The document outlines financial estimates and projections for a project, detailing the components of project costs such as land development, machinery, and working capital. It covers means of financing, including share capital, loans, and government incentives, as well as projections for revenues, costs, and profitability. It also addresses cash flow statements and balance sheets to monitor financial health over time.

1. Financial Estimates and Projections
(Chapter 6)
Submitted To:
Rowshanara Islam
Assistant Professor
Department Of Finance
Jagannath University
Submitted By:
Riadh Mohammed Arif
From Group No- 02
Finance 6th Batch
Jagannath University

2. Group Members
No. Name ID
1 Md. Abul Kashem 115202
2 Md. Ismaile Hossain 115235
3 Mahmudul Hasan 115268
4 Mufty Anupama Parvin 115275
5 Mohmmad Mahabubur Rahaman B-110203019
6 Saidur Rahman Munna B-110203043
7 Riadh Mohammed Arif B-110203044
8 Md. Saleh Rabbi Monir B-110203054
9 Md. Kowshik Talukder B-110203089
10 Noor E Jannath B-110203119

3. Cost of Project
The cost of project represents the total of all items of outlay associated with
long-term fields.
It is the sum of the outlays on the following:
 Land and Site Development:
 Buildings and Civil Works:
 Plant and Machinery
 Technical know-how and Engineering Fees
 Expenses on Foreign Technicians and Training of Technicians Abroad
 Miscellaneous Fixed Assets
 Preliminary and Capital Issue Expenses
 Pre-operative Expenses:
 Provision for Contingencies:
 Margin Money for Working Capital
 Initial cash Losses

4. Cost of Project (Cont’d)
Balance Sheet
Projected Sales
Tax Factor
Working Capital
Needs
Depreciation
Means of
Finance and
Time Phasing
Interest and Loan
Repayment
Production Plan
Cost of
Production
Estimate of
Working Results
Working Capital
Advance (WCA)
Cash Flow
Statement
Interest on WCA
Cost of Project
and Time
Phasing
Exhibit 6.1 Financial Projections

5. Cost of Project (Cont’d)
1. Land and Site Development: The costs of land site development are-
- Cost of leveling and development
- Cost of compound wall and gates
- Cost of tube wells
2. Buildings and Civil Works: Building and civil works covers the following-
- Buildings for the main plants and equipments
- Godowns, warehouse and open yard facilities
- Garage
- Sewers, drainage
3. Plant and Machinery: The plant and machinery consists the following costs-
i) Cost of Imported Machinery: This is the sum of a) FOB Value
b) imported duty c) Clearing, loading and unloading charges.
ii) Cost of Indigenous Machinery: This consists of a) FOR (Free On Rail) cost b) Sales tax
and other taxes
iii) Cost of Stores and Spares:
Provision of Escalation = (Latest rate of annual inflation to the plant and machinery X (Length of
the delivery period)

6. Cost of Project (Cont’d)
4. Technical know-how and Engineering Fees: The technical know-how and engineering fees
for setting up the project is a component of the project cost which is taken into account as
cost of capital.
5. Expenses on Foreign Technicians and Training of Technicians Abroad: Expenses on
foreign technicians like traveling, boarding and lodging are considered as a cost of project.
6. Miscellaneous Fixed Assets: Fixed assets and machinery which are not part of the direct
manufacturing process may be referred to as miscellaneous fixed assets. Like furniture,
office machinery and equipment.
7. Preliminary and Capital Issue Expenses:
Preliminary expenses are-
- Identifying the project
- Market survey
- Articles of association
Capital Issue Expenses are-
- Underwriting commission
- Brokerage
- Stamp duty

7. Cost of Project (Cont’d)
8. Pre-operative Expenses: These types of expenses are the following-
i) Establishment expenses ii) Traveling expenses
iii) Insurance charges iv) Mortgage expenses
v) Miscellaneous expenses
9. Provision for Contingencies: There are 2 procedures that are followed
for provision for contingencies. These are-
i) Divide the cost items into 2 categories
- Firm cost items
- Non-firm cost items
ii) Set the provision for contingencies at 5% to 10%.
10. Margin Money for Working Capital: Margin money for working capital is an important
element of the project cost which is provided by commercial banks and trade creditors.
11. Initial cash Losses: Most of the projects incur cash losses in the initial years. Failure to make
a provision for such cash losses in the project cost affects the liquidity position and impairs
the operations.

