This document provides an overview of conducting a financial analysis for a new project. It outlines estimating costs, means of financing, sales and production estimates, cost of production, working capital requirements and financing, profitability projections, and time value of money concepts. The objectives are to create a detailed financial plan, explore profitability from investor perspectives, and ensure smooth project functioning by providing relevant information to stakeholders.

1. Financial Analysis of a
project

2. Objectives of the financial analysis of the project
 to chart out detailed financial plan for the project
 to explore profitability of the project from promoter’s and
stakeholders’ perspective
 to ensure smooth functioning of the project by providing relevant
information to promoters and stakeholders.

4. COST OF PROJECT
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 Indian technicians
abroad
■ Miscellaneous fixed assets
■ Preliminary and capital issue expenses
■ Pre-operative expenses
■ Margin money for working capital
■ Initial cash losses

5. MEANS OF FINANCE
To meet the cost of the project the following means of finance are
available:
 Share capital
 Term loans
 Debenture capital
 Deferred credit
 Incentive sources
 Miscellaneous sources

6. Planning the Means of Finance
 How should you go about determining the specific means of finance
for a given project? The guidelines and considerations that should be
borne in mind for this purpose are as follows:
 Norms of regulatory bodies and financial institutions
 Key business considerations

7.  Norms of Regulatory Bodies and Financial Institutions :The primary
purpose of such regulations is to impart prudence to project
financing decisions and provide a measure of protection to
investors. In addition, the norms of financial institutions, which
often provide substantial assistance to projects significantly shape
and circumscribe project financing decisions.
 Key Business Considerations cost, risk, control, and flexibility.

8. ESTIMATES OF SALES AND PRODUCTION

9. COST OF PRODUCTION
The major components of cost of production are:
 Material cost
 Utilities cost
 Labour cost
 Factory overhead cost

10. WORKING CAPITAL REQUIREMENT AND ITS
FINANCING
 The working capital requirement consists of the following: (i) raw
materials and components (indigenous as well as imported), (ii) stocks
of goods-in-process (also referred to as work-in-process), (iii) stocks
of finished goods, (iv) debtors, (v) operating expenses and (vi)
consumable stores.
 The principal sources of working capital finance are: (i) working
capital advances provided by commercial banks, (ii) trade credit, (iii)
accruals and provisions, and (iv) long term sources of financing.

11.  There are limits to obtaining working capital advances from
commercial banks.
 They are in two forms: (i) the aggregate permissible bank finance is
specified as per the norms of lending, followed by the lending bank,
(ii) against each current asset a certain amount of margin money has
to be provided by the firm.

12.  The Tandon Committee has suggested three methods for determining
the maximum permissible amount of bank finance for working capital.
The method that is generally employed now is the second method
 According to this method, the maximum permissible bank finance is
calculated as follows:
Current assets as per the norms laid down by the Tandon Committee
(0.75) - Non-bank current liabilities like trade credit and provisions
 The implication of this norm is that at least 25 percent of current
assets must be supported by long-term sources of finance.

13.  The margin requirement varies with the type of current asset.
 While there is no fixed formula for determining the margin amount, the
ranges within which margin requirements for various current assets lie are 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

14. PROFITABILITY PROJECTIONS (OR ESTIMATES OF
WORKING RESULTS)
The estimates of working results may be 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 of production (A + B + C + D)
F Expected sales

15. 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 taxation
0 Profit after tax (M- N) Less Dividend on - Preference capital - Equity
capital
P Retained profit
Q Net cash accrual (P +I+ L)

17. Time Value of Money
 A rupee today is more valuable than a rupee a year hence.
 Individuals, in general, prefer current consumption to future
consumption.
 Capital can be employed productively to generate positive returns. An
investment of one rupee today would grow to (1+ r) a year hence (r is
the rate of return earned on the investment).
 In an inflationary period a rupee today represents a greater real
purchasing power than a rupee a year hence

18.  The process of investing money as well as reinvesting the interest earned
thereon is called compounding.
 The future or compounded value of an investment after n years when the
interest rate is r percent is:
Future value,, = Present value (1 + r)"
If no interest is earned on interest the investment earns only simple interest. In
such a case the investment grows as follows:
Future value= Present value [1 + nr]
The process of discounting, used for calculating the present value, is simply the
inverse of compounding. The present value formula is:
PV -FV,[1/(1 +r)]

19.  An annuity is a stream of constant cash flows (payments or receipts) occurring
at regular intervals of time. When the cash flows occur at the end of each
period the annuity is called a regular annuity or a deferred annuity. When the
cash flows occur at the beginning of each period, the annuity is called an
annuity due.
 The future value of an annuity is given by the formula:
FVA,,= A [(1 + r)"- 1]/r
 The present value of an annuity is given by the formula:
PVA,,= A {[(1 + r)"- 1]/r(1 +r)}

20.  A perpetuity is an annuity of infinite duration.
 The present value of a perpetuity is:
Present value of a perpetuity= A/r
 The general formula for the future value of a single cash flow after n years
when compounding is done m times a year is: FV,, = PV [1 +r/m]""