Professional Documents
Culture Documents
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Many a time plants may be viable economically and financially but would be
socially undesirable. An example would be dyes units, which have mushroomed
around Ahmedabad. These are polluting and generate effluents not acceptable
to the society and environment. In the last 5 years, India is slowly becoming
environment conscious and friendly. So using hazardous chemicals or polluting
industries may not get the necessary clearances. For instance, the state
government has ordered closure of all dyes units in Gujarat unless suitable
effluent treatment is implemented.
Project proposals should be derived from, and placed in the context of, broader
development objectives. These objectives may be explicitly stated in a
government plan document, or implicitly given through a public investment
program. A statement should be given of the main development objectives of a
country to which a proposed project will contribute.
Many investments will work well only if there are complementary investments in
related sectors or activities. For example, for an irrigation project to raise
agricultural output, the appraisal report must elaborate the necessary extra
requirements for transport and processing. Projects to improve urban services
should consider the capacity of the existing systems to deliver additional power
and water. Potential constraints in supplies, whether they can be overcome, and
the necessary timing of complementary investments, must be considered.
Because a project takes place within a given macroeconomic and sector context,
an investment project can be seen as an incremental change to an existing
structure. In fact, the context may be more important than the project itself.
Moreover, a project that is financially sound within one sector and
macroeconomic context may be financially unsound in another. Thus policy
changes may be as important as the physical investment to the achievement of
development objectives.
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QUES. NO. 2: EXPLAIN IN DETAILS THE TECHNICAL PARAMETERS OF
APPRAISING THE PROJECT.
To implement any project, the entrepreneur needs to carry out different types of
feasibility studies. These feasibility studies evaluate all the risks and returns and
tries to balance them and help the entrepreneur to finalize his plans.
Technical appraisal focuses upon appraising the likely technical gaps / grey areas
or technical problems which can be broadly grouped under the following three
phases:
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market access, physical & social infrastructure & facilities, utilities
like telecommunication, water, power etc, transportation & general
state of development.
b. Selection of Process / Production Technology. It needs to be
analysed whether process / production technology is outdated or
obsolete or too advanced or dependable with proven track record &
upgradeable considering the size of the unit, plant capacity,
capacity utilisation, product mix & collaborators tie-ups. The
collaborators details & its track record is also appraised.
c. Detailed Project Engineering taking into account the logistics,
maintenance / service back up, spares & consumables, quality
standards / orientation, raw material suppliers / vendors etc
d. Project Implementation / Work Schedule
e. Project Competitiveness Indicators like manufacturing lead
time, work in process, trough-put, capacity, performability,
flexibility, quality etc
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MORE SPECIFICALLY, THE LIKELY PROBLEMS TO BE APPRAISED IN
ADVANCE COULD BE STATED AS FOLLOWS:
SIZE OF THE PLANT: Size of the plant has a direct bearing on the
financial calculation in relation to annual production capacity. Hence in the
initial years about 60-70% production capacity is taken into account for
study of viability of the project. The determining factors of the size of the
plant is demand-supply of a particular product and the end use of the
product.
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PRODUCT MIX: The process might require certain product mix to arrive
at the final product that is needed to be produced. The cost factors of the
product thus mixed is also taken into account to arrive at cost at various
levels of production & its cost impact on the manufacturing.
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QUES NO. 3: THE ECONOMIC VIABILITY AND TECHNICAL FEASIBILITY OF
ANY PROJECT GOES HAND IN HAND. EXPLAIN WITH EXAMPLES THE
IMPORTANCE OF BOTH STUDIES PROVING COMPLEMENTARY TO EACH
OTHER FOR SUCCESS OF ANY PROJECT.
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required to transform a technically and operationally feasible project into an
economically feasible one.
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QUES NO. 4: COMPARE THE SUBTLE DIFFERENCES OF MARKET AND
COMMERCIAL APPRAISAL TECHNIQUES WITH EXAMPLES
A project has to be technically feasible and financially viable. The financial viability is possible
only if the project is able to realize the unit sales forecast / projection and thereby earn sales
revenue, ensuring smooth cash flow, funds flow and the resultant surplus generation. Market
appraisal therefore occupies a central position in project finance as it enables the promoters
and the financing institution to understand, estimate and assess the likely potential of the
market for the proposed product and arrive at a realistic projection as regards the market
share that can be captured.
