Description
This is a presentation explains about project financing.
Assessing Project Feasibility: Financial Appraisal and Projections
There are three basic questions asked in project appraisal exercise • Can we produce the goods and services? (Technical Appraisal) • Can we sell the goods or services? (Market Appraisal) • Can we earn a satisfactory return on the investment made in the project? (Financial Appraisal)
Key Elements of Financial Appraisal
• • • • Estimate the cost and benefits of the project Assess the riskiness of the project Calculate the cost of capital Compute the criteria of merit and judge whether the project is good or bad (Investment criteria)
Financial Projection Process
Balance Sheet
Cash flow statement Cost of Project & Time Phasing Means of Finance and time phasing
Depreciation Cost of Production
Interest and loan repayment
Working Capital Needs
Estimate of working results
Production Plan
Working Capital Estimates
Projected Sales
Elements of Cost of Project
Base Cost estimate • Land & site development • Building & civil works • Plant & Machinery • Technical Know-how & engineering fees • Expenses on foreign technicians and training of Indian technicians abroad • Miscellaneous fixed assets • Preliminary and capital issue expenses Pre-operative expenses • Margin money for working capital • Initial cash losses
Project Cost estimation
• Contingency Cost Estimate
– Linked to Project delays due to unforeseen changes in quantities, methods and period of implementation
• Cost Factor: Due to Difference in domestic and foreign currency rate fluctuation and potential rate adjustments • Interest During Construction (IDC)
– Interest on loans taken for funding construction
Means Of financing
• Share Capital • Term Loans
– ECB – Rupee Currency loan
• Debenture Capital • Deferred Credit • Incentive Sources
– Seed Capital Assistance – Tax deferment/ exemption – Capital Subsidy
• Miscellaneous Sources
– Unsecured Loans
Cost of Capital
• Cost of Debt
• Cost of Equity
CAPM DDM
Investment Criteria
• A means of assessing whether an investment project is worthwhile or not.
What factors need to be considered before investing in equipment such as this? Copyright: Gergely Erno, stock.xchng
Types of Investment Criteria
Investment Criteria
Discounting Criteria
Non-Discounting Criteria
Net Present Value
Benefit Cost
Ratio
Internal rate of return
Payback Period
Accounting rate of return
Urgency
• Net Present Value • Sum of PV of future Cash Flows – Initial Investment • Benefit Cost Ratio = PVB / I • Does not discriminate between large and small projects.
• Internal Rate of Return • Discount Rate at which NPV equal to zero. • Urgency: • Projects deemed to be more urgent get priority
• Payback Period • Length of time required to recover the initial cash outlay. • Accounting rate of return • Measure of profitability which relates income to investment.
Estimates of Sales and Production
• Sales revenue forecast starting point for projecting profitability • Points to be taken into consideration:
– Assuming a high capacity utilization level in the first year of operations not advisable – Not necessary to make adjustments for stocks of finished goods – Selling price considered should be the price realizable by the company net of excise duty (including dealer’s commission) – Selling price used may be the present selling price, or controlled price if the portion is saleable at that price
Cost of Production
• • Major components Material cost
– Most important element of cost – Mostly of raw materials, chemicals, components, and consumable stores required for production
•
Utilities cost
– Consist of power, water and fuel – Requirements may be determined on the basis of the norms specified by the collaborators, consultants, etc., or the industry standards, whichever is higher
•
Labour cost
– Function of the total number of employees and the rate of remuneration – Number of employees may be calculated on the basis of industry standard – During the years when capacity utilization tends to be low, somewhat lower labour costs may be assumed
•
Factory overhead cost
– Expenses on repair and maintenance, rent, taxes insurance on assets, etc. are collectively referred to as factory overheads – Rent, taxes, insurance, etc. may be calculated at the present rates. In addition, a contingency allowance may be provided
Working Capital Requirement
• Working Capital Requirement
– Minimum amount of resources required to effectively cover the usual costs and expenses necessary to operate the business – Calculated as current assets minus current liabilities – Positive working capital required to ensure that a firm is able to continue its operations and satisfy maturing short-term debt and
• Approaches for financing
1. 2. 3. Matching approach Conservative approach Aggressive approach
Working Capital Financing
• Matching approach
– Maturity structure of the firm’s liabilities is made to correspond exactly to the life of its assets
• Conservative approach
– When it depends on more of long-term funds
• Aggressive approach
– More of short-term sources for financing working capital
• The Cost Trade-off
– The firm should balance the profitability-solvency tangle by minimizing total costs-cost of liquidity and cost of illiquidity
Project Cash Estimation
• • • • • Significance of Cash Flows and Cash Flow Estimation The concept of “relevant” versus “irrelevant” cash flows Points to watch in estimating cash flows How to estimate project operating cash flows? How to estimate project total cash flows?
