project appraisal
TRANSCRIPT
Project Appraisal- 1 Project and Environmental Analysis - Some Basic
Points
The new era of GLOBALISATION AND ECONOMIC LIBERALISATION provides ample opportunities for growth which may be encashed through prudent investment strategy. A firm must take timely actions for adapting itself to the changed environment.
A capital project needs to be launched by: Analysing past environment Studying existing environment Forecasting future environment
An environment is defined to mean the conditions, prevailing at a particular point of time, which influence the process of initiation and development of a capital project.
Business Environment
Which is reflected by:- State of technology- Availability of resources- Rate of inflation- Economic policies of Government- Commercial laws
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Social Environment
Which is reflected by:- Awareness of Social responsibility- Status of consumers' preferences- Increased customers/investors protection- Status of education- Growth in population and it's distribution
Political EnvironmentWhich is reflected by:- Attitude of Government towards liberalisation- Political stability- Security
The inherent characteristic of an environment is: CHANGE
The environmental Changes:Provide - OpportunitiesCreate - ComplexitiesPose - ThreatsAdd - Risk
The complexity and risk in a particular project is reflected in:
Resource constraint Longer time period involved (i.e. Longer Gestation
period) Increased dependence
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In order to meet objectives in a situation of violet and rapid changes in the socio-economic-political environment, an organisation needs to build up strengths and capability to convert threats into opportunities. It needs to be vigilant, analytical in approach, and initiative- taking to meet challenges posed by dynamic environment. An analysis of external environment would throw light on:
The strategies and plans of growth of competitors. Existing government policy. The scope for growth and an improvement in the
market position.
An indepth analysis would show the financial, technological, marketing and managerial strengths of the company, and this would help in formulation of suitable investment strategy to meet objectives of the organisation. The impact of government plans and policies on the environment should be ascertained, and the inter-linkage between government plans and business plans of the company should be established. This is shown in he Figure I below:
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LINKAGE BETWEEN GOVERNMENTS PLANS AND CORPORATE PLANS
PLANS BROAD OBJECTIVES
Industrial Growth
Government Plans Agricultural Growth
Social Welfare
Growth and Survival
Corporate Plans Profitability
Welfare
(FIGURE I)
The government undertakes many development projects in various sectors of economy to achieve certain socio-economic objectives defined in the government plans such as increased standard of living, balanced development of regions, skill development through Research and Development projects, preservation of ecological balance, and so on. The various plans and policies of the government affect the investment plans of corporate sector. No corporate can afford to isolate itself in the changed environment. It needs to formulate it's long-term investment strategy based on SWOT. Analysis (i.e., an analysis of Strengths, Weaknesses, Opportunities and Threats) to maintain it's growth rate in the competitive market.
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The strength of a capital project is as depicted in Figure II below:
STRENGTH OF A CAPITAL PROJECT
Best Technology
State-of- the-Art Machine
Strength of a Capital Competent Manpower
Project Cheaper Resources/Inputs
Competitive Quality
Higher Productivity
Social Consciousness
(FIGURE II)
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Project Appraisal- 2 Capital Project - Definition, Characteristics, Benefits
A Capital Project is a non-repetitive scheme/a time bound programme of action that consumes specified resources on the activities relating to acquisition, creation/development and installation of capital assets to achieve certain pre-defined objectives.
The RESOURCES may be:
Tangible Resources Intangible ResourcesMoney SkillMaterial TimeMachines and equipments Efforts and VisionOther facilities and assets Co-operation, systems, etc.
Supply of resources are both through internal agencies (e.g. labour, management) and external agencies (e.g. customers, suppliers) who are involved in the execution of a project.
I. Capital Investment/ExpenditureThe sum total of all measurable costs is termed as Project Outlay or simply defined as Capital Investment/Expenditure.
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Examples of schemes involving capital expenditure are: Installation of a major new project such as
Thermal Power Station, Steel Plant, Cement Plant, etc.
Construction of road, building, hospital, school, shop, theatre, entertainment park, etc.
Creation of facilities under modernisation/ expansion schemes.
Project are undertaking in various sectors of an economy such as Industry, Agricultural, Shipping, Tourism, Infrastructure, Forestry, Fishing, Mining, Welfare, etc. for increasing welfare and growth of a society.
In case of an industrial project undertaken by a commercial concern, the total capital expenditure may be classified into two groups viz.:
Factory Area (which includes production shops, labs and all other facilities and buildings which are related from and to the operation of company).
Non-factory Area (which includes residential buildings for the employees and other welfare facilities such as school, hospital, marketing complex, etc. for the residents who are family members of the employees)
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2. Important characteristics of a capital project
While formulating a project and in respect of any decision making relating thereto, it is always better to keep in mind the important characteristics, which are inherent in a capital expenditure scheme/proposal.
There are briefly explained as follows:
One time investment (To be incurred in one year or
over a specified period in case of project with
longer gestation period).
Heavy investment in general.
Specific objectives, which are peculiar to the
project itself.
Irreversible nature of capital commitment, once
made.
Benefits from a project to accrue in future over a
longer period.
Risk is involved in the changing socio-economic-
political scenario.
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The broad distinction between capital and revenue expenditure is shown in the Figure III below.
Classification of Expenditure based on Objectives
EXPENDITURE
CAPITAL REVENUE
LONG-TERM FUTURE SHORT-TERMBENEFITS PRESENT BENEFITS
(FIGURE III)
The main performance parameters in a project are: To achieve time targets To achieve cost targets To achieve desired quality specifications
Any decision to reverse an already concluded project may be effected only after incurring huge financial losses particularly in respect of those projects wherein large fund has been invested in the specific/special-purpose assets created/procured to meet specific requirements. Besides, in general second-hand machines may not fetch desirable price. A bad investment decision creates sunk cost and might eat away even the resources generated through an existing good investment.
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Project Appraisal - 3Capital Projects - Opportunities and classification
Synopsis1. Search for investment opportunities by an 6 entrepreneur2. Classification of projects in an existing concern 73. Expansion Project 84. Modernisation Project 85. Balancing Facilities Project 86. Diversification Project 8
(1) Diversification may be undertaken through 9 VERTICAL INTEGRATION
7. Cost Reduction Project 98. Research & Development Project 99. Quality Improvement Project 910. Employees' Welfare Project 911. Statutory Requirement Project 912. Pollution Control Project 913. Benefits of a capital Project 10
A capital project may be undertaken: By a new entrepreneur By an existing concern
1. Search for investment opportunities by a new entrepreneur
A new entrepreneur wants to achieve certain objectives e.g. to encash opportunity to earn and to grow. He can make a search for investment opportunities through an indepth and systematic study in the following areas:
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1. Existing profitable product lines/industries in the market.
2. In case of input requirement of various existing industries:-
The sources available Constraints being faced in procurement of
resources The financial and qualitative factors involved The impact of following decisions on their
performance:
Make or buyImport substitutionProduct modification with the existing technologyModification in layout of specific facilitiesTechnological improvement
The objective here is to find out any opportunity of undertaking a project to meet out input requirements of one of more companies in the same industry of the others.
3. Scope for reprocessing and recycling of existing products.
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4. Scope for enlargement of domestic market, and an entry into the foreign market in respect of different products.
5. The opportunities of take-over, merger, acquisition, joint venture, etc.
6. Government plans and policies, which may lead to industrial development, change economic environment and change consumption behaviour.
In this connection, the source of information may be:
1. The suggestions of project consultants, financial institutions and companies engaged in the banking and financial service.
2. Trade exhibitions.
3. Project profiles prepared by consultancy firm.
4. Survey reports of government and private agencies, annual research reports of research institutions/agencies and newspapers.
5. Foreign training visits and survey on foreign nationals staying in the country in order to understand their traditions, consumption behaviour, style of living.
6. Suggestions from employees, etc.All these may also throw light on the new technological
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developments, availability of resources, new tastes of consumers and also provide some guidance in respect of assistance available for manufacturing and marketing. The various regulations and policies of government in connection with economic, trade, commercial and other social matters should be gone through in order to ascertain their impact in the evaluation of opportunities.
2. Classification of projects in an existing concern.
An existing commercial concern is interest in the maximisation of wealth of it's shareholders and in seeing that the market price of the shares are constantly appreciated.
In an existing concern, the projects may be broadly classified as:
Capacity Expansion/Augmentation Modernisation (Including replacement) Balancing Facilities Diversification Cost Reduction Research & Development Employees' Welfare Statutory Requirement
Each of the above categories is briefly described as follows:3. Capacity Expansion/Augmentation Project
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The objective here is to increase market share of the company either through penetration into new market, or improving the share of existing ones by supplying the product at reduced cost with latest technological features.
The major benefits of expansion projects are: Economies of large scale Optimum utilisation of existing and new facilities
4. Modernisation Project (including Replacement Project)
The objective is to:
Bridge gap in the existing facilities with the installation of new and most sophisticated machines.
Remove production bottlenecks (such as poor material handling facilities, inadequate storage facilities, etc.)
Add new features and systems to the existing facilities.
Replace old/obsolete assets due to high operation cost and lower productivity.
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The major benefits are: Increase productivity Reduced manufacturing cost Elimination of dependence on the external
suppliers of inputs.
5. Balancing Facilities Project
Balance facilities are those which are required to remove gaps/bottlenecks in the specific operation area to achieve certain targets and standards in respect of production/capacity utilisation, productivity and quality.This may help to achieve the following objectives:
To remove production bottlenecks, thereby increasing capacity utilisation. To bridge the technology gap. To provide for higher flexibility in operation. To make a strong infrastructural base. To improve cost effectiveness. To intensify R&D activities.
6. Diversification Project
The objective of diversification is to enter into new areas (whether related or unrelated to existing operation) to achieve a higher rate of growth.
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(1) Diversification may be undertaken through VERTICAL INTEGRATION
This maybe:
(a) Forward Integration
Forward Integration project involves addition of facilities to commence either manufacture of a new product or a new service with the use oi7through modification in the existing product.
(b) Backward Integration
Backward integration project involves addition of facilities to commence self-manufacturing of raw material and components for the existing product of the company.
The objective is to achieve cost reduction as well as to eliminate dependence on external suppliers of raw material.
