PROJECT FINANCE/INVESTMENT LOAN

General Attributes
Project finance Often availed on medium or long-term

finance
Establishment and/or expansion or non-recurrent
renovations projects for any business sector of the
economy
It is a finance to be availed for the purpose of covering

capital expenditures for fixed/plant assets,

pre-operating expenses, /doesn’t consider/
initial working capital for green field and/or renovation/
acquisition of businesses or investment properties

Project Appraisal: Among others, project appraisal should focus on

the detailed assessment and evaluation of

technical,
market,
financial,
organizational and managerial viabilities
socio-economic benefits of projects.
CONTINUED…
 The Bank may finance projects related with
 agriculture,
 industry,
 multipurpose commercial buildings,
 Real estate,
 hotel and other feasible projects;
 For the purpose of controlling end use of the project,
approval of the disbursement may be on phase by
phase basis, based on progress of the project;
 The duration of a project loan and repayment
frequency shall be determined based on the
nature of investment and cash flow projections.
 Disbursements shall be made after ascertaining that
previous disbursements are fully utilized for the sole.
 The status of utilizations shall be ascertained by the
CRM in collaboration with the bank’s property
Assessors
CONTINUED

 Procedural issues related to project

financing
 The maximum loan period for initial project loan shall
not exceed 15 years including the grace period;
 Any cost overrun that may incur during the project
implementation shall be covered by the Promoter
him/her/itself;
 If there is a changes to the project initial plan and
design, the approving committee should be decided
on the actual situation during the request for price
escalation;
 The discounting rate to be used for discounted cash
flow projection or NPV calculation shall be the
prevailing project loan profit rate of the Bank.
SPECIFIC QUALIFYING CRITERION

 The applicant shall submit

 feasibility study of the project.
 contractual agreement entered with suppliers, building
contractors
 consultants where possible,
 The applicant should submit at least three years’ financial
statements if he/she/it engaged in other Businesses
 The applicants should raise the required
Equity Contribution.
 The equity contribution may be in the form of
cash and/or any assets deployed in the
investment.
 Equity contribution for the project shall not be
from any type of borrowing or bank debt.;
CONTINUED…
 To be considered as equity contribution profit during
grace period can’t be paid by the customer;
 The project must have competent management in
place in order to ensure successful execution of the
project;
 All investment assets of the project shall be
registered as collateral, when applicable. To this end,
a business mortgage contract might be required;
 The financing schedule must also fall within the
maximum life-span of the loan which is specified as
15 years.
PROJECT FINANCE FOLLOW-UP

 Follow-Up during Project

Implementation
 Rationale:-
 To ensure whether sufficient equity
contribution;
 To ensure the disbursed loan are properly
used for intended purpose
 To check the physical progress of the
project vs project implementation schedule
FOLLOW-UP OF THE PROJECT AFTER OPERATION STARTUP

 Check periodic operational performance, the

level of activity, management, profitability;
 seeking monthly operational data, periodic
financial statements, etc;
 setting predetermined benchmark levels of
financial standards,
 monitoring payment of periodic installments
of finance and default in payments of
installments to other banks;
Tea-Break
PROJECT APPRAISAL METHOD

 Source of Data
 Ministry of inland revenue
 ECX
 Central statistics authority
 Books, booklets, brochure etc…
 Sector office/Agriculture, Education, health, transport
etc…/
 NBE
 Various publications, research outputs, magazines,
newspapers, media outlets/mainstream/ etc…
 Declarations, directives etc…
ASSESSMENT TECHNIQUES

 Legal documents
 Investment license, Approved construction plan, leases agreement
etc…
 Other documents such as company profile, sister companies etc…
 Technical Analysis
 Production capacity
 Location , area, infrastructure, utility, soil, weather, environmental
compliance etc…
 Market Aspects
 Market Gross Assessment/Domestic as well as Global/
 Competitors analysis
 Major importer/Exporter by country
 Market for the products as well as for factor input
 Demand for the product
 Supply for the product
 Demand and supply Gap
 Marketing Strategy
 Pricing strategy
Organization and Management

 Management of the project

 Educational Qualification/Experience/

 Existing staff, Direct laborers and

other staffing Plan

 Owners management Experience

 Organizational structure
Financial aspects
 Investment Cost
 Pre-operating expense

