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Project Appraisal- 1

Project and Environmental Analysis - Some Basic


Points

The new era of GLOBALISATION AND ECONOMIC


LIBERALISATION provides ample opportunities for
growth which may be encashed through prudent
investment strategy. A firm must take timely actions for
adapting itself to the changed environment.

A capital project needs to be launched by:


 Analysing past environment

 Studying existing environment

 Forecasting future environment

An environment is defined to mean the conditions,


prevailing at a particular point of time, which influence
the process of initiation and development of a capital
project.

 Business Environment

Which is reflected by:


- State of technology
- Availability of resources
- Rate of inflation
- Economic policies of Government
- Commercial laws

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 Social Environment

Which is reflected by:


- Awareness of Social responsibility
- Status of consumers' preferences
- Increased customers/investors protection
- Status of education
- Growth in population and it's distribution

 Political Environment
Which is reflected by:
- Attitude of Government towards liberalisation
- Political stability
- Security

The inherent characteristic of an environment is:


CHANGE

The environmental Changes:


Provide - Opportunities
Create - Complexities
Pose - Threats
Add - Risk

The complexity and risk in a particular project is


reflected in:
 Resource constraint

 Longer time period involved (i.e. Longer Gestation

period)
 Increased dependence

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In order to meet objectives in a situation of violet
and rapid changes in the socio-economic-political
environment, an organisation needs to build up
strengths and capability to convert threats into
opportunities. It needs to be vigilant, analytical in
approach, and initiative- taking to meet challenges
posed by dynamic environment. An analysis of external
environment would throw light on:

 The strategies and plans of growth of competitors.


 Existing government policy.
 The scope for growth and an improvement in the
market position.

An indepth analysis would show the financial,


technological, marketing and managerial strengths of
the company, and this would help in formulation of
suitable investment strategy to meet objectives of the
organisation. The impact of government plans and
policies on the environment should be ascertained, and
the inter-linkage between government plans and
business plans of the company should be established.
This is shown in he Figure I below:

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LINKAGE BETWEEN GOVERNMENTS PLANS
AND CORPORATE PLANS

PLANS BROAD OBJECTIVES

Industrial Growth
Government Plans Agricultural Growth
Social Welfare

Growth and Survival


Corporate Plans Profitability
Welfare
(FIGURE I)
The government undertakes many development
projects in various sectors of economy to achieve
certain socio-economic objectives defined in the
government plans such as increased standard of living,
balanced development of regions, skill development
through Research and Development projects,
preservation of ecological balance, and so on. The
various plans and policies of the government affect the
investment plans of corporate sector. No corporate can
afford to isolate itself in the changed environment. It
needs to formulate it's long-term investment strategy
based on SWOT. Analysis (i.e., an analysis of
Strengths, Weaknesses, Opportunities and Threats)
to maintain it's growth rate in the competitive market.
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The strength of a capital project is as depicted in
Figure II below:

STRENGTH OF A CAPITAL PROJECT

Best Technology

State-of- the-Art Machine

Strength of a Capital Competent Manpower

Project Cheaper Resources/Inputs

Competitive Quality

Higher Productivity

Social Consciousness

(FIGURE II)

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Project Appraisal- 2
Capital Project - Definition, Characteristics, Benefits

A Capital Project is a non-repetitive scheme/a time


bound programme of action that consumes specified
resources on the activities relating to acquisition,
creation/development and installation of capital assets
to achieve certain pre-defined objectives.

The RESOURCES may be:

Tangible Resources Intangible Resources


Money Skill
Material Time
Machines and equipments Efforts and Vision
Other facilities and assets Co-operation, systems, etc.

Supply of resources are both through internal


agencies (e.g. labour, management) and external
agencies (e.g. customers, suppliers) who are involved in
the execution of a project.

I. Capital Investment/Expenditure
The sum total of all measurable costs is termed as
Project Outlay or simply defined as Capital
Investment/Expenditure.

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Examples of schemes involving capital expenditure are:
 Installation of a major new project such as
Thermal Power Station, Steel Plant, Cement Plant,
etc.

 Construction of road, building, hospital, school,


shop, theatre, entertainment park, etc.

 Creation of facilities under modernisation/


expansion schemes.

Project are undertaking in various sectors of an


economy such as Industry, Agricultural, Shipping,
Tourism, Infrastructure, Forestry, Fishing, Mining,
Welfare, etc. for increasing welfare and growth of a
society.

In case of an industrial project undertaken by a


commercial concern, the total capital expenditure may
be classified into two groups viz.:

 Factory Area (which includes production shops,


labs and all other facilities and buildings which are
related from and to the operation of company).
 Non-factory Area (which includes residential
buildings for the employees and other welfare
facilities such as school, hospital, marketing
complex, etc. for the residents who are family
members of the employees)

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2. Important characteristics of a capital project

While formulating a project and in respect of any


decision making relating thereto, it is always better to
keep in mind the important characteristics, which are
inherent in a capital expenditure scheme/proposal.

There are briefly explained as follows:


 One time investment (To be incurred in one year or
over a specified period in case of project with
longer gestation period).
 Heavy investment in general.
 Specific objectives, which are peculiar to the
project itself.
 Irreversible nature of capital commitment, once
made.
 Benefits from a project to accrue in future over a
longer period.
 Risk is involved in the changing socio-economic-
political scenario.

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The broad distinction between capital and revenue
expenditure is shown in the Figure III below.

Classification of Expenditure based on Objectives

EXPENDITURE

CAPITAL REVENUE

LONG-TERM FUTURE SHORT-TERM


BENEFITS
PRESENT BENEFITS

(FIGURE III)

The main performance parameters in a project are:


 To achieve time targets

 To achieve cost targets

 To achieve desired quality specifications

Any decision to reverse an already concluded


project may be effected only after incurring huge
financial losses particularly in respect of those projects
wherein large fund has been invested in the
specific/special-purpose assets created/procured to meet
specific requirements. Besides, in general second-hand
machines may not fetch desirable price. A bad
investment decision creates sunk cost and might eat
away even the resources generated through an existing
good investment.
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Project Appraisal - 3
Capital Projects - Opportunities and classification

Synopsis
1. Search for investment opportunities by an 6
entrepreneur
2. Classification of projects in an existing concern 7
3. Expansion Project 8
4. Modernisation Project 8
5. Balancing Facilities Project 8
6. Diversification Project 8
(1) Diversification may be undertaken through 9
VERTICAL INTEGRATION
7. Cost Reduction Project 9
8. Research & Development Project 9
9. Quality Improvement Project 9
10. Employees' Welfare Project 9
11. Statutory Requirement Project 9
12. Pollution Control Project 9
13. Benefits of a capital Project 10

A capital project may be undertaken:


 By a new entrepreneur

 By an existing concern

1. Search for investment opportunities by a


new entrepreneur

A new entrepreneur wants to achieve certain objectives


e.g. to encash opportunity to earn and to grow. He can
make a search for investment opportunities through an
indepth and systematic study in the following areas:
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1. Existing profitable product lines/industries in the
market.
2. In case of input requirement of various existing
industries:-

 The sources available


 Constraints being faced in procurement of
resources
 The financial and qualitative factors involved
 The impact of following decisions on their
performance:

Make or buy
Import substitution
Product modification with the existing technology
Modification in layout of specific facilities
Technological improvement

The objective here is to find out any opportunity of


undertaking a project to meet out input requirements of
one of more companies in the same industry of the
others.

3. Scope for reprocessing and recycling of existing


products.

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4. Scope for enlargement of domestic market, and an
entry into the foreign market in respect of different
products.
5. The opportunities of take-over, merger,
acquisition, joint venture, etc.
6. Government plans and policies, which may lead to
industrial development, change economic
environment and change consumption behaviour.

In this connection, the source of information may


be:

1. The suggestions of project consultants, financial


institutions and companies engaged in the banking
and financial service.

2. Trade exhibitions.

3. Project profiles prepared by consultancy firm.

4. Survey reports of government and private


agencies, annual research reports of research
institutions/agencies and newspapers.

5. Foreign training visits and survey on foreign


nationals staying in the country in order to
understand their traditions, consumption
behaviour, style of living.

6. Suggestions from employees, etc.


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All these may also throw light on the new technological
developments, availability of resources, new tastes of
consumers and also provide some guidance in respect of
assistance available for manufacturing and marketing.
The various regulations and policies of government in
connection with economic, trade, commercial and other
social matters should be gone through in order to
ascertain their impact in the evaluation of opportunities.

2. Classification of projects in an existing concern.

An existing commercial concern is interest in the


maximisation of wealth of it's shareholders and in
seeing that the market price of the shares are constantly
appreciated.

In an existing concern, the projects may be broadly


classified as:

 Capacity Expansion/Augmentation
 Modernisation (Including replacement)
 Balancing Facilities
 Diversification
 Cost Reduction
 Research & Development
 Employees' Welfare
 Statutory Requirement

Each of the above categories is briefly described as


follows:
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3. Capacity Expansion/Augmentation Project

The objective here is to increase market share of the


company either through penetration into new market, or
improving the share of existing ones by supplying the
product at reduced cost with latest technological
features.