7. Cost Reduction ProjectThe objective here is to gain cost leadership in the competitive market. In general, the objective of cost reduction is achieved through modernisation, backward integration projects and so on.
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PROJECT APPRAISAL Detailed Project Report Formulation
Norms for Debt: Equity General Practice
1. Acceptable level by all 1.75:1 Institutions including SFC/SIIC
2. Preferred level 1.5 : 1
A. Capital Intensive Projects (like Fertilizer, Petrochemicals and Aluminium)
Acceptable level 3:1 to 4:1
B. On the basis of cost of project (indicative)
Project Cost
Below Rs. 5 Crores 1:1 to 1.5:1Rs. 5 Crores to 10 crores 1.5 to 2 : 1More than 10 crores 2:1 or more
At present it can be presumed that there is no fixed norm for Debt:Equity. The promoter may take 1.5:1 as the acceptable level and arrange the funds accordingly. With the liberalization in the process and greater autonomy available with the Financial Institutions like IFCI and IDBI and ICICI which are now independent corporate bodies do sanction the assistance on the norms which may be governed by the risks perceived by them.
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NORMS FOR PROMOTER'S CONTRIBUTION
With the recent announcement that the institutions will have to be profitable and its balance sheets should be transparent the institutions have been asked to assess the risk and fix the promoter's contribution accordingly. No fixed norm has emerged so far. The promoter's contributions do vary from 30 per cent to 50 per cent. In general there has been increase in the promoters contribution. All India Institutions are pressing for atleast 40 per cent stake of the promoters. It effectively implies that the debtequity ratio would not be allowed to exceed 1.5:1 in any case. Similar approach is likely to be followed by SFC's/SIIC's.
SEBI which is a developmental and regulatory body has fixed norms for minimum contribution for the promoters if they intend to raise the capital from public. As per SEBI guidelines atleast 25 per cent of the capital is to be subscribed to by the promoters.
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Application for financial assistance under Project Financing Participation Certificates Scheme
(To be used for submission to any or all of the all India financial institutions in respect of a new project or expansion or modernization of an existing unit)
Note :
1. In view of the recent policy changes many of the questions may not be answered in details.2. The institutions have not yet revised the forms. Hence some of the points may appear redundant.
1. GENERALDate of application
1.01 Name of the industrial concern (in block letters)
1.02 Constitution Public/Private Limited Company, Co-op, Society, Partnership/Proprietary concernEnclose:Copy of Memorandum and Articles, of Association/Bye-laws/Partnership Deed
1.03 Date of incorporation/registration
1.04 Date of commencement of business
1.05 SectorPublic sector/Joint sector/private sector/Co-operative sector
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1.06 Name of the business house/group to which the concern belongs and the list of other companies in the same group
1.07 Is the MRPT Act applicable to the company?If so, have you obtained the necessary clearance from the government?
1.08 Location(Indicate Village, Tehsil, District and State)(a) Registered Office(b) Controlling (Head) office(c) Project for which assistance is sought(d) Is it a backward area eligible
for concessional finance from institutions/central subsidy?
1.09 Give brief particulars of the project. Also state whether it is a new/expansion /modernisation/diversification project
1.10 Nature of industry and product Industry Capacity Installed Product Capacity licensed Existing Proposed(Letter of Intent issued)
1.11 Financial assistance applied for (a) Rupee loan (in thousands of rupees)
(b) Foreign currency loan (Rupee equivalent at market rate)
(c) Underwriting .(i) Equity capital(ii) Preference capital(iii) Debentures
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(e) Guarantee of foreign currency/deferred credit(i) Principal(ii) Interest(iii) Total(iv) Guarantee to be Issued in
favour of
1.12 Particulars of foreign currency Rate of Rupeeloan/guarantee applied for exchange equivalent at
Parity Market Parity MarketRate Rate Rate Rate
Currency and amount(i) Loan(ii) Guarantee of foreign currency
2. PROMOTERS
2.01 Give bio-data of main promoters including information on name, address, age, educational qualifications, past industrial/business experience, experience in the particular industry, brief write-up on other companies, if any, promoted by him or with which he is associated, togetner with a copy of the latest balance sheet (to be furnished separately in respect of each of the main promoters).
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2.02 In case the promoter is a limited company, furnish a brief writ4e-up on the activities and past performance of the company and any other expansion programme(s) contemplated.
Enclose:
(i) Certified copies of Memorandum and Articles of Association of the promoted company,
(ii) Audited balance sheets and profit and loss accounts for the past five years of the promoter company(s);
(iii) Copy of agreement(s), if any, entered into among the promoters.
2.03 Provide a list of directors along with a complete list of concerns with which they are connected, as director, partner, proprietor, etc. Also furnish brief write-ups on the above concerns including information on the nature of business and size of turnover, etc.
2.04 Give names of bankers with whom enquiries may be made regarding the applicant concern and its promoters, together with copies of letters addressed to bankers in Form 1.
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PARTICULARS OF THE INDUSTRIAL CONCERN
(Many of the questions in this section are applicable to existing concerns only)
3.01 Give a brief history of the concern including any changes in. names, business management, etc. Also indicate any mergers, reorganization, etc. which took place in the past.
3.02 Provide a list of subsidiaries, showing percentage of holding in each and nature of their business.
3.03 Give particulars of holding company (in the proforma given below), together with a self-explanatory note on the existing activities and its subsidiaries.
Enclose : Copies of audited balance sheets and profit, and loss accounts for last five years of the holding company.
Name of the holding company
Names of Subsidiary companies
Paid-up capital of subsidiary companies as on..........
Percent held by holding company
Equity Pref. Equity Pref.
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3.04 Give names, age and addresses of directors, including wholetime directors, their qualifications, past experience and business and industrial background and existing and proposed shareholdings in the company.
Enclose : Certified copies of:(i) agreement with the Managing Director/whole-
time director, (ii) Approval of the Central Government for
the appointment.
3.05 Enclose certified copies of audited balance sheets and profit and loss accounts for the last five years together with proforma balance sheet and profit and loss account of as recent date as possible.
3.06 In case the assets have been revealed or written off at any time during the existence of the company, furnish full details of such revelation, together with reasons therefor.
3.07 Provide a list of existing key technical and executive staff giving their names, age, qualifications, salaries, length of service with the company and previous experience.
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Furnish number of supervisory, skilled, semi-skilled and unskilled personnel employed in each of the existing plants.
Enclose: Organisation chart showing the lines of authority.
3.08 Give particulars of existing long-term and short-term borrowings as set out in Forms II and III.
3.09 Provide a list of shareholders owning or controlling 5 per cent or more of equity shares, indicating the amount owned and business relationship, if any, with the company. In case of preference shareholders, give a list of the ten largest shareholders. Also give the number of equity shareholders and preference shareholders. Furnish distribution of shareholdings in Form IV.
3.10 Give a note on the company's tax status, viz. the year up to which the company has been assessed for income tax, the estimated unassessed liability, the concessions available and the basis on which provision for tax has been made. Provide details of unclaimed tax benefits, if any.
3.11 Indicate whether the company is regular in crediting its contribution and the contribution of its employees to the "Employees' Provident Fund".
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Please enclose Provident Fund Dues Clearance Certificate from the Provident Fund Authorities.
3.12 Describe manufacturing facilities separately at each plant including:(a) Dates(s) of installation and major
remodelling;(b) Estimated annual capacity of major plant sections and major items of equipment (design capacity and normal capacity with basis for these estimates):(c) Specifications of products manufactured
3.13 Furnish figures of licensed capacity, installed capacity, production and sales (quantities and value) of each major product/product group during the last five years. Give reasons for underutilisation of capacity and significant variations in production and sales, if any.
3.14 Describe the locational advantage of existing plant with respect to supply of raw material, power, water, fuel and labour as also with respect to facilities for transportation, effluent disposal and market,
3.15 Indicate the existing requirement of various utilities and services and the arrangements for their supply.
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3.16 Give destination, physical volume and proceeds of export sales by main product lines in each of the last five years. Also detail the export incentives available to the concern.
3.17 Give details of insurance carried on fixed assets, inventories, etc, showing basis of insurance, names of insurers and types of risks covered.
3.18 Give details of any pending litigation either by or against the company.
3.19 Furnish a detailed note on the R and D activities of the company including information on the nature of R & D activities, total amount of capital expenditure incurred, annual budget, number of scientists/technical personnel employed, list of new products/processes developed and the extent of their commercial exploitation.
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4. PARTICULARS OF THE PROJECT4.01 Describe in details of the project for which
financial assistance is required, indicating whether
it relates to expansion, modernization or setting up
of a new plant.
Enclose : Copy of the project report / feasibility
report, if any.
A. Capacity
4.02 Furnish details of installed capacity and
production as below : (Capacity is arrived at on
the basis of ...... day's working on ...... shift basis)
Product Present installed capacity
Proposed installed capacity
Maximum Production envisaged
(i)(ii)(iii)(iv)4.03 Indicate the section-wise capacities for the major
sections of the plant, along with detailed
calculations. Explain the reasons for
excess/inadequate capacity, if any, in any of the
sections.28
4.04 Give specifications of major products and by-
products, including size and weight and, where
appropriate, chemical and physical properties as
also their industrial uses.
B. Process
4.05 Explain briefly, the technical process proposed to
be employed. Indicate reasons for
adopting/choosing the particular process.
Enclose: Copy of process.
4.06 Has the proposed process ever been tried in the
country? If so, with what results.
C. Technical arrangements
4.07 Explain the technical arrangements made/proposed
for the implementation of the project.
4.08 In case any collaboration is involved, furnish a
brief write-up on the collaborator company
indicating its activities, size and turnover,
particulars of existing plants, other projects in
India and abroad set up with same collaboration,
etc.
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Enclose:
(i) Copies of published brochures highlighting the
activities of the collaborator and balance sheets for
last three years;
(ii) Copy of collaboration agreement;
(iii) Copy of Government approval for the
collaboration;
(iv) Copy of Government approval for availing of the
services of foreign technicians.
4.09 Furnish the particulars of consultants, as below:
(a) name of the consultants (indicate whether Indian
or foreign.)