Cash Flows
• To be consistent with wealth maximization principle, an evaluation of a project must be based on cash flows and not on accounting profits • To be able to use NPV technique or any other technique of capital budgeting analysis successfully and accurately, we must have
– an unbiased estimate of the expected future cash flows of the project – including time to completion and estimate initial investment/cost – extremely important and most difficult task
“Relevant” versus “Irrelevant” Cash Flows
• The results of an acceptance of a project is to change the cash flows of a firm. • Cash flows of a firm that change because of the project are called “relevant” cash flows; • Any cash flows that does not change irrespective of the acceptance/rejection of the project is “irrelevant” to decision making and should not be considered.
Points of Consider
• • • •
Sunk Costs Opportunity Costs Project Externalities Change in Net Working Capital
Sunk Costs
• Sunk Costs—A cost that has already been incurred and cannot be recovered irrespective of the decision to accept or reject the project. • R&D, Market Research, Consultant’s Fees
Opportunity Costs
• Opportunity Costs--The cash flow foregone by using your resources in a particular way. • Resources have multiple uses • You can use them in one way to the exclusion of other uses and this gives rise to opportunity costs • By using your own building for your business, you forego the rent that you could have earned by renting it to some one else. •
Project Externalities
• Project Externalities--the effect of a new project (positive or negative) on an existing project or division of a firm. • For instance, introduction of a new model of a car on other existing models produced by the same firm.
Net Working Capital
• Change in Net Working Capital--Net working capital is defined as current assets minus current liabilities. • Investment in working capital is a cash outflow during the year in which investment takes place • Any investment in working capital is a cash inflow during the last year of the project and must be treated accordingly
Estimating Project Cash Flows
• Total Cash Flows of a Project in year t, where t ranges from year 0 to year n.
= Project Operating Cash Flows for that particular year – change in Net Working Capital – initial investment
There is no project operating cash flows for year 0
Estimating Project Operating Cash Flows
• Cash flows from operations for any year
– Estimated Sales Revenue – Total Costs
– Variable Costs – Fixed Costs per year – Depreciation
•
Sales Revenue minus Total Costs = Earnings Before Interest and Taxes (EBIT)
– Deduct Taxes from EBIT – Net Income
• Operating Cash Flows = Net Income + Depreciation OR
• Operating Cash Flows= EBIT – Taxes + Depreciation
Profitability Projections
• • • • • • • • • • Cost of Production • 9. Other Income Total Administrative Expenses • 10. Preliminary Expenses written off Total Sales expenses • 11. Profit/loss before Royalty and know-how taxation (9-10-11) payable • Less: Dividend on Total Cost of Production ( 1+2+3+4) • Preference Capital 5. Expected Sales • Equity Capital 6. Gross profit before Income • 12. Retained Profit 7. Total Financial Expenses • 13. Net Cash accrual ( 12+8+10) 8. Depreciations Operating Profit ( 6-7-8)
POWER GRID TRANSMISSION (SECTOR) PROJECT
• Started in 1996 • Funded by ADB • 3 core sub-projects
– Grid Strengthening for Tamil Nadu I – Grid Strengthening for Tamil Nadu II – Grid Strengthening for Tamil Nadu, Andhra Pradesh, and Union Territory of Pondicherry
POWER GRID TRANSMISSION (SECTOR) PROJECT
POWER GRID TRANSMISSION (SECTOR) PROJECT
Thank You
doc_783842234.pptx
This is a presentation explains about project financing.
