Project & Finance Decisions & Source of Finance 011009

DECISION ABOUT PROJECT & FINANCE
A PRESENATION BY CA. R.C. AGARWAL

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Capital Investments

Importance
Long term effects Irreversibility Substantial outlays

Difficulties
Measurement problems Uncertainty

Types of Investments

Mandatory Investments Replacement investments Expansion investments Diversification investments R & D investments Miscellaneous investments
Capital Budgeting Process

Planning Analysis Selection Financing Implementation Review
Key Issues in Project Analysis

Potential Market
Market Analysis
Market Share Technical Viability
Technical Analysis
Sensible Choices Risk
Financial Analysis Economic Analysis Ecological Analysis

Restoration Measures
Return Benefits and Costs in Shadow Prices Other Impacts Environmental Damage
Feasibility Study : A Schematic Diagram

P r e l i m i n a r y
Generation of Ideas Initial Screening
Is the Idea Prima Facie Promising Yes Plan Feasibility Analysis Terminate Conduct Market Analysis Conduct Technical Analysis No
W o r k
Conduct Financial Analysis

E v a l u a t i o
A n a l y s i s
Conduct Economic and Ecological Analysis Is the Project Worthwhile ? Yes Prepare Funding Proposal No Terminate
PROJECT & n INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Key Issues in Major Investment Decisions

Investment Risks Discounted Financing Options
story Cash Flow Value
Basic Considerations : Risk and Return

Investment decisions
Return Market value of the firm
Financing decisions
Risk
Identification of Investment opportunity

Monitoring the environment Corporate appraisal Identifying investment opportunities Preliminary screening Sources of Net Present Value (NPV)
Monitoring the environment

Important aspects
Economic sector State of economy Overall growth Cyclical fluctuations Linkage with world economy Trade surplus deficit Balance of payment situation

Governmental sector Industrial policy Government programmes and projects Tax framework Subsidies, incentives and concessions Import and export policies Financing norms Lending conditions of financial institutions and commercial banks

Technological sector Emergence of new technology Access to foreign and domestic technical knowknow-how Acceptability by industry

SocioSocio-Demographic sector Population trends Age shifts in population Income distribution Educational profile Employment of women Attitude towards consumption and investment

Competition sector Number of firms in industry and market share of top five Degree of homogeneity and differentiation in products Entry barriers Comparison with substitutes in terms of quality, price, appeal and performance Marketing policies and practices

Supplier sector Cost and availability of raw materials Cost and availability of energy Cost and availability of money
Corporate appraisal

Marketing and distribution Market image of firm Product line Market share Distribution network Customer loyalty Marketing and distribution costs
Corporate appraisal

Production and operation Condition and capacity of plant and machinery Availability of raw material and power Locational advantage Cost structure
Corporate appraisal

Research and development Research capability of firm Track record of new product development Laboratories and testing facilities Co-ordination between research and Cooperations
Corporate appraisal

Corporate resources and personnel Corporate image Clout with government and regulatory agencies Type of top management State of industrial relations
Corporate appraisal

Finance and accounting Financial leverage and borrowing capacity Cost of capital Tax situation Relations with shareholders and creditors Accounting and control systems Cash flow and liquidity
Identifying investment opportunities

Profit potential of industries-Porter Model industriesAs per Michael Porter profitability potential depends on combined strength of 5 components Threat of new entrants Rivalry among existing firms Pressure from substitute products Bargaining power of buyers Bargaining power of sellers
Porter Model
According to Michael Porter the profit potential of an industry depends on the combined strength of the five basic competitive forces as shown below Forces Driving Industry Competition
Potential Entrants Threat of New Entrants Bargaining Power of Suppliers
THE INDUSTRY Rivalry Among Existing Firms
Suppliers
Bargaining Power of Buyers
Buyers
Threat of Substitute Products Substitutes

Identifying investment opportunities

Analyse performance of existing industries Review imports and exports policies Study plan outlays and Government guidelines Find out local materials and resources Analyse Economic and Social trends New technological developments Trends of consumptions abroad Possibility of reviving Sick units
Preliminary screening

Compatibility with promoter Consistency with Government priorities Availability of inputs Adequacy of markets Reasonableness of cost Acceptability of risk level
Sources of Net Present Value (NPV)