(b) scope of work assigned to them;
(c) fees payable and the manner in which payable;
(d) brief particulars of the consultants including the
organisational set up, bio-data of senior personnel,
names of directors/partners, particulars of work
done in the past and work on hand.
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Enclose:
(i) Copies of published material on consultants;
(ii) Copy of agreement with consultants;
(iii) Copy of government approval in case of foreign
consultants.
D. Management
4.10 Describe proposed arrangement for executive
management of the concern both during the
construction period and for regular operations
thereafter.
4.11 Give particulars of proposed key technical,
administrative and accounting personnel.
Enclose : Proposed organisation chart indicating
the lines of authority.
E. Location and Land
4.12 Indicate location of plant, requirements of land for
the project and the arrangements made therefor.
Enumerate the locational advantages.
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4.13 Give the following particulars in respect of the land acquired/proposed to be acquired for the project:
(a) Area and cost
(b) Basis of valuation
(c) Mode of payment
(d) When purchased/take on lease
(e) Previous owners and their relationship, if any, to the promoters/directors
(f) Is it industrial land? If not, has it been converted for industrial use?
(g) Type of soil and load bearing capacity
(h) Water table
Enclose:
(i) copy of sale/lease deed;
(j) copy of soil test report;
(k) copy of Government order converting the land into industrial land, if applicable;
(1) location map;
(m) site plan showing the contour lines, the internal roads, power receiving station, railway siding, tube wells, etc.
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F. Buildings
4.14 Explain the arrangements made/proposed for
construction the buildings. Furnish particulars of
buildings as per Form V.
4.15 Give the following particulars of architects:
(a) Name of architect/firm;
(b) Scope of work;
(c) Fees payable and manner in which payable;
(d) Past experience of the architects;
(e) Bio-data of senior personnel in architects' firm. Enclose:(i) Copy of agreement with architects; (ii) Copy of published write-up/brochure on the architect.
G. Plant & Machinery
4.16 Explain the basis of selection of equipment for the
project. Furnish list of imported and indigenous
plant and machinery acquired/to be acquired for
the project, along with detailed specifications, etc.
as per Forms VI and VII. Enclose : Layout of the
pant and machinery indicating the flow of
material.
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H. Raw materials
4.17 Provide information as per Form VIII indicating
the requirement of the raw materials, components,
chemicals, etc.
4.18 Axe there any price or distribution controls on any
of the items listed above? If so, give details.
4.19 Indicate the arrangements made/proposed for
obtaining the raw materials/chemicals which are in
short supply or to be imported.
4.20 In case of mining lease, provide:
(a) location and area of the mineral bearing lands;
(b) particulars of minerals;
(c) principal terms of the mining lease;
(d) estimated future reserves and quality of
reserves for each of the minerals and basis thereof;
(e) means of transport from the mines to the
factory.
Enclose :
(i) Copy of the agreement for mining lease;
(ii) Expert's report regarding the reserves.
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I. Utilities
4.21 Power: Furnish the following details:
(a) Source of power and supply voltage
- purchased- own generation- stand-by arrangements
(b) Maximum demand
(c) Connected load
(d) Peak hour requirements
(e) Contracted load
(f) Power tariff
(g) Cost of power per annum at maximum
capacity utilisation (give calculations)
Enclose:
(i) Copy of letter of sanction for power;
(ii) Copy of agreement with Electricity Board;
(iii) Copy of electrical la)'out of the plant.
4.21 A Conservation of Energy (for Hotel Projects only)
(a) Indicate the efforts proposed for utilising
alternate sources of energy particularly the
following:
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(i) For improving power factor
(ii) For improving heating efficiency in kitchens,
toilets, etc.
(iii) Use of solar energy for low temperature heating
requirements and whether siding/orientation of the
hotel buildings has been made to optimise the use
of solar energy.
(iv) For bringing down air-conditioning loads.
(v) For optimizing illumination from lighting
fixtures.
(vi) For better power-load management, including for
evening-out peak demand requirements and
cutting down non-essential loads,
(vii) For generally cutting down losses in the use of
various utility services namely, power, water and
steam and maximum and efficient utilization of
waste heat.
(b) Indicate any other measures considered necessary
or proposed to be taken in the context of energy
conservation.
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(c) Give particulars of the monitoring system to acquire the desired economy in use of energy.
(d) Indicate the savings achieved/proposed to be achieved by utilising alternative source of energy.
A list of 16 items coming under the following 3 renewable energy systems, which are eligible for concessional financial assistance from financial institutions, is enclosed:
(i) Solar heaters for industrial applications
(ii) Wind-mill operated water pumps,
(iii) Manufacture and installation of systems based on bio-mass such as agricultural wastes, etc.
List showing items coming under alternate sources of
energy
1. Flat plate solar collectors;
2. Concentrating and parabolic type solar collectors;
3. Solar cookers;
4. Solar water heaters and systems;
5. Air/Gas/Fluid heating systems;
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6. Solar crop dryers and systems;
7. Solar refrigeration, cold storages and
air-conditioning systems;
8. Solar stills and desalination systems;
9. Solar pumps based on solar thermal and solar
photovoltaic conversion;
10. Solar power generating systems;
11. Solar photovoltaic modules and panels for water,
pumping and other applications;
12. Wind mills and any specially designed devices
which run on wind mills;
13. Any special devices including Electric Generators
and pumps running on wind energy;
14. Bio-gas plants and bio-gas engines;
15. Agricultural and municipal waste conversion
devices producing energy;
16. Geo ocean thermal energy.
4.22 Water : Give details on :
(a) Requirement of water, separately for - calculating,
make-up, process, boiler feed, drinking, cooling.
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(b) Sources of water arrangements proposed and water charges payable
(c) Capacities of the tanks, reservoirs(d) Describe water treatment arrangements proposed. Enclose :(i) Layout for the water system:(ii) Copy of letter of sanction of water by
municipal/local authorities, where applicable; (iii) Copy of water analysis report,
4.23 Steam : Details the following:
(a) Steam requirements and the steam balance.
(b) Capacity and type of the boiler with detailed specifications.
(c) Steam and energy balance diagrams.
(d) Total energy generated/purchased (converted into MK Cal); theoretical requirements of energy (in MK Cal) at the various consumption stations and expected actual requirement at these stations.
(e) If alternate processes are available, comparative energy consumption figures for the various processes. If the project of energy intensive, possibility of choosing alternative process in order to make the project less energy intensive.
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(f) Steps proposed to be taken by the company to improve energy efficiency and reduce energy losses (such as power factor improvement, power load management, optimizing illumination, waste heat utilization, etc.)
(g) Scope for usage of solar/other renewable source of energy.
(h) Any other measures contemplated in the direction of energy conservation and management. Enclose : Layout of the steam system
4.24 Compressed air, fuel etc. Provide information on:
(a) Requirement
(b) Sources
(c) Arrangements proposed
(d) Cost at site with detailed calculations
Enclose:
(i) Layout for compressed air, fuel etc.
(ii) Copies of letter of allotment of coal furnace oil
from the concerned authorities.
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4.25 Transport: Furnish information on:
Arrangements proposed for carrying raw materials
and finished goods, provision for own trucks,
railway siding, etc. and arrangements with private
truck operators.
J. Effluent
4.26 Furnish details of the nature of atmospheric, soil
and water pollution likely to be created by the
project and the measures proposed for control of
pollution. Indicate whether necessary permission
for the disposal of effluents has been obtained.
Enclose: Copy of approval from concerned
authorities for the proposed arrangements. K.
Labour
4.27 Give estimates of total requirements and
availability of skilled and unskilled labour and
plans for training of personnel. Briefly describe
the manpower development programme.
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L. Quarters and Labour Housing4.28 Furnish existing and proposed arrangements for
housing the staff and workers In the following form:
No. of quarters Floor area Unit cost Total costExisting Proposed Existing Proposed Existing Proposed Existing Proposed Amount
proposed to be met out of Industrial Housing Scheme
(sq.m) (Rs.)
Other Senior Secutives
Other Executives
Supervisors
Labour
Total
M. Schedule of implementation
4.29 Describe how the design engineering, erection, Installation and commissioning of the project will be -carried out. Also indicate the progress made so far In the implementation of the project and furnish the schedule of Implementation as follows:
Commencement Completion (Month & year) (Month & year)
(i) Acquisition of land
(ii) Development of land
(iii) Civil works ... factory building, machinery foundation, auxiliary
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building, administrativebuilding, miscellaneousbuildings
(iv) Plant and Machinery
Imported Placement of OrderDelivery at site
Indigenous Placement of OrderDelivery at site
(v) Arrangement for power
(vi) Arrangement for water
(vii) Erection of equipment
(viii) Commissioning
(ix) Procurement of raw materials and chemicals
(x) Training of personnel
(xi) Trial runs
(xii) Commercial production Enclose : PERT Chart
N. Other Projects of the-concern4.30 Give details of any other new/expansion projects
which are under implementation or which the company/promoters propose to implement, giving the estimated cost, means of financing and the present status.
43
5. COST OF THE REPORT
5.01 Furnish estimate of cost of project under following heads (details may be furnished as per Form IX). Also provide the basis of cost estimate (such as quotation, orders placed etc.) bringing out the built-in provision for cost escalation, if any.
(In thousands of rupees)
Rupee Cost
Rupee equivalent of foreign exchange cost
Total Cost
(1) Land and site development(2) Buildings(3) Pant and machinery
- Imported- Indigenous
(4) Technical know-how fees(5) Expenses on foreign
technicians and training of Indian technicians abroad
(6) Miscellaneous fixed assets(7) Preliminary and
preoperative expenses(8) Provision for contingencies(9) Margin money for working
capital
Total
44
6. MEANS OF FINANCING(In thousands of rupees)
6.01 Means of financing envisagedShare capital.......Equity
.......Preference
Rupee loans
Foreign currency loans
Debentures
Internal cash accruals
Others (specify) __________
__________
(Give details of the means of financing envisaged and the proposals for raising share capital and loans in Form X and Form XA respectively)
6.02 In case internal accruals are taken as a source of finance, explain the basis of estimation of internal accruals by means of a suitable statement.
