Project A Project is a set of interrelated investment activities to attain certain specific objectives by utilizing limited resources within a particular

period of time. Characteristics of Project: Projects are characterized by progressive elaboration: due to uniqueness and greater uncertainty projects cannot be understood entirely at or before project start, and therefore planning and execution of projects is happening many times in separate steps or phases. Based on this knowledge team members elaborate initial draft plans, and execute next phase of the project based on these detailed plans. Project execution is based on detailed plan, which considers also external factors and constraints. Planning, execution and controlling of project is the primary field of project management. It is necessary sometimes to set up a special temporary organization, consisting of a project team and one or more work teams. Major projects can be divided into subprojects, and program denotes collection of related projects.

Types of Project: 1. Type x : Self financing projects i.e. projects which earn revenue through sale of output (goods & services). These are called directly productive projects, i.e.. Industrial Projects. 2. Type y : In directly productive but non-revenue earning projects, i.e., projects which give rise to tangible output, benefit of which do not accrue directly to projects themselves but to other parties Example: Irrigation Projects, Roads, Bridge etc. 3. Type z : Service Sector Projects which do not give rise to tangible output but provide service benefits to the society. Example: School, College, Hospital, Training Institute. Project Cycle or Project Life Cycle: There tends to be a natural sequence in the way projects are planned and carried out and this sequence has come to be known as the Project Cycle. Seven stage process through which practically every major project goes through: (1) Identification: stage where one project-idea out of several alternatives is chosen and defined. (2) Preparation: defined idea is carefully developed to the appraisal stage. (3) Appraisal: every aspect of the project idea is subjected to systematic and comprehensive evaluation, and a project plan is prepared. (4) Presentation: detailed plan is submitted for approval and financing to the appropriate entities. (5) Implementation: with necessary approvals and financing in place, the project plan is implemented. (6) Monitoring: at every stage the progress of the project is assessed against the plan. (7) Evaluation: upon completion the project is reassessed in terms of its efficiency and performance. Also called project life cycle. Project Appraisal

Course: Project Appraisal

Project Appraisal involves a pre investment analysis in the form of comparison of costs and benefits. If benefits exceed costs, the project could be considered for acceptance Otherwise, it is not. Objectives of project appraisal Objectives of a project Appraisal are needed because of limited resources, allocation of resources, investment analysis, etc. Project Appraisal is necessitated because the resources or means are limited as compared to the needs of the society. Before allocation of resources for a particular project, the decision making authority must convince itself that the proposed project is the best and most economical way of achieving the desired objective (in terms of socio-economic benefits). A Project Appraisal involves detailed pre-investment analysis of market & technical feasibility, financial soundness, economic desirability and, finally, measuring its investment worth.

Importance of project appraisal It is a capital investment decision It has long term effects It involves comparison of costs and benefits. It entails measurement of investment worthiness Methods of calculation of profit worthiness is highly essential

Difficulties in respect of project appraisal Measurement of costs and potential benefits are difficult High degree of uncertainty Long term spread time value of money

Risks in respect of project There are many kinds of risks, but project management teams usually assign risks into two main categories: internal and external risks. From here, a team can further sort risks into categories, such as financial, technical, political or related to resources or manufacturing. A risk is the possibility of an issue that has not occurred yet, and if it occurs it would have a negative impact on a project. The process of risk management includes identifying, analyzing and addressing risks in order to mitigate their negative effects on a project.

Methods of Project Appraisal There are various methods of project appraisal. Following tools are of capital budgeting :(1) Pay-back method (2) Accounting rate of return method (3) Net present value index method (4) Discounted cash flow method (5) Linear programming method (6) Goal programming method Components of Cost of Project

Course: Project Appraisal

There are two components of cost of project as below: 1. Investment Costs: Include initial costs and replacement costs a. Initial Costs, referred to as the first cost, which is usually made up of a number of cost elements that do not recur after an activity is initiated. For example, construction and commissioning, including land, civil works, transportation, equipment & installations and other related initial expenditures. b. Replacement Costs, refers to the cost of equipment and installations procured during the operating phase of the project, to maintain its original productive capacity. 2. Operating costs: Costs experienced continually over the useful life of the project activity. They are of two broad categories: c. Fixed Cost (FC): Group of costs whose value will remain relatively constant throughout the range of operational activity or output level of the project. FC includes the following cost items: maintenance, insurance, lease rentals, interest payment on invested capital, certain administrative expense, and research. d. Variable costs (VC): Group of costs that vary with the level of operational activity or output. In general, VC includes costs of: labor, materials, fuel cost, and tax Capital Budgeting The term Capital Budgeting refers to long term planning for proposed capital outlays and their financing it involves raising of long term funds and their utilization. Characteristics of Capital Budgeting Capital Budgeting is a many-sided activity. It is a process of: searching for new and more profitable investment options by taking into account the consequences of accepting an investment proposal by making a detailed economic analysis of the profit making potential of each investment proposal. It is the formal process for acquisition and investment of capital. It is the one of most crucial and critical business decisions Involvement of heavy funds Impact of capital decisions are known after a long period. A wrong decision can prove disastrous for the long term survival of the firm Irreversible decisions. Capital Budgeting decisions require assessment of future events which are uncertain.

