How to Write Feasibility Report and Project Appraisal Report

Feasibility Report and Project Appraisal

1) General Information

a) Name

b) Constitution and sector

c) Location

d) Nature of industry and product

e) Promoters and their contribution

f) Cost of project and means of finance

2) Promoters Details

3) Market Feasibility Report

a) Segments

b) Competition

c) Pricing

d) SWOT Analysis

e) Marketing and Selling Arrangements

4) Particulars of the Project

a) Product and Capacity

b) Plant and Machinery

c) Raw Material

d) Utilities

5) Technical Feasibility Report

a) Technology

b) Alternatives

c) New Developments

d) Competing Technologies

e) SWOT Analysis of technology

f) Technical Arrangement

6) Production Process

7) Environmental Aspects

8) Schedule of Implementation

9) Financial Feasibility

a) Cost Details

b) Working Capital

c) Means of Finance

d) Profitability Estimates

e) Assumptions

f) Projections

i) Projected Income Statement

ii) Projected Balance Sheet

iii) Projected Cash Flow Statement

iv) Coverage Ratio’s

v) Break Even Analysis

10) Economic Consideration

11) Appendices

a) Depreciation Schedule

b) Repayment, interest schedule of term loan and bank finance

c) Working Capital and margin money for working capital schedule

d) Tax Computation

e) Details of Plant and Machinery

f) Requirement of skilled and unskilled labor

g) Cost of Project Details

Aspects of Project Appraisal

1. Market Appraisal.
2. Technical Appraisal.
3. Financial Appraisal.
4. Economic Appraisal.

1. Market Appraisal.

The market appraisal is attempted to answer two important questions.

(i) What is the size of the total market for the proposed product or service?

(ii) What is the product's share of total market?

Market Appraisal.

Two answer the questions market analyst complies and analysis the date relating to the following aspect.

(a) Past & present trends.

(b) Present and prospective supply position.

(c) Level of imports and exports.

(d) Structure of competition.

(e) Price and cross elasticity of demand

(f) Consumer requirements.

(g) Production constraints.

1. Technical Appraisal.

(i) Availability of the required quality and quantity of raw material.

(ii) Availability of utilities like power and water etc.

(iii) Appropriateness of the plant designs and layout.

(iv) The proposed technology vis a vis alternative technologies available.

(v) Optimality of scale of operations.

(vi) The technical specifications of plant and machinery in relation to the proposed technology.

(vii) Assembly line balancing.

1. Financial Appraisal.

(i) Cost of project

(ii) Means of financing.

(iii) Projected Revenue and cost.

(iv) Pay back period.

(v) NPV

(vi) Rate of return.

(vii) Internal Rate of Return.

1. Economic Appraisal.

(i) Impact of the project one the distribution of income in the society.

(ii) Impact of project on the level savings and investment in the society and socially desirable objectives like self sufficiently, employment etc.

(iii) Contribution of project.

Assessing project feasibility – Market.

(i) Selecting target market.

(ii) Measuring selected market.

Measurement of target market

(i) Demand

(ii) Supply

(iii) Distribution.

(iv) Prices.

(v) Government Policies.

Assessing Project Feasibility – Technical

(i) Selection of technology.

(ii) Manufacturing process.

(iii) Estimation of Inventory requirement.

(a) Raw Material Survey.

(iv) Selection of equipment.

(v) Plant Layout.

(vi) Plant Capacity

(a) Installed capacity.

(b) Capacity Utilization.

(vii) Utilities – Availability.

(a) Water

(b) Electricity

(c) Other Utilities.

(viii) Estimation of manpower needs.

(ix) Estimation of Building needs.

(x) Selection of project location.

(a) Nature of land.

(b) Nature of raw material.

(c) Utilities

(d) Effluent disposal.

(e) Transport.

(f) Labour.

Implementation Schedule.

4. Assessing Project Feasibility. Financial Projections

(i) Cost of Project.

Land and site develiopment.

(a) Availability of investment subsidy.

(b) Availability of concessional finance.

(c) Sales tax determents/exemptions.

(d) Income tax benefit.

Building and civil works.

Plant and machinery.

(a) Basic cost of indigenous machines.

(b) Basic cost of imported machines.

(c) Duties on indigenous machinery.

(d) Duties on imported machinery.

(e) Other expenses – erection charges etc.

(iv) Miscellaneous fixed assets.

(v) Preliminary expenses (2.5% of cost of project)

(vi) Preoperative expenses.

(a) Promotional expenses.

(b) Organizational and training cost.

(c) Rent, Rates, taxes.

(d) Travelling expenses.

(e) Postage, telegrams and telephone expenses.