 Expense incurred before the project kicks-off

such as licensing, cost of conducting feasibility

etc…
 Fixed Asset/Exhaustive list of FA/

 Cost of items, Asset life time

 Cost of construction of building, store, barns,

shade, fences, etc…

 Progress of construction/ if part of the project

intended to be financed by the Bank/

 Used for calculation of Depreciation, Repair

and maintenance as well as insurance for

the underlying project
 price/purchase and Selling price
 Collect information from sources stated previously
CONTINUED…

 Production and productivity

 Machine production capacity

 Information from machine vending company

 productivity per ha of land
 Factor input/Raw material, labor etc…/
 Labor market/formal and informal/

 Vendor document/Performa invoices/

 Projections
 Based on assumptions and facts /about price, productivity,

production, expenses, tax, depreciation rate, profit rate,

project period, own contribution, exchange rate etc…
 Projections

 Projected Profit and Loss

 Projected income statement
 Projected Balance sheet
 Evaluation criterion
 Payback period

 Break even

 NPV

 IRR (before and after tax)

 Sensitivity Analysis
NET PRESENT VALUE-NPV

 Net present value is used to determine whether or not a project will

be profitable through the project period. Essentially, the NPV of an
investment is the sum of all future cash flows over the investment’s
lifetime, discounted to the present value.
 Calculating net present value involves calculating the cash flows for
each period of the investment or project, discounting them to
present value, and subtracting the initial investment from the sum
of the project’s discounted cash flows.
 Cash flow involves cash outflow and cash inflow
 Number of period …. Project life time
 Discount factor
 Cash flows need to be discounted because of a concept called the time value of
money.
 Equivalent to interest rate
 Interpretation of NPV
 If NPV >0, project is profitable
 If NPV <0 the project is not profitable
 If NPV =0, neither profitable nor loss but other criterion may be considered
to accept the project
EXERCISE

 Exercise:- Calculate NPV for an

investment to be carried with an initial
cost of 80 Million Birr discounted at
15% rate
Year 1 Year 2 Year 3 Year 4

Cash inflow 50 55 60.5 66.55 Cash inflow


Cash out flow 30 33 36.3 39.93 Cash out flow

Net cash flow 20 22 24.2 26.62 Net cash flow

Discounted Discounted
Net Cash flow 17.39 16.64 15.91 17.50 Net Cash flow

Net cash flow 1 Net cash flow 2 Net cash flow 3 Net cash flow 4
formula (1+r)1 (1+r)2 (1+r)3 (1+r)4 formula
CONTINUED…

 Total discounted net cash flow…..67.44

 NPV=initial investment-discounted net
cash flow => 80-67.44=12.56
 NPV is positive, thus the project is
profitable
IRR/INTERNAL RATE OF RETURN/

 IRR is the discount rate for which the net

present value (NPV) equals zero (when
time-adjusted future cash flows equal the
initial investment).
 Characteristics
 The more higher the IRR the more preferable
 It usually compared against the average cost of
capital/interest rate/. The benchmark in our
Bank is interest rate affixed to a particular
sector. For companies they often use IRR to
compare profitability across the projects
BREAKEVEN POINT/BEP/

 It reveals the point at which the project

will generate sufficient revenue to
cover all of your costs.
 Determine what level of production is
necessary so that the revenue
generated sufficient to cover the cost
 Calculation of BEP
Fixed Cost/overhead cost/
 BEP=
-------------------------------------------------------------------------------------------
 Selling price per unit - variable cost per unit
CONTINUED…

 Example= Selling price per unit

Quantity is 200 birr
 Variable cost per unit= 600 Birr
 Overhead cost is 1,000,000.00 Birr


 BEP=1,000,000/(600-200)=2500 i.e.
the company required to produce as
least 2500 Quantity to cover all the
cost/variable as well as overhead cost/
PAYBACK PERIOD

 The payback period is the time required to

recover the cost of project/investment.
 The higher the payback period the better the
project
 How to calculate PBP
 For even cash flow
 Example:- You have a project that has a consistent cash
flow of 2 Million Birr per year for a project with initial cost
of 8 Million Birr . thus the payback period is
8,000,000/2,000,000=4 years
 For uneven cash flow
 For a project within initial investment cost of Birr 50 Million and has
he following cash flow for the four subsequent years as follows
EXERCISE
Remaining
Cash flow
/invest-CF/

25 25 Year 1 1 Year

19 6 Year 2 1 Year

15 (9) Year 3 2.06 Month

11 (20) Year 4

 Subtract investment less cash flow until the value get

negative . at the point where the value get negative,
calculate the remaining months i.e.
(50-25-6)/15=2.06
 Therefore the payback period is 2 year and 2.06
months