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An Investment Activity
Assets are created/ acquired
These Assets perform economic activity
Has a specified time frame
Benefits accrue for several years.
Identification of the Project
Preparation and formulation
Appraisal
Implementation
Evaluation
Technical Aspect
Commercial Aspect
Managerial Aspect
Financial Aspect
Social Aspects
Organisational Aspect
Economic Aspect
Technology : Indigenous <>High-tech
Manuf. process
Soil: Type, pH, Drainage, Depth
Location: Altitude, Slope, etc
Climate : Temperature, Humidity, Rain fall
Variety of Plant / Breed of animal
Backward linkages:
Quality animal
Veterinary care
Artificial insemination
centre
Fodder
Green grass
Water
Shed
Forward linkages:
Transportation
Milk Route
Milk collection Centre
Chilling plant
P
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D
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Man behind the venture
Technically qualified / Experienced ?
His Ability to hire qualified persons
Training
His Attitude towards the venture
Interview:
Recording
Pollution
Beneficiaries : Benefiting only a section
of society ?
Social acceptance ,Employment
opportunities
Labour resistance
Ability of the credit institution [MFI/Bank]
to service the unit
Support from other agencies to implement
the scheme:
Horticulture Department,NHB,NHM,APEADA
etc
Veterinary Department
Department of Sericulture
Boards : Coffee, Tea, Rubber, Spices
Whether National Priority?
Foreign exchange earner ?
Contribution to GDP
Thrust area?
Technical Aspect
Commercial Aspect
Managerial Aspect
Financial Aspect
Social Aspects
Organisational Aspect
Economic Aspect
Financial Analysis
Financial Analysis
Objective
To Find out Earning Capacity of a
Project
To know the Repaying Capacity of a
Project
To Compare Projects
Financial analysis is
comparing investment made
with the incremental net
benefit derived during useful
life of the assets
Steps in financial Analysis
Assessment of project cost (Outflow)
Assessment of project benefits ( I nflow)
Means of finance
Preparation of Cash Flow Statement
Work out the net benefit
Net Present value - NPV
Benefit Cost Ratio - BCR
I nternal Rate of Return - I RR
Break Even Point
Debt Service Coverage Ratio -
Sensitivity Analysis
0
50
100
150
200
250
Projected Actual
Cost of the Project
Projections
140 stems/Sq.mtr
Actuals
80 stems/Sq.mtr
Production of Roses
Projections
30 kgs/Sq.mtr
Actuals
25 Kgs/Sq.mtr
Production of Mushrooms
Benefits accrue due to
Increase in production
Cost reduction
Quality upgradation - value
addition
Prevention of loss
Stop decline in production
Life
Yield
C
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S
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G
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H
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L
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Mango
Benefits from a micro-enterprise
Gestation period assess properly
Stabilisation of productionperiod ,gap
Economic life or useful life of assets
Sale price
Main Product
By-Product
Scrap value of the assets at the end of
useful life
Pre Development Income OR Income
before project
Mango Project
0
100
200
300
400
500
600
700
1 4 6 8 12 16 20 24 28 32 36 40
Year
Fruits/
Tree
0
5000
10000
15000
20000
25000
Income from Paddy Income from
fisheries
Amount In Rs.
Incremental
Income
Pre-
Development
income
Investment cost
Initial investments
Replacements
Production cost:
Cost of inputs
Cost of labour
Insurance
Tax
Working capital interest etc.,.

A small Project : fruit and vegetable processing unit

Project cost : Rs. 60000 i.e. cost of dryer, shredder, washer etc

1st year 2nd year onwards

Production cost: Rs 45,000 70,000

Benefits: Rs. 80,000 1,20,000
Pre-Dev. income Rs. 30,000 30,000
Income 50,000 90,000

Gestation period : 6 months

Useful life of Machinery: 9 years


Cost 60000 45000 70000 70000 70000 70000 70000 70000 70000 70000
Year 0 yr 1st 2nd 3rd 4th 5th 6th 7th 8th 9th
Benefit 50000 90000 90000 90000 90000 90000 90000 90000 90000
Net
Benefit -60000 5000 20000 20000 20000 20000 20000 20000 20000 20000


The worth of Rs.100 TODAY
is not equal to the worth of Rs.100
TOMORROW
Due to:
Earning power of money
Opportunity costs
Risk taking ability

Two techniques which take time into
consideration for investment decisions
Compounding: Future value of present
money.