The major benefits of expansion projects are:


 Economies of large scale

 Optimum utilisation of existing and new facilities

4. Modernisation Project (including Replacement


Project)

The objective is to:

 Bridge gap in the existing facilities with the


installation of new and most sophisticated
machines.
 Remove production bottlenecks (such as poor
material handling facilities, inadequate storage
facilities, etc.)
 Add new features and systems to the existing
facilities.
 Replace old/obsolete assets due to high operation
cost and lower productivity.

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The major benefits are:
 Increase productivity

 Reduced manufacturing cost

 Elimination of dependence on the external


suppliers of inputs.

5. Balancing Facilities Project

Balance facilities are those which are required to


remove gaps/bottlenecks in the specific operation area
to achieve certain targets and standards in respect of
production/capacity utilisation, productivity and quality.
This may help to achieve the following objectives:

 To remove production bottlenecks, thereby


 increasing capacity utilisation.
 To bridge the technology gap.
 To provide for higher flexibility in operation.
 To make a strong infrastructural base.
 To improve cost effectiveness.
 To intensify R&D activities.

6. Diversification Project

The objective of diversification is to enter into new


areas (whether related or unrelated to existing
operation) to achieve a higher rate of growth.

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(1) Diversification may be undertaken through
VERTICAL INTEGRATION

This maybe:

(a) Forward Integration

Forward Integration project involves addition of


facilities to commence either manufacture of a new
product or a new service with the use oi7through
modification in the existing product.

(b) Backward Integration

Backward integration project involves addition of


facilities to commence self-manufacturing of raw
material and components for the existing product of
the company.

The objective is to achieve cost reduction as well as to


eliminate dependence on external suppliers of raw
material.

7. Cost Reduction Project


The objective here is to gain cost leadership in the
competitive market. In general, the objective of cost
reduction is achieved through modernisation, backward
integration projects and so on.

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PROJECT APPRAISAL
Detailed Project Report Formulation

Norms for Debt: Equity


General Practice
1. Acceptable level by all 1.75:1
Institutions including SFC/SIIC
2. Preferred level 1.5 : 1

A. Capital Intensive Projects


(like Fertilizer, Petrochemicals and Aluminium)
Acceptable level 3:1 to 4:1

B. On the basis of cost of project (indicative)

Project Cost

Below Rs. 5 Crores 1:1 to 1.5:1


Rs. 5 Crores to 10 crores 1.5 to 2 : 1
More than 10 crores 2:1 or more

At present it can be presumed that there is no fixed


norm for Debt:Equity. The promoter may take 1.5:1 as
the acceptable level and arrange the funds accordingly.
With the liberalization in the process and greater
autonomy available with the Financial Institutions like
IFCI and IDBI and ICICI which are now independent
corporate bodies do sanction the assistance on the
norms which may be governed by the risks perceived
by them.
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NORMS FOR PROMOTER'S CONTRIBUTION

With the recent announcement that the institutions will


have to be profitable and its balance sheets should be
transparent the institutions have been asked to assess
the risk and fix the promoter's contribution accordingly.
No fixed norm has emerged so far. The promoter's
contributions do vary from 30 per cent to 50 per cent. In
general there has been increase in the promoters
contribution. All India Institutions are pressing for
atleast 40 per cent stake of the promoters. It effectively
implies that the debtequity ratio would not be allowed
to exceed 1.5:1 in any case. Similar approach is likely
to be followed by SFC's/SIIC's.

SEBI which is a developmental and regulatory body has


fixed norms for minimum contribution for the
promoters if they intend to raise the capital from public.
As per SEBI guidelines atleast 25 per cent of the capital
is to be subscribed to by the promoters.

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Application for financial assistance under Project
Financing Participation Certificates Scheme

(To be used for submission to any or all of the all India


financial institutions in respect of a new project or
expansion or modernization of an existing unit)

Note :

1. In view of the recent policy changes many of the


questions may not be answered in details.
2. The institutions have not yet revised the forms.
Hence some of the points may appear redundant.

1. GENERAL
Date of application
1.01 Name of the industrial concern
(in block letters)

1.02 Constitution Public/Private Limited


Company, Co-op, Society,
Partnership/Proprietary concern
Enclose:
Copy of Memorandum and Articles,
of Association/Bye-laws/Partnership Deed

1.03 Date of incorporation/registration

1.04 Date of commencement of business

1.05 Sector
Public sector/Joint sector/private sector/Co-
operative sector

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1.06 Name of the business house/group
to which the concern belongs
and the list of other companies in
the same group
1.07 Is the MRPT Act applicable to the company?
If so, have you obtained the necessary
clearance from the government?

1.08 Location
(Indicate Village, Tehsil, District and State)
(a) Registered Office
(b) Controlling (Head) office
(c) Project for which assistance is sought
(d) Is it a backward area eligible
for concessional finance from
institutions/central subsidy?

1.09 Give brief particulars of the project.


Also state whether it is a new/expansion
/modernisation/diversification project

1.10 Nature of industry and product Industry Capacity Installed


Product Capacity licensed Existing Proposed
(Letter of Intent issued)

1.11 Financial assistance applied for


(a) Rupee loan (in thousands of rupees)

(b) Foreign currency loan (Rupee


equivalent at market rate)

(c) Underwriting .
(i) Equity capital
(ii) Preference capital
(iii) Debentures

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(e) Guarantee of foreign currency/deferred
credit
(i) Principal
(ii) Interest
(iii) Total
(iv) Guarantee to be Issued in
favour of

1.12 Particulars of foreign currency Rate of Rupee


loan/guarantee applied for exchange equivalent at
Parity Market Parity Market
Rate Rate Rate Rate
Currency and amount
(i) Loan
(ii) Guarantee of foreign currency

2. PROMOTERS

2.01 Give bio-data of main promoters including


information on name, address, age, educational
qualifications, past industrial/business experience,
experience in the particular industry, brief write-up
on other companies, if any, promoted by him or
with which he is associated, togetner with a copy
of the latest balance sheet (to be furnished
separately in respect of each of the main
promoters).

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2.02 In case the promoter is a limited company, furnish
a brief writ4e-up on the activities and past
performance of the company and any other
expansion programme(s) contemplated.

Enclose:

(i) Certified copies of Memorandum and Articles of


Association of the promoted company,
(ii) Audited balance sheets and profit and loss
accounts for the past five years of the promoter
company(s);
(iii) Copy of agreement(s), if any, entered into among
the promoters.

2.03 Provide a list of directors along with a complete


list of concerns with which they are connected, as
director, partner, proprietor, etc. Also furnish brief
write-ups on the above concerns including
information on the nature of business and size of
turnover, etc.

2.04 Give names of bankers with whom enquiries may


be made regarding the applicant concern and its
promoters, together with copies of letters
addressed to bankers in Form 1.

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PARTICULARS OF THE INDUSTRIAL
CONCERN
(Many of the questions in this section are applicable to
existing concerns only)

3.01 Give a brief history of the concern including any


changes in. names, business management, etc.
Also indicate any mergers, reorganization, etc.
which took place in the past.

3.02 Provide a list of subsidiaries, showing percentage


of holding in each and nature of their business.

3.03 Give particulars of holding company (in the


proforma given below), together with a self-
explanatory note on the existing activities and its
subsidiaries.

Enclose : Copies of audited balance sheets and


profit, and loss accounts for last five years of the
holding company.

Name of Names of Paid-up capital Percent held by


the holding Subsidiary of subsidiary holding company
company companies companies as
on..........
Equity Pref. Equity Pref.

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3.04 Give names, age and addresses of directors,
including wholetime directors, their qualifications,
past experience and business and industrial
background and existing and proposed
shareholdings in the company.

Enclose : Certified copies of:


(i) agreement with the Managing Director/whole-
time director,
(ii) Approval of the Central Government for
the appointment.

3.05 Enclose certified copies of audited balance sheets


and profit and loss accounts for the last five years
together with proforma balance sheet and profit
and loss account of as recent date as possible.

3.06 In case the assets have been revealed or written off


at any time during the existence of the company,
furnish full details of such revelation, together
with reasons therefor.

3.07 Provide a list of existing key technical and


executive staff giving their names, age,
qualifications, salaries, length of service with the
company and previous experience.

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Furnish number of supervisory, skilled, semi-
skilled and unskilled personnel employed in each
of the existing plants.

Enclose: Organisation chart showing the


lines of authority.

3.08 Give particulars of existing long-term and short-


term borrowings as set out in Forms II and III.

3.09 Provide a list of shareholders owning or


controlling 5 per cent or more of equity shares,
indicating the amount owned and business
relationship, if any, with the company. In case
of preference shareholders, give a list of the ten
largest shareholders. Also give the number of
equity shareholders and preference shareholders.
Furnish distribution of shareholdings in Form IV.

3.10 Give a note on the company's tax status, viz. the


year up to which the company has been assessed
for income tax, the estimated unassessed
liability, the concessions available and the basis
on which provision for tax has been made. Provide
details of unclaimed tax benefits, if any.

3.11 Indicate whether the company is regular in


crediting its contribution and the contribution of
its employees to the "Employees' Provident Fund".
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Please enclose Provident Fund Dues Clearance
Certificate from the Provident Fund Authorities.

