Project Report and Appraisal

Preparation of a Project Report and appraisal thereof

1 CA Day July 01 2007

Introduction

Project finance is… providing finance for particular projects, which is later repaid from cash flows generated by those specific projects.
Importance of risk management in project finance…

CA Debasish Banerjee

2 CA Day July 01 2007

Agenda  Today we are going to discuss the method of preparing a Project Report and its appraisal Preparing of Schemes for SSI Registration  CA Debasish Banerjee 3 CA Day July 01 2007 .

Overview  Project Report preparation involves Fixation of Cost of Project Fixation of Means of Financing Preparation of Financial Statements Assessing Financial viability Assessing Economic viability CA Debasish Banerjee 4 CA Day July 01 2007 .

Fixation of cost of Project      Great care should be taken Every item is properly scrutinized by financer Over-invoice to be avoided and creditability of the promoters retained Omission to be financed by promoter Time schedule fixed by Bar-Chart ( < 5 crores) PERT or CPM method CA Debasish Banerjee 5 CA Day July 01 2007 .

Fixation of cost of Project           The Cost of Project Land and Site development Building and civil woks Plant & Machinery Escalation & contingencies Other Fixed Assets Technical know-how fees Interest during construction Preliminary & Preoperative expenses Margin Money for working capital 6 CA Day July 01 2007 CA Debasish Banerjee .

Land and site development         Basic Cost of land Conveyancing charges and other allied charges Levelling of the plot Laying of the internal road Laying of the approach road Construction of the Boundary Walls Construction of the main gate Tube-well digging cost 7 CA Day July 01 2007 CA Debasish Banerjee .

Building and civil works   Main factory Building Allied civil structure There is a tendency of over stating this cost There is a tendency for over-run due to increase in the area and / or cost of construction CA Debasish Banerjee 8 CA Day July 01 2007 .

Plant & Machinery  Evaluation of technologies Increased Profitability Saving of labour Better consumption norms Lesser requirement of Plants Ease in availability of raw material  Selection of plant & machinery 9 CA Day July 01 2007 CA Debasish Banerjee .

CA Debasish Banerjee 10 CA Day July 01 2007 .Escalation and contingencies  Takes care of escalation which may take place during the actual implementation of the project.

Miscellaneous Fixed Assets  There are other items of machinery which do not form part of the direct manufacturing process These should be supported with quotations CA Debasish Banerjee 11 CA Day July 01 2007 .

Technical know-how fees  Fees for technical consultancy CA Debasish Banerjee 12 CA Day July 01 2007 .

Interest during construction period  The promoter is required to pay the interest during the period and depends on Quantum of loan Duration for which the loan will remain outstanding CA Debasish Banerjee 13 CA Day July 01 2007 .

Preliminary & preoperative expenses  Expenses which are not directly related with any of the above expenses and are required to be incurred CA Debasish Banerjee 14 CA Day July 01 2007 .

C.Margin money for working capital Essential requirement of any project is the Working Capital  Assessment of W. requirement 20% of Turnover CA-CL=WC & then 25% margin MPBF (Maximum Permissible Bank Finance)  15 CA Day July 01 2007 CA Debasish Banerjee .

Fixation of Means of Financing  Debt Equity Ratio maximum permissible is 3:1 for small scale unit And 2:1 for other units Promoters’ contribution  Unsecured Loan  Debt Service Coverage Ratio Repayment capacity  CA Debasish Banerjee 16 CA Day July 01 2007 .

5. Earlier it was 2.Debt Service Coverage Ratio   Should be in the vicinity of 1. High DSCR can be reduced by Reducing cash accruals By lower Capacity Utilization More Pessimistic Approach Altering the Interest Increasing the Instalment of the loan  Low DSCR can be reviewed alternatively by reversed remedy 17 CA Day July 01 2007 CA Debasish Banerjee .

Preparation of financial statement for the period of atleast the tenure of the term loan  Cost of production and profitability  Cash Flow Statement  Balance Sheet CA Debasish Banerjee 18 CA Day July 01 2007 .

Preparation of financial statement for existing Units for the period of atleast the tenure of the term loan  Cost of production and profitability Increase in Sale above 20% should be properly explained Cash Flow Statement  Balance Sheet  19 CA Day July 01 2007 CA Debasish Banerjee .

Performance Ratios Share Capital Reserve NET WORTH  Profitability ratios  Analysis of Cash Accruals  Analysis of Sales  Analysis of the Working Capital  Analysis of Debtors  more than 6 months may be considered not recoverable CA Debasish Banerjee 20 CA Day July 01 2007 .

Break Even Point Fixed Cost  Variable Cost  Contribution  Break Even Point  CA Debasish Banerjee 21 CA Day July 01 2007 .

Internal Rate of Return Return on Investment method  Pay back method criteria  Net present value criteria ( discounted)  Internal Rate of return  CA Debasish Banerjee 22 CA Day July 01 2007 .

It works out to 22.1% CA Debasish Banerjee 23 CA Day July 01 2007 .Internal Rate of Return  Internal Rate of return The cash flow are total ( Rs 35.000) The average cash flow calculated ( Rs 35000/5= Rs 7000) The initial investment is divided by the average Cash flow to 3 decimal places (Rs 20000/7000=2.856) This figure is matched with the annuity table and the closed rate for the number of years ( 5 yrs) for which the project is expected to have economic life is evaluated.

CA Debasish Banerjee 24 CA Day July 01 2007 .Essential criteria  For project financing. the financier essentially looks at the revenue generating capacity of the project for which a loan is sought.

Additional Formats Preparation of a Project Report  Preparation of the CMA Data for the Bank (Format enclosed)  Appraisal Report of the Banker (Format enclosed)  Credit rating Norms ( details enclosed )  Preparation of Schemes ( Format enclosed)  25 CA Day July 01 2007 CA Debasish Banerjee .

More Information  For those who love to read “Guide to Project Finance” enclosed in CD (downloaded from Net) Project Reports and Appraisals by H.Pahwa (Bharat Law House Pvt Ltd)  Credit Appraisal of any Bank  CA Debasish Banerjee 26 CA Day July 01 2007 .S.P.