aca-tm-37 (v2.2-20-nov-10 ) project financing projectappraisal satyajit dwivedi cab, pune
TRANSCRIPT
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ACA-TM-37 (v2.2-20-Nov-10)
PROJECT FINANCINGPROJECT
FINANCINGPROJECT PROJECT APPRAISALAPPRAISALSatyajit DwivediSatyajit Dwivedi
CAB, PuneCAB, Pune
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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.
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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.
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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
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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
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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
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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
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ACA-TM-37 (v2.2-20-Nov-10)
TYPES OF PROJECTS
FARM SECTOR NON FARM SECTOR
*
OTHERS
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ACA-TM-37 (v2.2-20-Nov-10)
PROJECT CYCLE
• IDENTIFICATION•FORMULATION•APPRAISAL• IMPLEMENTATION•MONITORING•EVALUATION
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ACA-TM-37 (v2.2-20-Nov-10)
IDENTIFICATION
FORMULATION
APPRAISAL
IMPLEMENTATAION
MONITORING
EVALUATION
PROJECT CYCLE
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ACA-TM-37 (v2.2-20-Nov-10)
APPRAISAL
TECHNICAL COMMERCIAL MANAGERIAL / BORROWER ORGANISATIONAL SOCIAL ECONOMIC FINANCIAL
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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
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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
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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
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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
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ACA-TM-37 (v2.2-20-Nov-10)
METHODS OF APPRAISAL
Two well known methods:
PAYBACK METHOD (Undiscounted)
TIME ADJUSTED RATE OF RETURN (Discounted)
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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
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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
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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)
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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)
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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
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ACA-TM-37 (v2.2-20-Nov-10)
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Benefit Cost Ratio
• Year Investment
costBenefits 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
BC Ratio
1055 :- 1000
1.055 : 1
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ACA-TM-37 (v2.2-20-Nov-10)
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Net Present Worth
• Year Investm
ent costBenefits
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 1055 - 1000
55
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ACA-TM-37 (v2.2-20-Nov-10)
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Net Present Worth
• Year Investment cost
Benefits DF @ 20 % PW of 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
NPW 969 - 1000
(-) 31
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ACA-TM-37 (v2.2-20-Nov-10)
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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%
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ACA-TM-37 (v2.2-20-Nov-10)
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Appraisal of Projects- Techniques-contd.
Not feasibleNegative ( - )Lower than thelending rate
Less than one
Marginal OEqual to lendingrate
One
FeasiblePositive ( + )More than thelending rate
More than one
Feasibility orotherwise ofinvestment
N P WI R R B C Ratio
Tools for decision making- No single technique for estimating project worth Could be many socio- economic factors , which are not always quantifiable
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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
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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 of the project to bear adversities
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ACA-TM-37 (v2.2-20-Nov-10)
REPAYMENT SCHEDULEThree 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