3.12 Describe manufacturing facilities separately at


each plant including:
(a) Dates(s) of installation and major
remodelling;
(b) Estimated annual capacity of major plant
sections and major items of equipment (design
capacity and normal capacity with basis for these
estimates):
(c) Specifications of products manufactured

3.13 Furnish figures of licensed capacity, installed


capacity, production and sales (quantities and
value) of each major product/product group during
the last five years. Give reasons for
underutilisation of capacity and significant
variations in production and sales, if any.

3.14 Describe the locational advantage of existing plant


with respect to supply of raw material, power,
water, fuel and labour as also with respect to
facilities for transportation, effluent disposal and
market,

3.15 Indicate the existing requirement of various


utilities and services and the arrangements for
their supply.

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3.16 Give destination, physical volume and proceeds of
export sales by main product lines in each of the
last five years. Also detail the export incentives
available to the concern.

3.17 Give details of insurance carried on fixed


assets, inventories, etc, showing basis of
insurance, names of insurers and types of risks
covered.

3.18 Give details of any pending litigation either by or


against the company.

3.19 Furnish a detailed note on the R and D activities of


the company including information on the nature
of R & D activities, total amount of capital
expenditure incurred, annual budget, number of
scientists/technical personnel employed, list of
new products/processes developed and the extent
of their commercial exploitation.

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4. PARTICULARS OF THE PROJECT
4.01 Describe in details of the project for which
financial assistance is required, indicating whether
it relates to expansion, modernization or setting up
of a new plant.
Enclose : Copy of the project report / feasibility
report, if any.
A. Capacity
4.02 Furnish details of installed capacity and
production as below : (Capacity is arrived at on
the basis of ...... day's working on ...... shift basis)
Product Present Proposed Maximum
installed installed Production
capacity capacity envisaged
(i)
(ii)
(iii)
(iv)
4.03 Indicate the section-wise capacities for the major
sections of the plant, along with detailed
calculations. Explain the reasons for
excess/inadequate capacity, if any, in any of the
sections.
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4.04 Give specifications of major products and by-
products, including size and weight and, where
appropriate, chemical and physical properties as
also their industrial uses.
B. Process
4.05 Explain briefly, the technical process proposed to
be employed. Indicate reasons for
adopting/choosing the particular process.
Enclose: Copy of process.
4.06 Has the proposed process ever been tried in the
country? If so, with what results.
C. Technical arrangements
4.07 Explain the technical arrangements made/proposed
for the implementation of the project.
4.08 In case any collaboration is involved, furnish a
brief write-up on the collaborator company
indicating its activities, size and turnover,
particulars of existing plants, other projects in
India and abroad set up with same collaboration,
etc.

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Enclose:
(i) Copies of published brochures highlighting the
activities of the collaborator and balance sheets for
last three years;
(ii) Copy of collaboration agreement;
(iii) Copy of Government approval for the
collaboration;
(iv) Copy of Government approval for availing of the
services of foreign technicians.
4.09 Furnish the particulars of consultants, as below:
(a) name of the consultants (indicate whether Indian
or foreign.)
(b) scope of work assigned to them;
(c) fees payable and the manner in which payable;
(d) brief particulars of the consultants including the
organisational set up, bio-data of senior personnel,
names of directors/partners, particulars of work
done in the past and work on hand.

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Enclose:
(i) Copies of published material on consultants;
(ii) Copy of agreement with consultants;
(iii) Copy of government approval in case of foreign
consultants.

D. Management
4.10 Describe proposed arrangement for executive
management of the concern both during the
construction period and for regular operations
thereafter.
4.11 Give particulars of proposed key technical,
administrative and accounting personnel.
Enclose : Proposed organisation chart indicating
the lines of authority.
E. Location and Land
4.12 Indicate location of plant, requirements of land for
the project and the arrangements made therefor.
Enumerate the locational advantages.

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4.13 Give the following particulars in respect of the
land acquired/proposed to be acquired for the
project:
(a) Area and cost
(b) Basis of valuation
(c) Mode of payment
(d) When purchased/take on lease
(e) Previous owners and their relationship, if any,
to the promoters/directors
(f) Is it industrial land? If not, has it been
converted for industrial use?
(g) Type of soil and load bearing capacity
(h) Water table
Enclose:
(i) copy of sale/lease deed;
(j) copy of soil test report;
(k) copy of Government order converting the
land into industrial land, if applicable;
(1) location map;
(m) site plan showing the contour lines, the
internal roads, power receiving station, railway
siding, tube wells, etc.

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F. Buildings
4.14 Explain the arrangements made/proposed for
construction the buildings. Furnish particulars of
buildings as per Form V.
4.15 Give the following particulars of architects:
(a) Name of architect/firm;
(b) Scope of work;
(c) Fees payable and manner in which payable;
(d) Past experience of the architects;
(e) Bio-data of senior personnel in architects' firm.
Enclose:
(i) Copy of agreement with architects;
(ii) Copy of published write-up/brochure on
the architect.
G. Plant & Machinery
4.16 Explain the basis of selection of equipment for the
project. Furnish list of imported and indigenous
plant and machinery acquired/to be acquired for
the project, along with detailed specifications, etc.
as per Forms VI and VII. Enclose : Layout of the
pant and machinery indicating the flow of
material.
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H. Raw materials
4.17 Provide information as per Form VIII indicating
the requirement of the raw materials, components,
chemicals, etc.
4.18 Axe there any price or distribution controls on any
of the items listed above? If so, give details.
4.19 Indicate the arrangements made/proposed for
obtaining the raw materials/chemicals which are in
short supply or to be imported.
4.20 In case of mining lease, provide:
(a) location and area of the mineral bearing lands;
(b) particulars of minerals;
(c) principal terms of the mining lease;
(d) estimated future reserves and quality of
reserves for each of the minerals and basis thereof;
(e) means of transport from the mines to the
factory.
Enclose :
(i) Copy of the agreement for mining lease;
(ii) Expert's report regarding the reserves.

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I. Utilities
4.21 Power: Furnish the following details:
(a) Source of power and supply voltage
- purchased
- own generation
- stand-by arrangements
(b) Maximum demand
(c) Connected load
(d) Peak hour requirements
(e) Contracted load
(f) Power tariff
(g) Cost of power per annum at maximum
capacity utilisation (give calculations)
Enclose:
(i) Copy of letter of sanction for power;
(ii) Copy of agreement with Electricity Board;
(iii) Copy of electrical la)'out of the plant.
4.21 A Conservation of Energy (for Hotel Projects only)
(a) Indicate the efforts proposed for utilising
alternate sources of energy particularly the
following:

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(i) For improving power factor
(ii) For improving heating efficiency in kitchens,
toilets, etc.
(iii) Use of solar energy for low temperature heating
requirements and whether siding/orientation of the
hotel buildings has been made to optimise the use
of solar energy.
(iv) For bringing down air-conditioning loads.
(v) For optimizing illumination from lighting
fixtures.
(vi) For better power-load management, including for
evening-out peak demand requirements and
cutting down non-essential loads,
(vii) For generally cutting down losses in the use of
various utility services namely, power, water and
steam and maximum and efficient utilization of
waste heat.
(b) Indicate any other measures considered necessary
or proposed to be taken in the context of energy
conservation.

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(c) Give particulars of the monitoring system to
acquire the desired economy in use of energy.

(d) Indicate the savings achieved/proposed to


be achieved by utilising alternative source of
energy.

A list of 16 items coming under the following 3


renewable energy systems, which are eligible for
concessional financial assistance from
financial institutions, is enclosed:

(i) Solar heaters for industrial applications

(ii) Wind-mill operated water pumps,

(iii) Manufacture and installation of systems based on


bio-mass such as agricultural wastes, etc.

List showing items coming under alternate sources of


energy
1. Flat plate solar collectors;
2. Concentrating and parabolic type solar collectors;
3. Solar cookers;
4. Solar water heaters and systems;
5. Air/Gas/Fluid heating systems;

37
6. Solar crop dryers and systems;
7. Solar refrigeration, cold storages and
air-conditioning systems;
8. Solar stills and desalination systems;
9. Solar pumps based on solar thermal and solar
photovoltaic conversion;
10. Solar power generating systems;
11. Solar photovoltaic modules and panels for water,
pumping and other applications;
12. Wind mills and any specially designed devices
which run on wind mills;
13. Any special devices including Electric Generators
and pumps running on wind energy;
14. Bio-gas plants and bio-gas engines;
15. Agricultural and municipal waste conversion
devices producing energy;
16. Geo ocean thermal energy.
4.22 Water : Give details on :
(a) Requirement of water, separately for - calculating,
make-up, process, boiler feed, drinking, cooling.

38
(b) Sources of water arrangements proposed and
water charges payable
(c) Capacities of the tanks, reservoirs
(d) Describe water treatment arrangements proposed.
Enclose :
(i) Layout for the water system:
(ii) Copy of letter of sanction of water by
municipal/local authorities, where applicable;
(iii) Copy of water analysis report,

4.23 Steam : Details the following:


(a) Steam requirements and the steam balance.

(b) Capacity and type of the boiler with detailed


specifications.

(c) Steam and energy balance diagrams.

(d) Total energy generated/purchased (converted into


MK Cal); theoretical requirements of energy (in
MK Cal) at the various consumption stations
and expected actual requirement at these stations.

(e) If alternate processes are available, comparative


energy consumption figures for the
various processes. If the project of energy
intensive, possibility of choosing alternative
process in order to make the project less energy
intensive.
39
(f) Steps proposed to be taken by the company to
improve energy efficiency and reduce energy
losses (such as power factor improvement, power
load management, optimizing illumination, waste
heat utilization, etc.)