Phases of Capital Budgeting Capital budgeting is a complex process and there are five broad phases. 1. Planning: The planning phase involves investment strategy and the generation and preliminary screening of project proposals. The investment strategy provides the framework that shapes, guides and circumscribes the identification of individual project opportunities. 2. Analysis: If the preliminary screening suggests that the project is worth investing, a detailed analysis of the marketing, technical, financial, economic, and ecological aspects is conducted. 3. Selection / Methods of Capital Budgeting: The selection process addresses the question is the project worth investing? A wide range of appraisal criteria has been suggested to judge the worth of a project. There are two methods of Capital Budgeting as below: 1. Discounting Cash Flow Method:

Course: Project Appraisal

a) Net Present Value (NPV) The net present value method, also known as excess present value or net gain method, in a discounted cash flow technique in which all cash inflows are discounted to their present value. If the net present value of the expected cash inflows is positive, i.e. it exceeds the initial cost of the project, the project should be accepted, if negative it should be rejected. b) Internal Rate of Return (IRR) IRR is that rate of return at which the sum of discounted cash inflows equals the sum of cash outflows. IRR is the maximum rate of interest which an organization can afford to pay on capital invested in a project. The internal rate of return is discount or interest rate that equates the present value of expected future receipts to the initial cost of investment c) Benefit- Cost Ratio (BCR) The profitability index is also known as benefit cost ratio. It is a capital expenditure where the present value of expected net cash over the initial cost. The index expresses the percentage relationship between cash inflows and the amount of the investment. The project is accepted when B/C ratio is greater than one and rejected when it is less than one. Criteria of Discounting Cash Flow Method: Discounting criteria Net Present Value (NPV) Internal Rate of Return (IRR) Benefit- Cost Ratio (BCR) Merit of Discounted Cash Flow method: 1. The method provides an opportunity for making valid comparisons between long-term competitive capital projects. 2. The method takes into account the entire economic life of the project investment and income. It gives due weight age to time factor of financing. Hence valuable in long term capital decisions. 3. It produces a measure which is precisely comparably among projects, regardless of the character and time shape of their receipts an outlays. 4. This approach provides for uncertainty and risk by recognizing the time factor. It measures the profitability of capital expenditure by reducing the earnings to the present value. 5. It is the best method of evaluating project where the cash flows are uneven. Cash inflows and outflows are directly considered under this method while they re averaged under other methods. De-Merit of Discounted Cash Flow method: 1. It involves a good amount of calculations hence it is difficult and complicated. But the supporters of this method rebate the argument and assert that difficulty of the method is unfamiliarity rather than its complexity. 2. It does not correspond to accounting concepts for recording costs and revenues with the consequence that special analysis is necessary for the study of capital investment. 3. The selection of cash inflows is based on sales forecasts which are in itself an indeterminable element. 4. The economic life of an investment is very difficult to forecast exactly. 5. The method considers discount on expected rate of return but the determine action of rate of return is in itself a problem. 2. Non Discounted Cash Flow Method: 4 Accept NPV > 0 IRR > cost of capital BCR >1 Reject NPV < 0 IRR < cost of capital BCR < 1