1. Demand analysis
Casual Methods: More analytical that the preceding methods, casual methods
seek to develop forecasts on the basic of cause-effect relationship specified in an
explicit, quantitative manner. The important casual methods are:
Chain ratio method
Consumption method
End use method
Leading indicator method
Econometric method
The commercial appraisal on the other hand normally resorts to undertaking forecasting.
Some of the techniques for forecasting are:
Demand technique forecasting: The future demand of the product, its proper
survey and future availability and supply is studied in depth. This will naturally
involve employing surveyors to carry out detailed market survey and document
the findings to arrive at proper forecasting’s.
Past Trend Method: Past trend method is adopted as a guide depending on the
consumption pattern of the society as a whole. Further, the changes that are
likely to take place are considered to arrive at the future demand.
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End use method: Suitable for estimating the demand for intermediate products,
the end use method, also referred to as the consumption coefficient method,
involves the following steps:
Identify the possible uses of the product.
Define the consumption coefficient of the product for various uses.
Project the output levels for the consuming industries.
Derive the demand for the product.
Export market: There exist a huge export potential in many products which need
to be tapped. Almost all sectors have good potential. The product that is planned
to be manufactured and its application is of vital importance to gauge the
potential.
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QUES NO.5: THE FINANCIAL APPRAISAL OF ANY PROJECT IS AN
ONGOING EXERCISE THROUGHT THE LIFE OF THE PROJECT. DISCUSS
THIS WITH VARIOUS TECHNIQUES & PRINCIPLES ADOPTED BY FINACIAL
INSTITUTIONS FOR VIBILITY STUDIES.
The setting up of projects not only involves substantial capital investment but
also the gestation period is long. The project completion cost is the basic
parameter based on which the cost of output is worked out. The implementation
of a project has to pass though a number of stages like planning and formulation
of project reports, obtaining statutory clearances, tying up finances and finally
the actual implementation of the project. Any slippage in project execution
stages will result in time and cost overrun, higher interest during construction
and consequently higher tariff. On the other hand, some more time and effort
taken in planning and formulation of project reports may be helpful in cutting the
time and cost overrun at the construction stage. It is, therefore, essential that all
the activities right from conceptualisation to execution of the power project are
properly planned and coordinated so that the project is implemented as per the
envisaged schedule of commissioning as well as within the estimated completion
cost of the project so that the cost of output is minimised to the ultimate
consumers. This is the first and foremost principle because the effect of any slip
up at this stage is permanent and can not be corrected subsequently.
Before extending finance for Projects, the economic feasibility and financial
viability of the project in relation to the macro economic conditions prevailing at
the time of conceptualization of the project and also the likely scenario that may
prevail during the normal life span of the project should be established. The
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project should be able to withstand reasonable levels of variation in crucial
parameters which should be established by sensitivity analysis of the cash flows.
The means of finance for the project along-with provisions to meet contingencies
such as cost/ time overrun should be established. The entire source of funds for
the project from sources other than that by the promoters shall be fully tied-up
before sanction/ disbursement of the limits.
The disbursements under project Finance would be made strictly in tune with the
sanction terms, only after ensuring the end use of funds already disbursed by
the consortium, meeting the required margin at each stage of project
implementation and certification by the competent consultants/ specialists as
per the procedure in vogue from time to time and as decided by the consortium.
The rate of interest on such credit facilities would be determined based on the
borrower gradation and the interest rate policy of the institution from time to
time. The credit facilities shall be secured by tangible assets and collaterals as
may be required based on the nature of project, quantum and duration of the
credit, anticipated return on investment and risk perception. In addition,
institution's usual normal lending norms and policy guidelines in force from time
to time would be equally applicable to project finance cases also.
