The document discusses various aspects of conducting a financial analysis for a new project, including: 1. Calculating the total cost of the project, means of financing, production plans, and cost of production. 2. Estimating working capital requirements, sources of working capital financing, and projected sales, costs, profits, and cash flows. 3. Preparing financial statements like the balance sheet, cash flow statement, and cost flow statement to analyze the project's viability and profitability. 4. Considering factors like demand and supply, economic and financial analyses, and environmental impacts to comprehensively evaluate the project.

1. Financial
Analysis

2. Balance Sheet
Cash Flow
Statement
Means of Finance
and Time Phasing
Cost of Project
and time phasing
Interest and loan Repayment
Depreciation
Estimate of Interest
Cost of Production working Result of ECA
Tax
Working Capital Needs Factor
Working Capital
Production Plan
Advance (WCA)
Projected Sales

3. Financial Analysis
 Cost of project
 Means of financing
 Elements of sales and production
 Cost of production
 Working capital requirement and its
financing
 Estimates of working results
 Break- even point
 Projected cost flow statement
 Projected balance sheets.

4. Cost of Project
 Land and site development
 Buildings and civil works
 Plant and Machinery
 Technical know how and engineering fees
 Expenses on foreign technician and training
of Indian Technicians abroad
 Misc. fixed assets
 Preliminary and capital issue expenses
 Pre-Operative expenses
 Provision for contingencies
 Margin money for working capital
 Initial cash losses

5. Working Capital requirement
and its financing
In estimating the working capital
requirement and planning for its financing,
the following points have to be borne in
mind.

6. 1. The W.C. requirement
consists of the following
 Raw materials and components
 WIP stock
 Stocks of finished goods
 Debtors
 Operating expenses

7. 2. The principal sources of
working capital finance are
 The advances provided by commercial
banks
 Trade credit
 Accruals and provisions
 Long term sources of financing

8. 3. The Advances from commercial bank
OA Margin
MPBF as Against each R.M. 10 –25 percent
per current
Lending assets a
norms certain
prescribe amount of
d margin
By Money has
Tondon to be
Committe provided by
e firm
WIP 10 –40 - do-

9. 4. Tondon committee
 Tondon committee has suggested
three methods for determining the
MPBF for WC. Second method is
generally employed
– 75% of CA – CL (like trade credit and
provisions)
– At least 25% of CA must be supported
by long term sources of finance

10. Financial Analysis based on
Commercial profitability
Indended direct benefits of a
project is likely to achieve at the
prevailing market prices

11. Investment Financial
Profitability Analysis
Analysis
Aims at assessing Takes care of the
the earning power financial features for
Of the resources the smooth
deployed for the operation of the
bothering of the project
sources of financing
Simple rate of return pay back
N.PV IRR ,Financial ratios

12. Financial Analysis based on social – cost –
benefit profitability
 Attempts to give replies to a varied set of
questions relating to the proposed project
such as –
– Whether it is being set up in consonance
with the general policy of the country ?
– It meets the priority needs of the people
– It is linked with the objectives and goals
of national planning and development ?

13. Financial Analysis based on
social – cost – benefit profitability
– It is fitted in to overall economics
and social development of the
country ?
– Who will benefit from the project ?
– Who will hurt from the project ?
– What are the requirements for the
local people to
contribute/participate in the project
?

14. Parameters which should weigh
while selecting site
 Size and cost of land
 Raw materials
 Utilities electricity, water, sanitary
and sewerage services etc
 Manpower
 Transport facility – Sea, air, rail-road

15.  Incentivesand concessions –
control and state Govt. provide –
– Loans, capital subsidy and
assistance
– Transport subsidy on a/c of
transport cost of raw materials and
finished products between the
selected rail-heads
– Income-tax exemptions extendable
up to first 10 A.Y.
– Purchase of machinery on hire
purchase basis

16. – Preferential treatment for import of raw
materials
– Price preference on Govt. purchases
– Sales tax and other tax exemptions
– Uninterrupted supply of power at
concessional rates
– Concessional finance
– Land acquisition and industrial estates
development on lease and subsidized
rent basis
– Assistance to technical entrepreneurs in
form of loans
– Investment subsidy to the units located
in backward areas
– Extending export support

17. i. Environmental considerations-
i. Climatic and Natural hazard
considerations temperature, humidity
etc/cool and dry
i. Technological Aspects – technology
has to be selected in a way that it has
a low running cost, cheap and easy
maintenance, High productivity per
unit of capital and other scarce
resources

18. Demand and supply Analysis –
Research Methods
 Sampling scheme and its size taking care
of constraints of time resources,
reliability and accuracy of data –
combination of different methods like
quota sampling, random, cluster
systematic, stratified etc.
 Make use of mailed questionnaire,
personal interviews, telephone interviews
etc.
 Data collected has been obtained through
primary and secondary sources – has to
be processed analysed and interpreted
and presented in the form of tables,
charts graphs etc.