6.03 Briefly describe the arrangements so far made for raising the finance and the proposed arrangements.
Enclose : Copies of letters sanctioning assistance
45
6.04 Indicate sources of foreign exchange and arrangements, if any, made for obtaining foreign exchange.
6.05 Indicate sources from which expenditure already incurred has been financed, in Form XB.
6.06 Promoter's contribution to the project cost Amount Rs...`
As per cent of total cost..........
6.07 List of persons/firms who would be contributing to the promoters share of the capital and the respective amounts.
6.08 Give details of security proposed to be offered for loan and/or guarantee for deferred payments on plant and machinery or guarantee for foreign currency loans.
6.09 In case you propose to offer a bank guarantee instead of mortgage of fixed assets, specify the name of the bank and enclose copy of letter from the bank indicating its willingness to provide the guarantee.
46
7. MARKET AND SELLING ARRANGEMENTS
Enclose:Copy of market survey report, if any, conducted by the company or independent consultant.
7.01 Give brief notes on the products, their major uses, scope of the market, possible competition from substitute products, etc. Indicate the special features (regarding quality, price, etc.) of your products which would result in consumer preference for your products in relation to competitive products.
7.02 Furnish estimates of the existing and future demand and supply of the products proposed to be manufactured.
7.03 Give an assessment of likely competition in the future and indicate any special features of the project which may enable it to meet the competition.
7.04 Provide information regarding export possibilities and the nature of competition to be faced in foreign countries; also give comparative data on the manufacturing costs and prices (domestic as well as export) prevailing in selected competing countries.
47
7.05 If there are any export commitments assumed by the company as part of the Government requirements, indicate the arrangements proposed for meeting the same and the export incentives available.
7.06 Give the international CIF, FOB prices and landed cost of the proposed products.
7.07 List of principal customers and particulars of any firm arrangements entered into with them.
7.08 Particulars of Government controls, restrictions, etc. if any, on the sale price, distribution, import, export, etc. in respect of the products proposed to be manufactured.
7.09 Indicate whether sales are to be made directly by the company or through distributors of selling agents. If sales are proposed to be made directly, provide information on the nature of the proposed selling organisation. Give particulars of proposed selling arrangements both in India and abroad and commission proposed to be paid. Give a brief note on the selling agent's organisation.
Enclose : Copy of the agreement with selling agent.
48
7.10 In case the company proposes to have any sole-selling agency for any of its products, furnish the following particulars:
(a) Name of the selling agent
(b) Remuneration
(c) Special advantages/reasons for the appointment of sole selling agents
(d) Relationship of the directors of the company with the directors/partners of the sole-selling agents.
(e) Past experience in handling the same/similar products and financial position of the sole-selling agents.
(f) Storage facilities available with the sole-selling agents and the adequacy of the facilities.
7.11 Give details regarding the trend in prices during the last five years. If the prices are controlled by the Government or on a voluntary basis, indicate the basis on which the prices are fixed.
7.12 In case of agro-based/agriculture input industries, indicate in detail the company's scheme for educating the farmers to use the product/to grow the produce required.
49
8. PROFITABILITY AND CASH FLOW
8.01 Give estimates of cost of production and working results for the first five years of operation as per Forms XI and XII respectively. Basis for all the calculations should be shown separately.
Note : Inc case of expansion/diversification of existing companies, two sets of profitability statements may be prepared - (1) for the project and (2) for the existing operations only.
8.02 Based on the estimates of working results in Form XII, provide a cash flow statement for the company as a whole, for five operating years of the project in Form XIII.
8.03 From the foregoing statements, provide a projected balance sheet for ten operating years for the company as a whole,
8.04 At what capacity will the plant break-even? Give detailed calculations.
50
9. ECONOMIC CONSIDERATIONS
Give prices of competing import/export products giving a break-up as FOB, GIF, landed cost (including import duty) and selling price.
Provide detailed explanation for differences in selling prices of the products and those of imported goods with quantitative data on differences in cost of production (such as scale of operation, differences in costs of inputs and various local duties and taxes).
Give the international/FIF/FOB price of all inputs which can either be imported/exported.
Explain in detail the various duties, taxes and
incentives;
(a) Excise duty
(b) Export duty
(c) Export assistance
(i) replenishment licence
(ii) duty drawback
(iii) cash subsidy
(iv) any other (specify)
51
Give brief write-up on the economic benefits to the country in general and the region in particular, on account of the proposed project.
How far does the unit contribute to the establishment of ancillary industries in the region?
10. GOVERNMENT CONSENTS
10.1 Indicate whether the various licences/consents required for the project, have been obtained from the respective authorities. Give details as follows:
Date of Present status issue if not already
issued
(a) Letter of intent
(b) Industrial licence
(c) Capital Goods clearance
(d) Import licence
(e) Foreign exchange permission
(f) Approval of technical/financial collaboration
52
(g) Clearance under MRTP Act
(h) Consent of the ControllerCapital Issues,
(i) Any other (Specify)
Enclose : Copies of licences/consents, etc. received
10.2 Specify any special conditions attached to the licences/consents and the undertaking given by the company in connection with them.
11. DECLARATION
We hereby declare that the information given hereinbefore and the statements and other enclosed are, to the best of our knowledge and belief, true and correct in all particulars.
SignatureStation Name & DesignationDate: Name of the concern
53
FORM I
FORM OF LETTER ADDRESSED TO THE BANKER OF THE APPLICANT CONCERN, PROMOTER, DIRECTOR, TO BE FORWARDED TO THE......
(NAME OF THE FINANCIAL INSTITUTION)
(This letter should, in the case of applicant or any other concern, be written on printed letterhead and signed by a person or persons authorised to operate the account with the banker. It should be forwarded to the bank, endorsing a copy to .......(name of financial institution)
Date :...........
The Manager..............................................
(Name and address of the bankers to be inserted here)
Dear Sir,
We hereby authorise you to discuss with the ..... (Name of the financial institution) to which we are making an application for financial assistance, our affairs or any matter relating thereto, and to disclose such information as the ..............Name of financial institution) may request of you or as you may consider fit to disclose.
54
"We also authorise you to disclose to .............(Name of financial institution) such information as it may require on a continuing basis".
Yours faithfully,
55
FORM- IIPARTICULARS OF EXISTING DEBENTURES AND LONG-TERM SECURED
LOANS AS ON………………………..A. DEBENTURES
Date of Debenture Trust Deed
Purpose for which debentures were raised
Security Charged and nature of charge
Trustees for debenture holders
Original amount of issue
Amount outstand-ing
Rate of Interest
Amortisation schedule
Conversion or other special provisions
Main holders of debentures
Restrictive covenants in regard to dividend, raising of loans, creation of further charges, etc.
1 2 3 4 5 6 7 8 9 10 11
Contd...2.B. LONG-TERM SECURED LOANS:
56
Name of the Institution from whom loan raised
Purpose of the Loan
Original Amount
Amount Outstanding
Rate of Interest
Amortization Schedule
Security Charges and nature of charge
Date of creation of charge
Defaults, if any, in the payment of interest and/or principal
Restrictive covenants in the security documents in regard to dividend, raising of loan, creation of further charges
1 2 3 4 5 6 7 8 9 10
FORM- IIIPARTICULARS OF EXISTING CASH CREDIT/OVERDRAFT ARRANGEMENTS AS ON............................
57
Name of the Bank
Nature of Facility
Maximum Limit
How and when repayable
Particulars of Security
Stipulated Margin Percentage
Particulars of guarantee, if any
Rate of Interest
Value of Security and drawing power
Amount outstanding on the date of application
Whether the bank has negative charge on fixed assets
1 2 3 4 5 6 7 8 9 10 11
58
FORM IVDISTRIBUTION OF SHAREHOLDINGS
(for existing companies only)(In thousands of rupees)
Equity Preference Total1. Indian promoters
(Name of major groups(i)(ii)(iii)(iv)2. Foreign, collaborators3. State Government4. Central Government5. State Industrial Development
Corporation (Specify)6. Financial institution
(i) IDBI(ii) IFCI(iii) ICICI(iv) LIC(v) UTI(vi) Others (Banks etc.) ______
Total ______In respect of shares issued for consideration other than for cash, furnish the following particulars:
Name of the party
No. and value of shares issued
Date of issue
Consideration for which issued
59
FORM-V
PARTICULARS OF FACTORY AND NON-FACTORY BUILDING(Details of all buildings / civil constructions included under item ‘2-Buildings’ in Form IX may be included here
Built-up Area In case contract is awarded
Des
crip
tion
of
the
Bui
ldin
g
Type
of
Con
stru
ctio
n
No.
of
Flo
ors
Len
gth
Bre
adth
Ave
rage
hei
ght o
f ea
ch f
loor
Tota
l flo
or a
rea
Rat
e pe
r sq
.m.
Est
imat
ed C
ost
Nat
ure
of
cont
ract
or
Dat
e of
con
trac
t
Am
ount
of
cont
ract
Exp
ecte
d da
te o
f co
mpl
etio
nR
emar
ks (
indi
cate
th
e re
ason
s fo
r hi
gher
low
er
cons
truc
tion
cost
1 2 3 4 5 6 7 8 9 10 11 12 13 14
60
FORM VIPARTICULARS OF MACHINERY IMPORTED / TO BE IMPORTED UNDER THE PROJECT
Sr.N
o.
Des
crip
tion
wit
h bo
ard
spec
ific
atio
n
Nam
e of
man
ufac
ture
r
Cou
ntry
of
Ori
gin
Whe
ther
ord
er p
lace
d or
not
Dat
e of
pla
cem
ent o
f or
der
(act
ual /
exp
ecte
d)
Exp
ecte
d da
te o
f de
live
ry a
t In
dian
por
t
Por
t of
Lad
ing
FO
B V
alue
Bas
is o
f va
luat
ion
(qu
otat
ion
(giv
e da
te)
orde
r, pl
ace
agre
emen
t ent
ered
into
, etc
.)
Insu
ranc
e an
d F
reig
ht (
Rs.
)
Impo
rt D
uty
perc
ent (
Rs.