Banks/financial institutions (FIs) are free to sanction term loans for technically
feasible, financially viable and bankable projects undertaken by both public
sector and private sector undertakings subject to the following conditions :
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i. The amount sanctioned should be within the overall ceiling of the
prudential exposure norms prescribed by the Reserve Bank of India from
time to time .
ii. Banks/FIs should satisfy themselves that the projects financed by them
have income generation capacity sufficient to repay the loan together with
interest. Banks/FIs should also satisfy themselves that the project financed
is run on commercial lines i.e. involving commercial considerations such
as identifiable activity, cash flow considerations and that they do not run
into liquidity mismatch on account of lending to such projects.
iii. FIs should evolve an appropriate debt-equity ratio for each project.
iv. Banks/FIs are free to decide the period of loans keeping in view, inter alia,
the maturity profile of their liabilities.
v. Banks/FIs should have the requisite expertise for appraising technical
feasibility, financial viability and bankability of projects, with particular
reference to risk analysis and sensitivity analysis.
vi. In respect of projects undertaken by public sector units, term loans may
be sanctioned only for corporate entities (i.e. public sector undertakings
registered under Companies Act or a Corporation established under the
relevant statute). Further, such term loans should not be in lieu of or to
substitute budgetary resources envisaged for the project. The term loan
could supplement the budgetary resources if such supplementing was
contemplated in the project design.
Appraisal
Projects are often financed through Special Purpose Vehicles and are structured
on a limited/non-recourse basis. Financing of these projects would, therefore, call
for special appraisal skills on the part of lending agencies. Identification of
various project risks, evaluation of risk mitigation through appraisal of project
contracts and evaluation of creditworthiness of the contracting entities and their
abilities to fulfil contractual obligations will be an integral part of the appraisal
exercise. In this connection, banks/FIs may consider constituting appropriate
screening committees/special cells for appraisal of credit proposals and
monitoring the progress/performance of the projects. Often, the size of the
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funding requirement would necessitate joint financing by banks/FIs or financing
by more than one bank under consortium or syndication arrangements. In such
cases, participating banks/FIs may, for the purpose of their own assessment,
refer to the appraisal report prepared by the lead bank/FI or have the project
appraised jointly. Banks/FIs should, however, ensure that the appraisal in all
cases is completed within a time bound period and repetitive and sequential
appraisals by several institutions are avoided.
Asset-Liability Management
Administrative Arrangements
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QUES NO. 6: DISCUSS THE LONG-TERM & SHORT-TERM FINANCING TOOLS
AND ENUMERATE THE STUDY IN RELATION TO VARIOUS FINANCIAL
RATIOS ADOPTED BY WAY OF TOOLS FOR ASSESSING THE VIABILITY OF
PROJECT.
The importance of financial appraisal of the project can be well understood from
the fact that an unsound investment decision may prove to be fatal to the very
existence of the firm. The need, significance or importance of assessing the
financial viability of the project arises mainly due to following:
1. Large Investments: Projects generally involve large investments of
funds. But the funds available are always limited and the demand for
funds far exceeds the resources. Hence it is very important to plan and
control the capital expenditure.
2. Long-term commitment of funds: Projects involves funds for long-term
or more or less on permanent basis. The long-term commitment of funds
increases the financial risk involved in the investment decision.
3. Irreversible Nature: Once the decision for acquiring a permanent asset
is taken, it becomes very difficult to dispose of these assets without
incurring heavy losses.
4. Long-term effect on profitability: Capital budgeting decisions not only
effect the present earnings but also the future growth and profitability of
the firm.. Capital budgeting is of utmost importance to avoid over
investment or under investment in fixed assets.
5. Difficulties of Investment Decisions: The long term decisions are
difficult to take because (i) decision extends to a series of years beyond
the current accounting period, (ii) uncertainties of future and (iii) higher
degree of risk.
6. National Importance: Investment decisions though taken by individual
concern is of national importance because it determines employment,
economic activities and economic growth.
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At each point of time a business firm has a number of proposals regarding
various projects in which it can invest funds. But the funds available are always
limited and hence it becomes essential to select amongst the various competing
proposals those, which give the highest benefit. There are many methods of
evaluating profitability of capital investment proposals. The various commonly
used methods are as follows:
2) RATE OF RETURN METHOD: This method takes into account the earnings
expected from the investment over their whole life. According to this method
the project with the highest rate of return is selected. The return on
investment method can be used in several ways as follows:
S.No Method Formula
.