(g) Scope for usage of solar/other renewable source of


energy.

(h) Any other measures contemplated in the direction


of energy conservation and management. Enclose
: Layout of the steam system

4.24 Compressed air, fuel etc. Provide information on:


(a) Requirement
(b) Sources
(c) Arrangements proposed
(d) Cost at site with detailed calculations

Enclose:
(i) Layout for compressed air, fuel etc.
(ii) Copies of letter of allotment of coal furnace oil
from the concerned authorities.

40
4.25 Transport: Furnish information on:

Arrangements proposed for carrying raw materials


and finished goods, provision for own trucks,
railway siding, etc. and arrangements with private
truck operators.

J. Effluent

4.26 Furnish details of the nature of atmospheric, soil


and water pollution likely to be created by the
project and the measures proposed for control of
pollution. Indicate whether necessary permission
for the disposal of effluents has been obtained.
Enclose: Copy of approval from concerned
authorities for the proposed arrangements. K.
Labour

4.27 Give estimates of total requirements and


availability of skilled and unskilled labour and
plans for training of personnel. Briefly describe
the manpower development programme.
41
L. Quarters and Labour Housing
4.28 Furnish existing and proposed arrangements for
housing the staff and workers In the following
form:
No. of quarters Floor area Unit cost Total cost
Existing Proposed Existing Proposed Existing Proposed Existing Proposed Amount
proposed
to be met
out of
Industrial
Housing
Scheme
(sq.m) (Rs.)
Other Senior Secutives
Other Executives
Supervisors
Labour
Total

M. Schedule of implementation

4.29 Describe how the design engineering, erection,


Installation and commissioning of the project will
be -carried out. Also indicate the progress made so
far In the implementation of the project and
furnish the schedule of Implementation as follows:

Commencement Completion
(Month & year) (Month & year)
(i) Acquisition of land

(ii) Development of land

(iii) Civil works ... factory


building, machinery
foundation, auxiliary
42
building, administrative
building, miscellaneous
buildings

(iv) Plant and Machinery

Imported Placement of Order


Delivery at site

Indigenous Placement of Order


Delivery at site
(v) Arrangement for power

(vi) Arrangement for water

(vii) Erection of equipment

(viii) Commissioning

(ix) Procurement of raw materials and chemicals

(x) Training of personnel

(xi) Trial runs

(xii) Commercial production


Enclose : PERT Chart

N. Other Projects of the-concern


4.30 Give details of any other new/expansion projects
which are under implementation or which the
company/promoters propose to implement, giving
the estimated cost, means of financing and the
present status.
43
5. COST OF THE REPORT

5.01 Furnish estimate of cost of project under following


heads (details may be furnished as per Form IX).
Also provide the basis of cost estimate (such as
quotation, orders placed etc.) bringing out the
built-in provision for cost escalation, if any.
(In thousands of rupees)
Rupee Rupee Total
Cost equivalent of Cost
foreign
exchange cost

(1) Land and site development


(2) Buildings
(3) Pant and machinery
- Imported
- Indigenous
(4) Technical know-how fees
(5) Expenses on foreign
technicians and training of
Indian technicians abroad
(6) Miscellaneous fixed assets
(7) Preliminary and
preoperative expenses
(8) Provision for contingencies
(9) Margin money for working
capital

Total

44
6. MEANS OF FINANCING
(In thousands of rupees)

6.01 Means of financing envisaged


Share capital.......Equity
.......Preference

Rupee loans
Foreign currency loans
Debentures
Internal cash accruals
Others (specify) __________
__________

(Give details of the means of financing envisaged


and the proposals for raising share capital and
loans in Form X and Form XA respectively)

6.02 In case internal accruals are taken as a source of


finance, explain the basis of estimation of internal
accruals by means of a suitable statement.

6.03 Briefly describe the arrangements so far made for


raising the finance and the proposed arrangements.

Enclose : Copies of letters sanctioning assistance

45
6.04 Indicate sources of foreign exchange and
arrangements, if any, made for obtaining foreign
exchange.

6.05 Indicate sources from which expenditure already


incurred has been financed, in Form XB.

6.06 Promoter's contribution to the project cost


Amount Rs...`
As per cent of total cost..........

6.07 List of persons/firms who would be contributing


to the promoters share of the capital and the
respective amounts.

6.08 Give details of security proposed to be offered for


loan and/or guarantee for deferred payments on
plant and machinery or guarantee for foreign
currency loans.

6.09 In case you propose to offer a bank guarantee


instead of mortgage of fixed assets, specify the
name of the bank and enclose copy of letter from
the bank indicating its willingness to provide the
guarantee.

46
7. MARKET AND SELLING ARRANGEMENTS

Enclose: Copy of market survey report, if any,


conducted by the company or independent
consultant.

7.01 Give brief notes on the products, their major uses,


scope of the market, possible competition
from substitute products, etc. Indicate the
special features (regarding quality, price, etc.) of
your products which would result in consumer
preference for your products in relation to
competitive products.

7.02 Furnish estimates of the existing and future


demand and supply of the products proposed to be
manufactured.

7.03 Give an assessment of likely competition in the


future and indicate any special features of the
project which may enable it to meet the
competition.

7.04 Provide information regarding export possibilities


and the nature of competition to be faced in
foreign countries; also give comparative data on
the manufacturing costs and prices (domestic as
well as export) prevailing in selected competing
countries.

47
7.05 If there are any export commitments assumed by
the company as part of the Government
requirements, indicate the arrangements proposed
for meeting the same and the export incentives
available.

7.06 Give the international CIF, FOB prices and landed


cost of the proposed products.

7.07 List of principal customers and particulars of any


firm arrangements entered into with them.

7.08 Particulars of Government controls, restrictions,


etc. if any, on the sale price, distribution, import,
export, etc. in respect of the products proposed to
be manufactured.

7.09 Indicate whether sales are to be made directly by


the company or through distributors of selling
agents. If sales are proposed to be made directly,
provide information on the nature of the proposed
selling organisation. Give particulars of proposed
selling arrangements both in India and abroad and
commission proposed to be paid. Give a brief note
on the selling agent's organisation.

Enclose : Copy of the agreement with selling agent.

48
7.10 In case the company proposes to have any sole-
selling agency for any of its products, furnish the
following particulars:
(a) Name of the selling agent
(b) Remuneration
(c) Special advantages/reasons for the
appointment of sole selling agents
(d) Relationship of the directors of the company
with the directors/partners of the sole-selling
agents.
(e) Past experience in handling the
same/similar products and financial position
of the sole-selling agents.
(f) Storage facilities available with the sole-
selling agents and the adequacy of the
facilities.

7.11 Give details regarding the trend in prices during


the last five years. If the prices are controlled by
the Government or on a voluntary basis, indicate
the basis on which the prices are fixed.

7.12 In case of agro-based/agriculture input industries,


indicate in detail the company's scheme for
educating the farmers to use the product/to grow
the produce required.

49
8. PROFITABILITY AND CASH FLOW

8.01 Give estimates of cost of production and working


results for the first five years of operation as per
Forms XI and XII respectively. Basis for all the
calculations should be shown separately.

Note : Inc case of expansion/diversification of


existing companies, two sets of profitability
statements may be prepared - (1) for the project
and (2) for the existing operations only.

8.02 Based on the estimates of working results in Form


XII, provide a cash flow statement for the
company as a whole, for five operating years of
the project in Form XIII.

8.03 From the foregoing statements, provide a


projected balance sheet for ten operating years for
the company as a whole,

8.04 At what capacity will the plant break-even? Give


detailed calculations.

50
9. ECONOMIC CONSIDERATIONS

Give prices of competing import/export products giving


a break-up as FOB, GIF, landed cost (including import
duty) and selling price.

Provide detailed explanation for differences in selling


prices of the products and those of imported goods with
quantitative data on differences in cost of production
(such as scale of operation, differences in costs of
inputs and various local duties and taxes).

Give the international/FIF/FOB price of all inputs


which can either be imported/exported.

Explain in detail the various duties, taxes and


incentives;
(a) Excise duty
(b) Export duty
(c) Export assistance
(i) replenishment licence
(ii) duty drawback
(iii) cash subsidy
(iv) any other (specify)

51
Give brief write-up on the economic benefits to the
country in general and the region in particular, on
account of the proposed project.

How far does the unit contribute to the establishment of


ancillary industries in the region?

10. GOVERNMENT CONSENTS

10.1 Indicate whether the various licences/consents


required for the project, have been obtained from
the respective authorities. Give details as follows:

Date of Present status


issue if not already
issued

(a) Letter of intent

(b) Industrial licence

(c) Capital Goods clearance

(d) Import licence

(e) Foreign exchange permission

(f) Approval of technical/financial


collaboration
52
(g) Clearance under MRTP Act

(h) Consent of the Controller


Capital Issues,

(i) Any other (Specify)

Enclose : Copies of
licences/consents, etc. received

10.2 Specify any special conditions attached to the


licences/consents and the undertaking given by the
company in connection with them.

11. DECLARATION

We hereby declare that the information given


hereinbefore and the statements and other enclosed are,
to the best of our knowledge and belief, true and correct
in all particulars.

