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Projects are the cutting edge of development. Projects are an investment activity in which financial resources are expended to create capital assets that produce benefits over an extended period of time. I UNIDO defines a project as a proposal for an investment to create and develop certain facilities in order to increase the production of goods/services in a community during a certain period of time. The Chartered Management Institute define a project as "an activity that has a beginning and an end which is carried out to achieve a particular purpose to a set quality within given time constraints and cost limits". A project may be defined as an activity for which money will be spent in an expectation of returns and which logically seems to lend itself to planning financing and implementation as a unit. It is the smallest operational element prepared and implemented as a separate entity in a national plan of programmes of development. A project is also defined as a proposal for an investment to create, expand and develop certain facilities in order to increase the production of goods and services in a community during a certain period of time. Furthermore, for evaluation purposes, a project is a unit of investment, which can be distinguished technically, commercially and economically from other investments.
Definition:
Systematic and comprehensive review of the economic, environmental, financial, social, technical and other such aspects of a project to determine if it will meet its objectives.
Project Appraisal:
Project appraisal is the process by which financial institution makes an independent and objective assessment of various aspects of the project for arriving at the financial decision. There are four broad aspects of appraisal. (1) Financial Feasibility: The data base required for financial feasibility analysis can be grouped as under: (a) Cost of project and means of financing (b) Cost of production and profitability (c) Cash-flow estimates during currency of loans (d) Performa balance sheet as at the end of each financial year during period of loan.
(a) Cost of project:: The cost of project can be broadly classified into the following: 1 Land and site development 2 Building 3 Plant and machinery
4 Transportation erections and commissioning 5 Miscellaneous assets. Though machinery cost always constitutes a major element in the total project cost, its estimation needs need not pose major problems since this can be based on competitive quotations. On the other hand cost of other items such as land, site development expenses and preoperative expenses, requires a carful inquiry and assessment. A realistic assessment of project cost with a reasonable contingency margin of absorbing normal cost escalations could take care of cost overruns. There is no ideal pattern for means of financing of a project. The means of financing is determined by a variety of factors like magnitude of funds required, risk associated with the project, nature of industry, prevailing taxation laws etc. 1. Share capital 2. Subsidies 3. Long term borrowing 4. Loans from friends and relatives 5. Retained earnings. Financial institutions specify certain debt equity ratio and promoters will have to rise own finance to match these ratios. (b) Cost of production and profitability: The next step is the assessment of earning capacity of the project. The unit should be in position to manufacture the product at a reasonable cost and sell it at a reasonable price which would allow adequate profit margin even in competitive market. The cost of production and sales estimates are also useful in working out
break-even point, the point at which income sales would cover the working cost of the project. At this point the unit begins to make profit. (c) Cash-Flow Estimates: The cash-flow estimates are essential to ensure availability of cash to meet requirements of the projects from time to time. The cash-flow estimates will show sources of funds including those arising from depreciation and profits as well as uses of funds including repayment of term loans instalments. The debt service coverage ratio is arrived by dividing cash approval comparison net profits (after tax, interest on term loans and depreciation added back) by total interest charges and instalments. This will indicate whether cash-flow would be adequate to meet the debt obligations and also provide a sufficient margin of safety. The repayment schedule of terms loans are determined taking into consideration the above aspect. (d) Proforma Balance Sheets: Proforma balance sheet is drawn for the existing concerns going for expansions as well as for new projects. However existing concerns going for expansions the balance for the past three years are also analysed and compared, with projections. The projected balance sheets can also be drawn for cash-flow estimates and profitability projections.
(2) Technical Feasibility: In asserting the technical feasibility of projects the following aspects are normally considered: (a) Technology and its Suitability: In these days of rapidly changing technology, the fear of technological obsolescence is always present. It is, therefore necessary to examine
the suitability of the technology adopted with reference to technical information available on the plant and equipment to be installed by the industrial unit. (b) Size of Plant: The size of plant and its capacity levels are very important decision. A plant should be planned in such a way so that it can be put to its optimum use. Fixed overheads do not vary with the various capacity levels of the plant. It is, therefore important to determine the adequate and optimum capacity of the plant before it is set up. In certain industries, a unit can be operated economically at a certain minimum scale of operations. Therefore, a proper evaluation scale of operations of the project is essential. (c) Location: For the success of the project, its location is of a great importance. The location of the project may be influenced by the closeness of the raw-materials, availability of power, fuel, transport, skilled and unskilled labour or closeness to market which would be served by the unit. For example: some industries like cement are located near the source of raw-material, whereas in case of glass industry, it is considered advantageous to locate the factory near the market. Incentives provided by the Government also influence the decision about the location of the project. For example: concessional assistance provided by the Government for backward districts may motivate the promoter to locate the plant in such areas. (d) Selection of Proper Plant and Equipment Suppler: While selecting the plant and equipment, the reputation and the experience of the supplier is important, in many cases, it is the responsibility of the supplier to provide for maintenance and training of workers etc, for proper utilization of equipment. Therefore it should be ensured that the suppliers would satisfactorily meet their obligations.
(e) Plant Layout: The layout of the plant is important from the point of view of possible future expansions. It should be evaluated with reference to site plan. (e) Facilitates for Supply of Power: It should be considered whether adequate supply of power would be available in case of difficulty of power, the company may consider the possibility of installing diesel generating set for contentious supply of power. (f) Project Schedule: This would involve the scrutiny of various elements of the project from the stage of engineering design work to the installation and testing of equipment and commercial production. A realistic project schedule is of great significance for the timely completion of the project and to avoid cost over runs. (g) Technical Know-how and Competent Personnel: Arrangements are to be made for securing technical know-how and training of personnel would be available for the project. It is to be examined whether existing work force and competent personnel would be available for the project.
(3) Economic Feasibility: The economic feasibility basically deals with the marketability of the product. Basic data regarding demand and supply of the product in the domestic market and international market should be collected. Man made storage are not to be reckoned as genuine demand and the market analysis is an essential part of full appraisal. Projection or forecasting of demand is no doubt a complicated matter but
is of vital importance. Equally important is to examine the sales promotion proposed by enterprise and its adequacy.
(4) Managerial Competence: The success of a business enterprise largely depends on resourcefulness, competence and integrity of its management. The management should be experienced and capable to run the project. Skilled management is required for day to day operations like production, maintenance, marketing, finance etc. For a new entrepreneur it will always be advisable to build up a competent team of specialists in the required discipline to join hands with entrepreneur who has requisite organisational and managerial expertise in the implementation and operation of the project.
companys bankers makes it easy to get correct information and the lending banker may remain disguised.
(2) Partners are unable to provide any collateral security so factory land brought by a partner would be collateral security.