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Ans 2a.

The cost of the project can be broadly classified into the following:
Land and Site Development - It includes the cost of the land, conveyance
expenses, premium payable on leasehold land, cost of leveling the site and other
site development expenses, cost of internal roads, cost of fencing and compound
wall and cost of providing gates etc.
Buildings and Civil Works - It includes construction cost of main factory building,
building for auxiliary services, factory administrative building, storehouse,
workshops, godowns, warehouses, open yard facilities, canteen, workers rest
rooms, sanitary works, staff quarters etc.
Plant and Machinery - It includes the cost of main plant and machinery, stores
and spares, auxiliary equipment, transportation cost, installation cost, cost of test-
runs, foundation cost, cost of errection and commissioning,
Technical know-how and Engineering Fees - It includes fees payable to provide
the technology and know-how and traveling expenses payable to technicians and
foreign collaborators etc.
Miscellaneous Fixed Assets - It includes the cost of office furniture and equipment
like tables, chairs, air conditioners, water coolers, miscellaneous stores items etc.
Preliminary and Preoperative Expenses - The preliminary expenses includes the
cost of raising finances like public issue expenses, commission and fees payable to
brokers and consultants in raising term-loans, expenses incurred for incorporation of
the company, legal charges, underwriters commissions etc. The preoperative
expenses include salaries, establishment expenses, rent, trail-run expenses and
other miscellaneous expenses incurred before the commercial production.
Provision for Contingencies and Escalation - It includes the provision for meeting
the unforeseen expenses and costs not provided in the other heads of the cost of
the project. It also includes the cost of escalation of the major heads of cost like
land and site development, building and civil works, plant and machinery, technical
know-how fees etc.
Working Capital Margin - The working capital margin required for the project,
which is not being financed by the banks, will also be included in the cost of project.

Ans 2b. Sources of Funds/Finance The usual sources of project finance are as
i. Equity/share capital ii. Terms loans iii. Debentures iv. Deferred
credit/payment v. Incentives/subsidies vi. Internal accruals (for existing
units/companies) vii. Misc. sources like Public deposits Deposits from
Friends/Relatives Unsecured loans from promoters viii. Venture capital ix. Foreign
Direct Investment (FDI) x. Foreign Institutional Investment (FII) Choice of a
particular source, depends upon
3 a) Technical aspect:

While making project appraisal, the technical feasibility of the project also needs to
be taken into consideration. In the simplest sense, technical feasibility implies to
mean the adequacy of the proposed plant and equipment to produce the product
within the prescribed norms. As regards know-how, it denotes the availability or
otherwise of a fund of knowledge to run the proposed plants and machinery.
It should be ensured whether that know-how is available with the entrepreneur or is
to be procured from elsewhere. In the latter case, arrangement made to procure it
should be clearly checked up. If project requires any collaboration, then, the terms
and conditions of the collaboration should also be spelt out comprehensively and
In case of foreign technical collaboration, one needs to be aware of the legal
provisions in force from time to time specifying the list of products for which only
such collaboration is allowed under specific terms and conditions. The entrepreneur,
therefore, contemplating for foreign collaboration should check these legal
provisions with reference to their projects.
While assessing the technical feasibility of the project, the following inputs covered
in the project should also be taken into consideration:
(i) Availability of land and site.
(ii) Availability of other inputs like water, power, transport, communication facilities.
(iii) Availability of servicing facilities like machine shops, electric repair shop, etc.
(iv) Coping-with anti-pollution law.
(v) Availability of work force as per required skill and arrangements proposed for
training-in-plant and outside.
(vi) Availability of required raw material as per quantity and quality.