Signature
Station Name & Designation
Date: Name of the concern

53
FORM I

FORM OF LETTER ADDRESSED TO THE BANKER


OF THE APPLICANT CONCERN, PROMOTER,
DIRECTOR, TO BE FORWARDED TO THE......

(NAME OF THE FINANCIAL INSTITUTION)

(This letter should, in the case of applicant or any other


concern, be written on printed letterhead and signed by
a person or persons authorised to operate the account
with the banker. It should be forwarded to the bank,
endorsing a copy to .......(name of financial institution)

Date :...........

The Manager
.......................
.......................
(Name and address of the bankers to be inserted here)

Dear Sir,

We hereby authorise you to discuss with the .....


(Name of the financial institution) to which we are
making an application for financial assistance, our
affairs or any matter relating thereto, and to disclose
such information as the ..............Name of financial
institution) may request of you or as you may consider
fit to disclose.
54
"We also authorise you to disclose to
.............(Name of financial institution) such information
as it may require on a continuing basis".

Yours faithfully,

55
FORM- II
PARTICULARS OF EXISTING DEBENTURES AND LONG-TERM SECURED
LOANS AS ON………………………..
A. DEBENTURES
Date of Purpos Securit Trustee Origina Amoun Rate of Amortis Conver Main Restrict
Debent e for y s for l t Interest ation sion or holders ive
ure which Charge debent amount outstan schedul other of covena
Trust debent d and ure of issue d-ing e special debent nts in
Deed ures nature holders provisi ures regard
were of ons to
raised charge dividen
d,
raising
of
loans,
creatio
n of
further
charge
s, etc.
1 2 3 4 5 6 7 8 9 10 11

56
Contd...2.
B. LONG-TERM SECURED LOANS:
Name of Purpose Original Amount Rate of Amortiz Security Date of Defaults Restricti
the of the Amount Outstan Interest ation Charges creation , if any, ve
Instituti Loan ding Schedul and of in the covenan
on from e nature charge paymen ts in the
whom of t of security
loan charge interest docume
raised and/or nts in
principal regard
to
dividend
, raising
of loan,
creation
of
further
charges
1 2 3 4 5 6 7 8 9 10

57
FORM- III
PARTICULARS OF EXISTING CASH CREDIT/OVERDRAFT ARRANGEMENTS
AS ON............................
Name Nature Maxim How Particul Stipulat Particul Rate of Value Amoun Whethe
of the of um and ars of ed ars of Interest of t r the
Bank Facility Limit when Securit Margin guaran Securit outstan bank
repaya y Percent tee, if y and ding on has
ble age any drawin the negativ
g date of e
power applica charge
tion on
fixed
assets

58
1 2 3 4 5 6 7 8 9 10 11

59
FORM IV
DISTRIBUTION OF SHAREHOLDINGS
(for existing companies only)
(In thousands of rupees)
Equity Preference Total
1. Indian promoters
(Name of major groups
(i)
(ii)
(iii)
(iv)
2. Foreign, collaborators
3. State Government
4. Central Government
5. State Industrial Development
Corporation (Specify)
6. Financial institution
(i) IDBI
(ii) IFCI
(iii) ICICI
(iv) LIC
(v) UTI
(vi) Others (Banks etc.) ______
Total ______
In respect of shares issued for consideration other than
for cash, furnish the following particulars:
Name of No. and value Date of Consideration for
the party of shares issued issue which issued

60
FORM-V
PARTICULARS OF FACTORY AND NON-FACTORY BUILDING
(Details of all buildings / civil constructions included under item ‘2-Buildings’ in Form
IX may be included here
Built-up Area In case contract is awarded

61
Description of the Building

Type of Construction

No. of Floors

Length

Breadth

Average height of each floor

Total floor area

Rate per sq.m.

Estimated Cost

Nature of contractor

Date of contract

Amount of contract

Expected date of completion

Remarks (indicate the reasons for higher lower construction cost


such as heavy foundation, special construction etc.)
62
1 2 3 4 5 6 7 8 9 10 11 12 13 14

63
Sr.No.

1
Description with board specification

2
Name of manufacturer

3
Country of Origin

4
A. ALREADY IMPORTED
Whether order placed or not

5
Date of placement of order (actual / expected)

6
Expected date of delivery at Indian port

7
FORM VI

Port of Lading
8

FOB Value
9

Basis of valuation (quotation (give date) order, place


10

agreement entered into, etc.)

Insurance and Freight (Rs.)


11

Import Duty percent (Rs.)


12
PARTICULARS OF MACHINERY IMPORTED / TO BE IMPORTED UNDER THE PROJECT

64
(i) Main plant and equipment
(ii) Miscellaneous fixed assets
B. PROPOSED TO BE IMPORTED
(i) Main Plant and equipment
(ii) Miscellaneous fixed assets
FORM-VII
PARTICULARS OF MACHINERY ALREADY ACQUIRED / PROPOSED TO BE
ACQUIRED FROM INDIGENOUS SOURCES UNDER THE PROJECT
Sr.No. Description Name of Whether Date of Expected Ex- Basis of valuation Remarks
including Manufacture order placement date of works (quotation (give
broad / Supplier placed of order delivery F.O.R. date), order placed,
Specification or not (actual/exp price agreements entered
ected) into, etc.)
1 2 3 4 5 6 7 8 9
A. ALREADY ACQUIRED
(i) Main plant and equipment
(ii) Miscellaneous fixed assets
B. PROPOSED TO BE ACQUIRED
65
(i) Main plant and equipment
(ii) Miscellaneous fixed assets

66
FORM –VIII
REQUIREMENT OF RAW MATERIALS, CHEMICALS AND COMPONENTS
(at maximum capacity utilization)
Sr. Name Speci Whethe Requir Total Unit Tota Basis Sources of Unit
No of fi- r e- annual cost l of supply consump
. materia catio importe ment requir of Cos cost (indicate tion
l / n d / per em- Mater t estim names and guarante
chemic indigen tone ent ial ate addresses of ed by the
al ous of principal trade collabora
compon final suppliers who tor /
ent produ have been technical
ct contracted / consulta
agreed to nt
supply
1 2 3 4 5 6 7 8 9 10 11

Enclose:
(i) Copies of letters from suppliers agreeing to supply the company’s requirements
67
(ii) Copies of import licence for items to be imported.

68
FORM-IX
ESTIMATED COST OF THE PROJECT
(In thousand of rupees)

(6) + (3)
Rupee Cost

Rupee Cost

costRupee equivalent of foreign exchange


Total

Total
costRupee equivalent of foreign exchange

1 2 3 4 5 6 7
1. Land and site development:
(a) Cost including conveyance
charges of .... Hectares of
freehold land acquired/proposed
to be acquired at the rate of Rs......
per hectare.

(b) Premium payable on leasehold land


And conveyance charges (...hectares
at the rate of Rs, .... Per hectare)

(c) Cost of levelling and development


of hectares ......of land at Rs. ......
69
per hectare

70
1 2 3 4 5 6 7
(d) Cost of laying roads:
(i) approach road connecting
the factory site to main road ...
rm of .... (type of construction)
at Rs. ... per rm.
(ii) Internal roads for the factory ....
Rm of ... (type of construction) at
Rs.....per rm.
(e) cost of fencing/compound wall
... rm of ...... (type of
construct! on) at Rs.....per rm.
(f) Cost of gates (No, of gates ....)

2. Buildings;
(a) Factory building for the main
plant and equipment

(b) Factory buildings for auxiliary


services like steam supply, water
supply, laboratory, workshop etc.

(c) Administrative buildings

(d) Godowns, ware-houses and


open yard facilities
(e) Miscellaneous non-factory
buildings like canteen, guest
houses, time office, excise
house, etc.

71
1 2 3 4 5 6 7
(f) Quarters for essential staff

(g) Silos, tanks, wells, chest, basin,


cisterns, hoopers, bins and other
structures which are necessary for
installation of plant and
equipment and which may
be constructed in RCC and
such other structural civil
engineers materials
(h) Garages
(i) Cost of sewers, drainage, etc.
(j) Civil engineering works
not included above
(k) Architects' fee

3. Plant and Machinery


(i) Imported
(a) FOB Value
(b) Shipping freight and
Insurance... per cent of (a)]
(c) Import duty
(d) Clearing, loading, unloading
and transport charges to
factory site
(ii) Indigenous
(a) FOR cost
(b) Sales tax (per cent), Octroi
(per cent) and other taxes,
if any
(c) Railway freight and transport
charges to site

72
1 2 3 4 5 6 7

(iii) Machinery stores and spares


(iv) Foundation and installation
charges on imported and
indigenous machinery.

4. Technical know-how fees and


expenses on drawings etc,
payable to technical collaborators

5. Expenses on foreign technicians


and training of Indian technicians
abroad:.
(a) Foreign technicians
(b) Indian technicians (.... Persons
for.....months)

6. Miscellaneous fixed assets:


(a) Furniture
(b) Office machinery and equipment
(c) Miscellaneous tools and
equipment including erection
tools
(d) Cars, trucks, etc (.... Cars; ....
(e) Railway siding
(f) Equipment (including cost of
installation, cabling etc. for
distribution of power and light
for factory and colony.