Course: Project Appraisal

a) Pay Back Period (PBP) This method gives the number of years in which the total investment in a particular pays back itself. This is based on the assumption that every capital expenditure pays itself back over a number of years. The payback period is calculated by dividing the cost of fixed asset. b) Accounting Rate of Return (ARR) It judges on the basis of relative profitability. The average rate of return or the accounting rate of return represents the ratio of the average annual net income to the ratio of the average net income to the average or original investment over the life of the project expressed as a percentage this is not based upon cash flow but upon the estimated accounting income. Criteria of Discounting Cash Flow Method: Non-discounting criteria Pay Back Period (PBP) Accounting Rate of Return (ARR) Merit of Non-Discounted Cash Flow method: 1. This technique takes into account the amount of capital investment necessary to back-up the project. 2. Allows share option availability to employees as an incentive. 3. Provides estimation based upon cash flows for businesses that value short-term cash flow more than longer-term cash flow. 4. Simple method to understand. De- Merit of Non-Discounted Cash Flow method: 1. Cash flows are not discounted for the time value of money, meaning that a dollar received three years from now has the same value as a dollar received in the current year 2. It fails to consider the profitability of the project in its entirety 3. Non-discounted cash flows is useful techniques for the analysis of projects 4. Fails to consider the timings of cash flows. 4. Implementation: The implementation phase for an industrial project, which involves the setting up of manufacturing facilities, consists of several stages: a) Project and engineering designs b) Negotiations and contracting c) Construction & Training d) Plant commissioning 5. Review: Once the project is commissioned, a review phase has to be set in motion. Performance review should be done periodically to compare the actual performance with the projected performance. In this stage, feedback is useful in several ways: a) It focuses on realistic assumptions b) It provides experience, which will be valuable in future decision making c) It suggests corrective action and helps to uncover judgmental biases d) It advocates the need for caution among project sponsors Steps for project appraisal/Aspects of project appraisal / Feasibility of the Project analysis 1. Commercial / Market Analysis 5 Accept PBP < target period ARR > target rate Reject ARR < target rate Course: Project Appraisal PBP >target period

Before the production actually starts, the entrepreneur needs to anticipate the possible market for the product. He has to anticipate who will be the possible customer for his product and where his product will be sold. Scope of the Project in market The scope of the project in market or the beneficiaries as follows: Customer friendly process and preferences Future demand of the supply Effectiveness of the selling arrangement Latest information availability an all areas Government control measures Course: Project Appraisal 6

Key steps for Market Analysis Following steps are required for market analysis: 1. Situational analysis and specification of objective Situational analysis generates enough data to measure the market and get a reliable handle over projected demand and revenue. For a formal study, it is necessary to spell out its objectives clearly and comprehensively. 2. Collection of Secondary information Secondary information is information that has been gathered in some other context and is already available as economically and accuracy. The general sources of secondary information as below: Newspaper, Article Books, Library Stock Exchange 3. Conducting of Market Survey Secondary information does not provide a comprehensive basis for market and demand analysis. It needs to be supplemented with primary information gathered through a market survey. Following are the steps in a sample survey: Define target population Select the sampling Develop the questionnaire Obtain information as per the questionnaire from respondents Scrutinize the information gathered Analysis and interpret the information

3. Characteristics of Market Through market survey, the market for the product / service may be described in following terms: Effective demand in the past and present

Breakdown of demand Price and Consumers Method for distribution and sales promotion Supply and competition Government policies

4. Demand Forecasting For market analyst, a wide range of forecasting methods are enlisted: a) Qualitative Methods: These methods rely essentially on the judgment of experts to translate qualitative information into quantitative estimates through below sub method: i. Jury of Execution Method: It soliciting the opinions of a group of managers on expected future sales ii. Delphi Method: It is used for eliciting the opinions of a group of experts with the help of mail survey. b) Trend Series Projection Methods: These methods generate forecasts on the basis of an analysis of the historical time series through below sub method: i. Trend Projection Method: It determine the trend of consumption by analyzing past and future consumption statistics. ii. Exponential Smoothing Method: It is a technique that can be applied to time series data, either to produce smoothed data for presentation, or to make forecasts. iii. Moving Average Method: The sales forecast for the next period is equal to the average of the sales for several preceding period. c) Causal Methods: These methods seek to develop forecast on the basis of cause and effect relationships specified in an explicit, quantitative manner. i. Chain Ratio Method: The potential sales of a product may be estimated by applying a series of factors to measure of aggregate demand. ii. Consumption Level Method: It estimates consumption level on the basis of elasticity coefficient. iii. End Use Method: It is suitable for estimating the demand for intermediate products. iv. Leading Indicator Method: it is variable which changes ahead of other variable, the lagging variable. 5. Market Planning To enable the product to reach a desired level of market penetration, following marketing plan is required: a) Covering pricing: To arrive at prices that cover all costs and deliver a reasonable profit margin b) Distribution: How and where the product will be moved, we have to decide best and easy distribution channel for market reaching on time c) Promotion and service: How we communicate with market is called promotion, through strong and consistent product identity we can catch the market segmentation.

