ENTREPRENEURSHIP DEVELOPMENT II Yr, STUDY NOTES- UNIT 4
UNIT –IV PROJECT APPRAISAL AND REPORT
1 Meaning and importance of project appraisal
Project appraisal is the systematic and comprehensive review of economic, environmental, financial, social, technological, and other aspects of a project to determine whether it will meet the organisational objectives.
2. Aspects of Project Appraisal
1 Technical appraisal :-Technical feasibility implies the adequacy of the proposed plant and equipment to produce the product within the prescribed norms. The technical analysis of a project involves designing the various processes, installing equipment, specifying material, and prototype testing. The project manager has to select the technology required in consultation with technical experts and consultants.
2 Management appraisal :-Management appraisal is a process of monitoring the managerial components of the promoter. It plays an important role for the organisational success. To judge the managerial capability of promoter an appraisal should be made regarding their resourcefulness, and commitment, industrial experience and past performance.
3 Environmental Appraisal The following factors into consideration(a) Public health and occupational safety(b)Control of air,water and land, pollution©Mgt of renewable natural resources (d) Efficient use of natural resources .
4. Market Appraisal Before the production actually starts, the entrepreneur needs to anticipate the possible market for the product. He/she has to anticipate who will be the possible customers for the product and where and when the product will be sold.
5 Economic and Financial Appraisal In economic analysis, an effort is made to find out as to whether the benefits associated with the project are more than the project cost for justifying investment made on it. Since all the business activities revolve around finance, the importance of financial aspects cannot be under estimated.
3 Tools of project appraisal Tools of Project appraisal are used to asses a proposed project’s success and viability. After identifying the associated cost and expected revenues, an entrepreneur tries to evaluate the project by using any or combination of the following methods.
3.1 Payback Method Payback period represent the number of years required to recover the original investment. Projects will be selected if initial outlay can be recovered within a predetermined period. This method is relatively easy since the cash flow doesn’t need to be discounted.
Formula for Calculating Payback Period
a) when annual cash inflows are equal.PBP = original cost of a project/annual cash inflow after tax before depreciation
b) when annual cash inflows are not equal:- The payback period can be found out by adding up the cash inflows until the total is equal to the initial cash outlay of the project.
3.2. Net Present Value
A project’s net present value is determined by summing the net cash inflows, discounted at the project’s cost of capital and deducting the initial outlay. Decision criteria are to accept a project with a positive net present value.
Net present value = present value of all cash inflows - present value of all cash outflows
The following steps are involved in the NPV method: 1. Determine appropriate rate of interest to discount cash flows
2 Compute the present value of total investment outlay 3. Compute the present value of total cash inflows 4. Subtract the present value of cash outflow from the present value of cash inflows 5. Choose the project if the NPV is positive. If the NPV is negative, i.e., the present value of cash outflow is more than the present value of cash inflow the project proposal will be rejected
3.3. Profitability Index
This is the ratio of the present value of project cash inflow to the present value of initial cost. Projects with a Profitability Index of greater than 1.0 are acceptable. Profitability index=Present value of cash inflows/Present value of cash outflow
3.4. Internal Rate of Return (IRR)
This method equates the net present value of the project to zero. The project is evaluated by comparing the calculated internal rate of return to the predetermined required rate of return. Projects with Internal rate of return that exceeds the predetermined rate are accepted. The major weakness is that when evaluating mutually exclusive projects, use of internal rate of return may lead to selecting a project that does not maximize the shareholders’ wealth.
4. Meaning and Significance of Project Report :- A Project Report is an important document to convince people about feasibility and viability of a project. It is a Blue Print of an investment proposal. It can be defined as a well evolved course of action derived to achieve the specific objective within a specified period of time.
5.significance of a Project Report:-• It acts like a road map• For getting financial assistance from Banks • To act as
means of communication• To serve as valid proof• To meet legal requirements• To measure the progress• To control the
performance
6.Process of Project Report
Selection of an idea Observation Scanning of Business environment Preparation of project report
7.Contents of a Project Report
The information to be included in a project report may be broadly classified as :-
1. General Information:- The information of general nature in the project report includes the following:
a. Bio-data of promoter. b. Industry profile. c. Constitution and organisation d. Product details
2. Project description: A brief description of the project is to be included here:-
a. Site : Location of the enterprise b. Availability of raw material and skilled labour. c. Utilities – power, fuel and water. d.
Pollution control – scope of dumps and sewage system e. Transport facilities
f. Machinery and equipments g. Production process
3. Market potential : The following aspects are to be covered
a. Demand and supply position b. Expected price c. Marketing strategy d. After sales service
4. Capital cost and sources of finance: An estimate of various components of capital items like land and building, plant,
etc and the probable source of financing the same.
5. Working capital requirements: Estimated working capital and its source should be mentioned here.
6. Economic and social variables: The source economic benefit expected to accrue from the project should also be stated
in the report which includes employment generation, local resource utilisation, development of the area etc.