8. Means of Finance
To meet the cost of the project, the following means of finance are available-
1. Share Capital: Two types of share capitals are-
i) Equity capital, represents the contribution made by the owner’s of the business
and equity shareholders.
ii) Preference capital, represents the contribution made by preference shareholders.
2. Term Loans: Term loans provided by financial institutions and commercial banks.
There are 2 types of term loans.
- Native Term Loans
- Foreign Currency Term Loans
3. Debenture Capital: There are 2 types of debenture capital. These are-
i) Non- convertible debentures, are straight debt instruments which maturity period
of 5 to 9 years.
ii) Convertible debentures, are debentures which are convertible wholly or partly
into equity shares.

9. Means of Finance (Cont’d)
4. Deferred Credit: The credit which is provided by suppliers (for plant and
machinery) as a deferred credit facility is deferred credit.
5. Incentive Source: Government provides different types of incentives for
financing. These are-
- Tax exemption
- Capital subsidy
6. Miscellaneous Sources: Miscellaneous sources are-
- Unsecured loans
- Public deposits
- Leasing and hire purchase finance

10. Planning the Means of Finance
We have described the various means of finance that can be tapped for a project.
These are included-
i) Norms of regulatory bodies and financial institutions
ii) Key business considerations: Key business considerations are-
- Risk (Business risk and Financial risk)
- Cost ( Lower than cost of equity)
- Control
- Flexibility

11. Estimates of Sales and Production
In estimating sales revenues, the following considerations should be kept in mind:
1. It is not advisable to assume a high capacity utilization level in the first year of
operation. It is sensible to assume that capacity utilization would be some what
low in the first year and rise there after gradually to reach the maximum level
inn the third or fourth year of operation.
2. It is not necessary to make adjustments for stocks of finished goods.
3. The selling price considered should be the price realizable by the company net
of excise duty.
4. The selling price used may b the present selling price- it is generally assumed
that changes in selling price will be matched by proportionate changes in cost of
production.

12. Estimates of Sales and Production (Cont’d)
Exhibit 6.2: Estimates of Production and Sales
(Details may be Furnished separately for each product and until plant reaches maximum capacity utilization)
Product
1st yr. 2nd yr. 3rd yr. 4th
yr.
Product
1st yr. 2nd yr. 3rd yr. 4th
yr.
1. Installed Capacity(qty. per annum)
2. No of working days
3. No of shifts
4. Estimated Production per day (qty.)
5. Estimated annual production (qty.)
6. Estimated Output as % of plant capacity
7. Sales (qty.) (after adjusting stocks)
8. Value of sales (in*000 of Tk.)
Note: Production in the initial period should be assumed at a reasonable level of utilization of capacity
increasing gradually to attain full capacity in subsequent years.

13. Cost of Production
The major components of cost of production are :
 Material cost
 Utilities cost
 Labor cost
 Factory overhead cost
Materials : The most important element of cost , the material cost comprises of the
cost of raw materials, chemicals, components and consumable stores required for
production. It is a function of the quantities in which these materials are required and
the prices payable for them.

14. Cost of Production (Cont’d)
Utilities : Utilities consist of power , water , and fuel. The requirements of power ,
water, and fuel may be determined on the basis of norms specified by the
collaborators, consultants, etc or the consumption standards in the industry, whichever
is higher.
Labor : Labor cost is the cost of all manpower employed in the factory. labor cost
naturally is a function of the number of employees and the rate of remuneration.
Factory Overhead : The expenses on repairs and maintenance, rent, taxes,
insurance on factory assets , and so on are collectively referred as factory overhead.

15. Working Capital Requirement and Its Financing
In estimating the working capital requirement and planning for its financing, the
following pints have to be kept in mind:
1. The working capital requirement consists of the following: (i)raw materials
(ii)stocks of goods in process (iii) stocks of finished goods(iv) debtors
(v)operating expenses (vi)consumable stores
2. The principal sources of working capital finance are: (i)working capital
advances (ii)trade credit (iii)accruals and provisions (iv)long term sources of
financing.
3. The margin requirement varies with the type of current assets as follows:
Current Assets Margin
Raw materials 10-25 percent
Work-in-process 20-40 percent
Finished Goods 30-50 percent
Debtors 30-50 percent

16. Working Capital Requirement and Its Financing (Cont’d)
The following exhibit may be used to estimate the working capital requirement, the amount of likely bank
finance available, and the margin money for working capital to be provided from long term sources.
Exhibit 6.3 Margin Money for Working Capital
Items No. of Months Bank Margin Amount Amount of Margin Amount
Requirements Availability Bank Finance Money
(1) (2) (3) (4) (5) (6) (7)
1. Indigenous raw materials
Less: Trade Credits
Net Indigenous raw materials
2. Import raw materials
3. Consumable stores
Less: Trade Credit
Net consumable stores
4. Wages and Salaries
5. Cost of fuel, light and power, taxes, insurance, rent etc.
6. Cost of repairs and maintenance
7. Packaging and Sales expenses
8. Stock of Finished goods at cost excluding depreciation
9. Stock of goods in process
10. Outstanding Debtors
11. Other items of Working Capital, if any
Net Working Capital