Choosing positive NPV projects is like selecting under valued securities Six factors result in positive NPV projects Economies of scale Product differentiation Cost advantage Marketing reach Technological edge Government policy
Analysis

Market and demand analysis by experts Technical analysis by technical experts Necessity for financial estimation because Project cost will depend on these analysis and decisions Variations and changes in decisions will affect the cost of project
Key Steps in Market and Demand Analysis and their Inter-relationships
Collection of Secondary Information
Demand Forecasting
Situational Analysis and Specification of Objectives
Characterisation of the Market
Conduct of Market Survey
Market Planning
Market and demand analysis

Experts will study mainly: Situational analysis Project analyst will conduct situational analysis which will provide basis for formal study`

Collection of information Secondary information which has been collected in some other context Its accuracy, relevance for the project to be examined To have comprehensive analysis, primary information to be gathered through market survey

Conduct of market survey To conduct sample survey Define target population Select sample size Develop questionnaire Verify the information collected Analyse the information

Characterization of market Based on information, market of the product to be defined in terms of Effective demand Price Method of distribution Consumers Supply and competition Government policy

Demand forecasting Based on the above information future demand to be projected Based on this and other factors the sales forecasting will be done

Market planning To have the product reach desired level of market Workout marketing plan Pricing Distribution Promotion of product Servicing of product
Technical analysis

For choosing technology for manufacturing/service the consideration may be Plant capacity Investment outlay Production cost Use of technology by other units of firm
Technical analysis

Satisfactory arrangement to be made to obtain technical know-how needed for knowproposed manufacturing process Define materials and input required Setting up supply programme
Technical analysis

Acquisition of technology may be through Technology licensing Outright purchase Joint venture arrangement
Technical analysis

Factors which affect plant capacity decision Technology requirement Input constraints Investment cost Market conditions Resources of firm Government policy
Technical analysis

Choice of location will mainly depend on Proximity to raw materials and market Availability of infrastructure facilities Specific piece of land is to be identified for the project
Technical analysis

Requirement of plant and machinery depends on Production technology Plant capacity Type of product
Technical analysis

Structure and civil works to be divided in Site preparation and development Building and structures Outdoor works Environmental aspects to be examined and taken care
Technical analysis

Important project charts and layout to be prepared General functional layout Material flow diagram Production line diagram Transport layout Utility consumption layout Communication layout Organizational layout Plant layout Prepare project implementation plan
Financial estimation and projections

Cost of project Means of financing Estimates of sales and production Cost of production Working capital requirement and its financing Profitability projections Projected cash flow statements Projected balance sheets
Financial Projections
Balance Sheet Cash Flow Statement Cost of Project and Time Phasing Means of Finance and Time Phasing Interest and Loan Repayment Depreciation Cost of Production Working Capital Needs Production Plan
Estimate of Working Results Working Capital Advance (WCA)
Interest on WCA Tax Factor
Projected Sales
Cost of Project
The cost of project represents the total of all items of outlay associated with a project which are supported by long-term funds. 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
Cost of project

Land and site development Cost of Land Premium on leasehold and conveyance charges Leveling and development Approach and internal roads Entry gates and tube wells
Cost of project

Building and civil works

Main plant Auxiliary services like steam supply, workshops, laboratory, water supply etc Godowns, warehouses and open yard Canteen, time office, excise office, guest house, staff quarters, garages Tanks, wells, chests etc. necessary for plant installation Sewers, drainage and civil engineering works
Cost of project

Plant and machinery Cost of imported machinery FOB (free on board) value Shipping, freight, insurance Import duty Clearing, loading/unloading, transportation
Cost of project

Plant and machinery-cont machinery Cost of indigenous machinery FOR (free on rail) cost Sales tax, octroi and other taxes Transportation to site Cost of stores and spares Foundation and installation cost
Cost of project

Technical know-how and engineering knowfees Royalty payable for the know-how will be knowoperating exp. Expenses on foreign technicians Expenses of training Indian technicians abroad
Cost of project

