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PROJECT FINANCING

PROJECT APPRAISAL Satyajit Dwivedi CAB, Pune. PROJECT FINANCING. PROJECTS - DEFINITION. CUTTING EDGE OF DEVELOPMENT – GITTINGER A SET OF ACTIVITIES LARGE ENOUGH TO REQUIRE PROPER PLANNING ETC. PROJECTS - DEFINITION. PROJECT IS AN ECONOMIC ACTIVITY IN WHICH

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PROJECT FINANCING

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  1. PROJECT APPRAISAL Satyajit Dwivedi CAB, Pune PROJECT FINANCING

  2. PROJECTS - DEFINITION • CUTTING EDGE OF DEVELOPMENT – GITTINGER • A SET OF ACTIVITIES LARGE ENOUGH TO REQUIRE PROPER PLANNING ETC.

  3. PROJECTS - DEFINITION • PROJECT IS AN ECONOMIC ACTIVITY IN WHICH FINANCIAL RESOURCES ARE EXPENDED TO CREATE CAPITAL ASSESTS THAT PRODUCE BENEFITS OVER A PERIOD OF TIME AND WHICH LOGICALLY LENDS ITSELF TO PLANNING, FINANCING AND IMPLEMENTING AS A UNIT.

  4. CHARACTERISTICS • P – PRODUCT OF GOODS AND SERVICES • R – RESOURCES : MAN, MATERIAL, MONEY • O – ORGANISATION • J – JUSTIFICATION : SOCIAL BENEFITS, WEALTH • E – ECONOMIC & FINANCIAL VIABILITY • C – CONTINUITY: PLANNING, RESEARCH & DEV. • T – TIME BOUND IMPLEMENTATION

  5. WHY PROJECT APPROACH ? • Integrated approach for systematic exploitation of resources • Gives an idea of costs year by year – Helps in resources planning • Impact of investment on the stakeholders • Better judgment of administrative & organisational problems • Encourage examination of alternatives

  6. ESSENCE OF PROJECT APPRAISAL • A COMPREHENSIVE & SYSTEMATIC REVIEW OF ALL ASPECTS OF PROJECT • A SECOND LOOK TO THE PROJECT BY ONE NOT INVOLVED IN PRJECT FORMULATION • HIGHLIGHT THE WEAK AREAS OF THE PROJECT FOR DUE RECTIFICATION

  7. ESSENCE OF PROJECT APPRAISAL • AN EXERCISE FOR FUTURE ASSESSMENT • A JOINT ASSESSMENT BY THE PROMOTER & FINANCIAL INSTITUTION • ENFORCEMENT OF A TIME BOUND PROGRAMME TO AVOID DISTORTION

  8. TYPES OF PROJECTS FARM SECTOR NON FARM SECTOR * OTHERS

  9. PROJECT CYCLE • IDENTIFICATION • FORMULATION • APPRAISAL • IMPLEMENTATION • MONITORING • EVALUATION

  10. IDENTIFICATION EVALUATION FORMULATION PROJECT CYCLE MONITORING APPRAISAL IMPLEMENTATAION

  11. APPRAISAL TECHNICAL COMMERCIAL MANAGERIAL / BORROWER ORGANISATIONAL SOCIAL ECONOMIC FINANCIAL

  12. OBJECTIVES OF FINANCIAL APPRAISAL • To assess the financial effect on the farmers and bank/financial institution • To asses overall return on the investment as well as return to farmer after repayment of installments • To know whether incremental benefits are attractive enough for farmer • To work out a plan that projects financial situations and sources of funds and to determine timing of investments

  13. CASH FLOW STATEMENT • Cash flow prepared on an annual basis over the economic life of assets • Identify the costs and benefits • Compare incremental benefits with incremental costs • Income and expenditure pertaining to the investment alone to be reckoned • For deciding the price – price paid or received at the farm-gate to be taken • Constant price principle is applied • Interest on borrowed capital is not included

  14. CASH FLOW STATEMENT CONTD.. Identification of costs: Investment: • Expenditure made before the production starts and replacement of machineries Production: • All recurring expenditure during the project life Pre-Development Income: • Pre-developmental income to be taken as cost • Cost not to be reduced with subsidy/margin

  15. Identification of Benefits • Increase in production • Cost reduction • Improvement in quality • Grading • Prevention of loss • Consumed part of production • Scrap/residual value of investments

  16. METHODS OF APPRAISAL Two well known methods: • PAYBACK METHOD (Undiscounted) • TIME ADJUSTED RATE OF RETURN (Discounted)

  17. PAYBACK METHOD • LENTH OF TIME FROM BEGINNING OF THE PROJECT TILL THE INCREMENTAL BENEFITS REACHES THE CAPITAL INVESTMENT • FAILS TO CONSIDER EARNINGS AFTER THE PAYBACK PERIOD • DOES NOT CONSIDER TIMIMGS OF OCCURRENCE OF CASH INFLOWS AND OUTFLOWS OF THE PROJECT

  18. DISCOUNTED CASH FLOW METHOD • TAKES INTO ACCOUNT TIME VALUE OF MONEY • COSTS AND BENFITS OCCUR AT DIFFRENT TIMINGS AND IN DIFFERENT AMOUNT • DISCOUNT FACTOR IS USED TO BRING COSTS AND BENEFITS TO THEIR PRESENT VALUE • BY DISCOUNTING AT A GIVEN RATE WE OVERCOME THE TIME DIMENSION

  19. DISCOUNTED CASH FLOW METHOD DISCOUNTED MEASURES OF PROJECT WORTH • BENEFIT COST RATIO (BCR) • NET PRESENT WORTH (NPW) • ITERNAL RATE OF RETURN (IRR)

  20. STEPS & METHODOLOGY FOR APPRAISAL • COST AND BENEFIT STREAM IN THE CASH FLOW TO BE DISCOUNTED SEPARATELY • TOTAL OF DISCOUNTED COST GIVES PRESENT WORTH OF COSTS (PWC) • TOTAL OF DISCOUNTED BENEFIT IN CASH FLOW GIVES PRESENT WORTH OF BENEFITS (PWB)

  21. STEPS & METHODOLOGY FOR APPRAISAL • BENEFIT COST RATIO : RATIO OF PWB TO PWC • NET PRESENT WORTH : DIFFERENCE BETWEEN PWB AND PWC • IF BCR IS > 1 AND NPW IS +VE AT THE DISCOUNTED RATE, THEN THE PROJECT IS VIABLE

  22. Benefit Cost Ratio

  23. Net Present Worth

  24. Net Present Worth

  25. 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%

  26. Appraisal of Projects- Techniques-contd.

  27. TREATMENT OF DEPRECIATION AND INTEREST Depreciation and interest on borrowed capital not treated as cost In DCF approach; ‘return of capital’ is ensured and hence no depreciation of investment ‘return to capital’ i.e interest on investment is also ensured

  28. SENSITIVITY ANALYSIS • Studies the changes in the scenario in case either price structure or timeframe undergoes change • Studies ability of the project to bear adversities

  29. REPAYMENT SCHEDULE Three issues to be seen • Instalments to be fixed in relation to surplus so that sufficient is available with the farmer after repayment • Period of loan to be within economic life of the assets • Instalments are fixed when surplus is available

  30. * THANK YOU

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