Market aspect:
3 b) Economic appraisal is a type of decision method applied to a project,
programme or policy that takes into account a wide range of costs and benefits,
denominated in monetary terms or for which a monetary equivalent can be
estimated. Economic appraisal is a key tool for achieving value for money and
satisfying requirements for decision accountability. It is a systematic process for
examining alternative uses of resources, focusing on assessment of needs,
objectives, options, costs, benefits, risks, funding, affordability and other factors
relevant to decisions.
The main types of economic appraisal are:
Costbenefit analysis-
Cost benefit analysis (CBA), sometimes called benefit cost analysis (BCA), is a
systematic approach to estimating the strengths and weaknesses of alternatives
(for example in transactions, activities, functional business requirements); it is used
to determine options that provide the best approach to achieve benefits while
preserving savings.[1] The CBA is also defined as a systematic process for
calculating and comparing benefits and costs of a decision, policy (with particular
regard to government policy) or (in general) project.
Cost-effectiveness analysis-
Cost-effectiveness analysis (CEA) is a form of economic analysis that compares the
relative costs and outcomes (effects) of different courses of action. Cost-
effectiveness analysis is distinct from costbenefit analysis, which assigns a
monetary value to the measure of effect.[1] Cost-effectiveness analysis is often
used in the field of health services, where it may be inappropriate to monetize
health effect. Typically the CEA is expressed in terms of a ratio where the
denominator is a gain in health from a measure (years of life, premature births
averted, sight-years gained) and the numerator is the cost associated with the
health gain.[2] The most commonly used outcome measure is quality-adjusted life
Scoring and weighting-
The weighted scoring method, also known as 'weighting and scoring', is a form of
multi-attribute or multi-criterion analysis. It involves identification of all the non-
monetary factors (or "attributes") that are relevant to the project; the allocation of
weights to each of them to reflect their relative importance; and the allocation of
scores to each option to reflect how it performs in relation to each attribute. The
result is a single weighted score for each option, which may be used to indicate and
compare the overall performance of the options in non-monetary terms.
Economic appraisal is a methodology designed to assist in defining problems and
finding solutions that offer the best value for money (VFM). This is especially
important in relation to public expenditure and is often used as a vehicle for
planning and approval of public investment relating to policies, programmes and
The principles of appraisal are applicable to all decisions, even those concerned
with small expenditures. However, the scope of appraisal can also be very wide.
Good economic appraisal leads to better decisions and VFM. It facilitates good
project management and project evaluation. Appraisal is an essential part of good
financial management, and it is vital to decision-making and accountability.
6 a) Due diligence is a process whereby an individual,or an organization,seeks
sufficient information about a business entity to reach an informed judgment as to
its value for a specific purpose.
The basic function of due diligence, in any merger or acquisition,is to assess the
potential risks of a proposed transaction by inquiring into all relevant aspects of the
past, present,and predictable future of the business to be acquired.
Due diligence is a vital activity in M&A transactions and conducting M&A due
diligence in todays global marketplace is a demanding, high-pressure undertaking
that requires considerable skill and expertise.
Due diligence is a vital activity in M&A transactions, and may consume several
months of intense analysis if the target firm is a large business with a global
presence. Using a variety of methods and accepted principles, the due diligence
team pursues an answer to the question: Do we buyand if sohow do we structure
the transaction and how much do we pay? To answer this question, M&A due
diligence activities typically focus on four areas at a target firm:

Strategic Position
Financial Data
Operational Assets
Legal Matters
Each of these four areas can be further sub-divided into business, legal, and
functional areasincluding ITeach receiving the appropriate level of attention and
analysis based upon the category and nature of the deal.
Conducting M&A due diligence in todays global marketplace is a demanding, high-
pressure undertaking that requires considerable skill and expertise. As a result,
firms that do a lot of M&A transactions often develop their own in-house M&A due
diligence expertise, whereas firms that pursue occasional M&A transactions often
engage outside professionals to assist them with this highly complex and risky

6 b) There are many purposes for conducting due diligence, including the following:
Confirmation that the business is what it appears to be;
Identify potential "deal killer" defects in the target and avoid a bad business
Gain information that will be useful for valuing assets, defining representations and
warranties, and/or negotiating price concessions; and
Verification that the transaction complies with investment or acquisition criteria.
To sufficiently reveal financial and tax risks
To analyse a firms past profitability and cash flow,and according to this forecast the
firms future operational prospects
To understand the target firms assets and liabilities (including contingent
liabilities),internal control,and the actual situation of operations management
To determine whether the target company is in keeping with the acquirers general
strategic goals
The first objective is to identify and clarify what is being acquired. By placing a
meaningful value on a target's assets,including its human capital,the acquiring firm
increases its understanding of the capabilities that it is purchasing
The second objective is to anticipate and mitigate the risks of undesirable post-
acquisition realities such as market share losses.

Ans 7a. Project Sponsors

The Project Sponsor is the individual (often a manager or executive) with overall
accountability for the project. The Project Sponsor is primarily concerned with
ensuring that the project delivers the agreed business benefits. The Project Sponsor
acts as the representative of the organisation, and plays a vital leadership role
providing 'championship' for the project, selling and marketing the project
throughout the organisation
providing business expertise and guidance to the Project Manager
acting as the link between the project, the business community and perhaps
most importantly, management decision making groups

Ans 7b. Margin Money: Commercial bank do not provide 100% working capital
finance and insist on part of working capital being contributed by the borrower. This
contribution towards working capital by the promoter is known as margin money.

Ans 7c. Takeout Financing

A commitment to provide permanent financing following construction of a
planned project. The takeout commitment is generally based on specific conditions,
such as the completion of a certain number of units, or sales of a certain percentage
of units. Most construction lenders require takeout financing.

Ans 7e. Causes of Project failure

1. Lack of understanding of the project complexity 2. Lack of access and internal
communication 3. Failure to integrate the key elements 4. Inadequate control 5.
Subtle change in requirement 6. Ineffective execution strategy 7. Too much
dependence on software 8. Contractor/customer with different expectations

Ans. 7f: Consortium lending: It is that type of lending in which two or more banks
come together to
finance the big projects requiring huge amount of money. It is done by
banks to distribute the
risks among the group of banks to use as an opportunity to be a part of
the big project
financing and to gain expertise in this area.