)
1 2 3 4 5 6 7 8 9 10 11 12
A. ALREADY IMPORTED(i) Main plant and equipment(ii) Miscellaneous fixed assets
B. PROPOSED TO BE IMPORTED(i) Main Plant and equipment(ii) Miscellaneous fixed assets
FORM-VII61
PARTICULARS OF MACHINERY ALREADY ACQUIRED / PROPOSED TO BE ACQUIRED FROM INDIGENOUS SOURCES UNDER
THE PROJECT
Sr.No. Description
including
broad
Specification
Name of
Manufacture
/ Supplier
Whether
order
placed
or not
Date of
placement
of order
(actual/exp
ected)
Expected
date of
delivery
Ex-
works
F.O.R.
price
Basis of valuation
(quotation (give
date), order placed,
agreements entered
into, etc.)
Remarks
1 2 3 4 5 6 7 8 9
A. ALREADY ACQUIRED(i) Main plant and equipment(ii) Miscellaneous fixed assets
B. PROPOSED TO BE ACQUIRED(i) Main plant and equipment(ii) Miscellaneous fixed assets
62
FORM –VIIIREQUIREMENT OF RAW MATERIALS, CHEMICALS AND COMPONENTS
(at maximum capacity utilization)
Sr. No.
Name of material / chemical component
Specifi-cation
Whether imported / indigenous
Require-ment per tone of final product
Total annual requirem-ent
Unit cost of Material
Total Cost
Basis of cost estimate
Sources of supply (indicate names and addresses of principal trade suppliers who have been contracted / agreed to supply
Unit consumption guaranteed by the collaborator / technical consultant
1 2 3 4 5 6 7 8 9 10 11
Enclose:(i) Copies of letters from suppliers agreeing to supply the company’s requirements(ii) Copies of import licence for items to be imported.
63
FORM-IX
ESTIMATED COST OF THE PROJECT(In thousand of rupees)
Rup
ee C
ost
Rup
ee e
quiv
alen
t of
fore
ign
exch
ange
cos
t
Tota
l
Rup
ee C
ost
Rup
ee e
quiv
alen
t of
fore
ign
exch
ange
cos
t
Tota
l
(6)
+ (
3)
1 2 3 4 5 6 7
1. Land and site development:(a) Cost including conveyance charges of .... Hectares of freehold land acquired/proposed to be acquired at the rate of Rs......per hectare.
(b) Premium payable on leasehold land And conveyance charges (...hectares at the rate of Rs, .... Per hectare)
(c) Cost of levelling and development of hectares ......of land at Rs. ...... per hectare
64
1 2 3 4 5 6 7
(d) Cost of laying roads:(i) approach road connecting
the factory site to main road ... rm of .... (type of construction) at Rs. ... per rm.
(ii) Internal roads for the factory .... Rm of ... (type of construction) at Rs.....per rm.
(e) cost of fencing/compound wall... rm of ...... (type ofconstruct! on) at Rs.....per rm.
(f) Cost of gates (No, of gates ....)
2. Buildings;(a) Factory building for the main
plant and equipment
(b) Factory buildings for auxiliary services like steam supply, water supply, laboratory, workshop etc.
(c) Administrative buildings
(d) Godowns, ware-houses and open yard facilities
(e) Miscellaneous non-factory buildings like canteen, guest houses, time office, excise house, etc.
65
1 2 3 4 5 6 7
(f) Quarters for essential staff
(g) Silos, tanks, wells, chest, basin, cisterns, hoopers, bins and other structures which are necessary for installation of plant and equipment and which may be constructed in RCC and such other structural civil engineers materials
(h) Garages(i) Cost of sewers, drainage, etc.(j) Civil engineering works
not included above(k) Architects' fee
3. Plant and Machinery(i) Imported
(a) FOB Value(b) Shipping freight and
Insurance... per cent of (a)](c) Import duty(d) Clearing, loading, unloading
and transport charges to factory site
(ii) Indigenous(a) FOR cost(b) Sales tax (per cent), Octroi
(per cent) and other taxes, if any
(c) Railway freight and transport charges to site
66
1 2 3 4 5 6 7
(iii) Machinery stores and spares(iv) Foundation and installation
charges on imported and indigenous machinery.
4. Technical know-how fees and expenses on drawings etc, payable to technical collaborators
5. Expenses on foreign technicians and training of Indian techniciansabroad:.(a) Foreign technicians(b) Indian technicians (.... Persons
for.....months)
6. Miscellaneous fixed assets:(a) Furniture(b) Office machinery and equipment(c) Miscellaneous tools and
equipment including erection tools
(d) Cars, trucks, etc (.... Cars; ....(e) Railway siding(f) Equipment (including cost of
installation, cabling etc. fordistribution of power and light for factory and colony.
67
1 2 3 4 5 6 7
(g) Equipment and piping for supply and treatment of water (including cost of installation).
(h) Equipment and piping for distribution of steam, air, etc. (which do not form part of the main plant and machinery).
(i) Laboratory equipment (j) Workshop equipment (k) Fire fighting equipment(1) Effluent collection, treatment
and disposal arrangement(m) Miscellaneous fixed assets
7. Preliminary and capital issue expenses:(a) Brokerage and commission on
capital (.... Per cent of Rs.....lakhs)
(b) Other capital issue expenses (legal, advertisement, printing, stationery etc.)
(c) Other preliminary expenses (company flatation and other initial expenses)
68
1 2 3 4 5 6 7
8. Pre-operative expenses:(from ..... (date) to date ofcommencement of commercial production)(a) Establishment(b) Rent, rates and taxes(c) Travelling expenses(d) Miscellaneous expenses(e) Interest and commitment
charges on borrowings (give details of calculations).
(f) Insurance during construction including erection insurance
(g) Mortgage expenses (stamp duty, registration charges and other legal expenses) (... per cent of loan of Rs......lakhs)
(h) Interest on deferred payments, if any
9. Provision for contingencies(Details as per Form IX A)
10 Margin money for working capital;(Details as per Form IX B)
_________Total ________
69
FORM IX AESTIMATES OF CONTINGENCY ESCALATION
PROVISION
Item of Cost Considered Reasons for considering the cost of
firm
Firm (Rs. In Lakhs)
Non(-) firm (Rs. In lakhs)
1 2 3 41. Land2. Buildings3. Plant & Machinery
- Imported- Indigenous- Stores & Spares- Foundation & Installation
4. Technical know-how fees etc.
5. Expenses on foreign technicians and training of Indian technicians abroad
6. Miscellaneous fixed assets7. Preliminary and capital
issue expenses8. Pre-operative expenses
Total
Contingency provision and the basis for calculations.
70
Form IX-BMARGIN MONEY FOR WORKING CAPITAL
1st year 2nd year 3rd year 4th yearIt
ems
No.
of
mon
ths
requ
irem
ents
Ban
k M
argi
n av
aila
ble
%
Am
ount
Am
ount
of
bank
fin
ance
Mar
gin
mon
ey r
equi
red
Am
ount
Am
ount
of
Ban
k fi
nanc
e
Mar
gin
mon
ey r
equi
red
Am
ount
Am
ount
of
Ban
k fi
nanc
e
Mar
gin
mon
ey r
equi
red
Am
ount
Am
ount
of
bank
Fin
ance
Mar
gin
mon
ey r
equi
red
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15(i) Indigenous raw materials/components(ii) Imported raw materials/components(iii) Consumable stores(iv) Wages & salaries(v) Cost of fuel, light and. power, taxes, insurance, rent, etc. (vi) Cost of repairs and maintenance (vii) Packing and sales expenses [other than salaries and wages on sales staff which should be included under (iv) above
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
71
(viii) Stock of finished goods at costexcluding depreciation (to be held forthe period between production and realisation-of sale proceeds)
(ix) Stock of goods-in-process (cost ofproduction,-excluding depreciationduring the period taken for onecomplete cycle-i.e. from raw material to the finished goods stage)
(x) Outstanding debtors (xi) Other items of working capital, if any
(Excise duty payable on one month's sale, etc) Less: Trade credits available on raw
materials and consumables. Networking capital required
Note: (1) The information may be provided for the initial years until the unit reaches maximum capacity utilisation.
(2) The amounts given here shall agree with the figures in the profitability statement as well as the cash flow statements
72
FORM XMEANS OF FINANCING
(in thousands of rupees)
In rupees
In rupees equivalent of foreign exchange
Total
(1) (2) (3)
1. Issue of ordinary shares2. Issue of preference share
capital (....per centredeemable after.....years butbefore .... Years)
3. Issue of secured debentures (State terms-rate of interest, date of redemption and any other rights attached)
4. Secured long-term and medium-verm loans
5. Unsecured loans and deposits (indicate by means of foot note the source, nature of security, rate of interest,amortization schedule and any other special terms of loans already availed of)
73
6. Deferred payments (including interest) to machinery suppliers (less amounts due upto start of production)
7. Capital subsidy from Central Government
8. Internal cash accruals
9. Any other source (specify)
Note : In case total of column 2 less than the total foreign exchange cost shown in Form IX, indicate clearly the sources of meeting additional foreign exchange requirements.
74
FORM X-APROPOSALS FOR RAISING SHARE CAPITAL,
LOANS AND DEBENTURES
Subscription / Underwriting of share capital
Rupees Loans
Foreign Currency Loans
Debentures
Remarks
Equity Pref.(1) (2) (3) (4) (5) (6)
Subscription(a) Indian Promoters
(i) In cash(ii) For consideration other
than cash specify)(b) Foreign collaboration
(i) In Cash(ii) For consideration other
than cash (specify)(c) State Government(d) State Industrial
Development Corporation (SIDC)
75
Underwriting/Loans: (i) IDBI(ii) IFCI(iii) ICICI(iv) LIC(v) UTI(vi) SFC (specify) (vii) SIDC (specify) (viii) Commercial banks(ix) (specify)(x) Insurance Brokers
________Total ________
76
FORM X-BSOURCES OF FUNDS IN RESPECT OF EXPENDITURE ALREADY INCURRED
Amount (in thousands of rupees)
Rate of interest payable
Other terms and conditions of loans / deposits etc.
1. Share - equity- preference
2. Long/Medium term loans from banks
3. Loans from financial institutions specify)
4. Loans/Deposits from promoters, directors, friends, etc.
5. Public deposit
6. Any other source (specify)
77
FORM XIESTIMATES OF COST OF PRODUCTION
(The statement should be prepared for 5 years)(In thousands of rupees)
Year ending 19... 19... 19... 19... 19...