Miscellaneous fixed assets Furniture, vehicles, office machinery and equipment Railway siding, diesel generating sets, transformers Boilers, laboratory and workshop equipment Fire fighting equip., effluent treatment plant etc. Exp. incurred for patents, trade marks, copyrights etc.
Cost of project

Preliminary and capital issue expenses Identifying project, market survey, feasibility report Memorandum and Articles of association Issue expenses
Cost of project

PrePre-operative expenses

Establishment expenses Rent, rates and taxes Traveling and conveyance Interest and commitment charges Insurance and mortgage charges StartStart-up expenses These expenses are related to project implementation and hence for expected delay, additional estimation of 20 to 25% escalation to be taken into account
Cost of project

Provision for contingencies Divide project cost in two parts i.e. firm cost and non-firm cost (variable cost) non Provide for 5 to 10% of non-firm non(variable) cost as contingency If implementation period is more than 1 year, provide for additional 5% per year
Cost of project

Margin money for working capital To avoid using margin money for over-run cost over Banks normally require amount of loan equivalent to margin money be released when project is completed
Initial cash losses Provision is to be made for expected cash losses in initial years to avoid liquidity problems
Estimation of Sales and Production

For estimating profitability these projections are very essential Following aspects to be considered

Not to assume high capacity utilization in 1st year Even when there is simple technology, firm may face shortage of Raw material, may get limited power supply, face marketing problems etc. Reasonably assumption should be in the range of

4040-50% in first year 50-80% in second year 5080-90% in third year and onwards 80-
Estimation of Sales and Production

Normally closing stock of finished goods is not assumed i.e. production is assumed equal to sales Selling price to include realizable price including dealers commission and Net of excise duty Selling price should be present price as any variation will also affect the cost of production If part of finished goods are to be sold at controlled price (e.g. sugar) take controlled price for that part of sale projection
Estimates of Production and Sales

(Details may be furnished separately for each product and until the plant reaches maximum capacity utilisation)
Product 1st 2nd 3rd 4th yr yr yr yr 1. 2. 3. 4. 5. 6. 7. 8. Installed capacity (qty per day per annum) No. of working days No. of shifts Estimated production per day (qty) Estimated annual production(qty) Estimated output as % of plant capacity Sales (qty) (after adjusting stocks) Value of sales (in000 of Rs) Product (i) (ii) (iii) Note : Production in the initial period should be assumed at a reasonable level of utilisation of capacity increasing gradually to attain full capacity in subsequent years.
Cost of production

Material cost Price of material input to be defined in CIF (cost, insurance and freight) terms Present cost of material inputs to be taken and inflation to be ignored If seasonal fluctuation in price is regular that should be accounted for
Cost of production

Utilities cost Consists power, water and fuel Consumption may be assumed at the level suggested by consultants or industry average whichever is higher Cost of power is assumed for power bought from outside. Cost of captive power plant is included in fuel cost Cost payable for water supply to be shown separately. If water is from own well, not to show water charges Difficult to estimate fuel cost for furnace oil, coal, firewood etc.
Cost of production

Labour cost

Cost of all manpower employed in factory Remuneration rates may be on the basis of practice available in industry Remuneration to include salary, allowances, benefits, reimbursements etc. i.e. cost to company basis Labour cost to be increased @ of 5% p.a. for estimation Cost to be estimated for the highest capacity utilization year and reduced to some extent for earlier years
Cost of production

Factory overhead cost Includes repairs, maintenance, rent, taxes, insurance on factory assets etc. Provision to be made for miscellaneous factory expenses Contingency margin may be considered for factory overheads
Working Capital requirement and Financing

The working capital requirement consists of

Raw materials and components Work-in-process Finished goods Consumable stores Debtors Operating expenses Working capital advances provided by commercial banks Trade credit Accruals and provisions Long-term sources of financing
The principal sources of working capital finance are

Working Capital requirement and Financing

Limits to obtain working capital advances from commercial banks They relate to the maximum permissible bank finance for working capital and Amounts that can be raised against each individual current asset Method of financing Tandon norms method I and II Turnover method Maximum permissible finance (MPBF) Drawing power Margin for each current asset
Profitability projections or Estimation of working results

