PROJECT

DEVELOPMENT
FINANCIAL ASPECTS
OF APPRAISAL
 Cost of project : All items associated with a project which are supported by long-term funds. It is the sum of

1. Land and site development

2. Buildings and civil work

3. Plant and machinery

4. Technical know-how and engineering fees

5. Expenses on foreign technicians and training of Indian technicians abroad

6. Miscellaneous fixed assets

7. Preliminary and Capital Issue Expenses:

8. Pre-operative Expenses

9. Initial cash losses

•Basic cost of land

•Premium payable on leasehold and conveyance charges

•Cost of levelling and development

•Cost of laying approach roads and internal roads

•Cost of compound wall and gates

•Cost of tube wells (subjective)

•Building for main plant and equipment

•Building for auxiliary services; steam supply, workshops, labs, water supply.

•Godowns, warehouses, and open yard facilities

•Non-factory buildings like canteen, guest houses

•Quarters for essential staff

•Silos, tanks, wells,

•Chests, basins, cisterns, hoopers, bins, and other structures necessary for installation of the plant and
equipment Garage.
3. Plant and Machinery:

The cost of the plant and machinery, typically the most significant component of the
project cost, consists of the following:

A- Cost of imported machinery: This is the sum of

(i) FOB (free on board) value

(ii) shipping, freight, and insurance cost,

(iii) import duty, and

(iv) clearing, loading, unloading, and transportation charges.

I. FOR (free on rail) cost,

II. sales tax, octroi, and other taxes, if any, and

III. railway freight and transport charges to the site Cost of stores and spares.

C- Cost of stores and spares.

D- Foundation and installation charges

Note: The cost of the plant and machinery is based on the latest available quotation
adjusted for possible escalation.
4. Technical Know-how and Engineering Fees

It is necessary to engage technical consultants or collaborators from India and/or abroad
for advice and help in various technical matters like preparation of the project report,
choice of technology and selection of plant and machinery etc.

While the amount payable for obtaining the technical know-how and engineering
services for setting up the project is a component of the project cost, the royalty payable
annually, which is typically a percentage of sales, is an operating expense taken into
account in the preparation of the projected profitability statements.
5. Expenses on Foreign Technicians and Training of Local Technicians Abroad:

 Services of foreign technicians may be required for setting up the project and
supervising the trial runs.

Expenses on their travel, boarding, and lodging along with their salaries and allowances
must be shown here.

Likewise, expenses on local technicians who require training abroad must also be
included here.
6. Miscellaneous Fixed Assets:

Fixed assets and machinery which are not part of the direct manufacturing
process may be referred to as miscellaneous fixed assets.

They include items like furniture, office machinery and equipment, tools,
vehicles, railway siding, diesel generating sets, transformers, boilers, piping
systems, laboratory equipment, workshop equipment, effluent treatment plants,
fire fighting equipment, and so on.
7. Preliminary and Capital Issue Expenses:

Expenses incurred for identifying the project, conducting the market survey, preparing the
feasibility report.

Expenses borne in connection with the raising of capital from the public are referred to as
capital issue expenses.

The major components of capital issue expenses are: underwriting commission, brokerage,
fees to managers and registrars, printing and postage expenses, advertising and publicity
expenses, and stamp duty.
8. Pre-operative Expenses:

Expenses:(i) establishment expenses, (ii) rent, rates, and taxes, (iii) travelling
expenses, (iv) interest and commitment charges on borrowings, (v) insurance
charges, (vi) mortgage expenses, (vii) interest on deferred payments, (viii) start up
expenses,
9. Initial Cash Losses:

Most of the projects incur cash losses in the initial years.

Yet, promoters typically do not disclose the initial cash losses because they want the
project to appear attractive to the financial institutions and the investing public.
To meet the cost of the project the following means of finance are available:

1. Share capital

2. Term loans

3. Debenture capital

4. Deferred credit

5. Incentive sources

6. Miscellaneous sources
1. Share Capital:

There are two types of share capital: equity capital and preference capital

. Equity capital represents the contribution made by the owners of the business, the
equity shareholders, who enjoy the rewards and bear the risks of ownership. Equity
capital being risk capital carries no fixed rate of dividend.

Preference capital represents the contribution made by preference shareholders and

Provided by financial institutions and commercial banks, term loans represent secured
borrowings which are a very important source (and sometimes, the major source) for
financing new projects as well as for the expansion, modernisation, and renovation schemes
of existing firms.

A- Rupee term loans: are given for financing land, building, civil works, indigenous plant
and machinery, and so on.

B- Foreign currency term loans: are provided for meeting the foreign currency expenditures
towards the import of equipment and technical know-how,
3. Debenture capital:

There are two broad types of debentures: non-convertible debentures and convertible
debentures.

Non-convertible debentures are straight debt instruments. Typically they carry a fixed rate
of interest and have a maturity period of 5 to 9 years.

Convertible debentures, as the name implies, are debentures which are convertible, wholly
or partly, into equity shares. The conversion period and price are determined in advance.
4. Deferred credit:

Suppliers of the plant and machinery offer a machinery can be made over a period
of time.

5. Incentive sources:

Government and its agencies may provide financial support as an incentive to

A small portion of the project finance may come from miscellaneous sources like
unsecured loans, public deposits, and leasing and hire purchase finance.
 Planning the Means of Finance

How should you go about determining the specific means of finance for a given
project!

Key Business Considerations

The key business considerations which are relevant for the project financing decision
are: cost, risk, control, and flexibility.
Business risk refers to the variability of return on invested capital and arises mainly from
fluctuations in demand and variability of prices and costs.

Financial risk represents the risk arising from financial leverage. It must be emphasised that
while debt capital is cheaper source of finance it is also a riskier source of finance because
of the fixed financial burden associated with it.

Control From the point of view of the promoters of the project, the issue of control is
important. They would ordinarily prefer a scheme of financing which enables them to
maximise their control, current as well as potential, over the affairs of the firm.
Flexibility This refers to the ability of a firm (or project) to raise further capital from
any source it wishes to tap to meet the future financing needs.

 Flexibility means that the firm does not fully exhaust its debt capacity. Put
differently,
It is not advisable to assume a high capacity utilisation level in the first year of
operation. There are likely to be other constraints like raw material shortage, limited
power, marketing problems, etc.

A reasonable assumption with respect to capacity utilisation is as follows: 40-50

The selling price used may be the present selling price

2. Utilities cost

3. Labour cost

4. Factory overhead cost

The cost of raw materials, chemicals, components, and consumable stores required
for production. It is a function of the quantities in which these materials are required
and the prices payable for them.

The present costs of various material inputs is considered. In other words, the
factor of inflation is ignored.
2. Utilities Cost:

The requirements of power, water, and fuel may be determined on the basis of the
norms specified by the collaborators, consultants, etc. or the consumption standards
in the industry whichever is higher.

The cost payable to local authorities and charges payable to some other firms for
water and/or steam supply may be shown separately.
3. Labour:

Besides basic pay, dearness allowance, house rent allowance, conveyance allowance,
medical reimbursement, leave travel concession, provident fund contribution,
gratuity contribution, and bonus payments. In addition, account shoul vacations,
overtime work, night work, work on holidays.

Labour cost estimates may be raised at the rate of 5 percent per annum to allow for
annual increment, etc.