2. Technical Analysis Analysis of Technical or Engineering aspects is done continually when a project is being examined and formulated. Technical feasibility analysis is the systematic gathering and analysis of the data pertaining to the technical inputs required and formation of conclusion there from. Technical analysis implies the adequacy of the proposed plant and equipment to prescribed norms. It should be ensured whether the required know how is available with the entrepreneur. 7

Course: Project Appraisal

Purpose of Technical Analysis The broad purpose of technical analysis as follows: To ensure that the project is technically feasible All the inputs required to setup the project are available To facilitate the formulation of the project in term of technology, size, location and so on.

Importance of Technical Analysis Analysis of technical and engineering side of the project needs to be done continuously at the time of formulation. The availability of the raw materials, power, sanitary and sewerage services, transportation facility, skilled man power, engineering facilities, maintenance, local people etc are coming under technical analysis. This feasibility analysis is very important since its significance lies in planning the exercises, documentation process, and risk minimization process and to get approval. Examination of the technical and engineering characteristics of a project needs to be done repeatedly when a project is made. Technical analysis seek out to decide whether the fundamentals for the successful commissioning of the project has been considered and reasonably good options have been made with respect to location, size, process etc.

Example of Technical Analysis Machinery of the company, whether the machinery is competent enough to face the market conditions or it is obsolete, another example is location of the plant, whether the plant is located at the feasible site with regard the transport facilities, sismic conditions, etc. Issues of Technical Analysis Availability of infrastructure Plant capacity refer to the volume that can be manufactures during a given period of time Technological requirement should be fulfilled for maximum and smooth production The perfect market condition will serve success of the product. The capacity level is influenced by the Government policies. Proximities to Raw material and market Easy procurement of plant and machinery Ability to face the external competition Research and development incumbent The investment cost per unit of capacity decreases as the plant capacity increases.

3. Financial Analysis Finance is one of the most important prerequisites to establish an enterprise. It is finance only that facilitates an entrepreneur to bring together the labor, machines and raw materials to combine them to produce goods. Aspects of Financial Analysis To judge a project from the financial angle, we need information about the following: 8

Course: Project Appraisal

1) Cost of Project: it represents the sum of all items of outlay associated with a project which are supported by long term funds. 2) Means of Financing: The means of finance includes the share capital, term loan, debenture capital, deferred credit, Incentive sources, and miscellaneous sources. We need to know norms of regulatory bodies and financial institutions and key business consideration. 3) Estimation of Sales and Production: The starting point for profitability projections is the forecast for sales and revenues. 4) Cost of Production: It consist material, labor and factory overhead cost. 5) Working Capital requirement and its financing: We need to build up current assets till the rated level of capacity utilization is reached. 6) Estimation of Profitability projections: It is referred to by term lending financial institutions. 7) Breakeven point: It is the point at which cost or expenses and revenue are equal: there is no net loss or gain 8) Projected Cash Flow statement: A projected cash flow statement is used to evaluate cash inflows and outflows to determine when, how much, and for how long cash deficits or surpluses will exist for a farm business during an upcoming time period. 9) Projected Balance Sheet: It is a Balance Sheet as at the end of a future accounting period, which is prepared to present the financial position as per the present plans. Generally projected Accounts Statements are prepared for 3, 5, 7 or longer future years 4. Economic Appraisal Economic analysis is judging a project from larger social point of view. In such an evaluation the focus is on the social cost and benefit of a project which may be different from its monetary perspective. It is said that a business should have always a volume of profit clearly in view which will govern other economic variable like sales, purchase, expenses and alike Aspects of Economic Analysis Requirements for raw material Level of capacity utilization Anticipated sales Anticipated expense Proposed profits Estimated demand Importance of Economic Analysis 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. 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. 9

Course: Project Appraisal

Economic appraisal is a methodology designed to assist in defining problems and finding solutions that offer the best value for money It facilitates good project management and project evaluation.

