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Projects are the cutting edge of development. Projects are an

investment activity in which financial resources are expended to create capital assets

that produce benefits over an extended period of time. I UNIDO defines a project as

a proposal for an investment to create and develop certain facilities in order to

increase the production of goods/services in a community during a certain period of

time.

The Chartered Management Institute define a project as "an activity

that has a beginning and an end which is carried out to achieve a particular purpose

to a set quality within given time constraints and cost limits". A project may be

defined as an activity for which money will be spent in an expectation of returns and

which logically seems to lend itself to planning financing and implementation as a

unit. It is the smallest operational element prepared and implemented as a separate

entity in a national plan of programmes of development.

A project is also defined as a proposal for an investment to create,

expand and develop certain facilities in order to increase the production of goods

and services in a community during a certain period of time. Furthermore, for

evaluation purposes, a project is a unit of investment, which can be distinguished

technically, commercially and economically from other investments.

Systematic and comprehensive review of the economic, environmental, financial,

social, technical and other such aspects of a project to determine if it will meet

its objectives.
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Project appraisal is the process by which financial institution makes an independent

and objective assessment of various aspects of the project for arriving at the

financial decision. There are four broad aspects of appraisal.

The data base required for financial feasibility analysis can be grouped as under:

(a) Cost of project and means of financing

(b) Cost of production and profitability

(c) Cash-flow estimates during currency of loans

(d) Performa balance sheet as at the end of each financial year during period of

loan.

The cost of project can be broadly classified into the

following:

1 Land and site development

2 Building

3 Plant and machinery


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4 Transportation erections and commissioning

5 Miscellaneous assets.

Though machinery cost always constitutes a major element in the

total project cost, its estimation needs need not pose major problems since this can

be based on competitive quotations. On the other hand cost of other items such as

land, site development expenses and preoperative expenses, requires a carful

inquiry and assessment. A realistic assessment of project cost with a reasonable

contingency margin of absorbing normal cost escalations could take care of cost

overruns.

There is no ideal pattern for means of financing of a project. The

means of financing is determined by a variety of factors like magnitude of funds

required, risk associated with the project, nature of industry, prevailing taxation laws

etc.

1. Share capital

2. Subsidies

3. Long term borrowing

4. Loans from friends and relatives

5. Retained earnings.

Financial institutions specify certain debt equity ratio and promoters will have to rise

own finance to match these ratios.

The next step is the assessment of earning capacity of the project. The

unit should be in position to manufacture the product at a reasonable cost and sell it

at a reasonable price which would allow adequate profit margin even in competitive

market. The cost of production and sales estimates are also useful in working out


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break-even point, the point at which income sales would cover the working cost of

the project. At this point the unit begins to make profit.

The cash-flow estimates are essential to ensure availability of cash to

meet requirements of the projects from time to time. The cash-flow estimates will

show sources of funds including those arising from depreciation and profits as well

as uses of funds including repayment of term loans instalments. The debt service

coverage ratio is arrived by dividing cash approval comparison net profits (after tax,

interest on term loans and depreciation added back) by total interest charges andinstalments. This will indicate whether cash-flow would be adequate to meet the debt

obligations and also provide a sufficient margin of safety. The repayment schedule of

terms loans are determined taking into consideration the above aspect.

Proforma balance sheet is drawn for the existing concerns going for

expansions as well as for new projects. However existing concerns going for

expansions the balance for the past three years are also analysed and compared,

with projections. The projected balance sheets can also be drawn for cash-flow

estimates and profitability projections.

In asserting the technical feasibility of projects the following aspects are normally

considered:

In these days of rapidly changing technology, the fear of

technological obsolescence is always present. It is, therefore necessary to examine


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the suitability of the technology adopted with reference to technical information

available on the plant and equipment to be installed by the industrial unit.

The size of plant and its capacity levels are very important decision.

A plant should be planned in such a way so that it can be put to its optimum use.

Fixed overheads do not vary with the various capacity levels of the plant. It is,

therefore important to determine the adequate and optimum capacity of the plant

before it is set up. In certain industries, a unit can be operated economically at a

certain minimum scale of operations. Therefore, a proper evaluation scale of operations of the project is essential.

For the success of the project, its location is of a great importance.