It is done on following lines

i. Cost of production ii. Total administrative expenses iii. Total sales expenses iv. Royalty and know-how payable knowv. Total cost of production (i+ii+iii+iv) vi. Expected sales vii. Gross profit before interest (vi-v) (viviii.Total financial expenses including interest ix. Depreciation x. Operating profit (vii-viii-ix) (vii-viii-
Profitability projections or Estimation of working results

It is done on following lines-cont lines
xi. Other income xii. Preliminary expenses written off xiii.Profit/loss before tax (x+xi-xii) (x+xixiv.Provision for tax xv. Profit after tax (xiii-xiv) (xiiixvi.Dividend on Preference and Equity Capital xvii.Retained earnings (xv-xvi) (xvxviii.Net cash accrual (xvii+ix+xii)
Cash Flow Statement

Sources of Funds 1. 2. 3. 4. 5. 6. 7. 8. 9. Share issue Profit before taxation with interest added back Depreciation provision for the year Development rebate reserve Increase in secured medium and long-term borrowings for the project Other medium/long-term loans Increase in unsecured loans and deposits Increase in bank borrowings for working capital Increase in liabilities for deferred payment (including interest) to machinery suppliers
10. Sale of fixed assets 11. Sale of investments 12. Other income (indicate details) Total (A)
Application of Funds 1. 2. 3. 4. Capital expenditure for the project Other normal capital expenditure Increase in working capital* Decrease in secured medium and long-term borrowings - All India Institutions - SFCs - Banks 5. 6. 7. 8. 9. Decrease in unsecured loans and deposits Decrease in bank borrowings for working capital Decrease in liabilities for deferred payments (including interest) to machinery suppliers Increase in investments in other companies Interest on term loans Total (B)
Projected Balance sheet

Following information is need for preparing projected B/S Balance sheet at the end of year A Projected income statement and distribution of earnings for the year A+1 Proposed external finance to be obtained in the year A+1 Proposed repayment of debt capital (long term, medium term, short term) during the year A+1

Following information is need for preparing projected B/S-cont B/S

Additions and disposal of Fixed assets during the year A+1 Changes in level of Current assets during the year A+1 Changes in other assets and certain additions like preoperative and preliminary expenses (which are capitalized) during the year A+1 Cash balance at the end of year A+1

Example
Particulars OpBl Changes ClBl Liabilities Share capital 100 -100 Reserve & surplus 20 +20 retained earnings 40 Secured loans 80 +20 add. TL 5 Repay 95 Unsecured loans 50 +10 proposed increase 60 Current liabilities 90 -90 Provisions 20 -20 -------------360 405

ExampleExample-cont Assets
Fixed assets Investments Current assets Cash Inventories Receivables 180 +30Add. 20 Depre -180 20 (balancing A/c) 80 +10 proposed increase 80 +15 Proposed increase -----------360 ------------190 -215 30 90 95 ------405 -------

Multi year projection

Like one year projections are made, multi year projections can be made In projections certain assumptions are made e.g.

What will be tax rate How much preliminary and pre-operative exp. are to be written preoff (Amortized) or capitalized When dividend payment is expected to start and how much Other assumptions like interest rates, market credit, turnover etc. are to be made Above assumptions are required for estimating projected revenue and costs
Financing Option

Primarily funded by Equity, Debt & Govt Grant Debt Financing can be in Local Currency & Foreign Currency. Foreign Currency Debt (ECB) can be arranged from Indian Bank, Foreign banks, MLAs IFC, ADB, Etc, ECA, Bonds. ECB raising should be in compliance with RBI Policy. Project to comply with Equator Principles in case ECB to be raised from Foreign Banks & MLAs.
Project Finance Key Terms

Security : Project Assets and assignment of contracts & Insurance Upfront equity contribution atleast 50% 2 qtr of Interest and Term Loan repayment liability DSCR : Average 1.50 and min 1.25 Max Debt to Equity : 75:25/ 80:20 Interest Reset Clause Escrow Account for Financial discipline Repair & maintenance Reserve account Lenders approval compulsory for addl borrowing or diversion of surplus cash for other opportunities. Step in Provision Pledge of at least 51% of Promoters share. Availability period Construction period + 6/12 months.
Financial and Investment Decisions

