Project Appraisal

Swagat Kishore Mishra

Department of Economics and Finance
WILP: Project Appraisal
Lecture 7
Email: swagat@goa.bits-pilani.ac.in
Tel. 0832-2580207 (O) 08879506995 (M)

September 2, 2014

Course No. ETZC414 Project Appraisal

Outline

Introduction
Financial Estimates
Cost of the Project: Project cost estimate
Means of Finance
Cost of Production
Working capital requirement
Financing for working capital

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Course No. ETZC414 Project Appraisal

Introduction:

Project investment is a series of processes aimed at

foregoing short-term economic benefits from financial
resources by investing them in land, buildings,
equipment, and other capital assets to produce products,
goods, and services directly or through investments in
securities or direct loans to financial intermediaries with
the objective of maximizing economic benefits over the
life of the investment.
Projects are managed by and implemented by Executing
Agencies (EAs) and Implementing Agencies (IAs).
9/2/2014

Swagat Mishra with PoE

 Guidelines recognize that the analysis of projects should be

carried out through an integrated approach including a
through evaluation of the physical, economic, financial,
stakeholder and risk aspects of each project in a single
consistent framework or model.
The assessment of the physical aspects of the project focuses
on a determination of or identification of the least cost
technical solution to the issue addressed by the project.
The issue that the economic analysis is mainly focused on is
the contribution of the project to the economy of the country
concerned and the economic cost of producing the project
goods or services.

 Within the integrated appraisal framework, the economic

analysis is built directly upon the financial cash flows of the
project.
The economic treatment of project benefits is initially
based by either the revenue generated by the project
and/or its cost savings, consistent with the methodology for
the financial evaluation of revenue or cost savings.
Similarly, direct project costs form the basis of the input
values for the economic evaluation of the project.
Upon this base any externalities are measured and included
in the economic analysis. In the stakeholder analysis the
quest is to identify the primary stakeholders affected by the
project.

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Financial Estimates
For financial aspects one must consider:
i. Cost of project
ii. Means of financing
iii. Estimates of sales and production
iv. Cost of production
v. Working capital requirement and its financing
vi. Profits projections
vii. Break-even point
viii. Projected cash flow statements and balance sheets
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Project Cost Estimate

The Project Cost Estimate Table shows the total cost of a
project and incorporates all elements in a manner that is both
explicit and meaningful.
It provides an understanding of the costs of the principal
components as at the date of appraisal.
Equally it provides information for project cost control during
implementation by the borrower, the EA and the Bank.

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PROJECT COST ESTIMATE TABLE

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The principal components that should be included in the base

cost typically consist of local and foreign costs of :
(i)

land and rights of way needed for implementation and incurred after
the loan request was made,
(ii) capital goods (including initial requirements of operational inputs, e.g.
fertilizers),
(iii) civil works and construction,
(iv) consulting services,
(v) training,
(vi) incremental administrative costs (including cost of staffing and auditing
to satisfy the Bank's requirements) incurred during implementation,
(vii) initial working capital, and
(viii) taxes and duties incurred on any of the above components.
The cost of land, rights of way and taxes and duties are properly included in
the base cost of a project even though the Bank does not finance these costs.

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Means of Finance

Norms of regulatory bodies

Norms of financial institutions
Key business considerations
Cost, risk, control and flexibility

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Cost of Production

Material cost (raw materials)

Utilities cost (power, water and fuel)
Labour cost (manpower cost)
Factory overhead cost (repairs, maintenance,
taxes, insurance of factory assets etc.)

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Working capital requirement

It has been said that the lifeblood of any business is its net
working capital (WC). The simplest explanation of this figure is
the formula:
WC = Current assets Current liabilities

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 It is the amount of assets available to pay off your short term

expenses such as salaries, equipment rental, inventory, and so
on. Your assets would be considered your cash, accounts
receivable, and inventory.
The WC demonstrates the amount of liquid assets that are
available to sustain and build you business by measuring your
companys efficiency and short-term financial health.
As such, it carries great value to those who might be
interested in investing in your business or even purchasing it.

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Financing for working capital

Your working capital is used to pay short-term obligations
such as your accounts payable and buying inventory.
If your working capital dips too low, you risk running out of
cash.
Even very profitable businesses can run into trouble if they
lose the ability to meet their short-term obligations. The
calculator assists you in determining working capital needs for
the next year.

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To maintain a current ratio of 2 you need a total of $12,000 in working

capital.
Your actual working capital is $8,000 with a current ratio of 1.67.
If you grow 20% per year in 12 months you will need $14,400 of working
capital. This will keep your current ratio at 2.
This assumes that both your current liabilities and current assets increase at
an annual rate of 20%.

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http://www.workingcapital.org/

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Annual growth
The percent of growth you expect over the next year.
Total current assets
This is any cash or asset that can be quickly turned into
cash. This includes prepaid expenses, accounts receivable,
most securities and your inventory.
Total current liabilities
This is a liability in the immediate future. This includes
wages, taxes and accounts payable.

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Current ratio
Current Assets divided by current liabilities. Your current ratio helps you
determine if you have enough working capital to meet your short-term
financial obligations. A general rule of thumb is to have a current ratio of
2.0. Although this will vary by business and industry, a number above two
may indicate a poor use of capital. A current ratio under two may indicate
an inability to pay current financial obligations with a measure of safety.
Working capital
Working capital is used by lenders to help gauge the ability for a
company to weather difficult financial periods. Working capital is
calculated by subtracting current liabilities from current assets. Due to
differences in businesses and the fact that working capital is not a ratio
but an absolute amount, it is difficult to predict what the ideal amount of
working capital would be for your business. To calculate working capital
requirements this calculator uses the 'Current Ratio' to determine a target
amount of working capital. See the 'Current Ratio' definition for more
information.

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Key Words

Financial Estimates
Cost of the Project: Project cost estimate
Means of Finance
Cost of Production
Working capital requirement
Financing for working capital

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THANK
YOU
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