1 Average Rate of Total Profits (after Depreciation & Taxes) x 100
Net Investment in the project x No. of Yrs of
return
profits
2 Return per unit of Total Profits (after Depreciation & Taxes) x 100
Net Investment in the project
Investment Method
3 Return on Average Total Profits (after Depreciation & Taxes) x 100
Total Net Investment / 2
Investment Method
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4 Average Return on Average Annual Profits (after Depreciation &
Average Investment Taxes) x 100
Total Net Investment / 2
Method
3) NET PRESENT VALUE METHODS: The Net present value method is the
modern method of evaluating investment proposals. This method takes into
consideration the time value of money and attempts to calculate the return
on investments by introducing the factor of time-element. The following are
the necessary steps to be followed for adopting the NPV method:
a) Determine an appropriate rate of interest that should be selected as the
minimum required arte of return called cut-off rate or discount rate.
b) Compute the present value of total investment outlay i.e. cash outflows at
the determined discount rate.
c) Compute the present value of total investment proceeds i.e. cash inflows
(profit before depreciation & after tax) at the determined discount rate.
d) Calculate the NPV of each project by subtracting the present value of cash
outflows from the present value of cash inflows for each project.
e) If NPV is positive or Zero, the proposal may be accepted otherwise it
should be rejected.
f) The project with maximum positive NPV may be selected.
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Break Even Point Analysis: A Business is said to break even when its total
sales are equal to its total costs. It is a point of no profit no loss. At this point
contribution is equal to fixed cost. A concern which attains break even point at
less number of units will definitely be better from another concern where break
even point is achieved at more units of production. The BEP can be calculated by
the following formula:
BEP (In Units) = Total Fixed Expenses / Contribution per Unit
BEP (Based on Total Sales) = Fixed Expenses / P/V ratio
Contribution: Contribution is the difference between the sales and the marginal
cost of sales and it contributes towards fixed expenses and profit.
a) Liquidity Ratios
Liquidity Ratios tells about the ability of the firm to meet it’s short-term
financial obligations and commitments. These ratios are based on the
relationship between current assets which provide the sources of meeting
short term obligations and current liabilities which are obligations to be met
within one year. Two types of liquidity ratios are: Current Ratio & Acid –
Test Ratio.
b) Leverage Ratios
A firm uses a combination of equity and debt for financing it’s assets. Debt
is riskier source of finance as it entails a fixed outgo of periodic interest
payments and loan repayments. Leverage ratios help us to analyze the risk
arising from the use of Debt Capital.
The commonly used Leverage Ratios are:
i. Debt-Equity Ratio: = Debt/Equity
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Debt includes all liabilities whether long-term or short-term. Equity
represents the net-worth of the firm i.e. Equity Capital, Reserves &
Surpluses and Preference Shares.
An alternative form of Debt-Equity ratio is the Long-term debt to equity.
The numerator would consist of only long-term debt.
A lower value of debt-equity ratio indicates a higher degree of protection
employed by the creditors.
ii. Interest-Coverage Ratio
Interest-Coverage Ratio = Profit before interest and Taxes
Fixed Interest Charge
Interest coverage ratio is used as an indicator of the paying capacity by
the lenders. A high interest coverage suggest more paying capacity but at
the same time may indicate the firms inability to use low interest debt as
a source of finance to increase the return to it’s shareholders.
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QUES NO. 7: MANAGERIAL APPRAISAL POINTS MORE TO THE INTEGRITY
OF THE ENTERPRENUER THAN THE CAPABILITY TO RUN THE UNIT
SMOOTHLY – DISUSS WITH EXAMPLES.
In cases where a MNC, which has a long track record and significant experience,
is implementing a project, it would be an added comfort about management
feasibility. In businesses, which are technologically driven based on intellectual
capital, technocrats would be preferred.
The dues to the banking sector are generally related to the performance of the
unit/industrial segment. In a few cases the cause of NPA has been due to internal
factors (to the banks) such as weak appraisal or follow-up of loans but more
often than not, it is due to factors such as management inefficiency of borrower
units, obsolescence, lack of demand, non- availability of inputs, environmental
factors etc. Wherever the unit/segment is doing well the credit relationship is
generally maintained except in cases of willful default / misappropriation /
diversion of funds. The problems to the unit/ segment arising out of various
internal/ external factors were felt to be originating point for NPAs in banks.