Financing Decisions Investment Decisions
Financing decisions take place in capital markets which are approximately perfect. While making financial decisions, you can observe the value of similar financial assets
Investment decisions take place in real markets which tend to be imperfect. While making investment decisions, you have to estimate the value of the capital projects. There are many opportunities in the realm of capital budgeting that have an NPV that is significantly different from zero.
There are very few opportunities in the realm of financing that have an NPV that is significantly different from zero
Financial economists feel that securities are fairly priced i.e. capital market is efficient.
Basic Differences between Equity and Debt

Equity Debt
Equity shareholders have a Creditors (suppliers of debt) have a residual claim on the income fixed claim in the form of interest and the wealth of the firm. and principal payment. Dividend paid to shareholders is not deductible payment. equity Interest paid to creditors is a tax a tax deductible payment.
Equity ordinarily has indefinite Debt has a fixed maturity. life. Equity investors enjoy the Debt investors play a passive role prerogative to control the of course, they impose certain affairs of the firm. restrictions on the way the firm is run to protect their interest.
Debt - Equity Ratio

Key factors in determining the debt-equity ratio for a project are:

Cost Nature of assets Business risk Norms of lenders Control considerations Market conditions

Checklist
Use more equity when Corporate tax rate applicable is negligible. Business risk exposure is high. Dilution of control is not an important issue. Assets of the important issue. project are Use more debt when Corporate tax rate applicable is high. Business risk exposure is low. Dilution of control is an issue. Dilution of control is an issue. Assets of the project are mostly tangible. Project has few growth options.
Assets of the project are mostly intangible. Project has many valuable growth options.
Sources of Finance
Part A Sources of Finance
Internal Accruals
Securities Equity Preference Bonds
Term loans
Working capital advances
Miscellaneous sources
Part B Sources of Finance
Equity
Debt
Equity Preference Internal accruals
Bonds Term loans Working capital advances Miscellaneous sources
Methods of Offering

There are different ways in which a company may raise finances in the primary market
Public offering Rights issue Private placement Preferential allotment

Comparison of the Various Methods

Public Issue Amount that can Large be raised Cost of issue Dilution of control Degree of underpricing Market perception Negative Neutral Neutral Neutral Large Irrelevant Small No High Yes Negligible No Negligible Yes Negligible Depends Rights Issue Moderate Private Placement Moderate Preferential Allotment Moderate
Financing options

Owned funds Conventional Debt financing Unconventional debt financing
Owned funds

Equity capital Ordinary shares with voting right No compulsion to pay dividend Affects controlling rights Dividend tax to be paid by firm Preference capital Cumulative and non-cumulative non Participating and non-participating in profits non Redeemable and non-redeemable non Convertible and non-convertible nonPROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL
Owned funds
Preference
Fixed
capitalcapital-cont
dividend No voting rights Preference in return of capital If firm skips dividend for 3 years, voting rights for matters affecting preference share holders
Owned funds

Venture capital Normally provided by investor unrelated to promoter group to finance start-up companies start Normally take preference shares with right to Convert voting right seat on the board sale share holding to firm
Owned funds

Retained earnings General reserves Share premium account Un appropriated Credit balance of P&L A/c Unencumbered reserves and not related to a specific purpose Features are
readily available no issue cost no dilution of control

Owned funds

Government subsidies

Incentives by Central Govt. Incentives by State Govt. Subsidies Infrastructure creation Incentives provided by the Government or its agencies for setting up project in certain areas Capital assistance at nominal interest Capital subsidy Tax deferment or exemption for certain period Power subsidy
Owned funds

Warrants / Options Attachments to instruments which culminate through conversion or eligibility into shares at future date with or without additional payments Warrants attached to convertible debentures or Global Depository receipts to be lodged with issuing co. on specified date to acquire equity shares of co. In options, holder has the option to acquire shares or retain the debt instrument without conversion in shares e.g. Essar Oil Optionally Convertible Debentures
Owned funds

Foreign Institutional Investors Registration with RBI for investment in shares of Indian companies Investment upto 49% of issued capital under general scheme on cumulative basis Investment can be through subscription to public offer private placement These are usually Mutual funds, Institutional investors Banks, Venture capital funds registered abroad
Owned funds

Foreign Direct Investment (FDI) Foreign investors invest in Indian company as per prior agreement with promoters Usually it is part of deal of technology transfer or joint venture It can be only for investment also
Conventional Debt financing

Features Interest tax deductible No impact on control of company Debt holders do not participate in remaining profits Maturity of instrument can be tailored as per requirement Default can result is bankruptcy Restrictive covenants

Financial institutions, National, International IDBI Asian Development Bank World Bank International Finance Corporation Tourism Finance Corporation Power Finance Corporation etc.