Discounting: Present value of future
money
Today
One
Year
from
Now
Two
Years
from
Now
Rs.100 Rs.110 Rs.121
Rs.121 Rs.110 Rs.100
10% 10%
10% 10%
Two techniques which take time into
consideration for investment decisions
Compounding: Future value of present
money.
F = P (1+ r )
n
Discounting: Present value of future
money
P=F (1+ r)
n


Where P = Present value, F= Future value, r = rate of interest , n = number of years
1
Opportunity cost -15% in Developing countries
Start discounting the cash flow with 15%
During the economic life of asset, If the
discounted returns are more than the
investment made, then it is worth while
examining critically further.
To know this, two tools are used
Benefit Cost Ratio ( BCR)
Net Present Value/ Worth ( NPV or NPW)
Cost 60000 45000 70000 70000 70000 70000 70000 70000 70000 70000
Year 0 yr 1st 2nd 3rd 4th 5th 6th 7th 8th 9th
Benefit 50000 90000 90000 90000 90000 90000 90000 90000 90000
Net
Benefit -60000 5000 20000 20000 20000 20000 20000 20000 20000 20000

82390

DF
@ 15%
0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284
4350
15120
13160
11440
9940
8640
7520
6540
5680
Cost 60000 45000 70000 70000 70000 70000 70000 70000 70000 70000
Year 0 yr 1st 2nd 3rd 4th 5th 6th 7th 8th 9th
Benefit 50000 90000 90000 90000 90000 90000 90000 90000 90000
Net
Benefit -60000 5000 20000 20000 20000 20000 20000 20000 20000 20000

DF
@ 15% 0.870
0.756 + 0.658 + 0.572+ 0.497+ 0.432+ 0.376+ 0.327+ 0.284
3.902
78040
4350
82390
0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284
Cost
Year 0 year 1st year 2nd to 9th year
Benefit
Net Benefit
3.902 0.870 DF @ 15%
60000
45000 70000
50000 90000
-60000
20000
5000
-
1
Tools for Financial Analysis








Present worth of benefits
Present worth of costs
BCR =
IF BCR is more than 1, then the project is viable.
NPW = PWB - PWC
IF NPW = + ve then Project is viable
+ = PWB
+ + =PWC
Cost
Year 0 year 1st year 2nd to 9th year
Benefit
Net Benefit
3.902 0.870 DF @ 15%
60000
45000 70000
50000 90000
-60000
20000
5000
Disc.Cost 273140 39150 60000
Disc.Benefit
43500 351180
-
1
-
BCR =
372290
394680
= 1.06 : 1.00
NPW =( PWB - PWC) = 394680 - 372290 = 22390
PWB
PWC
=
1000 1210
2 years
10%
B
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f
i
t

C
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1000
Internal Rate of Return (IRR)
At what rate the project is giving returns
Investing Rs. 100 - and getting back Rs. 121 after
two years - means the investment is giving return at
the rate of 10%. i.e. IRR in the case is 10%
In above case When Rs. 121 ( benefit) is discounted
@ 10% we get Rs.100, i.e. the present value of
benefit which is equal to the investment ( cost)
That means IRR is the rate of discount which would
equate the Present value of benefit to the present
value of cost.
Internal Rate Of Return (IRR)
Internal Rate Of Return (IRR)
IRR = discount rate at which :

Present value = Present value
of benefits of costs

Worked out by trial and error method.
By discounting Cash flow at higher
discount rates till NPV = 0 or negative.
Proceed discounting at 5 point scale
higher each time.

+ + =NPW
@ 25%
+ + =NPW
@ 20%
Cost
Year 0 year 1st year 2 to 9 yrs
Benefit
Net Benefit
3.198 0.833 DF @ 20%
60000
45000 70000
50000 90000
-60000
20000
5000
PW @ 20% 63960 4170 - 60000
-
1
DF @ 25% 1
0.800
2.663
PW @ 25%
-60000
4000
53260
IRR =
20 +
5
8130
8130
= 23.74%
= 8130
= (2740)
- (-2740)
Working out Cost of Funds
75%
25%
Bank loan
Own funds
Investment : Rs. 60000
Loan : @ 15% rate of int.
Own funds : 12% r.o.i.

Cost of funds: 14.25%
Cost of fund
=(Proportion of equity X Cost of Equity)
+ (Proportion of borrowed fund X cost
of borrowed fund)
=( 0.25X 12) +(0.75X 15)
= 3 + 11.25
= 14.25%
Repayment period of loan - Linked to the
Economic life
Tool used here is Debt Service Coverage
Ratio ( DSCR)
Ratio of Annual Long term debt obligation to
the Net cash surplus
Defer the interest during gestation
Earlier we recover the dues , the better.
Financing pumpset for lifting water from canal : Repayment schedule
Capital investment : Rs.60000
Margin from farmer : Rs.20000
Bank loan : Rs. 40000
Amount in Rs. Rate of Int: 12 %
Repayment
Year
Disburse
ment
Outstanding
at beginning
of year Interest
Net
benefit Principal Interest
Defered
Interest
Total
Outgoing
(6+7)
Surplus
(5-9)
DSCR
(5/9)
1 2 3 4 5 6 7 8 9 10 11
1st 40000 40000 4800.00 5000 0 0 4800 0 5000
2nd 40000 4800.00 20000 0 9600 0 9600 10400 2.08
3rd 40000 4800.00 20000 5000 4800 0 9800 10200 2.04
4th 35000 4200.00 20000 6000 4200 0 10200 9800 1.96
5th 29000 3480.00 20000 6500 3480 0 9980 10020 2.00
6th 22500 2700.00 20000 7000 2700 0 9700 10300 2.06
7th 15500 1860.00 20000 7500 1860 0 9360 10640 2.14
8th 8000 960.00 20000 8000 960 0 8960 11040 2.23
Total 40000 40000 Average DSCR 2.14
Average DSCR for Loans
Lowest Risk >= 2.00
Low Risk < 2.00 >= 1.80
Medium Risk < 1.80 >= 1.60
High Risk < 1.60 >= 1.40
Highest Risk < 1.40 >= 1.25
Caution < 1.25
NECC Egg Prices - Hyderabad
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
1995
1996
1997
Break Even analysis
Break even point - Sales level at which all the
costs are recovered.
Total sales
Break even Point=------------------- X Fixed cost
Contribution
(Contribution = Total sales- variable cost)