73
1 2 3 4 5 6 7
(g) Equipment and piping for
supply and treatment of water
(including cost of installation).
(h) Equipment and piping for
distribution of steam, air, etc.
(which do not form part of
the main plant and machinery).
(i) Laboratory equipment
(j) Workshop equipment
(k) Fire fighting equipment
(1) Effluent collection, treatment
and disposal arrangement
(m) Miscellaneous fixed assets

7. Preliminary and capital issue


expenses:
(a) Brokerage and commission on
capital (.... Per cent of Rs.....
lakhs)

(b) Other capital issue expenses


(legal, advertisement, printing,
stationery etc.)

(c) Other preliminary expenses


(company flatation and other
initial expenses)

74
1 2 3 4 5 6 7

8. Pre-operative expenses:
(from ..... (date) to date of
commencement of commercial
production)
(a) Establishment
(b) Rent, rates and taxes
(c) Travelling expenses
(d) Miscellaneous expenses
(e) Interest and commitment
charges on borrowings (give
details of calculations).
(f) Insurance during construction
including erection insurance
(g) Mortgage expenses (stamp
duty, registration charges and
other legal expenses) (... per
cent of loan of Rs......lakhs)
(h) Interest on deferred payments,
if any

9. Provision for contingencies


(Details as per Form IX A)

10 Margin money for working capital;


(Details as per Form IX B)
_________
Total ________

75
FORM IX A
ESTIMATES OF CONTINGENCY ESCALATION
PROVISION
Item of Cost Considered Reasons
Firm Non(-) for
(Rs. In firm consider
Lakhs) (Rs. In ing the
lakhs) cost of
firm
1 2 3 4
1. Land
2. Buildings
3. Plant & Machinery
- Imported
- Indigenous
- Stores & Spares
- Foundation &
Installation
4. Technical know-how
fees etc.
5. Expenses on
foreign technicians
and training of
Indian technicians
abroad
6. Miscellaneous fixed
assets
7. Preliminary and
capital issue
expenses

76
8. Pre-operative
expenses
Total

Contingency provision and the basis for calculations.

77
Form IX-B
MARGIN MONEY FOR WORKING CAPITAL
1st year 2nd year 3rd year 4th year

Amount

Amount

Amount

Amount

Amount of bank Finance


Items

Amount of bank finance


No. of months requirements

Amount of Bank finance

Amount of Bank finance


Margin money required

Margin money required

Margin money required

Margin money required


Bank Margin available %
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
(i) Indigenous raw
materials/components
(ii) Imported raw
materials/components
(iii) Consumable stores
(iv) Wages & salaries
(v) Cost of fuel, light and. power,
taxes, insurance, rent, etc.
(vi) Cost of repairs and
maintenance
78
(vii) Packing and sales expenses
[other than salaries and wages
on sales staff which should be
included under (iv) above
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
(viii) Stock of finished goods at cost
excluding depreciation (to be held for
the period between production and
realisation-of sale proceeds)
(ix) Stock of goods-in-process (cost of
production,-excluding depreciation
during the period taken for one
complete cycle-i.e. from raw material
to the finished goods stage)
(x) Outstanding debtors
(xi) Other items of working capital, if any
(Excise duty payable on one month's sale, etc)
Less: Trade credits available on raw
materials and consumables.
Networking capital required
Note: (1) The information may be provided
for the initial years until the unit

79
reaches maximum capacity utilisation.
(2) The amounts given here shall
agree with the figures in the
profitability statement as well as
the cash flow statements

80
FORM X
MEANS OF FINANCING
(in thousands of rupees)
In In rupees Total
rupees equivalent
of foreign
exchange
(1) (2) (3)

1. Issue of ordinary shares


2. Issue of preference share
capital (....per cent
redeemable after.....years but
before .... Years)
3. Issue of secured debentures
(State terms-rate of interest,
date of redemption and any
other rights attached)
4. Secured long-term and
medium-verm loans
5. Unsecured loans and deposits
(indicate by means of foot
note the source, nature of
security, rate of interest,
amortization schedule and
any other special terms of
loans already availed of)

81
6. Deferred payments (including
interest) to machinery suppliers
(less amounts due upto start
of production)

7. Capital subsidy from Central


Government

8. Internal cash accruals

9. Any other source (specify)

Note : In case total of column 2


less than the total foreign
exchange cost shown in Form IX,
indicate clearly the sources of
meeting additional foreign
exchange requirements.

82
FORM X-A
PROPOSALS FOR RAISING SHARE CAPITAL,
LOANS AND DEBENTURES

Subs R F De Re
cripti upe ore be ma
on / es ign ntu rks
Unde Loa Cur res
rwriti ns ren
ng of cy
shar Loa
e ns
capit
al
Equit Pref
y .
(1) (2) (3) (4) (5) (6)

Subscription
(a) Indian Promoters
(i) In cash
(ii) For consideration other
than cash specify)
(b) Foreign collaboration
(i) In Cash
(ii) For consideration other
than cash (specify)
(c) State Government
(d) State Industrial
Development Corporation
(SIDC)

83
84
Underwriting/Loans:
(i) IDBI
(ii) IFCI
(iii) ICICI
(iv) LIC
(v) UTI
(vi) SFC (specify)
(vii) SIDC (specify)
(viii) Commercial banks
(ix) (specify)
(x) Insurance Brokers
________
Total ________

85
FORM X-B
SOURCES OF FUNDS IN RESPECT OF
EXPENDITURE ALREADY INCURRED
Amoun Rate Other
t (in of terms
thousa intere and
nds of st condition
rupees) payab s of loans
le / deposits
etc.

1. Share - equity
- preference

2. Long/Medium term loans


from banks

3. Loans from financial


institutions specify)

4. Loans/Deposits from
promoters, directors,
friends, etc.

5. Public deposit

6. Any other source (specify)

86
FORM XI
ESTIMATES OF COST OF PRODUCTION
(The statement should be prepared for 5 years)
(In thousands of rupees)
Year ending
19... 19... 19... 19... 19...
Raw materials, chemicals, components
and consumable stores
1.
2.
3.
4.
5.
6.
(a) Total material cost
Utilities
Power
Water
Fuel
(b) Total utilities
Labour and plant overheads
Wages
Factory supervision salaries
Bonus
Provident fund
(c) Total labour
Repairs and maintenance
Light
Rent and taxes on factory assets
Insurance on factory assets
Miscellaneous factory expenses
Contingencies
(d) Total factory overhead
(e) Estimate of cost of manufacture (a+b+c+d)
Note : Indicate the basis for
(a) wastage for raw materials, and
(b) rejection rate for finished products

87
FORM XII
ESTIMATES OF WORKING RESULTS
(The statement should be prepared for a period of 5 years)
(In thousands of rupees)
Year ending
19... 19... 19... 19... 19...

(a) Cost of production as


per statement In Form XI
Administrative expenses
Administrative salaries
Remuneration of directors
Professional fee
Light, postage, telegrams
and telephone, office supplies
(stationery, printing etc,)
Insurance and taxes on
office property ....

Miscellaneous
(b) Total administrative, expenses
(c) Total sales expenses
(d) Royalty and non-how payable
(e) Total cost of production (a+b+c+d)
(f) Expected sales (As per statement in
Form XII-A

88
19.. 19... 19... 19... 19...

(g) Gross profit before interest(f-e)


Financial expense
Interest on terms loans.
Interest, on borrowings for working
capital
Guarantee commission
(h) Total financial expenses
(i) Depreciation
(j) Operating profit (g-h-i)
(k) Other income, if any (Give details)
(1) Preliminary expenses written off
(m) Profit/loss before taxation (j-k-l)
(n) Provision for taxation
(o) Profit after tax (m-n)
Less: Dividend on : Preference capital
: Equity capital
(with rate)
(p) Retained profit
Add: Depreciation
Preliminary expenses written off
NET cash accruals
Note : Detailed workings shall be provided
for calculation of depreciation
(straight-line and income tax
method), interest, taxation, etc.
89
FORM XII-A
FSTIMATES OF PRODUCTION AND SALES
(Details may be furnished separately for each product and until the plant reaches maximum capacity utilisation)
Product Product Product
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th
Y Y Y Y Y Y Y Y Y Y Y Y
ear ear ear ear ear ear ear ear ear ear ear ear

1. Installed capacity (quantity per


Day/annum)
2. No. of working days
3. No. of shifts
4. Estimated production per day (quantity)
5. Estimated annual production (quantity)
6. Estimated output as percentage of
plant capacity
7. Sales (quantity) (after adjusting stocks)
8. Value of sales (in thousand of Rs.)
Unit selling price - product/Price (Rs)
1.
2.
3.
Note : Production in the initial period should be assumed at a reasonable level of
90
utilisation of opacity increasing gradua.ly to attain full capacity in subsequent years.

91
FORM XII-B
CALCULATION OF WAGES AND SALARIES AT
MAXIMUM PRODUCTION
Number Average Total
Monthly Annua
Salary l
Salary
1. Factory wages and salaries
(a) Workers
Skilled workers
Semi-skilled workers
Unskilled workers
Casual workers
_________________________________
Total _________________________________
(b) Factory supervision
Category Salary Number Average Total
Scale monthly annual
salary salary
_________________________________
Total _________________________________

2. Administrative sales staff


Category Salary Number Average Total
Scale monthly annual
salary salary

(a) Administrative staff ........... ........... ........... ...........