(f) Printing and stationery expenses.

(g) Advertisement expenses.

(h) Guarantee commission.

(i) Insurance during construction.

(j) Interest during cons. period.

(vii) Provision for contingencies.

(a) Firm Cost – 5%

(b) Non Firm cost – 10%

(viii) Technical know how fees.

(ix) Margin money for working capital.

(x) Means of finance.

(a) Equity capital

(b) Performance capital.

(c) Debenture capital.

(d) Term loan.

(e) Deferred credit.

(f) Unsecured loans and deposits.

(g) Capital subsidy and development loans.

(xi) Fixing Means of finance.

(a) Debt-equity ratio

(b) Promoters contribution.

(xii) Sales Estimation

(a) Cost of production

(b) Product mix

(c) Installed capacity

(d) Capacity utilization.

(xiii) Elements of cost of production.

(a) Raw materials

(b) Chemicals.

(c) Components.

(d) Consumables.

(e) Total raw material cost (a)+(b)+(c)+(d)

(f) Utilities

(g) Power

(h) Water

(i) Fuel

(ii) Total utilities (e)+(f)+(g)+(h)

(j) Wages

(k) Factory supervision and salaries.

(m) Bonus and PF

(iii) Total Labour (i)+(j)+(k)

(o) Repairs & maintenance

(p) Light

(q) Rent & taxes on factory.

(r) Insurance on factory assets.

(s) Packing material.

(t) Miscellaneous factory overheads.

(u) Contingency at 5%.

(iv) Total factory overheads ( o to u)

(v) Cost of manufacturing/operating cost (i) + (ii) + (iii) + (iv)

(vi) Total Administrative expenses.

(vii) Total sales expenses.

(viii) Royalty and know how payable.

(ix) Total cost of production (v) + (vi) + (vii) + (viii).

4. Assessing Project Feasibility - Financial Appraisal.

(i) Cost & benefits are measured in terms of cash flow i.e. cash in flow and cash outflow.

(ii) Evaluating projects in terms of costs and benefits is based on marginal or incremental cash flows. The marginal or incremental cash flows. The marginal cash flow is the change in total firm cash flow from adopting that investment.

(iii) As already mentioned n (i) above cash flows are always measured in post tax terms as that represents net flow from the firm point of view.

(iv) Focus should be on long term funds.

Evaluation Techniques.

(i) Present value.

(ii) Internal rate of return (simply rate of return).

(iii) Payback period.

(iv) Accounting rate of return.

(v) Debt service coverage ratio.

(vi) Benefit cost ratio.

Present Value.

The present value of a cash flow is, flow what it worth in today.

It states that an investment should be adopted only if the present value of the cash it generates in future exceeds its cost.

NPV = Present value of cash flow – Initial cost.

= CF₁ (PV_IF,K,I)+-------------------

Internal Rate of Return –

An internal rate of return is the rate we expect to earn on an investment of project. IRR is that rate which discounts a projects cash flow to an NPV=0.

CF CF CF

0 = ----- + ----- + ------- ------ - I

1+r (1+r)² (1+r)ⁿ

= CF(PV1FA,r,n) – I

PAY BACK PERIOD :

The pay back period measures the length of time required to recover the initial investment on a project.

ACCOUNTING RATE OF RETURN –

The accounting rate of return (ARR) equal the average annual after tax accounting profit generated by the investment divided by the average investment.

average annual profit

ARR = ------------------------------

(1 – s)

2

DEBT service coverage ratio –

The capacity of the project to meet the interest payment and principal repayments on time.

1 n PA T_t + D_t + I_t

DSCR = --- S ------------------------

n t=1 I_t + L_t

PA T_t = Profit after tax in year t.

D_t = Depreciation charge in year t.

I_t = Interest on long term loans in year t.

n = Period over which the loan has to be repaid.

Benefit cost ratio (BCR)

PV

BCR = ------

I

BCR = Benefit Cost Ratio

PV = Present value of future cash flows.

I = Initial investment

BCR > 1 NBCR > 0 Accept

BCR < 1 NBCR < 0 Reject

Break Even Point.

The point at which the entire fixed costs are covered.

Fixed Cost

BEP = -----------------------------------

Sales price - variable cost

Fixed cost

= -----------------------

Contri bution

POINTS TO BE DISCUSSED

1. Debt Equity Ratio – Chaebol Korea/BPL

2. Rate of interest/Subsidy/optional sources-Enron/BPL

3. Working capital management/Bajaj/SME main problem.

Repayment cycles 30/60/90

4. Turn around – Restructuring

i. Steel industry in India

ii. Daewoo

iii. SME