7. Other financial aspects: To assess the Profitability of the project, a projected profit and loss account and to assess the
financial position a projected balance sheet and cash flow statement is to be appended.
8. Project Implementation: A time table for the project to ensure the timely completion of the project is also to be
presented.
8 . Proforma of a Project Report:-
1. Introduction: a. Nature of activity b. Constitution c. The entrepreneur and his ability to implement the project d.
Market analysis
2. Investment analysis: a. Fixed capital requirements (Fixed assets and sources) b. Working capital requirements c.
Material and labour.
3. Analysis of costs: a. Fixed costs b. Variable costs c. Cost of production
4. Calculation of surplus: a. Sales realization b. Non-cash costs c. Finance charges d. Surplus
5. Sources of finance: a. Cost of the project b. Own funds c. Borrowed funds d. Sources
6. Project performance and profitability
A. Sales XXX
Other income XXX
Total (A) XXX
B. Cost of sales
Raw materials XXX
Wages XXX
Others XXX
Total (B) XXX
C. Surplus (A-B) XXX
Depreciation XXX
Profit before interest and tax (B-C) XXX
D. Interest XXX
Profit before tax (C-D) XXX
Tax XXX
E. Profit after Tax XXX
7. Project Balance Sheet
A. Assets: XXX
B. Liabilities: XXX
8. Cash Flow Statement
A. Sources: Profit after Tax: XXX
Add: Depreciation ,Interest XXX
Tax XXX
Increase in Liabilities XXX
Decrease in Assets XXX
Total(A) XXX
B. Applications:
Interest XXX
Tax XXX
Increase in Assets XXX
Decrease in Liabilities XXX
Loan repayments XXX
Others XXX
Total(B) XXX
C. Surplus (A-B) XXX
D. Drawings XXX
Balance of Cash XXX
Opening balance of Cash XXX
Closing balance of Cash XXX
9. Ratio Analysis
a. Current Ratio b. Debt- Equity ratio and DSCR c. Profitability Ratio
10. Break-even Analysis
Sales XXX
Less : Variable Costs XXX
Materials XXX
Wages XXX
Overheads XXX
Fixed Costs : Salaries XXX
Electricity XXX
Depreciation XXX
Others XXX
Total XXX
Break-even Sales: Fixed Cost X Sales
Contribution % of BEP : BEP Sales X 100/Total Sales
Margin of Safety : Total Sales – BEP Sales
11. Conclusion : A brief concluding summary is to be given.
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1 Meaning and importance of project appraisal
Project appraisal is the systematic and comprehensive review of economic, environmental, financial, social, technological, and other aspects of a project to determine whether it will meet the organisational objectives.
2. Aspects of Project Appraisal
1 Technical appraisal :-Technical feasibility implies the adequacy of the proposed plant and equipment to produce the product within the prescribed norms. The technical analysis of a project involves designing the various processes, installing equipment, specifying material, and prototype testing. The project manager has to select the technology required in consultation with technical experts and consultants.
2 Management appraisal :-Management appraisal is a process of monitoring the managerial components of the promoter. It plays an important role for the organisational success. To judge the managerial capability of promoter an appraisal should be made regarding their resourcefulness, and commitment, industrial experience and past performance.
3 Environmental Appraisal The following factors into consideration(a) Public health and occupational safety(b)Control of air,water and land, pollution©Mgt of renewable natural resources (d) Efficient use of natural resources .
4. Market Appraisal Before the production actually starts, the entrepreneur needs to anticipate the possible market for the product. He/she has to anticipate who will be the possible customers for the product and where and when the product will be sold.
5 Economic and Financial Appraisal In economic analysis, an effort is made to find out as to whether the benefits associated with the project are more than the project cost for justifying investment made on it. Since all the business activities revolve around finance, the importance of financial aspects cannot be under estimated.
3 Tools of project appraisal Tools of Project appraisal are used to asses a proposed project’s success and viability. After identifying the associated cost and expected revenues, an entrepreneur tries to evaluate the project by using any or combination of the following methods.
3.1 Payback Method Payback period represent the number of years required to recover the original investment. Projects will be selected if initial outlay can be recovered within a predetermined period. This method is relatively easy since the cash flow doesn’t need to be discounted.
Formula for Calculating Payback Period
a) when annual cash inflows are equal.PBP = original cost of a project/annual cash inflow after tax before depreciation
b) when annual cash inflows are not equal:- The payback period can be found out by adding up the cash inflows until the total is equal to the initial cash outlay of the project.
3.2. Net Present Value
A project’s net present value is determined by summing the net cash inflows, discounted at the project’s cost of capital and deducting the initial outlay. Decision criteria are to accept a project with a positive net present value.