Raw materials, chemicals, componentsand consumable stores1.2.3.4.5.6.(a) Total material cost
UtilitiesPower Water Fuel
(b) Total utilitiesLabour and plant overheadsWagesFactory supervision salariesBonusProvident fund
(c) Total labourRepairs and maintenanceLightRent and taxes on factory assetsInsurance on factory assetsMiscellaneous factory expensesContingencies
(d) Total factory overhead(e) Estimate of cost of manufacture (a+b+c+d)Note : Indicate the basis for(a) wastage for raw materials, and (b) rejection rate for finished products
78
FORM XIIESTIMATES OF WORKING RESULTS
(The statement should be prepared for a period of 5 years)(In thousands of rupees)
Year ending19... 19... 19... 19... 19...
(a) Cost of production as
per statement In Form XI
Administrative expenses
Administrative salaries
Remuneration of directors
Professional fee
Light, postage, telegrams
and telephone, office supplies
(stationery, printing etc,)
Insurance and taxes on
office property ....
Miscellaneous
(b) Total administrative, expenses
(c) Total sales expenses
(d) Royalty and non-how payable
(e) Total cost of production (a+b+c+d)
(f) Expected sales (As per statement in
Form XII-A
79
19.. 19... 19... 19... 19...
(g) Gross profit before interest(f-e)
Financial expense
Interest on terms loans.
Interest, on borrowings for working
capital
Guarantee commission
(h) Total financial expenses
(i) Depreciation
(j) Operating profit (g-h-i)
(k) Other income, if any (Give details)
(1) Preliminary expenses written off
(m) Profit/loss before taxation (j-k-l)
(n) Provision for taxation
(o) Profit after tax (m-n)
Less: Dividend on : Preference capital
: Equity capital
(with rate)
(p) Retained profit
Add: Depreciation
Preliminary expenses written off
NET cash accruals
Note : Detailed workings shall be providedfor calculation of depreciation(straight-line and income taxmethod), interest, taxation, etc.
80
FORM XII-AFSTIMATES OF PRODUCTION AND SALES
(Details may be furnished separately for each product and until the plant reaches maximum capacity utilisation)
Product Product Product1st
Year2nd
Year3rd
Year4th
Year1st
Year2nd
Year3rd
Year4th
Year1st
Year2nd
Year3rd
Year4th
Year
1. Installed capacity (quantity perDay/annum)
2. No. of working days3. No. of shifts4. Estimated production per day (quantity)5. Estimated annual production (quantity)6. Estimated output as percentage of
plant capacity 7. Sales (quantity) (after adjusting stocks) 8. Value of sales (in thousand of Rs.)
Unit selling price - product/Price (Rs)1.2. 3.
Note : Production in the initial period should be assumed at a reasonable level of utilisation of opacity increasing gradua.ly to attain full capacity in subsequent years.
81
FORM XII-BCALCULATION OF WAGES AND SALARIES AT MAXIMUM PRODUCTION
Number Average Monthly Salary
Total Annual Salary
1. Factory wages and salaries(a) Workers
Skilled workersSemi-skilled workersUnskilled workersCasual workers
_________________________________Total _________________________________
(b) Factory supervisionCategory Salary Number Average Total
Scale monthly annualsalary salary
_________________________________Total _________________________________
2. Administrative sales staffCategory Salary Number Average Total
Scale monthly annualsalary salary
(a) Administrative staff ........... ........... ........... ...........Total administrative staff........... ........... ........... ...........
(b) Sales staff ........... ........... ........... ...........Total sales staff ........... ........... ........... ...........
_________________________________Total _________________________________
FORM XIII CASH FLOW STATEMENT
(This statement should be prepared for a period of 5 operating years)
82
(In thousands of rupees)Construction Operating yearsPeriodHalf 19... 19... 19... 19... 19...yearly
Sources of Funds1. Share issue2. Profit before taxation with interest added back3. Depreciation provision for the year4. Development rebate reserve5. Increase in secured medium and long-term borrowings for the projects6. Other medium/long-term loans7. Increase in unsecured loans and deposits8. Increase in bank borrowings for working capital9. Increase in liabilities for deferred payment (including interest) to machinery suppliers)10. Sale of fixed assets 11. Sale of investments12. Other income (indicate details)
_______Total (A) _______
Half 19... 19... 19... 19... 19...yearly
Disposition of Funds
83
1. Capital expenditure for theproject.
2. Other normal capitalexpenditure
3. Increase in Working Capital
4. Decrease in securedmedium and long-term borrowings... all-India Institutions... SFCS... Banks
5. Decrease in unsecured loansand deposits.
6. Decrease in Bank borrowingsfor working capital
7. Decrease in liabilities fordeferred payments (includinginterest) to machinery suppliers
8. Increase in investments inother companies
9. Interest on term loans10. Interest on bank borrowings
for working capital.11. Taxation12. Dividends : equity
: Preference
Project Feasibility Study
Some investment proposals pass through the stage of
84
checking out the feasibility. Large projects usually need a feasibility test to be carried out before a handsome amount is committed. The strategic content in such projects is high, but the availability of relevance of internal data is less.
Introduction
Project feasibility is a test where the prima facie viability of the investment is evaluated. Evaluation is based on secondary but comprehensive data. Rough estimates based on others' experience form the basis of the viability check in the project feasibility report. There are basically three types of feasibilities evaluated in the project feasibility report, namely, (a) market feasibility, (b) technical feasibility, and (c) financial feasibility. When projects are evaluated by government or government agencies, economic and social feasibility is also considered. Market feasibility is carried out in detail at this stage. Technical feasibility and financial feasibility are less emphasised at this stage.
Market Feasibility
Products whose sales potential is high are less risky to invest in. A market feasibility study aims at assessing the sales potential of a proposed product.
The approach for conducting market feasibility study
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will vary depending upon the type of proposed product. In the case of a novel product idea (a product is novel, if the same or similar product is not available in the market anywhere in the world), the market feasibility check has to be based on creative judgement and wishful thinking. At most, indicators of buyer behaviour (in terms of their response to a 'new' or 'dream' product) are taken into account for estimating the potential demand for the product.
If a proposed product is-new in an economy, but has been successfully marketed in some other economy, then its market feasibility is assessed through a meaningful comparison of some broad economic and cultural indicators in the two economies. Each economy is likely to experience an almost identical buying pattern and preference for products, if the economic indicators are comparable. Cultural differences should be adjusted before drawing conclusions about the demand potential. The per-capita incomes, income disparity levels, the pattern indicating shifts in choice for consumption, literacy levels and other economic factors can indicate the potential of demand for a particular proposed produce.
If the proposed project is for an addition to the capacity existing in the economy, then the task of the market feasibility study will be different. A historical data analysis and study of factors, which influence consumption trends, become essential in such cases.
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The following discussion is centered around the market feasibility study for a product which is already selling in the market. It is divided in 5 points: 1) A study of general economic factors and indicators2) Demand estimation3) Supply estimation4) Identification of critical success factors5) Estimation of the demand-supply gap
General Economic Indicators
The demand potential for any product is likely to have some kind of association with a few economic indicators. A change in demand and a change in one particular or some economic indicators may take place simultaneously, or with lead or lag. Some of the important economic indicators include gross domestic product, per capita income, income disparity, rate of urbanisation, population growth rate, literacy rate, government spending and money supply.
For example, the per capital income, especially of the upper middle class has exploded the demand for a car in India in the 90's. The demand for consumer durable goods like white goods and electronics is also linked with income trends.
Demand EstimationProjection of demand is the most important step in a project feasibility study, Salient points related to
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demand estimation are briefly enumerated below: The end-user profile The study of influencing factors Regional, national and export market potential Infra-structure facilities which may facilitate
or constrain demand Demand forecasting.
Different end-user profile: A product may have different uses and different end-users. The total demand for the product is made up of different end users. These different market segments may not be interlinked. For example, the demand for cement can be divided into two broad categories, namely housing, office maintenance and rehabilitation activities, and infrastructure projects such as irrigation, canal, railways, road and ports. The scope of alternative usage should also be assessed. In the case of plastic, a whole new market of packing is opening up with even newer application, which may affect, and in fact has already affected, the tinplate-packaging industry. In the case of cement, end-users are also classified on the lines of government and non-government demand, as well as urban and rural demand.
Influencing factors : Product demand may have influencing factors and they must be assessed. The demand for a product is a derived demand. Demand for tyres depends upon the sale of automobiles, fertiliser sales are dependent on monsoons, and sales of steel and
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industrial growth are associated with each other. Those factors must be forecast.
Market Potential: The regional, national and export market potential of a product may be different due to many factors. A study of national demand may not be adequate, because there may be regional imbalances caused by several constraints. India has a large demand for electric power, but due to inadequate infrastructure for its distribution, some states continue to be power-surplus states. In the case of cement, regional demand matters more than national demand due to transportation costs acting as a deterrent. Assessment; of export potential is a big exercise, First, 'the economic distance to which a particular product can be exported' must be evaluated. Next importing countries in the same part of the globe, must be identified, and the countries that have no exportable surplus. The cost and quality aspects of our goods should' also be compared with other potentially exporting countries, and other such factors need consideration as well.
Infrastructure facility : The Infrastructure facility should be assessed. For example, the exportability of Indian cement depends less on the quality and cost of production, and more on the high cost of transportation. But cargo facilities are very rare in India. As a result, the cargo costs are prohibitive in exporting cement. In the Indian market the uncertainty surrounding availability of wagons makes it difficult for a cement
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unit to serve demand in a region, which is outside the economic distance from the factory.
Demand-forecasting: This is an important step in the assessment of demand potential. Growth in demand in the past can be indicative of future demand. There are various methods of demand forecasting. Some assume that factors influencing consumption behaviour in the past will continue to influence the future, others provide for adjustment of some economic indicators which are likely to be different in the future. The list of demand forecasting techniques is given later in this lesson.
