2. Financial analysis
Assessment of theViability, Stability and
Profitability of a project
All Costs and Expenditures, Sales and
Revenues, Inflation and Escalation,Taxes
and Duties
Minimum investment which is technically and
economically feasible.
Spend money in expectation of returns and
logically seems to lend itself to planning,
financing and implementation as a unit.
Have a specific starting and ending point
intended to accomplish a specific objective.
Project
3. Major Components of Financial Analysis
A set of accounting statements for the
project life on
Cash inflows (Costs and benefit) statement
Income and expenditure (Profit and loss
statement)
Balance sheet
A set of indicators derived from these
statements
Net Present value
Internal rate of return
Cash benefit ratio
Break-even point
Payback period, etc
Project risk and sensitivity analysis
4. Criteria for Selection of Project
1) Internal Rate of Return (IRR) > Prevailing Discount Rate orWACC
a) Internal rate of return (IRR)
Net present value of all the cash flows (both positive and negative) from a
project or investment equal zero.
b) Prevailing Discount Rate
It is the rate which reflects the time value of money and is used to convert costs
and benefits occurring at different times to equivalent values at a common time.
PV = F /[(1 + r)n]
where PV = present value; F = future value;
r = discount rate per period; n = number of periods
c) Weighted cost of capital (WACC)
It is used as reflective of the discount rate and calculated as:
Where i is the cost of debt (interest rate);
ROE is the cost of equity (Return on Equity)
WACC = Debt * i + Equity * ROE
(Debt + Equity) (Debt + Equity)
5. 4) Break-even at low capacity
3) Pay-back period is short
Period of operation (years/months) over which
accumulated net revenues is equal to investment
Payback period =Total Investment / Average Annual
2) Maximum Net PresentValue
The process in which the present value of expected future outflows (costs) is
subtracted from the present value of inflows (benefits) is called NPV
NPV = PV of benefits – PV of costs
PV = M/(1+r)+M/(1+r)2 + M/(1+r)3 +....…+M/(1+r)n
Where PV= present value of benefits or costs; r= discount rate; n= number of period
Break-even analysis entails the calculation and examination of the margin of safety for
an entity based on the revenues collected and associated costs.
6. House Investment for Government Scheme
Years Increase Monthly rent Ann Rent 5000000 -5000000 -5000000
2017 20000 240000 240000 -4760000
2018 20000 240000 240000 -4520000
2019 20000 240000 240000 -4280000
2020 20000 240000 240000 -4040000
2021 10% 22000 264000 264000 -3776000
2022 22000 264000 264000 -3512000
2023 22000 264000 264000 -3248000
2024 22000 264000 264000 -2984000
2025 22000 264000 264000 -2720000
2026 10% 24200 290400 290400 -2429600
2027 24200 290400 290400 -2139200
2028 24200 290400 290400 -1848800
2029 24200 290400 290400 -1558400
2030 24200 290400 290400 -1268000
2031 10% 26620 319440 319440 -948560
2032 26620 319440 319440 -629120
2033 26620 319440 319440 -309680
2034 26620 319440 319440 9760
2035 26620 319440 319440 329200
2036 10% 29282 351384 351384 680584
2037 29282 351384 351384 1031968
2038 29282 351384 351384 1383352
2039 29282 351384 351384 1734736
2040 29282 351384 351384 2086120
2041 10% 32210 386522 386522 2472642
2042 32210 386522 386522 2859165
2043 32210 386522 386522 3245687
2044 32210 386522 386522 3632210
2045 32210 386522 386522 4018732
2046 32210 386522 386522 4405254
9405254
IRR 4.2%
During 34 year of
government service,
officer receive
9405254/- rupees
as a rent.This
amount is more
then enough for him
to purchase a house
for himself.