17. Profitability Projections (Estimates of
working result)
The profitability projections or estimates of working results (as they are referred to by term-
lending financial institutions ) are prepared along the following lines:
A. Cost of production
B. Total administrative expenses
C. Total sales expenses
D. Royalty and know-how payable
E. Total cost production ( A+B+C+D)
F. Expected sales
G. Gross profit before interest
H. Total financial expenses
I. Depreciation
J. Operating profit ( G-H-I)
K. Other income
L. Preliminary expenses written off
M. Profit/loss before taxation ( J+K-L)
N. Provision for taxes
O. Profit after tax ( M-N)
Less, dividend on : preference capital & equity capital
P. Rental profit
Q. Net cash accrual ( P+I+L)

18. Profitability Projections ( Cont’d)
Cost of Production:
Represent the cost of materials , labor, utilities and factory overheads as calculated earlier.
Total Administrative Expenses:
Consist of Administrative salaries, remuneration to directors, professionals fees, light, postage,
telegrams and telephones and office supplies ( stationary , printing etc)
Total Sales Expense:
Consist of commission payable to dealers, packing and forwarding charges, salary of sales staff,
sales promotion and advertising expense and other miscellaneous expenses.
Royalty and Know-how Payable:
Rate is usually 2-5 % of sales and generally payable for a limited numbers f years i.e. 5 to 10
years

19. Profitability Projections ( Cont’d)
Total cost of production:
Gross profit before interest:
Cost of
Production
Total
administrati
ve expense
Total sales
expense
Royalty
and know-
how
payable
Total cost of
production
Expected
Sales
Total cost of
production
Gross profit
before interest

20. Profitability Projections ( Cont’d)
Total Financial Expense:
Consist of interest on term loans, interest on bank borrowings, commitment charge on term
loans and commission for bank guarantee.
In estimating the interest on term loans, two points should be borne in mind:
 Interest on term loans is based on the present rate of interest charged by the term
lending financial institutions and commercial banks.
 Interest amount would decrease according to repayment schedule of the term loan.
The interest on working capital borrowings from banks may be estimated as follows:
i. Determine the total requirement of the working capital
ii. Find out the quantum of bank borrowing that would be available against the total
working capital requirement
iii. Calculate the interest charge on the basis of the prevailing interest rates

21. Profitability Projections ( Cont’d)
Depreciation:
An important item, particularly for capital-incentive projects. In figuring out the depreciation
charge, the following points should be borne in mind:
1. Contingency margin and pre-operative expenses provided in estimating the cost of project
should be added to the fixed assets proportionately to ascertain the value of fixed assets for
determining the depreciation charge.
2. Preliminary expenses in excess of 5.0% of the project cost is included under pre-operative
expenses which is subsequently allocated to fixed assets for determining the depreciation
charge.
3. The income tax specifies that the written down value method should be used for tax purpose.
If further specifies the rate of depreciation applicable to different kinds of assets.
4. For company law ( Financial reporting) purpose, the method of depreciation may be either
written down value ( WDV) or straight line (SL) method.
The depreciation charge for the nth year is:
Dn= I(1-d)^(n-1)*d

22. Profitability Projections ( Cont’d)
Other Income:
Income arising from transactions is not part of the normal operations of the firm. i.e. sale of
machinery, disposal of scrap etc.
Write off Preliminary Expenses:
5% of the cost of project or capital employed ,whichever is higher, can be amortized in five
equal annual installments.
Profit or Loss Before Taxation:
Operating
profit
Other
income
Write-off
of
preliminary
expenses
Profit or loss
before taxation

23. Profitability Projections ( Cont’d)
Provision of Taxation:
Profit After Taxation:
A part of profit after tax usually paid out as dividend- dividend on preference capital and
dividend on equity capital.
Retained Profit:
Also called ploughed back earnings
Net Cash Accrual:
Profit after
tax
Dividend
payment
Retained
Profit
Retained
profit
Depreci
ation
Write off of
preliminary
expenses
Other non
cash charge
Net cash
accrual

24. Projected Cash Flow Statement
The cash flow statement shows the movement of cash into and out of the firm and its net impact
on the cash balance within the firm. A format for preparing the cash flow statement which is
really a cash flow budget.
Cash Flow Statement
Sources of fund
1. Share issue
2. Profit before taxation with interest added back
3. Depreciation provision for the year
4. Development rebate reserve
5. Increase in secured medium and long-term borrowings for the project
6. Other medium/long–term loans
7. Increase in unsecured loans and deposits
8. Increase in bank borrowings for working capital
9. Increase in liabilities for deferred payment to machinery suppliers
10. Sale of fixed assets
11. Sale of investments
12. Other income (indicate details)
Total (A) (contd.)