BanksBanks-National, International Public Sector Banks Private Sector Banks (Old generation) Private Sector Banks (new) Foreign banks Co-operative banks Co Regional Rural banks

Banks, National, International-cont International-
Facilities

Fund based

Loans, Overdraft
Cash credit / packing credit Bills purchased / discounted NonNon-fund based

L/C DP / DA, Inland / Foreign Letter of guarantee (LG) Performance, Financial Deferred payment (DPG) Advance payment, Bid-bond Bid-

Government
loans Governments form specific funds for funding modernization / expansion of specific industries e.g. Steel development fund Shipping development fund

Public deposits RBI permission is necessary for duration, interest rates, quantum etc. Debentures Secured / Unsecured Rated by rating agencies Convertible, partially convertible, nonnonconvertible Deep discount

Debentures Features
Debenture
trust Maturity more than 18 months have to be compulsorily rated For maturity of more than 18 months Debenture redemption reserve (DRR) has to be created DRR equal to 50% of issue has to be crated before redemption starts

Debentures- eaturesDebentures-features-cont First charge over fixed assets and second charge over current assets Fixed rate / floating rate/ zero rate of interest Call option to company to redeem before maturity at a certain price Put option to holder to seek redemption at a specified time at pre determined price

Unsecured
loans Normally by promoters By associates and friends No security Normally part of covenants
Term loans
Currency
Rupee
term loan Foreign currency term loans

Security
Direct
security Collateral security Second charge on moveable assets

Term loans

Interest payment and principal repayment

time Interest, cumulative period Commitment charges Prepayment charges Penalty for defaults Processing charge and upfront fee Duration of installments
Moratorium
Term loans

Restrictive covenants
Representation on the Board Level of unsecured loans Declaration of dividend Restrictions on undertaking new projects or expansion Repayment of existing loans Restrictions on taking additional loans Restriction on transfer of shareholding by promoters / Associates

Unconventional debt financing

Mutual funds Normally invest in Equities Debentures Hybrid instruments Inter corporate deposits Through subscription to public issues, private placements

Suppliers credit Facilities extended by Banks and Financial institutions to good companies for supplying plant and machinery or equipment or engaged in fabrication and engineering Clients of such companies are approved by financers and receive plant and machinery on credit and pay the amount in installments

Short term borrowings Inter corporate deposits Loans on basis of promissory notes Normally repayable within 1 year May be secured / unsecured Commercial paper by rated companies Finance against collateral security of Treasury bills and other Government securities

Short term borrowings-cont borrowings
Commercial paper Short term unsecured promissory note Maturity period less than 1 year normally 90 to 180 days Normally issued at a discount from its face value Normally investors keep the CP till maturity therefore, secondary market did not develop

Foreign lines of credit Lines of credit provided by foreign banks or FIIs who do not have representation in India Provided for specified industries/companies Financial institutions or banks in India provide the funds on the basis of line of credit received from abroad
Miscellaneous sources

Public deposits Finance Lease Hire purchase
Finance Lease

Long term non cancelable arrangement during primary lease period Lease is fully amortized during primary lease period i.e. during this period lessor recovers his investment along with acceptable return Lessee is responsible for maintenance, insurance and taxes Lessee enjoys option for renewing the lease Lessee can not claim depreciation
Hire purchase

Features
Hiree
hirer Hirer pays regular installments for interest and principal Normally hiree charges flat rate of interest on principal without reducing balance Possession of asset is with hirer Hirer enjoys salvage value being owner
purchases the asset and gives on hire to
Financing Options

Working capital finance Fund based

Cash credit / Overdraft PrePre-shipment Packing credit Bill purchase / Discounting PostPost-shipment Bill discounting Letter of guarantee Letter of credit
NonNon-fund based

