FINANCIAL APPRAISAL

• Major aspects-
a) Project cost estimation
b) Project funding
• Minor Aspects-
c) Operation Costs/Working cost
 NON-DISCOUNTED CASH FLOW
TECHNIQUES
PAY BACK PERIOD

Cash inflow after tax is uniform-

PBP= Initial Investment
Constant Annual cash inflow
 PAY BACK PERIOD
• Cash inflow is variable-
PBP= A+B/C
Where, A- Last period with –ve cumulative
cash flow ( net invested cash inflow)
B- Absolute value of cumulative cash outflow
at the end of period A ( net invested cash flow
at the end of period A)
C- Cash inflow during the next period after A
 PAY BACK PERIOD
• Advantages-
a) Easy and simple
b) Risk measuring
c) Beneficial for companies facing liquid funds
problem to rank multiple projects
• Disadvantages-
a) Time value of money not included
b) Does not account cash flow after pay back period
 AVERAGE RATE OF RETURN
• ARR/ROI= Avg. Annual Profit After Taxes*100
Avg. investment over project life
• Avg. annual profit after taxes (Annuity Profit)
= Total profit after tax
No. of
Years
• Profit= Income-Expenditure-Depriciation
• After tax profit = Profit – Income tax
 AVERAGE RATE OF RETURN
• Average investment over project life=
½ (Initial cost- Salvage value)+ Salvage value+
Working Capital
WORKING CAPITAL= CURRENT ASSETS-CURRENT
LIABILITIES
SALVAGE VALUE= INITIAL COST-TOTAL AMOUNT
OF DEPRICIATION
 DISCOUNTED TECHNIQUES OF FINANCIAL
APPRAISAL
• Compounding And Discounting
• Time value of money
• NET PRESENT VALUE-
F= P( 1+r)ⁿ where ,F- Future value
P= F/(1+r)ⁿ P- Present value/discounted cash
flow
P=F(1+r)⁻ⁿ r- Interest per annum
n – No. of years
DISCOUNTING CASH FLOW TECHNIQUES

• 1/(1+r)ⁿ = Discounting Factor

• Discounted Cash Flow= CF1 +CF2 +……+ CFn
(1+r) (1+r)² (1+r)ⁿ
•CF1- future cash flow after 1 years
•CFn- Future cash flow after n years
•So, DCF> Total Initial Investment then
Financially viable..
 NET PRESENT VALUE

NPV= TOTAL PRESENT VALUE OF CASH INFLOW

- TOTAL PRESENT VALUE OF CASH OUTFLOW
OR
NPV= TOTAL DCF- TOTAL INITIAL INVESTMENT
OR
NPV=TOTAL DCF-TOTAL INVESTMENT AT
PRESENT COST
 NET PRESENT VALUE

• If NPV> 0 , VIABLE
• NPV=0 , BREAK EVEN
• NPV<0, NOT VIABLE
• IF MORE THAN ONE PROJECT HAS POSITIVE
NPV THEN ONE WITH MAXIMUM IS CHOSEN
•Total present value(DCF)> Total Initial
Investment
Then project is financially viable
 BENEFIT COST RATIO
BCR= Total benefits at present value
Total investment at present value

If BCR>1, ACCEPT
BCR=1, INDIFFERENCE
BCR<1, REJECT
 PROJECT FINANCING
• Process of obtaining funds
• Difference between Project financing and
Conventional financing
MAJOR TYPES OF FINANCING
EQUITY
DEBT
 SOURCES OF PROJECT FINANCE
• ORDINARY SHARES
• PREFERNCE SHARES
• DEBENTURES
• BONDS
• TERM LOANS
• UNSECURED LOANS
• BRIDGE LOANS
• CAPITAL INVESTMENT SUBSIDIES