Supply EstimationUnlike demand, supply estimation is more difficult. Past trends of supply of goods can be studied and further extrapolated. Projections so made, need to be adjusted with the help of additional information like the projects undertaken in the economy, import possibility as governed by imports policy, import tariff and international prices. Information regarding the entry barrier is also useful. A long gestation period and a high capital to labour ratio in an industry may create a natural entry barrier. The government licensing policy, the availability of required inputs like materials and skilled labour also cause entry barrier. Product category where entry barrier is high is unlikely to see sudden spur in supply, offering more comfortable position to existing players.
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Identification of Critical Success Factors
For the choice of location and to study the risk of a project, it is essential to identify the critical factors, which determine the success of project. Availability of raw material (lime stone in the case of a cement project), supply and cost of electrical power (in case of an aluminum project) transportation facilities (for any bulk goods producer), supply of skilled manpower (in case of the information technology industry) or other variables could be the critical success factors. They are product and region specific. The right choice of location may reduce the cost of a project and the uncertainty regarding the availability of resources. However, if some crucial factors are subject to volatile changes, then the impact of their variability on the net profitability of a project has to be separately analysed.
Estimation of the Demand-Supply Gap
Demand and supply estimates, fine-tuned with new or changed factors, are now compared with each other in order to find a gap. The demand-supply gap, is meaningful only for a relevant geographical territory. It is quite likely that the forecast of demand and supply may not be a single point forecast. It may be in terms-of various scenarios. A multiple point forecast gives a most adverse, most likely and most favourable forecast of demand and supply. However is it done? Look at the demand and supply projections given in Table 1, which
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also shows the calculation of the demand-supply gap for a particular product in the next five years.
Table-1 Demand Supply Gap Calculation for Five years
Year Cement Demand Cement Supply
Demand Surplus
Min Likely Max Likely Max Min Likely Max1 48.00 48.00 48.00 48.00 48.00 0.00 0.00 0.002. 49.44 50.40 51.36 50.70 50.70 -1.26 -0.30 0.663. 51.66 53.93 56.50 53.38 53.38 -1.72 0.55 3.124. 54.76 58.78 63.84 61.03 63.24 -8.48 -2.25 2.815 58.60 65.25 74.69 62.45 65.46 -6.86 2.80 12.24Demand Surplus Minimum = Min demand - Max supply
Likely = Likely demand - Likely supply Maximum = Max demand - likely supply
Note : All the confirmed capacity additions constitute the 'Likely supply scenario' while 'maximum supply scenario' assumes another capacity addition in the third year to fifth year. It is assumed that firms will be able to operate at 80 per cent capacity.
In case the supply shortage is estimated to be sufficiently large, the market feasibility of a product is said to be positive. Aggressive promoters, however, study the strength and weaknesses of the present manufacturers, and set up a large capacity plant with the
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clear strategy of eating into the market of competitors. They leverage on their own strength and others weaknesses.
Technical Feasibility
Various factors are analysed in checking the technical feasibility of a proposed project. They are listed below:
1) Availability of commercially exploited technology and its alternatives.2) The transplantability of technology into the local environment. The suitability of the technology involved must be assessed in the light of the available quality of material, quality of power, skilled personnel, atmospheric conditions, quality of water and other factors.3) Technological innovation rate in the product.4) Production processes.5) Capacity utilization rate and its justification.6) Availability of raw material and other resources like power, gas water, compressed air, labour, etc.7) Requirement of plant and equipment and fabrication facilities.8) A feasible product mix with possibilities of point and byproducts.9) Facilities for affluent disposal.
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A broad-based evaluation of the technical aspects of projects is carried out at the project feasibility stage along the lines listed above. The commercial side of technical details is also studied simultaneously so that the commercial exploitability of the technology can be evaluated.
Financial Feasibility
Demand and price estimates are derived from the market feasibility study. Project costs and operating costs are derived from the technical feasibility study. The estimates need to be supplemented with a) tax implications depending upon the prevailing tax laws, and (b) financial costs emanating from the financing alternatives considered for the project. That provides enough information for the calculation of the financial bottom-line of the project.
The financial feasibility check involves a detailed financial analysis. The financial analysis includes quite a few assumptions, workings and calculations. Some are briefly described below:
1) Projections are made for prices of products, the cost of various resources required for manufacturing goods, and capacity utilization. Use of the thumb rule or actual data of some comparable projects are generally included in the estimates.
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2) The period of estimation is determined, and the value of the project at the terminal period of estimation is forecast. Hie period of estimation should be justified by factors lie the product life cycle, business cycle, ability to forecast, period of debt funds, etc.
3) Financing alternatives are considered and a tentative choice of financing mix is made together with assumptions regarding the cost of funds and repayment schedules.
4) Basic workings are shown in different statements. of the schedules made for this purpose include,
a) An interest and repayment scheduleb) The working capital schedulec) The working capital loan, interest and repayment
scheduled) The depreciation schedule for income tax purposese) The depreciation schedule for the purpose of
reporting under Companies Act, 1956 (if depreciation policy is different than income tax rules.
5) Some financial statements are prepared in the project feasibility report. They include:
a) Profit and Loss accounts of the companyb) Balance-Sheets of the companyc) Cash Flow statements for the proposed project
6) Financial indicators are calculated using data derived in various financial statements. Two
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basic financial parameters are used for judging the viability of the project:
a) Debt-service coverage ratio (DSCR)b) Net present value (NPV) or internal rate of return
(IRR)PAT = Profit after taxOCF = Operating cash flow
= PAT + depreciationDSCR = Debt service coverage ratio
Some firms also prefer to calculate (I) payback period (PBP) (ii) interest cover ratio, (iii) net present value (NPV) either as alternate tools or additional ones.
a) The interest cover ratio indicates the safety and timely payment of interest to lenders of money. It is calculated with the help of the following formula;
Interest cover ratio = PAT+Depreciation+interest------------------------------- (eq.l)
Interest
This shows how many times the operating cash flow before interest is earned against the interest liability. However, this is not a very important indicator of project viability.
b) Debt-service coverage ratio (DSCR) uses the same numerator as the interest cover ratio, but that is
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compared with the interest payment and principal sum repayment in a particular year. The formula is
PAT+Depreciation+interestDSCR = ---------------------------------- (eq.2)
Interest+principal sum repayment
Academically and according to many leading financial institutions an average DSCR of 1.5 is considered very good. This is also the safety indicator for lenders of money. A project that generates enough funds during the period of loan taken for the project is considered good from the business prudence angle. Let us take an example for the calculation of the interest cover ratio and debt service coverage ratio.
Example – 1: Nirmal Bhavan Limited (NBL)
Nirmal Bhavan. Limited has estimated the following cash flows from the project over the next five years:
Y-1 Y-2 Y-3. Y-4 Y-5 Total of 5 years
Depreciation 14,000 14,000 14,000 14,000 14,000 70,000Interest 5,000 5,000 5,000 5,000 5,000 25,000Profit after tax 10,000 15,000 25,000 25,000 15,000 90,000Principal repayment
-— — 10,000 20,000 20,000 50,000
The company has planned to use a 15% discount rate for the evaluation of the project in which Rs.70,000 is invested. Calculate (a) interest cover ratio, (b) debt
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service coverage ratio, (c) NPV, (d) IRR.
Solution
Y-1 Y-2 Y-3 Y-4 Y-5 TotalOCF before interest
15,000 20,000 30,000 30,000 20,000 115,000
Interest 5,000 5,000 5,000 5,000 5,000 25,000Loan repayment — — 10,000 20,000 20,000 50,000Interest cover 3.00 4.00 6.00 6.00 4.00 4.60DSCR 3.00 4.00 2.00 1.20 0.80 1.53NPV 4,988IRR 17.74%
Note : Tax assumption is simplified, and tax shield on I interest is not adjusted.
c) The net present value (NPV) and the internal rate of return (IRR) are based on the present value concept. The project cash flow (excluding financing or debt related cash flow) Is discounted at a discount rate (usually equal to the cost of capital) to find the net present value. In IRR, a discount rate is found with trial and error at which NPV is zero. A positive NPV and an IRR greater than the cost of capital indicate that the project will add to the wealth of shareholders.
d) The pay back period shows the capital recovery period. It is the period over which initial capital investment is recovered.
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A project is said to be viable if the average DSCR is at least equal to 1.5 (sometimes even a little lower, say 1.33, is also considered okay), and the NPV of the project is positive (or the IRR greater than the cost of capital).
Risk Assessment
Basic indicators of financial viability use profit and cash flow estimates. They may be subject to risk or uncertainty. The evaluation of risk is also necessary.
There are many methods of risk analysis and risk management. However, at the stage of the project feasibility study, two main methods are applied ; (a) break even point, and (b) sensitivity analysis.
These two methods are briefly explained below:a) The Break-even point is calculated and compared with achievable capacity utilization. The difference indicates the safety margin. In the previous example the breakeven is calculated as below:
Expected Sales, (units) Rs. 25,000Annual Fixed cost Rs. 80,00,000Sales price per unit Rs. 1,000Variable cost per unit Rs. 600Contribution per unit Rs. 400
Fixed Cost
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BEP (Unit) =------------------------Contribution per unit
80,00,000= ------------------------- =20,000 units
400
BEP (%) = BEP (Units)/ sale units = 20,000/25,000 = 80%
b) Sensitivity analysis is another technique of risk analysis. In sensitivity analysis, the effect of change in a single factor on the profitability is measured. This shows the variability in the profit due to change in a factor.
Economic ViabilityThe terms 'economic viability' and 'financial viability' | are not different for companies. However, from the national angle and from the view-point of the economy as a whole, economic feasibility and financial feasibility are not considered to be the same. Cost and benefits to the nation due to the proposed project are considered in the economic feasibility test. Tax revenue, generation of employment, savings of foreign exchange and such other factors, differentiate economic viability from financial viability. government and government agencies calculate the economic indicator .of a project before permitting the project to finance it.
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Critical Success FactorsThe success of a project depends on the actual outcome of some key variables. These key variables are called critical success factors. An inaccuracy and uncertainty surrounding these factors may render a project unattractive. Each industry has its own critical success factors identified from the experience of businesses. For example, in the case of a cement project, availability of wagons, freight charges, supply of power and supply of coal are the key success factors, as they generally constitute 65% of the variable cost and 40% of realisation. In the case of an aluminum project, power which accounts for more than 60% of realisation is the critical success factor. Some of the factors are project specific, and they are also specific to the economy and location. Risk is studied in the light of possible variations in critical success factors.
