PROJECT
FINANCING
PROJECT
APPRAISAL
Satyajit Dwivedi
CAB, Pune
ACA-TM-37 (v2.2-20-Nov-10)
PROJECTS - DEFINITION
• CUTTING EDGE OF
DEVELOPMENT – GITTINGER
• A SET OF ACTIVITIES LARGE
ENOUGH TO REQUIRE PROPER
PLANNING ETC.
ACA-TM-37 (v2.2-20-Nov-10)
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.
ACA-TM-37 (v2.2-20-Nov-10)
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
ACA-TM-37 (v2.2-20-Nov-10)
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
ACA-TM-37 (v2.2-20-Nov-10)
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
ACA-TM-37 (v2.2-20-Nov-10)
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
ACA-TM-37 (v2.2-20-Nov-10)
TYPES OF PROJECTS
*
FARM SECTOR
NON FARM
SECTOR
OTHERS
ACA-TM-37 (v2.2-20-Nov-10)
PROJECT CYCLE
• IDENTIFICATION
• FORMULATION
• APPRAISAL
• IMPLEMENTATION
• MONITORING
• EVALUATION
ACA-TM-37 (v2.2-20-Nov-10)
IDENTIFICATION
PROJECT
CYCLE
IMPLEMENTATAION
ACA-TM-37 (v2.2-20-Nov-10)
APPRAISAL
TECHNICAL
COMMERCIAL
MANAGERIAL / BORROWER
ORGANISATIONAL
SOCIAL
ECONOMIC
FINANCIAL
ACA-TM-37 (v2.2-20-Nov-10)
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
ACA-TM-37 (v2.2-20-Nov-10)
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
ACA-TM-37 (v2.2-20-Nov-10)
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
ACA-TM-37 (v2.2-20-Nov-10)
Identification of Benefits
•
•
•
•
•
•
•
Increase in production
Cost reduction
Improvement in quality
Grading
Prevention of loss
Consumed part of production
Scrap/residual value of investments
ACA-TM-37 (v2.2-20-Nov-10)
METHODS OF APPRAISAL
Two well known methods:

PAYBACK METHOD (Undiscounted)

TIME ADJUSTED RATE OF RETURN
(Discounted)
ACA-TM-37 (v2.2-20-Nov-10)
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
ACA-TM-37 (v2.2-20-Nov-10)
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
ACA-TM-37 (v2.2-20-Nov-10)
DISCOUNTED CASH FLOW
METHOD
DISCOUNTED MEASURES OF PROJECT WORTH
• BENEFIT COST RATIO (BCR)
• NET PRESENT WORTH (NPW)
• ITERNAL RATE OF RETURN (IRR)
ACA-TM-37 (v2.2-20-Nov-10)
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)
ACA-TM-37 (v2.2-20-Nov-10)
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
ACA-TM-37 (v2.2-20-Nov-10)
Benefit Cost Ratio
•
Year
Investment
cost
Benefits
DF
@15%
PW of
costs
( 2x4)
PW of
benefits
(3x4)
1
2
3
4
5
6
0
1000
-
1.000
1000
-
1
-
400
0.870
-
348
2
-
500
0.756
-
378
3
-
500
0.658
-
329
Total
1000
1400
1000
1055
1055 :1000
1.055 : 1
BC
Ratio
22
ACA-TM-37 (v2.2-20-Nov-10)
Net Present Worth
•
Year
Invest
ment
cost
Benefits DF @15 PW of
%
costs
( 2x4)
PW of
benefits
(3x4)
1
2
3
4
5
6
0
1000
-
1.000
1000
-
1
-
400
0.870
-
348
2
-
500
0.756
-
378
3
-
500
0.658
-
329
Total
1000
1400
1000
1055
NPW
23
ACA-TM-37 (v2.2-20-Nov-10)
1055 1000
55
Net Present Worth
Year
Investment Benefits DF @ 20 % PW of
cost
costs
( 2x4)
PW of
benefits
(3x4)
1
2
3
4
5
6
0
1000
-
1.000
1000
-
1
-
400
0.833
-
333
2
-
500
0.694
-
347
3
-
500
0.579
-
289
Total
1000
1400
1000
969
969 1000
(-) 31
•
NPW
24
ACA-TM-37 (v2.2-20-Nov-10)
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%
25
ACA-TM-37 (v2.2-20-Nov-10)
Appraisal of Projects- Techniquescontd.
B C Ratio
IRR
NPW
More than one
More than the
lending rate
Equal to lending
rate
Lower than the
lending rate
Positive ( + )
One
Less than one
O
Negative ( - )
Feasibility or
otherwise of
investment
Feasible
Marginal
Not feasible
Tools for decision making- No single technique for estimating project worth
 Could be many socio- economic factors , which are not always quantifiable

26
ACA-TM-37 (v2.2-20-Nov-10)
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
ACA-TM-37 (v2.2-20-Nov-10)
SENSITIVITY ANALYSIS
• Studies the changes in the scenario in case
either price structure or timeframe undergoes
change
• Studies ability
adversities
ACA-TM-37 (v2.2-20-Nov-10)
of
the
project
to
bear
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
ACA-TM-37 (v2.2-20-Nov-10)
*
THANK
ACA-TM-37 (v2.2-20-Nov-10)
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