The high level of NPAs is a historical legacy mainly due to lacunae in credit
recovery system, largely arising from inadequate legal provisions on foreclosure
and bankruptcy, long drawn legal procedures and difficulties in execution of the
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decrees awarded by the Court. The Indian legal system is sympathetic towards
the borrowers and works against the banks' interest. Despite most of their loans
being backed by security, banks are unable to enforce their claims on the
collateral, when the loans turn non-performing, and therefore, loan recoveries
have been insignificant. Due to this the integrity of the entrepreneur
becomes all the more important.
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QUES NO. 8: THE LONG TERM FINANCIAL INSTITUION LAY MORE STRESS
ON FUTURE PRODUCTION AND PROFITABILITY BASED ON PROJECTED
TURNOVER, WHEREAS THE BANKS AND SHORT-TERM FINANCING
AGENCIES GO IN FOR SHORT TERM VIABILITY AND SUCCESS OF ANY
PROJECT. EXPRESS YOUR OPINION IN THE LIGHT OF LARGE SCALE
FAILURE OF LONG TERM PROJECTS IN RECENT TIMES.
The fact that the financial sector of a country plays a very important role in
economic growth and development is well documented. In using the financial
sector as an engine of economic growth. Prudential regulations like capital
adequacy requirements, collateral requirements, lending restrictions, direct
supervision and others are required to keep the financial institutions sound. The
most common causes of failure of financial institutions in different parts of the
world are political pressure to finance bad projects and poor incentives for
financial institutions to screen and monitor projects. In East Asia, among the key
success factors was an insistence on commercial standards within priority
sectors. Successful development banks transformed themselves from
government agencies financing development projects into more market-oriented
financial enterprises, enhancing growth through financial restraint and credit
allocation.
Many projects fail to live up to their potential. Some projects fail to achieve their
schedule or budget goals or fail to deliver everything initially promised. Still
other projects simply fail altogether. Many of the problems faced by projects can
be avoided, or at least contained, by effective project management practices.
Most frequent reasons for project failure, and some alternatives and
remedies for each are as follows:
1. Lack of clear link between the project and the organisation’s key strategic
priorities, including agreed measures of success.
2. Lack of clear senior management and Ministerial ownership and
leadership.
3. Lack of effective engagement with stakeholders.
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4. Lack of skills and proven approach to project management and risk
management.
5. Too little attention to breaking development and implementation into
manageable steps.
7. Evaluation of proposals driven by initial price rather than long- term value
for money (especially securing delivery of business benefits).
8. Lack of understanding of and contact with the supply industry at senior
levels in the organisation.
9. Lack of effective project team integration between clients, the supplier
team and the supply chain.
If any of the answers to the above questions are unsatisfactory, project
should not be allowed to proceed until the appropriate assurances are
obtained.
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3) Top Management Support. Top or divisional management support for the
project that has been conveyed to all concerned parties.
4) Competent project team members. The importance of selecting and, if
necessary, triaging project team members.
5) Sufficient resource allocation. These are Resources in the form of
money, personnel, logistics, etc.
6) Adequate communication channels. Sufficient information is available
on the project objectives, status, changes, organizational coordination,
clients’ needs, etc.
7) Control Mechanisms. (Including planning, schedules, etc.). Programs are
in place to deal with initial plans and schedules.
8) Feedback capabilities. All parties concerned with the project area able
to review project status, make suggestions, and corrections through formal
feedback channels or review meetings.
9) Responsiveness to client. All potential users of the project are consulted
with and kept up to date on project status. Further, clients receive
assistance after the project has been successfully implemented.
10)Client consultation. The project team members share solicited input
from all potential clients of the project. The project team members
understand the needs of those who will use the systems.
11)Technical tasks. The technology that is being implemented works well.
Experts, consultants, or other experienced project managers outside the
project team have reviewed and critiqued the basic approach.
12)Client Acceptance. Potential clients have been contacted about the
usefulness of the project. Adequate advanced preparation has been done
to best determine how to sell the project to the clients.
13)Trouble-shooting. Project team members spend a part of each day
looking for problems that have surfaced or are about to surface. Project
team members are encouraged to take quick action on problems on their
own initiative.
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Good Planning The first indicator, Good Planning, requires excellent forward
planning, which includes detailed planning of the process implementation
stages, task timeliness, fall-back positions, and re-planning. Notice that initial
planning is not enough. Projects often take wrong turns, or initial solutions
prove unfounded. The project manager who does not prepare to re-plan, or
has not considered and planned fall-back positions when initial plans fail, will
often find that the project first stalls, and then fails. We must remember that
project management is not a straight-line process, but an iterative process
that requires agile rethinking as the known environment changes before your
eyes.