Total administrative staff........... ........... ........... ...........

(b) Sales staff ........... ........... ........... ...........


Total sales staff ........... ........... ........... ...........
_________________________________
Total _________________________________
FORM XIII
92
CASH FLOW STATEMENT
(This statement should be prepared for a period of 5
operating years)
(In thousands of rupees)
Construction Operating years
Period
Half 19... 19... 19... 19... 19...
yearly

Sources of Funds
1. Share issue
2. Profit before taxation with
interest added back
3. Depreciation provision
for the year
4. Development rebate
reserve
5. Increase in secured
medium and long-term
borrowings for the projects
6. Other medium/long-term
loans
7. Increase in unsecured
loans and deposits
8. Increase in bank
borrowings for working capital
9. 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) _______

Half 19... 19... 19... 19... 19...


93
yearly
Disposition of Funds

1. Capital expenditure for the


project.

2. Other normal capital


expenditure

3. Increase in Working Capital

4. Decrease in secured
medium and long-term borrowings
... all-India Institutions
... SFCS
... Banks

5. Decrease in unsecured loans


and deposits.

6. Decrease in Bank borrowings


for working capital

7. Decrease in liabilities for


deferred payments (including
interest) to machinery suppliers

8. Increase in investments in
other companies

9. Interest on term loans


10. Interest on bank borrowings
for working capital.
11. Taxation
12. Dividends : equity
: Preference

94
Project Feasibility Study

Some investment proposals pass through the stage of


checking out the feasibility. Large projects usually need
a feasibility test to be carried out before a handsome
amount is committed. The strategic content in such
projects is high, but the availability of relevance of
internal data is less.

Introduction

Project feasibility is a test where the prima facie


viability of the investment is evaluated. Evaluation is
based on secondary but comprehensive data. Rough
estimates based on others' experience form the basis of
the viability check in the project feasibility report.
There are basically three types of feasibilities
evaluated in the project feasibility report, namely, (a)
market feasibility, (b) technical feasibility, and (c)
financial feasibility. When projects are evaluated
by government or government agencies, economic and
social feasibility is also considered. Market feasibility is
carried out in detail at this stage. Technical feasibility
and financial feasibility are less emphasised at this
stage.

Market Feasibility

Products whose sales potential is high are less risky to


invest in. A market feasibility study aims at assessing
95
the sales potential of a proposed product.

The approach for conducting market feasibility study


will vary depending upon the type of proposed product.
In the case of a novel product idea (a product is novel,
if the same or similar product is not available in the
market anywhere in the world), the market feasibility
check has to be based on creative judgement and
wishful thinking. At most, indicators of buyer behaviour
(in terms of their response to a 'new' or 'dream'
product) are taken into account for estimating the
potential demand for the product.

If a proposed product is-new in an economy, but has


been successfully marketed in some other economy,
then its market feasibility is assessed through a
meaningful comparison of some broad economic and
cultural indicators in the two economies. Each economy
is likely to experience an almost identical buying
pattern and preference for products, if the economic
indicators are comparable. Cultural differences should
be adjusted before drawing conclusions about the
demand potential. The per-capita incomes, income
disparity levels, the pattern indicating shifts in choice
for consumption, literacy levels and other economic
factors can indicate the potential of demand for a
particular proposed produce.

If the proposed project is for an addition to the capacity


existing in the economy, then the task of the market
96
feasibility study will be different. A historical data
analysis and study of factors, which influence
consumption trends, become essential in such cases.
The following discussion is centered around the market
feasibility study for a product which is already selling
in the market. It is divided in 5 points:
1) A study of general economic factors and indicators
2) Demand estimation
3) Supply estimation
4) Identification of critical success factors
5) Estimation of the demand-supply gap

General Economic Indicators

The demand potential for any product is likely to have


some kind of association with a few economic
indicators. A change in demand and a change in one
particular or some economic indicators may take place
simultaneously, or with lead or lag. Some of the
important economic indicators include gross domestic
product, per capita income, income disparity, rate of
urbanisation, population growth rate, literacy rate,
government spending and money supply.

For example, the per capital income, especially of the


upper middle class has exploded the demand for a car in
India in the 90's. The demand for consumer durable
goods like white goods and electronics is also linked
with income trends.

97
Demand Estimation
Projection of demand is the most important step in a
project feasibility study, Salient points related to
demand estimation are briefly enumerated below:
 The end-user profile

 The study of influencing factors

 Regional, national and export market potential

 Infra-structure facilities which may facilitate


or constrain demand
 Demand forecasting.

Different end-user profile: A product may have different


uses and different end-users. The total demand for the
product is made up of different end users. These
different market segments may not be interlinked. For
example, the demand for cement can be divided into
two broad categories, namely housing, office
maintenance and rehabilitation activities, and
infrastructure projects such as irrigation, canal,
railways, road and ports. The scope of alternative usage
should also be assessed. In the case of plastic, a whole
new market of packing is opening up with even newer
application, which may affect, and in fact has already
affected, the tinplate-packaging industry. In the case of
cement, end-users are also classified on the lines of
government and non-government demand, as well as
urban and rural demand.

Influencing factors : Product demand may have


influencing factors and they must be assessed. The
98
demand for a product is a derived demand. Demand for
tyres depends upon the sale of automobiles, fertiliser
sales are dependent on monsoons, and sales of steel and
industrial growth are associated with each other. Those
factors must be forecast.

Market Potential: The regional, national and export


market potential of a product may be different due to
many factors. A study of national demand may not be
adequate, because there may be regional imbalances
caused by several constraints. India has a large demand
for electric power, but due to inadequate infrastructure
for its distribution, some states continue to be power-
surplus states. In the case of cement, regional demand
matters more than national demand due to
transportation costs acting as a deterrent. Assessment;
of export potential is a big exercise, First, 'the economic
distance to which a particular product can be exported'
must be evaluated. Next importing countries in the
same part of the globe, must be identified, and the
countries that have no exportable surplus. The cost and
quality aspects of our goods should' also be compared
with other potentially exporting countries, and other
such factors need consideration as well.

Infrastructure facility : The Infrastructure facility


should be assessed. For example, the exportability of
Indian cement depends less on the quality and cost of
production, and more on the high cost of transportation.
But cargo facilities are very rare in India. As a result,
99
the cargo costs are prohibitive in exporting cement. In
the Indian market the uncertainty surrounding
availability of wagons makes it difficult for a cement
unit to serve demand in a region, which is outside the
economic distance from the factory.

Demand-forecasting: This is an important step in the


assessment of demand potential. Growth in demand in
the past can be indicative of future demand. There are
various methods of demand forecasting. Some assume
that factors influencing consumption behaviour in the
past will continue to influence the future, others provide
for adjustment of some economic indicators which are
likely to be different in the future. The list of demand
forecasting techniques is given later in this lesson.

Supply Estimation
Unlike demand, supply estimation is more difficult.
Past trends of supply of goods can be studied and
further extrapolated. Projections so made, need to be
adjusted with the help of additional information
like the projects undertaken in the economy, import
possibility as governed by imports policy, import tariff
and international prices. Information regarding the entry
barrier is also useful. A long gestation period and a high
capital to labour ratio in an industry may create a
natural entry barrier. The government licensing policy,
the availability of required inputs like materials and
skilled labour also cause entry barrier. Product category
where entry barrier is high is unlikely to see sudden
100
spur in supply, offering more comfortable position to
existing players.

Identification of Critical Success Factors

For the choice of location and to study the risk of a


project, it is essential to identify the critical factors,
which determine the success of project. Availability of
raw material (lime stone in the case of a cement
project), supply and cost of electrical power (in case of
an aluminum project) transportation facilities (for any
bulk goods producer), supply of skilled manpower (in
case of the information technology industry) or other
variables could be the critical success factors. They are
product and region specific. The right choice of location
may reduce the cost of a project and the uncertainty
regarding the availability of resources. However, if
some crucial factors are subject to volatile changes,
then the impact of their variability on the net
profitability of a project has to be separately analysed.

Estimation of the Demand-Supply Gap

Demand and supply estimates, fine-tuned with new or


changed factors, are now compared with each other in
order to find a gap. The demand-supply gap, is
meaningful only for a relevant geographical territory. It
is quite likely that the forecast of demand and supply
may not be a single point forecast. It may be in terms-of
various scenarios. A multiple point forecast gives a
101
most adverse, most likely and most favourable forecast
of demand and supply. However is it done? Look at the
demand and supply projections given in Table 1, which
also shows the calculation of the demand-supply gap for
a particular product in the next five years.

Table-1
Demand Supply Gap Calculation for Five years

Year Cement Cement Demand


Demand Supply Surplus
Min Like Max Like Max Min Like Max
ly ly ly
1 48.0 48.0 48.0 48.0 48.0 0 0.00 0.00
0 0 0 0 0 .00
2. 49.4 50.4 51.3 50.7 50.7 -1.2 -0.3 0.66
4 0 6 0 0 6 0
3. 51.6 53.9 56.5 53.3 53.3 -1.7 0.55 3.12
6 3 0 8 8 2
4. 54.7 58.7 63.8 61.0 63.2 -8.4 -2.2 2.81
6 8 4 3 4 8 5
5 58.6 65.2 74.6 62.4 65.4 -6.8 2.80 12.2
0 5 9 5 6 6 4
Demand Minimum = Min demand -
Surplus Max supply Likely = Likely
demand - Likely supply
Maximum = Max demand -
likely supply
102
Note : All the confirmed capacity additions constitute
the 'Likely supply scenario' while 'maximum supply
scenario' assumes another capacity addition in the third
year to fifth year. It is assumed that firms will be able to
operate at 80 per cent capacity.

