Financial Appraisal

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 Financial appraisal
• Financial projections – to ascertain financial
viability of projects
• Cost of production and profitability estimate

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 Profitability estimate
• Estimate of expected sales and expenses
• Projections over project life
• Starting point – forecast of sales revenues
• Build up of plant capacity utilisation- initial
technical problems,learning curve concept,
raw material,power and marketing
constraints - type of industry,process
compelxities and product demand
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 Contd
• No adjustment for FG stock ( prodn= sales)
• Selling price- realisation net of duties/taxes and
based on prevailing selling prices
• Components of cost of production
• Materials cost- raw materials,chemicals and
consumables required for production
• Requirement of materials per unit of product –
guarantees and wastage allowances
• Prices based on present prices – no inflation factor
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 Contd
• Consumables – consumption depends on
process and m/c type
• Utilities cost- power, water and fuel –
norms of consumption
(collaborators/consultants/industry
standards
• Water cost only if procured from outside

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 Contd
• Wages and salaries – cost of manpower
• Function of number of employees and
remuneration levels
• Though initial years planned capacity less the
number of employees can not be proportionately
less , no depends on no of operators for operating
m/cs and manning other services
• Supervisory/administrative personnel- industry
norms
• Normal increase of 5% p.a.
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 Contd
• Repairs & maintenance – for periodical
maintenance
• Leased bldg only rents and maintenance by owner
• Bldg 0.5% of cost and plant & m/c1% -5% of cost
• Higher charges in industries subjected to high
wear & tear
• Increment of 10% every year

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 Contd
• Rent and insurance
• Rent as per lease agreement
• Insurance of fixed assets against major risks
• Value to be insured ( purchase Vs market )

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• Depreciation- decrease in value of fixed assets and
chargeable as expense
• 2 alternative methods- WDV and straight line
methodsContd
• Administrative expenses- salary to administrative
staff, director’s fees, audit fees,printing, stationery
and other miscellaneous administrative expenses
• Selling expenses - as % of sales , depends on
distribution system, product and market conditions

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 Interest cost
• Interest on term loan
• Moratorium during implementation and
initial period of oprn as per cash flow
• Interest on outstanding at the agreed rate
• Subsequent yrs on av balance
• Interest on working capital loan – availment
of loan and interest rate
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 Viability
• Debt service coverage ratio=
• Profit after tax+Depreciation+Interest on TL
• Term loan + Interest on term loan

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