CONCLUSION
So at this point we have several lists of things that might indicate project
success and others that might indicate project failure. But there is one thing
primarily that one must recognize in all of these lists. There are no stock
answers, and there is no one list that will guarantee success. Projects are
complex by nature, and each is unique. It is very difficult to plan with complete
certainty something that has never before been done. Every single factor in
all of these lists is important and must be considered for each project. The
most difficult part may be prioritizing the factors. Which are most important?
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Which must be done first? In each case one must ultimately make the
decisions based upon the unique circumstances of one’s immediate project.
Good project management is a process of continuous improvement. It is a
process of making mistakes and learning from those mistakes. It is a process
of continuous study and learning. For those who cannot devote themselves to
this never-ending process, there will be few successes.
Working capital comprises short term net assets: stock, debtors, and cash, less
creditors. Working capital management then is to do with management of all
aspects of both current assets and current liabilities, so as to minimise the risk of
insolvency while maximising return on assets.
Thus strictly speaking, working capital is not a part of the project finance which
deals with providing finance for fixed assets.
1. the margin money for working capital has to be financed by long term
sources and
2. inadequate working capital leads to liquidity crunch, diversion of funds
and financial problems.
The working capital limits would be considered only after the project nearing
completion and after ensuring full tie-up of the term loan requirements of the
borrower. These limits would be either in the form of fixed loans or running
accounts and / or bill financing facility. The finance extended under this category
would be for meeting the funds requirements for day to day operations of the
units i.e, to meet recurring expenses such as acquisition of raw material, the
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various expenses connected with products, conversion of raw materials into
finished products, marketing and administrative expenses, etc.
The working capital limits may require such security and personal/ third party
guarantees as applicable to general lending norms of the bank and risk
perception in respect of individual borrowal account in the form of:
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Even profitable companies fail if they have inadequate cash flow. Liabilities are
settled with cash not profits. The primary objective of working capital
management is to ensure that sufficient cash is available to:
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QUES NO. 10: A PROJECT SHOULD LAY EQUAL STRESS ON TECHNICAL,
FINANCIAL, COMMERCIAL AND MANAGERIAL APPRAISAL. DO YOU AGREE
WITH THIS STATEMENT? IF SO, SUBSTANTIATE YOUR ANSWER WITH
WEIGHTAGE SYSTEM FOR EACH APPRAISAL.
To implement any project, the entrepreneur needs to carry out different types of
appraisal / feasibility studies. These feasibility studies evaluate all the risks and
returns and tries to balance them and help the entrepreneur to finalize his plans.
Technical Appraisal
Financial Appraisal
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was good, market survey showed existence of a good market and the
government was giving fiscal incentives. What was overlooked was availability of
skilled labour. Bicycle assembly is a hard work and labor in Gujarat is used to
process industries. Therefore the project failed. The center of the bicycle industry
is Ludhiana where native Punjabis/ Sikhs are sturdy people and used to hard
work and have requisite skills in assembly of bicycles.
Managerial Appraisal
In cases where a MNC, which has a long track record and significant experience,
is implementing a project, it would be an added comfort about management
feasibility. In businesses, which are technologically driven based on intellectual
capital, technocrats would be preferred.
Economic Appraisal
Social Appraisal
Many a time plants may be viable economically and financially but would be
socially undesirable. An example would be dyes units, which have mushroomed
around Ahmedabad. These are polluting and generate effluents not acceptable
to the society and environment. In the last 5 years, India is slowly becoming
environment conscious and friendly. So using hazardous chemicals or polluting
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industries may not get the necessary clearances. For instance, the state
government has ordered closure of all dyes units in Gujarat unless suitable
effluent treatment is implemented.
Market Appraisal
This is a critical analysis because the output of any factory has to sell in the
market place for the promoter to earn revenues. Very often demand analysis and
projections are optimistic leading to problems in the future. Another observation
has been that products that sell abroad may not have a market in India. India, in
general is a cost conscious market and the promoter has to keep this in the back
of his mind. T series with its low priced cassettes met phenomenal success.
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