Net present value = present value of all cash inflows - present value of all cash outflows
The following steps are involved in the NPV method: 1. Determine appropriate rate of interest to discount cash flows
2 Compute the present value of total investment outlay 3. Compute the present value of total cash inflows 4. Subtract the present value of cash outflow from the present value of cash inflows 5. Choose the project if the NPV is positive. If the NPV is negative, i.e., the present value of cash outflow is more than the present value of cash inflow the project proposal will be rejected
3.3. Profitability Index
This is the ratio of the present value of project cash inflow to the present value of initial cost. Projects with a Profitability Index of greater than 1.0 are acceptable. Profitability index=Present value of cash inflows/Present value of cash outflow
3.4. Internal Rate of Return (IRR)
This method equates the net present value of the project to zero. The project is evaluated by comparing the calculated internal rate of return to the predetermined required rate of return. Projects with Internal rate of return that exceeds the predetermined rate are accepted. The major weakness is that when evaluating mutually exclusive projects, use of internal rate of return may lead to selecting a project that does not maximize the shareholders’ wealth.
4. Meaning and Significance of Project Report :- A Project Report is an important document to convince people about feasibility and viability of a project. It is a Blue Print of an investment proposal. It can be defined as a well evolved course of action derived to achieve the specific objective within a specified period of time.
5.significance of a Project Report:-• It acts like a road map• For getting financial assistance from Banks • To act as
means of communication• To serve as valid proof• To meet legal requirements• To measure the progress• To control the
performance
6.Process of Project Report
Selection of an idea Observation Scanning of Business environment Preparation of project report
7.Contents of a Project Report
The information to be included in a project report may be broadly classified as :-
1. General Information:- The information of general nature in the project report includes the following:
a. Bio-data of promoter. b. Industry profile. c. Constitution and organisation d. Product details
2. Project description: A brief description of the project is to be included here:-
a. Site : Location of the enterprise b. Availability of raw material and skilled labour. c. Utilities – power, fuel and water. d.
Pollution control – scope of dumps and sewage system e. Transport facilities
f. Machinery and equipments g. Production process
3. Market potential : The following aspects are to be covered
a. Demand and supply position b. Expected price c. Marketing strategy d. After sales service
4. Capital cost and sources of finance: An estimate of various components of capital items like land and building, plant,
etc and the probable source of financing the same.
5. Working capital requirements: Estimated working capital and its source should be mentioned here.
6. Economic and social variables: The source economic benefit expected to accrue from the project should also be stated
in the report which includes employment generation, local resource utilisation, development of the area etc.
7. Other financial aspects: To assess the Profitability of the project, a projected profit and loss account and to assess the
financial position a projected balance sheet and cash flow statement is to be appended.
8. Project Implementation: A time table for the project to ensure the timely completion of the project is also to be
presented.
8 . Proforma of a Project Report:-
1. Introduction: a. Nature of activity b. Constitution c. The entrepreneur and his ability to implement the project d.
Market analysis
2. Investment analysis: a. Fixed capital requirements (Fixed assets and sources) b. Working capital requirements c.
Material and labour.
3. Analysis of costs: a. Fixed costs b. Variable costs c. Cost of production
4. Calculation of surplus: a. Sales realization b. Non-cash costs c. Finance charges d. Surplus
5. Sources of finance: a. Cost of the project b. Own funds c. Borrowed funds d. Sources
6. Project performance and profitability
A. Sales XXX
Other income XXX
Total (A) XXX
B. Cost of sales
Raw materials XXX
Wages XXX
Others XXX
Total (B) XXX
C. Surplus (A-B) XXX
Depreciation XXX
Profit before interest and tax (B-C) XXX
D. Interest XXX
Profit before tax (C-D) XXX
Tax XXX
E. Profit after Tax XXX
7. Project Balance Sheet
A. Assets: XXX
B. Liabilities: XXX
8. Cash Flow Statement
A. Sources: Profit after Tax: XXX
Add: Depreciation ,Interest XXX
Tax XXX
Increase in Liabilities XXX
Decrease in Assets XXX
Total(A) XXX
B. Applications:
Interest XXX
Tax XXX
Increase in Assets XXX
Decrease in Liabilities XXX
Loan repayments XXX
Others XXX
Total(B) XXX
C. Surplus (A-B) XXX
D. Drawings XXX
Balance of Cash XXX
Opening balance of Cash XXX
Closing balance of Cash XXX
9. Ratio Analysis
a. Current Ratio b. Debt- Equity ratio and DSCR c. Profitability Ratio
10. Break-even Analysis
Sales XXX
Less : Variable Costs XXX
Materials XXX
Wages XXX
Overheads XXX
Fixed Costs : Salaries XXX
Electricity XXX
Depreciation XXX
Others XXX
Total XXX
Break-even Sales: Fixed Cost X Sales
Contribution % of BEP : BEP Sales X 100/Total Sales
Margin of Safety : Total Sales – BEP Sales
11. Conclusion : A brief concluding summary is to be given.
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