25. Projected Cash Flow Statement (Cont’d)
Disposition Of Funds
1. Capital expenditure for the project
2. Other normal capital expenditure
3. Increase in working capital
4. Decrease in secured medium and long-term borrowings
 All Bangladesh institutions
 SFCs
 Banks
5. Decrease in unsecured loans and deposits
6. Decrease in bank borrowings for working capital
7 . Decrease in liabilities for deferred payments to machinery suppliers
8. Increase in investments in other companies
9. Interest on term loans
10. Interest on bank borrowings for working capital
11. Taxation
12. Dividends
 Equity
 Preference
13. Other expenditure
Total (B)
 Opening balance of cash in hand and at bank
 Net surplus/deficit (A-B)
 Closing balance of cash in hand and at bank

26. Projected Balance Sheet
The balance sheet, showing the balances in various asset and liability accounts,
reflects the financial condition of the firm at a given point of time. The horizontal
format of balance sheet as prescribed by the Companies Act is given in Exhibit 6.7.
Exhibit 6.7 Format of Balance Sheet
AssetsLiabilities
Share capital
Reserved and surplus
Secured loans
Unsecured loans
Current liabilities and provisions
Fixed assets
Investments
Current assets, loans, and advances
Miscellaneous expenditures and losses

27. Projected Balance Sheet (Cont’d)
Liabilities side of the balance sheet represents the following:
 Share capital consists of paid-up equity and preferences capital.
 Reserves and surplus represent mainly the accumulated retained earnings like debenture
redemption reserve, dividend equalization reserve, and the general reserve.
 Secured loans represent the borrowings of the firm against which security has been provided.
The important components are debentures, term loans from financial institutions, and loans from
commercial banks.
 Unsecured loans represent borrowings against which no specific security has been provided.
Examples; fixed deposits from public and unsecured loans from promoters.
 Current liabilities are obligations which mature in the near future, usually within a year.
Payables from acquiring materials and supplies used in production, provision for provident fund,
provision for pension and gratuity, and provision for proposed dividends.

28. Projected Balance Sheet (Cont’d)
The assets side of the balance sheet shows how funds have been used in the business.
The major asset components may be described briefly.
 Fixed assets are tangible long-lived resources ordinarily used for producing goods
and services. They are shown at original cost less accumulated depreciation.
 Investments represent financial securities owned by the firm.
 Current assets, loans, and advances consist of cash, debtors, inventories of
different kinds, and loans and advances made by the firm.
 Miscellaneous expenditures and losses represent outlays not covered by the
previously described asset accounts and accumulated losses, if any.

29. Projected Balance Sheet (Cont’d)
For preparing the projected balance sheet at the end of year n+1, we need information
about following:
o the balance sheet at the end of year n;
o the projected income statement and the distribution of earnings for year n+1;
o the sources of external financing proposed to be tapped in year n+1;
o the proposed repayment of debt capital (long-term, intermediate term, and short-
term) during year n+1;
o the outlays and the disposal of fixed assets during year n+1;
o the changes in the level of current assets during year n+1;
o the changes in other assets and certain outlays like preoperative and preliminary
expenses (which are capitalized) during year n+1;
o the cash balance at the end of year n+1;

31. Multi-Year Projections
Having learnt the basics of projection ,we shall now look at illustration where in
financial projections are made over a longer frame.
A new firm ABC limited is being set up to manufacture alloy steel . The expected
outlays and proposed financing during construction and the first two operating years
are shown:
1st Operating year 2nd Operating year
Outlays
Preliminary and preoperative expenses 2 - -
Fixed assets 20 20 10
Current assets - 20 10
Financing
Share capital 10 15 -
Term Loan 15 15 7.5
Short-term bank borrowing - 12 6
Construction
period
Rs. in millions

32. Projected Profit and Loss Statements
1st Operating year 2nd Operating year
Sales 30 60
Cost of sales 30 40
Interest 4.8 6.4
Depreciation 2 2.8
Losses -- 6.8
Profit before tax (6.8) 4
Tax -- 2.4
Profit after Tax (6.8) 1.6

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