to evaluate an investment

7/27/2019 To Evaluate an Investment

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Feasibility test of a project:

To evaluate an investment, project feasibility test is being done. There are three

types of feasibilities evaluated for a project viz. 1) market feasibility 2) technicalfeasibility 3) financial feasibility.

Market feasibility (for demand and market price estimates):

The process of market feasibility test includes following steps:

1) Study of end user profile

2) Study of influencing factors with critical infrastructure factors

3) Market potential analysis

4) Demand forecasting and supply estimation

5) Estimation of demand supply gap

6) Analysis of Companys own market share with potential to fill the demand-

supply gap

7) Analysis of Competition in the market and substitute of the product

Technical feasibily (to derive project cost with operational cost and

critical factors for the project):

The factors considered in technical feasibility are:1) Availability of commercially viable technology, raw material and other

resources

2) Technological innovation rate

3) Market rate of technology and raw material

4) Identification of the factors that are critical for the project

Financial feasibility:

Financial feasibility study requires detailed financial analysis based on certain

assumptions, working and calculations such as:-

1) Projections for prices of products, cost of various resources for

manufacturing goods and capacity utilization.

2) Basic workings in different schedules like interest and repayment

schedule, working capital schedule, working capital loan etc.

3) Risk- return analysis is also an important part of feasibility test. The

required rate of return should be higher than the risk free market rate of

retun.

4) Financial statements prepared in the project feasibility report viz.

projected profit and loss account, projected balance sheet and projectedcash flow statements.


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5) Financial indicators are calculated from data available in various financial

statements. Basic financial parameters used for judging the viability of the

project are interest coverage ratio (ICR), Debt service coverage ratio

(DSCR), net present value (NPV) or internal rate of return (IRR).

Sometimes pay back period is also calculated. Followings are the financial

indicators:-

Interest coverage ratio indicates the safely and timely payment of

interest to lenders. The ratio indicates how many times the

operating cash flow before interest is earned against interest

liability.

Debt service coverage ratio indicates the safely and timely payment

of interest and principal amount to lenders. An average DSCR of 1.5

is considered good.

Net present value (NPV) is an approach in which total value addition

from project is calculated taking into account the discounted cash

flow. Positive NPV is mandatory to beat the inflation and the higher

NPV is preferable.

Internal rate of return (IRR) is a rate where NPV is zero. It is a

minimum required rate of return from any project.

Pay back period technique is used to calculate the period in which

initial investment will be recovered.

6) After testing the project on above parameters, the project feasibility is

checked under risk and uncertainties. For this purpose a new approach

has been introduced that is called sensitivity analysis or what if analysis.

Under this approach, the relationship between basic underlying factors

(quantity sold, sale price, input cost) and N.P.V. is established. And the

effect of changes in basic factors on N.P.V. is studied. (one factor is values

at a time with a variation range like +- 10%)

The project is acceptable when it is positive on all the above parameters.


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Solar Photovoltaics in India

Begun as far back as in the mid 70s solar photovoltaics programme of theGovernment of India is one of the largest in the World. While the rest of

the world has progressed tremendously in production of basic siliconmonocrystalline photoltaic cells, in India the major players are Central


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Electronics Ltd, BHEL, REIL and the other manufacturers of SPV modulesare in fact assemblers sourcing the cells and carrying out assembly.Where this segment of basic manufacturing has not shown much growthin India and is unlikely also in the near future due to high costs involved inmanufacturing monocrystalline silicon cells from scratch, the market is

growing for SPV applications based products with the activeencouragement of the government.

Electricity and social development go hand in hand. Rural areas of Indiaare so far-flung that in some cases it is decided not to lay downconventional electricity lines due to the small populace to be served andhigh cost of laying lines.

Conventional gensets are also not feasible due to recurring maintenanceproblems. The best solution under the circumstances is solar photovoltaicbased systems to generate power, run irrigation pumping sets and home

lighting and streetlights.

In addition to offering subsidy on these products government is alsooffering training on PV technology, PV system designs and related fields.

The programme of MNES comprises of promoting use of PV technology toprovide lighting in villages in the form of :

Community lighting systems Capacity usually 1KW to 2.5KW

Portable solar lanterns Small 10Wp SPV moduleconnected to a 12V7AHbattery lighting 7 W CFL lampfor 3 hours a day

Street lights Built around a 75Wp SPVmodule charging a 100-130AHbattery to run a 11W CFLlamp for dusk to dawnoperation.

Fixed home lighting systems Based on 35-50Wp SPVmodule, powering two CFLseach of 9 or 11W to work 4-5hours per day. Some systemsalso incorporate facility to runa small TV set or a fan fromthe power supply.

Water Pumping Typically 1KW DC motor

based pumping for shallowpumping.


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Reliefs offered by government on SPV manufacturers and users of SPVbased products :

100% depreciation in the first year of

installation of the systems

No excise duty for manufacturers

Low import tariff for several rawmaterials and components

Soft loans to users, intermediaries andmanufacturers.

Entrepreneurs worldwide wishing to tap the Indian markets will find it arewarding experience. A local partner helps..

So go on.spread the light..

to evaluate an investment

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