Financing Options

Letter of credit (L/C) Guarantee of bank to honour an exporters draft (bill) or any other claims for payment, which has fulfilled the conditions of L/C Issuing or Opening bank Importers bank who opens the L/C Advising bank Correspondent bank in exporters country who receives L/C from opening bank Than forwards L/C to exporter
Financing Options

Letter of credit (L/C)-cont (L/C) Beneficiary Exporter Uniform Customs and Practices for Documentary Credits Code evolved by International Chamber of Commerce to resolve disputes in documents of international trade Utilisation of L/C - D/P or D/A A bankers acceptance When L/C opening bank accepts DA Bill
Financing Options

Utilisation of L/C - D/P or D/A cont Discounting Discounting DA bill Revocable L/C Right to opening bank to amend or cancel L/C without consent of beneficiary Irrevocable L/C L/C can not be cancelled or amended without the consent of exporter
Financing Options

Utilisation of L/C-cont L/C Confirmed irrevocable L/C In addition to opening bank an additional bank i.e. Confirming bank gives commitment to pay the bill if all conditions are met It may be advising bank or one more bank is added Revolving L/C Used when export will take place on continuing basis and single L/C will cover several shipments
Financing Options

Utilisation of L/C-cont L/C Transferable L/C Permits the beneficiary to transfer part or full benefits of L/C to secondary beneficiary Used when the exporter is middleman Back-to-Back L/C Back-to When exporter asks its own bank to open irrevocable L/C in favour of another party on the basis of L/C received by him from importer Original L/C becomes guarantee against next L/C
Financing Options

Utilisation of L/C-cont L/C Red clause L/C With this red clause, advising bank is authorized to make clean advance to exporter to be adjusted from the discounted bills When invoice is in currency neither of importer nor of exporter than importers bank to advise third country bank to inform exporter that payment will be made in third country currency Standby L/C Provides a fallback guarantee to supplier if primary obligator fails to pay
Financing Options

Other methods Cross border leasing Forfeiting Importer gives bundle of bills of exchange / promissory notes for principal and intt. which fall due say every six month Bills are guaranteed by importers bank Bills are discounted without recourse by exporter

International financing options

Will be dealt separately
Financial closer
All
sources of funds required for project have been tied up It takes a long time Adequate underwriting arrangements have been made for market related offerings
Project Financing Decision

key business considerations relevant for the project financing decisions are:
Cost Risk Control Flexibility


Project &amp; Finance Decisions &amp; Source of Finance 011009

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Project &amp; Finance Decisions &amp; Source of Finance 011009

Uploaded by

Copyright:

Available Formats

DECISION ABOUT PROJECT & FINANCE

A PRESENATION BY CA. R.C. AGARWAL

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Capital Budgeting Process

Key Issues in Project Analysis

Financial Analysis Economic Analysis Ecological Analysis

Feasibility Study : A Schematic Diagram

Generation of Ideas Initial Screening

Conduct Financial Analysis

PROJECT & n INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Key Issues in Major Investment Decisions

story Cash Flow Value

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Basic Considerations : Risk and Return

Return Market value of the firm

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Identification of Investment opportunity

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Monitoring the environment

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Monitoring the environment

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Monitoring the environment

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Monitoring the environment

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Monitoring the environment

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Monitoring the environment

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Identifying investment opportunities

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Bargaining Power of Buyers

Threat of Substitute Products Substitutes

Identifying investment opportunities

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Sources of Net Present Value (NPV)

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Key Steps in Market and Demand Analysis and their Inter-relationships

Collection of Secondary Information

Situational Analysis and Specification of Objectives

Characterisation of the Market

Conduct of Market Survey

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Market and demand analysis

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Market and demand analysis

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Market and demand analysis

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Market and demand analysis

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Market and demand analysis

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Market and demand analysis

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

PROJECT & INFRASTRUCTURE FINANCE BY CA. R.C. AGARWAL

Project & Finance Decisions & Source of Finance 011009

Project & Finance Decisions & Source of Finance 011009

It is done on following lines-cont lines

Following information is need for preparing projected B/S-cont B/S