19. (C) Economic Analysis – determines
the viability of a project over a period of
time
 Capitalcost
 Working capital requirements
 Operating costs

20. Direct Indirect
Material, Labour, Supervisory and
exp. accounting staff stores
operations technical
staff rentals Utility
costs consultants’ fees,
interest in working
capital Adm, Sales
Promotion and
distribution exp
Advertising

21.  Estimates of operating revenues, sales
volume and price of the end product
 Depreciation/taxes
 Profits
 Due weight age to factors like-
• Price fluctuations
• Inflation
• Changes in Govt. policy
• Adaptation of new technology

22. (D) Financial
 Model
Analysis-
formats designed by UNIDO
and planning commission.
 Major items of expenditure and the
business plans during the like cycle
of a project
 .Generation of funds & expenditure

23.  Division of a project in three
phases
– pre – investment
– Construction
– Implementation

24. Techniques to analyse
investment project-
 Net national value added
 Employment effect
 Distribution effect
 Foreign exchange effect
 Infrastructure effect
 Environmental complications

25.  All
these details regarding Technical
Economic, Financial Commercial,
Organizational, Managerial, Social,
Environmental when put together in
one document known as pre-
investment report, project report,
feasibility reports the like.

26. Planning commission guidelines
(1992)
insist that instead of the term
feasibility report
the term detailed FR should be used
to
facilitate the proper appraisal of the
investment.

27.  The proposal to prepare feasibility
report is considered by public
investment Board (PIB)- It consists
of secretary expenditure as
chairman.

28.  Secretary Planning commission
and
 Secretary of adm. Ministry as
members
 Project appraisal attempts to
consolidate the result of exercises
made at various levels, from
different angles on various aspects
of the project.

29. The important aspects studied in monitoring
the key sectors of the environment-
Economic Sector Competitor Sector
State of the economy, No. of firms in the industry and
the mkt. share of the top few
overall rate of Growth,
 Degree of homogeneity and
cyclical fluctuations, differentiation among products
Inflation Rate,. Linkage Entry barriers
with world economy, Comparison with substitutes in
trade terms of quality, price, appeal,
Surplus/deficits ,BOP function
situation Marketing policies and practices

30. Marketing policies and practices
 Industrialpolicy.
 Govt. programmes & Projects
 Tax frame-work
 Subsidies, incentives and
concessions
 Import & export policies
 Financing norms
 Lending conditions of FI & C.Bs

31. Cash Flows From Long Term
Funds
 This method is based on the
assumption that funds invested in a
project come from both equity share
holders and long term lenders.
 When calculating net cash flows using
this method; the interest paid on long
term loans is excluded. The rationale
for this approach is that the net cash
flows are defined from the view point
of suppliers of long term funds.

32.  Hence the post tax cost of funds is
used as the interest rate for
discounting.
 The post tax cost of long term funds
obviously includes the post tax cost of
long term debt.
 Therefore, if the interest on long term
debt is considered for the purpose of
determining net cash flows, an error
due to double counting would occur.

33. 1. Operating cash flow = Pat +Depreciation
+other non cash charges +interest on long
term (1-T.)
2. Terminal Cash flow = Net salvage value of
fixed Asset +net recovery of working
 Net salvage is arrived after adjusting the
sale value of on asset for either tax or tax
shield. If a fixed asset realizes more than its
book value, the profit is taxed and needs to
be adjusted. Similarly if there is a loss on the
sale of a fixed asset, you get shield on the loss
and needs to be adjusted .
NSV =Sales value- Tax/tax shield

34. Cash Flows From Equity funds
Point of View
1.When cash flows are computed from
the equity funds point of view, only the
funds contributed by the equity holders
towards the project are considered as an
initial investment.
2.The operating cash flow includes profit
after taxes,depreciation, other non-cash
charges and preference dividend.

35. The terminal cash flow will be equal to
the net salvage value of fixed asset
minus repayment of term loans,
redemption of preferences capital,
repayment of working capital
advances, and retirement of trade
credit and other dues.
Operating flow = Pat+Depreciation
-repayment on long and short-term
loans.

36. Cash Flow From Total Funds Point
of View
 When cash flows are computed from the
total funds point of view , the funds
contributed by all the suppliers of funds
towards the project are considered for the
calculation of the initial investment.
 The operating cash flows are calculated by
adding profit after taxes, depreciation,
non cash charges, interest on long term
borrowing (1-t)and interest on short term
borrowers (1-t)

37. The terminal cash flow will be
equal
to the net salvage value of
fixed asset
and net recovery of W.C.
margin.
Operating flow = Pat
+depreciation +
interest on long and short term
loans(1-t)

38. Benefit Cost Ratio
The BCR is a time adjusted capital
budgeting technique. Also known as
the profitability index, it measures
the present value of returns per
rupee invested. BCR is defined as the
ratio of the present value of benefits
to the initial investment
BCR = PVB or PVCIF/I

39. Decision criteria
Accept all proposals with a BCR >
1.
If projects are mutually exclusive,
the project with higher BCR should
chosen.

40. Capital Rationing Among
Multiple Project
 An Enterprise may be planning to
invest in two or more project while
the funds available may be
insufficient to take up all the project
for implementation, though all
project are considered good for
investment(if it satisfies any one of
the following investment criteria.)

41.  The NPV is positive
 The IRR > cost of capital
 The PI > 1.00
 The BCR > 1.00

42.  Capital Rationing may be defined
as the process of judiciously
allocating the available
demarcated funds towards the
capital.The capital outlay of two or
more project that are considered
good for investment, in such a way
that the return on investment is
maximized.