Types of Economic Analysis The main types of economic appraisal are: 1. Cost-benefit analysis: It is a systematic process for calculating and comparing benefits and costs of a project 2. Cost-effectiveness analysis: It compares the relative costs and outcomes (effects) of two or more courses of action. Course: Project Appraisal 10 3. Scoring and weighting: A method of scoring options against a prioritize requirements list to determine which option best fits the selection criteria. 5. Environmental / Ecological Analysis Environmental appraisal concerns with the impact of environment on the project. The factors include the water, air, land, sound, geographical location etc. In recent years, environmental concerns have assumed great deal of significance. Ecological analysis should also be done particularly for major projects which have significant implication like power plant and irrigation schemes, and environmental pollution industries like bulk-drugs, chemical and leather processing. Key Factors for Ecological Analysis The key factors considered for ecological analysis are: 1. Environmental damage 'Environmental damage' has a specific meaning in the regulations, covering only the most serious cases where an operator has caused damage to the natural environment. There are three types of environmental damages: biodiversity damage water damage land damage 2. Restoration measure Intentional activity that initiates or accelerates the recovery of an ecosystem with respect to its health, integrity and sustainability. The practice of ecological restoration includes wide scope of projects including: erosion control, reforestation, the use of genetically local native species, removal of non-native species and weeds, revegetation of disturbed areas, day lighting streams, reintroduction of native species, as well as habitat and range improvement for targeted species Components of Cost of production The following are the cost of production: 1. Material: The ingredients of a meal or the parts of a machine would be things that incur material costs. The amount of money invested in the production of a product. This cost is apart from the cost of labor to produce the product.

The material cost together with the cost of labor helps determine the total cost of a product and its eventual sale price. Direct materials are also called productive materials, raw materials, raw stock, stores and only materials without any descriptive title. Indirect Material costs are nothing but the costs incurred by the company in manufacturing a product. E.g.: Lubricants, grease, sand paper etc...

2. Labour: Labour cost means all amounts which direct or indirect are given to labour or employee for his work for production. Labour is very important part of production. Its cost is very important in total cost of production The cost of wages paid to workers during an accounting period on daily, weekly, monthly, or job basis, plus payroll and related taxes and benefits Direct labor costs include the actual cost of wages as well as the employment taxes accrued on these wages. Indirect labor costs include any other expenses that a business indirectly incurs as a result of retaining its employees, such as training programs and human resources staffing. 3. Factory overhead: Factory overhead is normally aggregated into cost pools and allocated to units produced during the period Overhead expenses are the indirect, nonproduction costs necessary to run a business. This also includes marketing costs and other administrative expenses like travel or educational spending. Overhead expenses can further be divided into fixed costs, like rent and insurance, and variable costs, such as dining, office supplies or fuel. Factory overhead is the costs incurred during the manufacturing process, not including the costs of direct labor and materials. It is charged to expense when inventory is sold as finished goods. Factory overhead also includes certain costs such as quality assurance costs, cleanup costs, and property insurance premiums. Short Notes Projected Balance Sheet This is an estimate of what the balance sheet will look like at the end of the 12-monthperiod covered in our projections. In the business plan section related to our projected balance sheet, state the assumptions that we used for all major changes between our last historical balance sheet and the projection. When projecting Balance Sheets for solvency, we have an opening balance sheet with expected outstanding liabilities. Importance of Projected Balance Sheet A projected, or pro forma, balance sheet contains assumption data about specific future economic scenarios. Corporate leadership may present balance sheets for worst-case and best-case settings, specifying how either category could affect the firm's financial situation. In a projected financial-condition report, accountants include projection data for assets, liabilities and equity, also called net worth. A projected balance sheet indicates how financially strong the business could become under similar circumstances. 11

Course: Project Appraisal

A projected balance sheet is designed to help an individual or a company to understand what it owes and what the owner's value is within the company.

Project Risk Analysis A Project Risk Analysis (PRA) identifies the risks and potential obstacles to the future exploitation of a project's results. Project risk analysis is concerned with the assessment of the risks and uncertainties that threaten a project The variety of techniques developed to handle risk in capital budgeting fall into broad categories: a. Approaches that consider the stand alone risk i. Sensitivity Analysis: It indicates the sensitivity of the criterion of merit (NPV, IRR or any other) to variations in basic factors. Sensitivity analysis determines which variables have the most potential to affect your project. These variables are: task duration, task start time, success rate and costs risks lags between predecessors and successors Scenario Analysis: A scenario analysis is a strategy that involves the assessment of various potential future events and the development of scenarios regarding what would likely come to pass if various combinations of those events did take place. This process is helpful in a number of situations, including business expansion and investing. Break even Analysis: Breakeven point analysis can be a very useful and relatively simple tool for management to use to make decisions. The major problem with break even analysis is that no project really exists in isolation. There are alternative uses for the firm's funds in every case. Hillier Model: In particular situations, the anticipated NPV and the standard deviation of NPV can be incurred with the help of analytical derivation. There are situations where correlation between cash flows is either complete or nonexistent. Simulation Analysis: Simulation analysis is utilized for formulating the probability analysis for a criterion of merit with the help of random blending of variable values that carry a relationship with the selected criterion.

ii.

iii.

iv.

v.

