie we cela the NPV of the cash lows of the project co the 1) capital C y index”. It is defined as the ratio of ited (Cr) for a project through “profitability inde ; m= eae erate ash ows to the inital capital expenditure (C0). Assuming tha all the capital expenditure is incurred in year zero, the profitably 'n is as follows (Table 41.6): a NOV sley eer (59) Plane Co By Uti vey poet we "4 TADLE 416 Estimation of Profitability Index. xd in a project = Rs. 60,000 Original amount investec | Pesisct nen oS lr omy Non RRS Cosh iow fins) ——_Dcounting factor Net Preseat Worth 1 (in Rs) Ee (15%) (in Rs.) ce 4300 own now 14900 oz 1.878 0207 5,175.00 vs rey azn 1816 18,700 0.5355 188s 101s 95559 1s.000 0567s 10781 20,000 o5use woasz 03,700, 69438 1 uaa os423 y= Net_present value of cash flows Original amount invested Dos sea 6, 138 ag ours SENSITIVITY ANALYSIS SENEIUMITY. ons 72464 ject appraisal techniques above, provide us certain measure of project's worth and this is elated to a certain period of time and we will be forming this measure fof the projec? under the assumption that the ciata used in the project evaluation aay EEER remsin unchanged over a length of tee. Bu, in reality this is ade 8 valid assump: tion because our estimates of costs and returns goes awry over time, as prices of agricultural produce as well as the cosis of inputs are subject to change. Under these Conditions our estimates of financial snalysis will be misleading, Hence, there is a feed for considering the probable changes in the data required for the project ap- ppraisal. Its also sometimes necessary to know as t0 how far our estimates of project Appraisal remain constant under Ihe changing situation of costs, prices and yields. any analysis is able to provide clues o all these questions, we.gall such an analysis fs Sensitivity analysis’, Ifa thoupht ts given to che forecasting behaviour of costs and prices in the sensitivity analjsis, indeed, it becomes very much useful to the policy makers and planners of development. Since forecasting process is a difficult praisal tne to go weung, But, a simplified procedure of proposition, our project apy Sensitivity analysis, which 1s mot subject to tivity analysis Of the project appraisal includes the following points ciucism, is always welcome, The sensi“ eration of the leugth of the pe i Consideration of m eviod over the existing one; nges (increase or decrease) in the ce 2, Chang i Prices of goods and services by cer roportions of the project say, by 10 per cent, 2¢ er ce et 50 per cent, ete, Ps 20 per cent, 30 per cent, 40 ps . Changes (increase or decrease) in the levels of costs, y by 10 per cent, 20 p Xen er cent, 40 per cent, ete, ee 4, Changes (increase or decteasc) in’the yield of crops and livestock; and 5. Delays in the implementation, fre, varying. gestation periods Assuming the changed values for the above paraineters, by a definite propor the project worth is calculated time and again. This proceduve desle aioe que tion of tisk and uncerlainty to a certain extent in the projet anaysia But it this is not adequate, Elaborate risk analysis using probability analysis and sin ‘most appropriate tools to indicate ns of risk and uncertainty. tion models exploring the randomization, are the the real worth of the project under the conditior ia eRe rs