Project Approach to Lending &Financial Appraisal

1. Project Approach to Lending &Financial Appraisal Satyajit Dwivedi Member of Faculty CAB Pune

2. Potential Activities • Fruits and Vegetables • Floriculture • Medicinal and Aromatic Plants • Minor Irrigation Schemes - development & management • Livestock based Schemes - Dairy, Poultry, Fisheries, etc. • Land development activities - soil & water conservation • Mechanisation of Agriculture • Organic Farming • Bio-fuel and TBO seeds • Agro-processing • Seed and Planting material production • Agri-clinic and Agri-Business Centres • Post harvest and Marketing Infrastructure Development, etc. College of Agricultural Banking, RBI, PUNE

3. PROJECT AN ACTITY IN WHICH FINANCIAL RESOURCES ARE EXPENDED TO CREATE CAPITAL ASSETS THAT PRODUCE BENEFITS OVER AN EXTENDED PERIOD OF TIME AND WHICH LOGICALLY LENDS ITSELF TO PLANNING,FINANCING AND IMPLEMENTING AS A UNIT. College of Agricultural Banking, RBI, PUNE

4. ETERNAL TRIANGLE OF PROJECT MANAGEMENT SCOPE QUALITY COST TIME College of Agricultural Banking, RBI, PUNE

5. Project Cycle Idea/identification Evaluation Formulation Monitoring Implementation Appraisal College of Agricultural Banking, RBI, PUNE

6. WHY APPRAISE POJECT • TO DETERMINE IF COMPONENTS OF PROJECT ARE CONSISTENT • TO ASSESS SOURCES AND MAGNITUDE OF RISKS AND THEIR MANAGEMENT • FINANCIAL/ECONOMIC VIABILITY OF PROJECT • DECISION ON GOOD OR BAD PROJECTS College of Agricultural Banking, RBI, PUNE

7. PROJECT APPRAISAL • TECHNICAL • COMMERCIAL • ENTERPRENEURIAL • FINANCIAL • ECONOMIC • MANAGERIAL • SOCIAL • ENVIRONMENTAL College of Agricultural Banking, RBI, PUNE

8. FINANCIAL APPRAISAL UNDISCOUNTED CASH FLOW METHOD DISCOUNTED CASH FLOW METHOD

9. COMPONENTS OF CASH FLOW • INITIAL INVESTMENT • OPERATING CASH FLOW • TERMINAL CASH FLOW

10. Bankability / Repayment Schedule • Will the borrower be able to repay the loan + interest within repayment period? • Repayable surplus • Generally 50% of gross surplus for small borrowers • 75% of gross surplus for large borrowers • Contd…..

11. Bankability / Repayment Schedule • Repayment Schedule Types • Equal Principal Installment • Loan (Principal) • + Accrued Interest • No of Installment • It changes (reduces) over time • Contd……

12. Economic Life of Project(Rs.)

13. Discounted Measures of Project Worth • Used in financial analysis • Future stream of benefits and Future Stream of costs • Reduced to present worth • Present worth of costs and present worth of benefits during the project life is compared to know which project gives maximum benefits

14. Time Value of Money • Money has value • Different values at different times • Preference for smaller sums today • Than larger sums at future date

15. Concept of Interest • For getting larger sum at future date • Part with the present sum • Forego the use of money for present • We expect reward/benefit - interest • Interest - payment for foregoing use of money by person to whom it is lent.

16. Compounding (Future Worth) • Interest determines price of money • Compounding:: Future worth of present money at a specified interest rate • Discounting: Present worth of future money at a specified interest rate. • Discount Factor also called Present Worth Factor

17. Compounding-Illustration

18. (e) Discounting - Illustration

19. Techniques in Discounted Measures • Benefit Cost Ratio • Net Present Worth / Value (NPW/NPV) • Internal Rate of Return (IRR)

20. Benefit Cost Ratio • Total of Present Worth of Benefits = BCR Total of Present Worth of Cost • For selection of project BCR should be more than 1 when discounted at opportunity cost of capital • Broad idea of profitability of the project

21. Benefit Cost Ratio

22. Benefit Cost Ratio (contd)

23. Benefit Cost Ratio (contd) • Cannot be used to compare 2 projects • projects may have same BC Ratio but net benefits vary • projects may have same net benefit but BC Ratio varies

24. Net Present Worth (NPW) • Present Worth of Benefits minus Present Worth of Cost • NPW should be positive at opportunity cost of capital • Indicates size of benefits at opportunity cost of capital which BC Ratio cannot indicate • Cannot rank project by size of NPW

25. Net Present Worth

26. Internal Rate of Return • Discount Rate at which PWB = PWC OR • Net Present Worth of Cash flow is zero • Earning capacity of money invested in the project over project life • Helps in ranking the project

27. Internal Rate of Return (contd) • Found out by Trial and Error method • Discount rate increased in multiples of 5 (15-20, 20-25, etc.) • NPW decreases as discount rate increased • Through trial and error a stage reached when NPW becomes negative • IRR found out by interpolation

28. Internal Rate of Return (IRR)

29. Net Present Worth

30. Internal Rate of Return • Internal Rate of Return ( IRR ) : • Lower of the two discount rates (+ ) Difference between two discount rates x (NPW @ lower discount rate :- Absolute difference between NPWs at two discount rates ) IRR= 15 + 5 x ( multiplied by ) 55 :- 86 ( 55+-31) = 18 % ( 18.2 ) • IRR determined by trial and error • Represents return for resources over life of project • Earning power of money used in project • IRR not estimated beyond 50% • Present cut off IRR : 15%

31. FORCE FIELD ANALYSIS-WORKSHEET Developed by Kurt Lewin CHANGE PROPOSAL UPGRADE FACTORY WITH NEW MACHINERY

32. Training the staff - Increase in Expenditure : (+ 1) • Fear of technology could be eliminated after training-Reduce fear:(-2) • Impress staff-change is inevitable for survival-New force in favor:(+1) • Impress staff thatnew machines would introduce variety and interest to their jobs - New force in favor : (+1) • Increase wages to reflect new productivity – • Increase in Expenditure :(+1) & Reduce in loss of overtime : (-1) • Propose installation of slightly different machines with filters to • eliminate pollution – Reduce environmental impact : (-1) FORCE FIELD ANALYSIS .. CONTD These changes would swing the balance from 11 : 10 (against the plan), to 9 : 12 (in favor of the plan).

33. CHANGE PROPOSAL UPGRADE FACTORY WITH NEW MACHINERY

34. Case exercise on project -financial appraisal Case:MI Project A farmer having a water source like open well or canal nearby would like to invest on a pumpset to lift water. Presently, he is cultivating only a single crop and getting a net benefit of Rs.3,000 (pre development income) per year On installation of pumpset, it would be possible to take two crops with some additional expenditure. First year he projects raising of one crop, as it is assumed that the installation of pumpset might take some time. Therefore, during first year, the production expenditure is estimated as Rs.4,500 for single crop, with a projected benefit of Rs.8,000 (benefit assumed to be increased from Rs.3,000 to Rs.8,000 due to irrigation) Contd...

36. All the Best Thank You