FIN APPRAISAL Agriculture Projects
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Transcript FIN APPRAISAL Agriculture Projects
PROJECT
FINANCING
PROJECT
APPRAISAL
Satyajit Dwivedi
CAB, Pune
ACA-TM-37 (v2.2-20-Nov-10)
PROJECTS - DEFINITION
• CUTTING EDGE OF
DEVELOPMENT – GITTINGER
• A SET OF ACTIVITIES LARGE
ENOUGH TO REQUIRE PROPER
PLANNING ETC.
ACA-TM-37 (v2.2-20-Nov-10)
PROJECTS - DEFINITION
• PROJECT IS AN ECONOMIC ACTIVITY IN
WHICH
FINANCIAL RESOURCES ARE EXPENDED TO
CREATE CAPITAL ASSESTS THAT PRODUCE
BENEFITS OVER A PERIOD OF TIME AND WHICH
LOGICALLY LENDS ITSELF TO PLANNING,
FINANCING AND IMPLEMENTING AS A UNIT.
ACA-TM-37 (v2.2-20-Nov-10)
CHARACTERISTICS
•P – PRODUCT OF GOODS AND SERVICES
•R – RESOURCES : MAN, MATERIAL, MONEY
•O – ORGANISATION
•J – JUSTIFICATION : SOCIAL BENEFITS, WEALTH
•E – ECONOMIC & FINANCIAL VIABILITY
•C – CONTINUITY: PLANNING, RESEARCH & DEV.
•T – TIME BOUND IMPLEMENTATION
ACA-TM-37 (v2.2-20-Nov-10)
WHY PROJECT APPROACH ?
• Integrated approach for systematic
exploitation of resources
• Gives an idea of costs year by year – Helps
in resources planning
• Impact of investment on the stakeholders
• Better judgment of administrative &
organisational problems
• Encourage examination of alternatives
ACA-TM-37 (v2.2-20-Nov-10)
ESSENCE OF PROJECT APPRAISAL
• A COMPREHENSIVE & SYSTEMATIC REVIEW
OF ALL ASPECTS OF PROJECT
• A SECOND LOOK TO THE PROJECT BY ONE
NOT INVOLVED IN PRJECT FORMULATION
• HIGHLIGHT THE WEAK AREAS OF THE
PROJECT FOR DUE RECTIFICATION
ACA-TM-37 (v2.2-20-Nov-10)
ESSENCE OF PROJECT APPRAISAL
• AN EXERCISE FOR FUTURE ASSESSMENT
• A JOINT ASSESSMENT BY THE
PROMOTER & FINANCIAL INSTITUTION
• ENFORCEMENT OF A TIME BOUND
PROGRAMME TO AVOID DISTORTION
ACA-TM-37 (v2.2-20-Nov-10)
TYPES OF PROJECTS
*
FARM SECTOR
NON FARM
SECTOR
OTHERS
ACA-TM-37 (v2.2-20-Nov-10)
PROJECT CYCLE
• IDENTIFICATION
• FORMULATION
• APPRAISAL
• IMPLEMENTATION
• MONITORING
• EVALUATION
ACA-TM-37 (v2.2-20-Nov-10)
IDENTIFICATION
PROJECT
CYCLE
IMPLEMENTATAION
ACA-TM-37 (v2.2-20-Nov-10)
APPRAISAL
TECHNICAL
COMMERCIAL
MANAGERIAL / BORROWER
ORGANISATIONAL
SOCIAL
ECONOMIC
FINANCIAL
ACA-TM-37 (v2.2-20-Nov-10)
OBJECTIVES OF FINANCIAL APPRAISAL
• To assess the financial effect on the farmers and
bank/financial institution
• To asses overall return on the investment as well
as return to farmer after repayment of
installments
• To know whether incremental benefits are
attractive enough for farmer
• To work out a plan that projects financial
situations and sources of funds and to determine
timing of investments
ACA-TM-37 (v2.2-20-Nov-10)
CASH FLOW STATEMENT
• Cash flow prepared on an annual basis over the
economic life of assets
• Identify the costs and benefits
• Compare incremental benefits with incremental costs
• Income and expenditure pertaining to the investment
alone to be reckoned
• For deciding the price – price paid or received at the
farm-gate to be taken
• Constant price principle is applied
• Interest on borrowed capital is not included
ACA-TM-37 (v2.2-20-Nov-10)
CASH FLOW STATEMENT CONTD..