Assessing Project Feasibility: Financial Appraisal and Projections
There are three basic questions asked in project appraisal exercise • Can we produce the goods and services? (Technical Appraisal) • Can we sell the goods or services? (Market Appraisal) • Can we earn a satisfactory return on the investment made in the project? (Financial Appraisal)
Key Elements of Financial Appraisal
• • • • Estimate the cost and benefits of the project Assess the riskiness of the project Calculate the cost of capital Compute the criteria of merit and judge whether the project is good or bad (Investment criteria)
Financial Projection Process
Balance Sheet
Cash flow statement Cost of Project & Time Phasing Means of Finance and time phasing
Depreciation Cost of Production
Interest and loan repayment
Working Capital Needs
Estimate of working results
Production Plan
Working Capital Estimates
Projected Sales
Elements of Cost of Project
Base Cost estimate • Land & site development • Building & civil works • Plant & Machinery • Technical Know-how & engineering fees • Expenses on foreign technicians and training of Indian technicians abroad • Miscellaneous fixed assets • Preliminary and capital issue expenses Pre-operative expenses • Margin money for working capital • Initial cash losses
Project Cost estimation
• Contingency Cost Estimate
– Linked to Project delays due to unforeseen changes in quantities, methods and period of implementation
• Cost Factor: Due to Difference in domestic and foreign currency rate fluctuation and potential rate adjustments • Interest During Construction (IDC)
– Interest on loans taken for funding construction
Means Of financing
• Share Capital • Term Loans
– ECB – Rupee Currency loan
• Debenture Capital • Deferred Credit • Incentive Sources
– Seed Capital Assistance – Tax deferment/ exemption – Capital Subsidy
• Miscellaneous Sources
– Unsecured Loans
Cost of Capital
• Cost of Debt
• Cost of Equity
CAPM DDM
Investment Criteria
• A means of assessing whether an investment project is worthwhile or not.
What factors need to be considered before investing in equipment such as this? Copyright: Gergely Erno, stock.xchng
Types of Investment Criteria
Investment Criteria
Discounting Criteria
Non-Discounting Criteria
Net Present Value
Benefit Cost
Ratio
Internal rate of return
Payback Period
Accounting rate of return
Urgency
• Net Present Value • Sum of PV of future Cash Flows – Initial Investment • Benefit Cost Ratio = PVB / I • Does not discriminate between large and small projects.
• Internal Rate of Return • Discount Rate at which NPV equal to zero. • Urgency: • Projects deemed to be more urgent get priority
• Payback Period • Length of time required to recover the initial cash outlay. • Accounting rate of return • Measure of profitability which relates income to investment.
Estimates of Sales and Production
• Sales revenue forecast starting point for projecting profitability • Points to be taken into consideration:
– Assuming a high capacity utilization level in the first year of operations not advisable – Not necessary to make adjustments for stocks of finished goods – Selling price considered should be the price realizable by the company net of excise duty (including dealer’s commission) – Selling price used may be the present selling price, or controlled price if the portion is saleable at that price
Cost of Production
• • Major components Material cost
– Most important element of cost – Mostly of raw materials, chemicals, components, and consumable stores required for production
•
Utilities cost
– Consist of power, water and fuel – Requirements may be determined on the basis of the norms specified by the collaborators, consultants, etc., or the industry standards, whichever is higher
•
Labour cost
– Function of the total number of employees and the rate of remuneration – Number of employees may be calculated on the basis of industry standard – During the years when capacity utilization tends to be low, somewhat lower labour costs may be assumed
•
Factory overhead cost
– Expenses on repair and maintenance, rent, taxes insurance on assets, etc. are collectively referred to as factory overheads – Rent, taxes, insurance, etc. may be calculated at the present rates. In addition, a contingency allowance may be provided
Working Capital Requirement
• Working Capital Requirement
– Minimum amount of resources required to effectively cover the usual costs and expenses necessary to operate the business – Calculated as current assets minus current liabilities – Positive working capital required to ensure that a firm is able to continue its operations and satisfy maturing short-term debt and
• Approaches for financing
1. 2. 3. Matching approach Conservative approach Aggressive approach
Working Capital Financing
• Matching approach
– Maturity structure of the firm’s liabilities is made to correspond exactly to the life of its assets
• Conservative approach
– When it depends on more of long-term funds
• Aggressive approach
– More of short-term sources for financing working capital
• The Cost Trade-off
– The firm should balance the profitability-solvency tangle by minimizing total costs-cost of liquidity and cost of illiquidity
Project Cash Estimation
• • • • • Significance of Cash Flows and Cash Flow Estimation The concept of “relevant” versus “irrelevant” cash flows Points to watch in estimating cash flows How to estimate project operating cash flows? How to estimate project total cash flows?
