Pradip Lath PROJECT APPRAISAL STAGES OF PROJECT DEVELOPMENT

Project Conception/Identification Pre-feasibility study/ Preliminary screening Clearance/licence to be obtained Availability of inputs. Capital Raw Materials Technical. Etc. Adequacy of Market Profitability Primacie discussion with FI Marketing Viability Technical Viability Economic/Environme ntal standard Detailed Project Report Formation of company Complying with all statutory laws Processing clearances it not obtained Approaching financial institution and others for raising finance Start Construction work etc.

Project Shelved

Detailed Feasibility Study

Project Implementation

Delays/over runs Feasibility & Market Study

Construction period

Additional Finance

Commercial Production

COMMERCIAL PRODUCTION

Cash Generation

Cash Loss

Repayment of Term Loan

Approach F1s for Deferment

Deferment/ Reschedulement

Additional Funding

Cash Generation

Cash Loss

Rehabilitation

Cash Generation

Cash Loss

Project Shelved

CASE STUDY

RICE MILL PROJECT

BA Ltd. Is a proposed company to be incorporated under the Companies Act with their registered office and head office at Mumbai. Considering the prospects of good irrigation facilities leading to double crop at Kalahandi of Orissa the company proposes to establish a rice mill. The capacity of the proposed plant shall be ( 4 MT per hour ) i.e. 19200 MT per annum of raw material (paddy) working on double shift basis. The number of working days has been assumed to be 300. The promoters have already purchased the land measuring 3 acres and the cost of land including land development is estimated at Rs. 1800 thousands. The promoters have further, estimated from the registered valuers regarding the cost of civil construction which is estimated at Rs. 99.64 lakhs as per details in Annexure of the excel sheet of the project. The promoters have hired a technical consultant and the cost of machinery required including the installation costs is as follows: Rs in 000s i) Milling section including elevators 3900 ii) Weigh Bridge 540 iii) Par-Boiling section including dryer & pre-cleaner 5430 iv) Boiler with all accessories 2400 v) Electrical installation & motors 2700 The promoters will incur 6% towards freight, taxes and insurance on the above machines and equipment. The project will require eight months for the construction work to be completed and the details of the expenses during construction period is estimated as follows: Rs 000s i) Establishment including traveling 360 ii) Project Feasibility study & report including market survey 300 iii) Insurance during construction period 150 iv) Incorporation expenses 180 The implementation of the project is scheduled to take 8 months and it is assumed that the term loan shall be disbursed pro-rata as and when required along with the investment done of the promoters funds. The promoters have discussed their project with a commercial bank and the bankers have prima facie agreed to finance the project. However, the amount of term loan is to be arrived at after finding out the margin on the basis of 75% of the relevant capital cost of the project and Debt Equity ratio (DER) of 1.5:1. The amount proposed by the banker will be the lower of the amount arrived at by the above two criteria. Round off the term loan to the nearest lakh. The term loan will be repayable in 66 monthly equal instalments excluding the moratorium period of six months; i.e the total repayment period is six years. The rate of interest @ 12% is considered to be prevailing. Assume the project to start from 1st April of Year 1.

:2: The promoters have no problem in selling the rice produced and the average selling price in the open market as well as levy to government is Rs. 17,500/- per MT. Paddy which is the only raw material will be easily available in close proximity and the cost per MT is expected to be Rs. 10500 including freight inwards and taxes. The processing of paddy by par boiling method takes less than one shift and the promoters do not wish to consider the work in process. The percentage of output and selling prices are as follows: i) ii) iii) iv) Rice Bran Broken Husk 68% 4% 1% 27% as discussed above Rs. 9000/MT Rs. 6000/MT to be used as fuel for the boiler

The unit will require gunny bags estimated to cost Rs. 30 per bag for packing of rice, and other by products excluding husk. The bags will be for packing of goods of 100 kg. each and 50% of the cost of the bags will be reimbursed to the unit. The plant requires a power connection of 160 Kw and the rate of power may be considered at Rs 5.00 per unit. Power consumption of 24000 Kw per year is required. The unit requires direct labour the cost of which is Rs 3747 thousands in Year 1, Rs 4121 thousands in Year 2 and Rs 4534 thousands in Year 3 and onwards. Details of the same are given in the excel sheet of the project. The repair and maintenance cost may be assumed on the cost of buildings and plant & M/c at the following % ages. Years 2 3& Onwards (In %ages of cost) 1 2 3 1 Buildings 6 9

Plant & Machinery 3

The administrative and other office overheads including marketing and finance department expenses is estimated at Rs 1440 thousands per year and slated to increase by 10% for year 2 and year 3 and thereafter increase @ 2.5% every year over the previous year. For the purpose of estimating working capital, the promoters have further, estimated to keep raw materials of 2 months in hand as paddy is produced seasonally. They also propose to stock packing materials of 1.50 months and finished goods of 0.50 month.

:3: Debtors are considered at 0.25 month at selling prices. The operating expenses other than financial expenses are to be provided for one month as cash margin to meet the expenses. Paddy purchases are assumed to be on cash basis. The bank is willing to finance working capital to the tune of 75% of the inventories and 60% of the book debts (debtors). It may be assumed that all sales are credit sales. The rate of interest proposed to be charged by the bank on working capital finance will be 12% per annum. The Company follows the written down value method of depreciation as per the Companies Act. However, you may assume the rates as per the present income tax acts which are as follows: Building: 10%, Plant & Machinery: 15% Consider income tax at the prevalent rates after considering incentive u/s 80 IB and without considering MAT. The promoters further, feel that a provision must be made for contingencies and price escalation @ 5% on the cost of machinery and building. Consider capacity utilization at 60% in year 1, 70% in year 2, and 80% in year 3 & onwards. Should the company have profits the directors have proposed to keep provision for dividends @ 5% on the equity capital for Year 2 and thereafter the same is proposed to be increased to 10% for Year 3 and Year 4. From the Year 5 onwards the dividend proposed is 20%. You are required to prepare the following and make a financial viability report making other necessary assumptions, if required. i) ii) iii) iv) Projected Profitability Statement Estimation of Working Capital Repayment of Term Loan Schedule Projected Balance Sheet Projected Cash Flow Statement Financial Evaluation by: IRR & NPV assuming cost of equity = 18% by different basis of cash flows. B/E Analysis Ratio Analysis including DSCR (both Gross & Net) Sensitivity Analysis.( variation of 2% and 4% of sales price and variable costs)