Identification of costs:
Investment:
• Expenditure made before the production starts and
replacement of machineries
Production:
• All recurring expenditure during the project life
Pre-Development Income:
• Pre-developmental income to be taken as cost
• Cost not to be reduced with subsidy/margin
ACA-TM-37 (v2.2-20-Nov-10)
Identification of Benefits
•
•
•
•
•
•
•
Increase in production
Cost reduction
Improvement in quality
Grading
Prevention of loss
Consumed part of production
Scrap/residual value of investments
ACA-TM-37 (v2.2-20-Nov-10)
METHODS OF APPRAISAL
Two well known methods:
PAYBACK METHOD (Undiscounted)
TIME ADJUSTED RATE OF RETURN
(Discounted)
ACA-TM-37 (v2.2-20-Nov-10)
PAYBACK METHOD
• LENTH OF TIME FROM BEGINNING OF THE
PROJECT TILL THE INCREMENTAL BENEFITS
REACHES THE CAPITAL INVESTMENT
• FAILS TO CONSIDER EARNINGS AFTER THE
PAYBACK PERIOD
• DOES NOT CONSIDER TIMIMGS OF
OCCURRENCE OF CASH INFLOWS AND
OUTFLOWS OF THE PROJECT
ACA-TM-37 (v2.2-20-Nov-10)
DISCOUNTED CASH FLOW
METHOD
TAKES INTO ACCOUNT TIME VALUE OF
MONEY
• COSTS AND BENFITS OCCUR AT DIFFRENT
TIMINGS AND IN DIFFERENT AMOUNT
• DISCOUNT FACTOR IS USED TO BRING
COSTS AND BENEFITS TO THEIR PRESENT
VALUE
• BY DISCOUNTING AT A GIVEN RATE WE
OVERCOME THE TIME DIMENSION
ACA-TM-37 (v2.2-20-Nov-10)
DISCOUNTED CASH FLOW
METHOD
DISCOUNTED MEASURES OF PROJECT WORTH
• BENEFIT COST RATIO (BCR)
• NET PRESENT WORTH (NPW)
• ITERNAL RATE OF RETURN (IRR)
ACA-TM-37 (v2.2-20-Nov-10)
STEPS & METHODOLOGY FOR
APPRAISAL
• COST AND BENEFIT STREAM IN THE CASH
FLOW TO BE DISCOUNTED SEPARATELY
• TOTAL OF DISCOUNTED COST GIVES
PRESENT WORTH OF COSTS (PWC)
• TOTAL OF DISCOUNTED BENEFIT IN CASH
FLOW GIVES PRESENT WORTH OF
BENEFITS (PWB)
ACA-TM-37 (v2.2-20-Nov-10)
STEPS & METHODOLOGY FOR
APPRAISAL
• BENEFIT COST RATIO : RATIO OF PWB TO PWC
• NET PRESENT WORTH : DIFFERENCE BETWEEN
PWB AND PWC
• IF BCR IS > 1 AND NPW IS +VE AT THE
DISCOUNTED RATE, THEN THE PROJECT IS
VIABLE
ACA-TM-37 (v2.2-20-Nov-10)
Benefit Cost Ratio
•
Year
Investment
cost
Benefits
DF
@15%
PW of
costs
( 2x4)
PW of
benefits
(3x4)
1
2
3
4
5
6
0
1000
-
1.000
1000
-
1
-
400
0.870
-
348
2
-
500
0.756
-
378
3
-
500
0.658
-
329
Total
1000
1400
1000
1055
1055 :1000
1.055 : 1
BC
Ratio
22
ACA-TM-37 (v2.2-20-Nov-10)
Net Present Worth
•
Year
Invest
ment
cost
Benefits DF @15 PW of
%
costs
( 2x4)
PW of
benefits
(3x4)
1
2
3
4
5
6
0
1000
-
1.000
1000
-
1
-
400
0.870
-
348
2
-
500
0.756
-
378
3
-
500
0.658
-
329
Total
1000
1400
1000
1055
NPW
23
ACA-TM-37 (v2.2-20-Nov-10)
1055 1000
55
Net Present Worth
Year
Investment Benefits DF @ 20 % PW of
cost
costs
( 2x4)
PW of
benefits
(3x4)
1
2
3
4
5
6
0
1000
-
1.000
1000
-
1
-
400
0.833
-
333
2
-
500
0.694
-
347
3
-
500
0.579
-
289
Total
1000
1400
1000
969
969 1000
(-) 31
•
NPW
24
ACA-TM-37 (v2.2-20-Nov-10)
Internal Rate of Return
• Internal Rate of Return ( IRR ) :
Lower of the two discount rates (+ ) Difference between two discount rates x (NPW
@ lower discount rate :- Absolute difference between NPWs at two discount rates )
• IRR=
• 15 + 5 x ( multiplied by )
• 55 :- 86 ( 55+-31)
• = 18 % ( 18.2 )
• IRR determined by trial and error
• Represents return for resources over life of project
• Earning power of money used in project
IRR not estimated beyond 50%
Present cut off IRR : 15%
25
ACA-TM-37 (v2.2-20-Nov-10)
Appraisal of Projects- Techniquescontd.
B C Ratio
IRR
NPW
More than one
More than the
lending rate
Equal to lending
rate
Lower than the
lending rate
Positive ( + )
One
Less than one
O
Negative ( - )
Feasibility or
otherwise of
investment
Feasible
Marginal
Not feasible
Tools for decision making- No single technique for estimating project worth
Could be many socio- economic factors , which are not always quantifiable
26
ACA-TM-37 (v2.2-20-Nov-10)
TREATMENT OF DEPRECIATION
AND INTEREST
Depreciation and interest on
borrowed capital not treated as
cost
In DCF approach;
‘return of capital’ is ensured and
hence no depreciation of investment
‘return to capital’ i.e interest on
investment is also ensured
ACA-TM-37 (v2.2-20-Nov-10)
SENSITIVITY ANALYSIS
• Studies the changes in the scenario in case
either price structure or timeframe undergoes
change
• Studies ability
adversities
ACA-TM-37 (v2.2-20-Nov-10)
of
the
project
to
bear
REPAYMENT SCHEDULE
Three issues to be seen
Instalments to be fixed in relation to surplus so
that sufficient is available with the farmer after
repayment
Period of loan to be within economic life of the
assets
Instalments are fixed when surplus is available
ACA-TM-37 (v2.2-20-Nov-10)
*
THANK
ACA-TM-37 (v2.2-20-Nov-10)
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