Decision Tree Analysis: It is tool for analyzing sequential decisions in the face of risk. Decision Trees are excellent tools for helping you to choose between several courses of action. They provide a highly effective structure within which you can lay out options and investigate the possible outcomes of choosing those options. Key steps in decision tree analysis are: Identification of the problem and alternatives Delineation of the decision tree Specification of probabilities and monetary outcomes Evaluation of various decision alternatives b. Approaches that consider the contextual risk i. Corporate risk analysis: Corporate risk analysis focuses on the analysis of risk that may influence the project in terms of the entire cash flow of the firm. The corporate risk of a project refers to its share of the total risk of a company. Market risk analysis: This looks at the risk of a project through the eyes of the stockholder. It looks at the project not only from a company's perspective, but from the stockholder's overall portfolio. It is measured by the effect the project may have on the company's beta. 12

vi.

ii.

Course: Project Appraisal

Debt Equity Ratio A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. Importance of Debt Equity Ratio: The debt/equity ratio also depends on the industry in which the company operates. The Company's Debt Equity Ratio should not be more than 2:1. A company that takes on debt to start a new project is considered better then a company that dilutes equity. This is because debt once taken can be repaid back whereas equity once issued remains that way unless the company starts buying back shares. The cost of equity is also higher than the cost of debt. The Roe and RoCE of a company that is aggressively growing on debt capital should be more than the cost of debt (interest). A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt It is a bad sign to see a Company take debt when the Industry is in an up cycle (boom)

Capital Expenditure Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building a brand new factory. A capital expenditure (Capex) is money invested by a company to acquire or upgrade fixed, physical, nonconsumable assets, such as buildings and equipment or a new business. Types of Capital Expenditure There are two types of capital expenditures: growth and maintenance. 1. Growth: Capital expenditures that increase asset value over time are the growth type of expense. An example of a growth expense is an addition to a building or purchase of another business to add to the current business. 2. Maintenance: Capital expenditures that do not change from month to month are considered maintenance expenses. Maintenance expenses include ongoing upgrades to a facility--stores, schools and apartment complexes, for example--or ongoing replacement costs.

Means of Financing The means of finance includes the: 1. Share capital: Share capital is the term used to describe funds that are generated by issuing shares of stock as a means of raising cash for the issuer. share capital can be used to fund any project that the company desires, including the construction of new facilities, the launch of a new product, or some other project that is likely to increase the value of the business and enhance shareholders equity in the business. 13

Course: Project Appraisal

2. Term loan: Term loan is a long term secured debt extended by banks or financial institutions to the corporate sector for carrying out their long term projects maturing between 5 to 10 Years which is normally repaid in monthly or quarterly equal installment. Term loan is acquired for new projects, diversification of business, expansion projects, or for modernization or technology up gradation 3. Debenture Capital: Debentures are financial instruments used to raise capital that offer borrowers the chance to finance their business without forfeiting control of company ownership. Debentures help finance projects, business expansion and operational objectives that are believed to contribute to their organization's financial success. 4. Deferred Credit: Deferred credit is revenue that has been received by a company. Deferred credit is a concept that organizations use as a method of recording and reporting income and revenue. With deferred credit a company will take on a job and receive up-front payment for the job but they will not report the income or revenue received as income until the project is completed. 5. Incentive Sources: The government and its agencies may provide financial support as an incentive to certain types of promoters for setting up industrial units in certain locations. 6. Miscellaneous Sources: A small portion of the project finance may come from miscellaneous sources like: unsecured loans, public deposits and leasing and hire purchase finance. Formulas: Course: Project Appraisal 14

The future value (FV) of an annuity.

FV = Future Value PMT = periodic payment amount N = number of compounding periods I = interest rate Number of compounding periods (n)

Payment amount (PMT)

Interest rate (i)

the present value (PV) of an annuity.

Course: Project Appraisal 15

Proof of Annuity Formula

To calculate present value, the k-th payment must be discounted to the present by dividing by the interest, compounded by k terms. Hence the contribution of the k-th payment R would be R/(1+i)^k. Just considering R to be one, then:

We notice that the second factor is an infinite geometric progression of the form,

therefore,

Similarly, we can prove the formula for the future value. The payment made at the end of the last year would accumulate no interest and the payment made at the end of the first year would accumulate interest for a total of (n1) years. Therefore,

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Course: Project Appraisal