Cash Flows
• To be consistent with wealth maximization principle, an evaluation of a project must be based on cash flows and not on accounting profits • To be able to use NPV technique or any other technique of capital budgeting analysis successfully and accurately, we must have
– an unbiased estimate of the expected future cash flows of the project – including time to completion and estimate initial investment/cost – extremely important and most difficult task
“Relevant” versus “Irrelevant” Cash Flows
• The results of an acceptance of a project is to change the cash flows of a firm. • Cash flows of a firm that change because of the project are called “relevant” cash flows; • Any cash flows that does not change irrespective of the acceptance/rejection of the project is “irrelevant” to decision making and should not be considered.
Points of Consider
• • • •
Sunk Costs Opportunity Costs Project Externalities Change in Net Working Capital
Sunk Costs
• Sunk Costs—A cost that has already been incurred and cannot be recovered irrespective of the decision to accept or reject the project. • R&D, Market Research, Consultant’s Fees
Opportunity Costs
• Opportunity Costs--The cash flow foregone by using your resources in a particular way. • Resources have multiple uses • You can use them in one way to the exclusion of other uses and this gives rise to opportunity costs • By using your own building for your business, you forego the rent that you could have earned by renting it to some one else. •
Project Externalities
• Project Externalities--the effect of a new project (positive or negative) on an existing project or division of a firm. • For instance, introduction of a new model of a car on other existing models produced by the same firm.
Net Working Capital
• Change in Net Working Capital--Net working capital is defined as current assets minus current liabilities. • Investment in working capital is a cash outflow during the year in which investment takes place • Any investment in working capital is a cash inflow during the last year of the project and must be treated accordingly
Estimating Project Cash Flows
• Total Cash Flows of a Project in year t, where t ranges from year 0 to year n.
= Project Operating Cash Flows for that particular year – change in Net Working Capital – initial investment
There is no project operating cash flows for year 0
Estimating Project Operating Cash Flows
• Cash flows from operations for any year
– Estimated Sales Revenue – Total Costs
– Variable Costs – Fixed Costs per year – Depreciation
•
Sales Revenue minus Total Costs = Earnings Before Interest and Taxes (EBIT)
– Deduct Taxes from EBIT – Net Income
• Operating Cash Flows = Net Income + Depreciation OR
• Operating Cash Flows= EBIT – Taxes + Depreciation
Profitability Projections
• • • • • • • • • • Cost of Production • 9. Other Income Total Administrative Expenses • 10. Preliminary Expenses written off Total Sales expenses • 11. Profit/loss before Royalty and know-how taxation (9-10-11) payable • Less: Dividend on Total Cost of Production ( 1+2+3+4) • Preference Capital 5. Expected Sales • Equity Capital 6. Gross profit before Income • 12. Retained Profit 7. Total Financial Expenses • 13. Net Cash accrual ( 12+8+10) 8. Depreciations Operating Profit ( 6-7-8)
POWER GRID TRANSMISSION (SECTOR) PROJECT
• Started in 1996 • Funded by ADB • 3 core sub-projects
– Grid Strengthening for Tamil Nadu I – Grid Strengthening for Tamil Nadu II – Grid Strengthening for Tamil Nadu, Andhra Pradesh, and Union Territory of Pondicherry
POWER GRID TRANSMISSION (SECTOR) PROJECT
POWER GRID TRANSMISSION (SECTOR) PROJECT
Thank You
doc_783842234.pptx