The location of the project may be influenced by the closeness of the raw-materials,

availability of power, fuel, transport, skilled and unskilled labour or closeness to

market which would be served by the unit. For example: some industries like cement

are located near the source of raw-material, whereas in case of glass industry, it is

considered advantageous to locate the factory near the market. Incentives provided

by the Government also influence the decision about the location of the project. For

example: concessional assistance provided by the Government for backward

districts may motivate the promoter to locate the plant in such areas.

While selecting the plant and equipment, the reputation and the

experience of the supplier is important, in many cases, it is the responsibility of the

supplier to provide for maintenance and training of workers etc, for proper utilization

of equipment. Therefore it should be ensured that the suppliers would satisfactorily

meet their obligations.


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The layout of the plant is important from the point of view of possible

future expansions. It should be evaluated with reference to site plan.

It should be considered whether adequate supply of power would be

available in case of difficulty of power, the company may consider the possibility of

installing diesel generating set for contentious supply of power.

This would involve the scrutiny of various elements of the project from the

stage of engineering design work to the installation and testing of equipment and

commercial production. A realistic project schedule is of great significance for the

timely completion of the project and to avoid cost over runs.

Arrangements are to be made for securing technical know-how and

training of personnel would be available for the project. It is to be examined whether

existing work force and competent personnel would be available for the project.

The economic feasibility basically deals with the marketability of the

product. Basic data regarding demand and supply of the product in the domestic

market and international market should be collected. Man made storage are not to

be reckoned as genuine demand and the market analysis is an essential part of full

appraisal. Projection or forecasting of demand is no doubt a complicated matter but


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is of vital importance. Equally important is to examine the sales promotion proposed

by enterprise and its adequacy.

The success of a business enterprise largely depends on resourcefulness,

competence and integrity of its management. The management should be

experienced and capable to run the project. Skilled management is required for day

to day operations like production, maintenance, marketing, finance etc. For a new

entrepreneur it will always be advisable to build up a competent team of specialists

in the required discipline to join hands with entrepreneur who has requisite

organisational and managerial expertise in the implementation and operation of the

project.

The source of primary information can be from the banks and

financial inst i tut ions themselves which are the most original , the

mos t de ta i l ed and by fa r the mos t t rustworthy source , and as

much relevant information as possible may be sought from the

prospective banks.

Information about the general financial health of the companies

would come from the bankers with whom the company has its account, but

also the bankers who might have lent to the company. Getting a reference through the


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companys bankers makes it easy to get correct information and the lending banker may remain

disguised.

C r e d i t R a t i n g I n f o r m a t i o n S e r v i c e s o f I n d i a

Limited, An RBI credit rating agency is care Credit Analysis and Research Limited &other

agencies are ICRA Investment Information and Credit Rating Agency of India, &

DCR INDIA Duff and Phelps Credit Rating India Private Limited, & ONICRA Credit

Rating Agency of India Limited are the main credit rating agencies in

India T h e s e a g e n c i e s p r o v i d e r e a d y a n d d e t a i l e d i n f o r m a t i o n r e q u i

red by banks andfinancial institutions for financing the capital requirements of the companies which are credit rated by these agencies.

One of the most convenient and commonly used tools of

credit eva lua tion by the banks is the companys annual accounts which are

statutorily prepared annually and laid before the shareholders. Apart from the annual

accounts, a listed company has to publish half yearly unaudited results in the newspapers

twice a year.

Investors perception is best judged by the market opinion about the

company. This market opinion also has an indirect impact on the companys health.

Hence, a banker a financial institution may also refer to shareholders or share

dealers to know the market sentiments about the prospective company.

Debt equity ratio

Debt service coverage ratio and Interest coverage ratio


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1) Promoters have studied the requirement of milk in the Mumbai city.

2) Partners are trying to penetrate in a competitive market and trying to make it

profitable.

3) Promoters have taken up this project after proper market research.4) Promoters are building a large scale industrial unit to capture the entire

Mumbai market.

(1) High capacity imported machines for pasteurization of milk.

(2) Best quality due to modern machines installed for customer satisfaction

before it could be delivered to customers.

(1) Partners are contributing


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(2) Partners are unable to provide any collateral security so factory land brought

by a partner would be collateral security.

(1) Cost saving due to bulk procurement.

(1) Partners are experienced, qualified and dynamic.

(2) These partners are working together for the first time but are experienced.

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