Capacity Utilised
Break even point= --------------------- X Fixed cost
Contribution
(In terms of % of Capacity utilised)
(In terms of amount of sales)
M/S ABC Floritech Limited
Break Even Analysis Rs. in lacs
Year 1 2 3 4 5 6 7 8
A) Sales 600.86 723.11 854.45 854.45 854.45 854.45 854.45 854.45
VARIABLE COSTS
I)Raw material costs 32.47 34.28 36.25 36.25 36.25 36.25 36.25 36.25
II) Utilities 9.45 10.80 13.50 13.50 13.50 13.50 13.50 13.50
iii) Sales & wages 16.32 17.14 17.99 18.89 19.84 20.83 21.87 22.96
iv) Overheads 3.00 16.84 21.53 29.98 21.98 22.46 30.95 22.53
v) int. on working capital 8.99 8.99 8.99 8.99 8.99 8.99 8.99 8.99
vi) Direct selling expenses 259.05 314.56 374.70 374.70 374.70 374.70 374.70 374.70
B) Total Variable costs 329.28 402.61 472.96 482.31 475.26 476.73 486.26 478.93
C) CONTRIBUTION (A-B)271.58 320.50 381.49 372.14 379.19 377.72 368.19 375.52
FIXED & SEMI VARIABLE COSTS
I) Administrative expenses 27.31 21.69 25.63 25.63 25.63 25.63 25.63 25.63
II)W/O of plants 50.40 50.40 50.40 50.40 50.40 50.40 50.40 50.40
iii) W/O of Def. Rev. Exp. 17.13 17.13 17.13 17.13 17.13 17.13 17.13 17.13
iv) Int. on Term loans 38.00 67.00 52.60 38.20 23.00 7.80 1.60 0.80
v) W/o of Prel. Exp. 4.40 4.40 4.40 4.40 4.40 4.40 4.40 4.40
vi) Depreciation 37.96 37.96 37.96 37.96 37.96 37.96 37.96 37.96
D)Total fixed &
semivariable cost 175.20 198.58 188.12 173.72 158.52 143.32 137.12 136.32
BEP ( Capacity utilisation)= 39.94%
Interpretation of Break even
analysis
Indicates margin of safety
Lower the BEP, more the margin of
safety.
To be compared with Industrial
average.
Cash Break even analysis
Sales level at which all cash costs are
recovered : i.e.. all costs excluding:
Depreciation
Pre-operative expenses
Sales
Cash Break even (Sales)= --------------- X Fixed cost
Contribution
Gives an indication regarding at what level of
sale the unit will not make cash losses - Useful
Mainly in analysis of rehabilitating sick units.
To assess the ability of the investment to
bear the adversities:
Inflation affecting only the cost or only
the benefit
Increased investment cost due to time
over-run , or while replacing them
Area of cost and benefits to which the
project is sensitive
Analysis to be done based mainly on
the data available to us

Tea Project
Weedicides
3%
Pesticides
5%
Labour
charges
71%
Manure &
Fertilizers
21%
Tea Project
50.32
84.4
68
20.2
22.7
24.7
26.3
29.3
32.3
47.73
47.72
38.19
0
10
20
30
40
50
60
70
80
90
1994 1995 1996 1997 1998 1999
Labour
charges per
day
Tea auction
price
0
100
200
300
400
500
600
1992 1993 1994 1995 1996
Feed cost
Egg Price
Poultry - Layer Unit
Feed cost : Rs./ Qtl, Egg price: Rs./ 100 eggs
Summary of Financial Analysis
NPW BCR IRR DSCR BEP
Normal 2250 1.24 24% 1.9 29%
Sensitivity 250 1.04 17% 1.54 35%
Recommendations
We must focus on the income stream; credibility,
capability to repay as well as technical feasibility of
the project

70% of the decision ,must settle at the desk level
Composite cash credit facility needed to the.
promoter
Design saving module, in built into credit, to cushion
farmers against natural calamities / Price fluctuation.
Give agri-preneures the right advice about cropping
pattern, yield ,critical inputs etc.,.