Demand forecasting TechniquesThe key aspect of any decision-making situation lies inbeing able to predict the circumstance that surround thedecision and that situation. Business managers are expected I to know and apply forecasting techniques in their decision making processes.
A number of methods and techniques have been developed in the last few decades for forecasting the future. These can be separated into two broad classes; namely quantitative techniques and qualitative
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techniques. The former is one where the forecast is directly based on historical data and can be carried out in a mechanical fashion. It assumes that the past trend and relationship will continue in the future also. Qualitative techniques aim at forecasting changes in a basic pattern as well as the pattern itself. Qualitative techniques are used for forecasting the turning point in a pattern; for example, the expected decline in demand of a product, which has touched the maturity point.
The choice of A forecasting technique is of vital importance because historical data analysed by them may have different patterns, and also the future for which the forecast is made may have some of the factors in variation, compared to what they were during the relevant period of the historical data. This section, for fear of digressing into side j topics, does not emphasise techniques per se, but attempts to drive home a point to the readers that one cannot just take 'any technique' for forecasting. A need-based choice would minimise errors in judgement.
The following section is therefore, divided into two ! points:(a) Pattern based forecast, and (b) causal model based forecast
Pattern Based ForecastIn cases where one or a few independent factors may not have an explanatory power for demand, just the
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pattern can be studied for forecast. Let us first consider various patterns
Types of patterns: Patterns can be divided into four groups; namely, horizontal patterns, seasonal patterns, cyclical patterns and trend patterns. Figures 1.a to l.d give a pictorial presentation of these patterns.
In the long term, the business cycle effect on demand will show a cyclical pattern, whereas quarterly sales
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may show a seasonal pattern. The horizontal data pattern indicates the product maturity, whereas the trend data pattern shows long term growth orientation in the demand of the product. The demand forecast for a project should cover the period encompassing more than one business cycle and check the cyclical effect on demand. Moreover, the trend (growth) pattern over the long period (two to three business cycles period) should be considered for forecasting the demand.
The right time of undertaking projects is essential for ensuring better profitability. A study of the cyclical data pattern would clearly show that the project should be undertaken at a particular point in the business cycle, so that it will be ready for commercial exploitation (commissioning) when the upward phase of the cycle begins.
Methods of pattern based forecasting: The second point is about various methods for forecasting the future based on the historical data pattern. Some of the important methods include:1. mean2. naive3. moving average4. exponential smoothing5. auto-regression/moving average6. regression
A simple arithmetic mean of the historical data can be
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taken as the forecast for the next period, if the horizontal data pattern is observed. However, it has to be ensured that the period does not represent the end of product maturity.
The naive method of forecasting use' the most recently observed value as a forecast. This method, which has most apparent demerits, can be used for forecasting (or setting a target for) say the sales in the next one week. In the project feasibility report the naive method is given no recognition.
The moving average method is more useful in forecasting for a fairly short period. This method reduces the randomness in variation, because the average of the last few observation Is considered as the forecast value, unlike the last observation in naive method.
In the exponential smoothing method, exponentially decreasing weights are assigned to various observations so that the more recent values receive more weightage than older values. (The moving average method assumes equal weights for each value). There are many approaches to the exponential smoothing method. These variations seek to make adjustments for such things as trend and seasonal patterns. They are called higher form of exponential smoothing. In the case of the project feasibility report, it is most likely that the project would be found attractive if a rising trend
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pattern in demand is observed. Higher forms of exponential smoothing are required for handling the trend pattern of data. Double moving average and double exponential smoothing methods are prescribed for it.
The auto-regressive moving average (ARMA) method adopts a procedure where, along with past values and their weights, past errors in the forecast (deviation of actual from forecast) are also weighed. This ensures minimum error in the forecast. The procedure developed by Box and Jenkins is most commonly used in this method. The filtering method also falls in the same class.
Regression and its variations are useful in handling the trend data pattern. A best-fit line can be drawn in such a way that the distances of data points on both sides of the line are approximately equal. Time is on the X-axis and values on the Y-axis. The extension of the line to the next time period indicates the forecast value. The distance of data points from the best-fit line indicates error. Time is considered a causal variable in this case otherwise; the best-fit line and other regression methods are more suitable, if the forecast variable is found dependent on some other casual variable.
Casual Model Based Forecast
Forecasting methods described in previous pages can be
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applied, if all other factors which can possibly influence the I demand, remain constant in the forecast period, or, demand is a function of time. In many cases, the demand of a particular product can have explanatory factors. The behaviour of one or more factors may be responsible for the change in demand. Many methods can be employed for forecasting variables of such nature. They can be grouped as explanatory models, or causal models. Some of these methods are listed below:
1. Regression and correlation2. Coefficient of correlation3. Decomposition method4. Input-output tables5. Econometric models6. Consumption level method7. Consumption co-efficient (end use) method8. Leading indicator method.
Regression techniques are useful when the forecast variables is dependent on some other independent variable. This relationship is assumed to be linear.. The basic mathematical function is written as:
Y = a + bx (eq. 3)
The best-fit line, least square method and regression are grouped together, as they are based on the same logic expressed in the above mathematical function. If more than one independent (casual) variable is likely to have a bearing on a dependent fact, then multiple regression
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analysis should be carried out. Sometimes, it may not be possible to pinpoint that one is a dependent variable and the other independent, although they may be related. In such cases the two variables are said to be correlated.
The co-efficient of correlation is the square root of the I explained variation from Y over the total variation. This can be mathematically written as explained variation.
r2 = Explained variation = (Y-y) 2 (eq. 4)Total Variation (Y+y)2
Total variation Co-efficient of correlation can be between + 1 and -1;
The Decomposition method attempts to explain the pattern or the change in it with the factors responsible for it. A pattern or the change in it can' be broken down (decomposed) into a few factors. This decomposition is mathematically represented as:
S = T x C x I x R (eq. 5)
Where : T = the trend factor S = The forecast C = the cyclical factor I = the seasonal factor R = randomness
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Input-output tables have their own place in forecasting. These tables use co-efficients, which are assumed to remain constant. For example, the savings rate and GNP growth relations are used in planned economies for preparing their annual plans. Such tables can be used for projections of some demand.
Many econometric models are also developed for measuring the impact rate of change in the casual variable. In a way simple and multiple regression equations are part of econometric models. Unlike a single equation in simple regression, in the econometric models that is several equations require to be solved simultaneously. These models are based on discovering and measuring the interrelationships that exist in the economy, and are particularly suitable for answering what if questions. In most broad economic and business situations, particularly in demand forecasting as a part of the project feasibility study, many factors may have a is interrelation with demand. This can expressed as below:
Sales = f(GNP, price, advertising)Production Cost = f (production, inventory levels)Selling Expenses = f (advertising, other selling expensesPrice = f(cost, selling expenses, competition)Advertising = f (sales, profitability, competition)
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As it would appear, the complexity of econometric model is high and goes up with additional casual variables. Obviously, smaller and medium size firms cannot afford to use these models. They can however, avail econometric forecasting services on a subscription basis. There are quite a few econometric models developed for specific application. For example,K.T. Wise (1975) developed a model for the price and demand supply of steel scrap.
Consumption level methods are useful for estimating the demand of consumer goods items. The demand for a particular product might be elastic to the income and/or the price. Therefore, we get two models, one based on the income elasticity of demand and the other based on the price elasticity of demand. In both the cases the elasticity is measured and then applied to the casual variable. Income j elasticity is measured as follows:
Q2-Q1 I1+I2
Ei = ------- x ------ (eq-6)I2-I1 Q1Q2
where, E1= income elasticity of demandQ1 = quantity demand in the base period Q2= quantity demand m the following year
11 = income (per capita) level in the base year12 = income (per capita') level in the following year
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The next step is the calculation of the change in per capita consumption using the following equation.
Per capita consumption =1+ (change in income level x Ei) (eq. 7)
In the last step the total national demand is calculated by multiplying the forecast of the per capita, consumption with the estimated population. For example,
The projected population is 95 crores
The present population is 90 crores the base population 88 crores
the cement consumption per head in the base year is 10 kg.
the cement consumption per head in the following year is 10.3 kg.
the base year per capita income is Rs. 1970
the following year per capita income is Rs. 2,000
the projected per capita income in real terms five years from now is Rs. 2,200
E1 = 10.3-10 x 1980 + 20002000-1980 10 + 10.3
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0.3 3980 = —— x ——
20 20.3= 2.94
Per capita consumption=1+{(2200/2000 x 100) x 2.94}= 1.294kg
Finally, the total demand in the economy will be, 95 crores population x 1.294 kg.
= 123 crores of kg approximately
The price elasticity of demand is similarly studied and included in the demand forecasting. The first formula of E1 will change to Ep, I (for income will change to P (for price). The subsequent two steps of determining the per capita consumption and the total demand are the same as in income elasticity of demand.
The consumption co-efficient (end-use) method is recommended for forecasting the demand for intermediate goods. Usually intermediate goods have multiple end uses. First, the demand for each end-use product is estimated (based on the application of some forecasting method), then the correlation of consumption of the intermediate product with the end-use product is defined, and finally, the demand of intermediate goods is forecast. For example, cement has two broad groups of the end-use segment; household and infrastructure. Both activities can be estimated
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separately and the demand for cement can be derived. Steel is also an intermediate product. The construction industry, railways, automobile industry and others consume it. The end-use method of forecasting is suitable in estimating the demand for such products.
The leading indicator method is useful where the demand for a product follows a particular indicator but with a difference in timing. To avoid reliance on a single series, composites of many leading indicators are usually constructed. However, in the project situation this lead indicator method has less significance, as it can be suitably applied for forecasting only short-term fluctuations in demand.
Finally, one should remember that there is no foolproof method of forecasting demand without any error. Trends may change due to change in ca 1 variables. The ca al variables and their correlation with forecast variables may also change. Therefore, probabilistic theories are developed. The judicious use of qualitative analysis along with quantitative techniques of forecasting is highly recommended. Manager play a role in supplying qualitative variables in the process of estimating demand.
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