In case the supply shortage is estimated to be


sufficiently large, the market feasibility of a product is
said to be positive. Aggressive promoters, however,
study the strength and weaknesses of the present
manufacturers, and set up a large capacity plant with the
clear strategy of eating into the market of competitors.
They leverage on their own strength and others
weaknesses.

Technical Feasibility

Various factors are analysed in checking the


technical feasibility of a proposed project. They are
listed below:

1) Availability of commercially exploited technology


and its alternatives.
2) The transplantability of technology into the
local environment. The suitability of the technology
involved must be assessed in the light of the available
quality of material, quality of power, skilled
personnel, atmospheric conditions, quality of water
and other factors.
103
3) Technological innovation rate in the product.
4) Production processes.
5) Capacity utilization rate and its justification.
6) Availability of raw material and other resources
like power, gas water, compressed air, labour, etc.
7) Requirement of plant and equipment and
fabrication facilities.
8) A feasible product mix with possibilities of point
and byproducts.
9) Facilities for affluent disposal.

A broad-based evaluation of the technical aspects


of projects is carried out at the project feasibility stage
along the lines listed above. The commercial side of
technical details is also studied simultaneously so that
the commercial exploitability of the technology can be
evaluated.

Financial Feasibility

Demand and price estimates are derived from the


market feasibility study. Project costs and operating
costs are derived from the technical feasibility study.
The estimates need to be supplemented with a) tax
implications depending upon the prevailing tax laws,
and (b) financial costs emanating from the financing
alternatives considered for the project. That provides
enough information for the calculation of the financial
bottom-line of the project.

104
The financial feasibility check involves a detailed
financial analysis. The financial analysis includes quite
a few assumptions, workings and calculations. Some
are briefly described below:

1) Projections are made for prices of products, the


cost of various resources required for
manufacturing goods, and capacity utilization. Use
of the thumb rule or actual data of some
comparable projects are generally included in the
estimates.
2) The period of estimation is determined, and the
value of the project at the terminal period of
estimation is forecast. Hie period of estimation
should be justified by factors lie the product life
cycle, business cycle, ability to forecast, period of
debt funds, etc.
3) Financing alternatives are considered and a
tentative choice of financing mix is made
together with assumptions regarding the cost of
funds and repayment schedules.
4) Basic workings are shown in different statements.
of the schedules made for this purpose include,
a) An interest and repayment schedule
b) The working capital schedule
c) The working capital loan, interest and repayment
schedule
d) The depreciation schedule for income tax purposes
e) The depreciation schedule for the purpose of
reporting under Companies Act, 1956 (if
105
depreciation policy is different than income tax
rules.

5) Some financial statements are prepared in the


project feasibility report. They include:
a) Profit and Loss accounts of the company
b) Balance-Sheets of the company
c) Cash Flow statements for the proposed project

6) Financial indicators are calculated using data


derived in various financial statements. Two
basic financial parameters are used for judging the
viability of the project:
a) Debt-service coverage ratio (DSCR)
b) Net present value (NPV) or internal rate of return
(IRR)
PAT = Profit after tax
OCF = Operating cash flow
= PAT + depreciation
DSCR = Debt service coverage ratio

Some firms also prefer to calculate (I) payback period


(PBP) (ii) interest cover ratio, (iii) net present value
(NPV) either as alternate tools or additional ones.

a) The interest cover ratio indicates the safety and


timely payment of interest to lenders of money. It is
calculated with the help of the following formula;

Interest cover ratio = PAT+Depreciation+interest


106
------------------------------- (eq.l)
Interest

This shows how many times the operating cash flow


before interest is earned against the interest liability.
However, this is not a very important indicator of
project viability.

b) Debt-service coverage ratio (DSCR) uses the same


numerator as the interest cover ratio, but that is
compared with the interest payment and principal sum
repayment in a particular year. The formula is

PAT+Depreciation+interest
DSCR = ---------------------------------- (eq.2)
Interest+principal sum repayment

Academically and according to many leading financial


institutions an average DSCR of 1.5 is considered very
good. This is also the safety indicator for lenders of
money. A project that generates enough funds during
the period of loan taken for the project is considered
good from the business prudence angle. Let us take an
example for the calculation of the interest cover ratio
and debt service coverage ratio.

Example – 1: Nirmal Bhavan Limited (NBL)

Nirmal Bhavan. Limited has estimated the following


cash flows from the project over the next five years:
107
Y-1 Y-2 Y-3. Y-4 Y-5 Total
of 5
years
Depreciation 14,00 14,00 14,00 14,00 14,0 70,00
0 0 0 0 00 0
Interest 5,000 5,000 5,000 5,000 5,00 25,00
0 0
Profit after 10,00 15,00 25,00 25,00 15,0 90,00
tax 0 0 0 0 00 0
Principal -— — 10,00 20,00 20,0 50,00
repayment 0 0 00 0
The company has planned to use a 15% discount rate
for the evaluation of the project in which Rs.70,000 is
invested. Calculate (a) interest cover ratio, (b) debt
service coverage ratio, (c) NPV, (d) IRR.

Solution

Y-1 Y-2 Y-3 Y-4 Y-5 Total


OCF 15,00 20,00 30,00 30,00 20,00 115,0
before interest 0 0 0 0 0 00
Interest 5,000 5,000 5,000 5,000 5,000 25,00
0
Loan — — 10,00 20,00 20,00 50,00
repayment 0 0 0 0
Interest cover 3.00 4.00 6.00 6.00 4.00 4.60
DSCR 3.00 4.00 2.00 1.20 0.80 1.53
NPV 4,988
IRR 17.74
%

108
Note : Tax assumption is simplified, and tax shield on I
interest is not adjusted.

c) The net present value (NPV) and the internal rate


of return (IRR) are based on the present value concept.
The project cash flow (excluding financing or debt
related cash flow) Is discounted at a discount rate
(usually equal to the cost of capital) to find the net
present value. In IRR, a discount rate is found with trial
and error at which NPV is zero. A positive NPV and an
IRR greater than the cost of capital indicate that the
project will add to the wealth of shareholders.

d) The pay back period shows the capital recovery


period. It is the period over which initial capital
investment is recovered.

A project is said to be viable if the average DSCR is at


least equal to 1.5 (sometimes even a little lower, say
1.33, is also considered okay), and the NPV of the
project is positive (or the IRR greater than the cost of
capital).

Risk Assessment

Basic indicators of financial viability use profit and


cash flow estimates. They may be subject to risk or
uncertainty. The evaluation of risk is also necessary.

109
There are many methods of risk analysis and
risk management. However, at the stage of the project
feasibility study, two main methods are applied ; (a)
break even point, and (b) sensitivity analysis.

These two methods are briefly explained below:


a) The Break-even point is calculated and compared
with achievable capacity utilization. The difference
indicates the safety margin. In the previous example the
breakeven is calculated as below:

Expected Sales, (units) Rs. 25,000


Annual Fixed cost Rs. 80,00,000
Sales price per unit Rs. 1,000
Variable cost per unit Rs. 600
Contribution per unit Rs. 400

Fixed Cost
BEP (Unit) =------------------------
Contribution per unit

80,00,000
= ------------------------- =20,000 units
400

BEP (%) = BEP (Units)/ sale units


= 20,000/25,000
= 80%

b) Sensitivity analysis is another technique of risk


110
analysis. In sensitivity analysis, the effect of change in a
single factor on the profitability is measured. This
shows the variability in the profit due to change in a
factor.

Economic Viability
The terms 'economic viability' and 'financial viability' |
are not different for companies. However, from the
national angle and from the view-point of the economy
as a whole, economic feasibility and financial feasibility
are not considered to be the same. Cost and benefits to
the nation due to the proposed project are considered in
the economic feasibility test. Tax revenue, generation of
employment, savings of foreign exchange and such
other factors, differentiate economic viability from
financial viability. government and government
agencies calculate the economic indicator .of a project
before permitting the project to finance it.

Critical Success Factors


The success of a project depends on the actual outcome
of some key variables. These key variables are called
critical success factors. An inaccuracy and uncertainty
surrounding these factors may render a project
unattractive. Each industry has its own critical success
factors identified from the experience of businesses. For
example, in the case of a cement project, availability of
wagons, freight charges, supply of power and supply of
coal are the key success factors, as they generally
constitute 65% of the variable cost and 40% of
111
realisation. In the case of an aluminum project, power
which accounts for more than 60% of realisation is the
critical success factor. Some of the factors are project
specific, and they are also specific to the economy and
location. Risk is studied in the light of possible
variations in critical success factors.

Demand forecasting Techniques


The key aspect of any decision-making situation lies in
being able to predict the circumstance that surround the
decision and that situation. Business managers are
expected I to know and apply forecasting techniques in
their decision making processes.

A number of methods and techniques have been


developed in the last few decades for forecasting the
future. These can be separated into two broad classes;
namely quantitative techniques and qualitative
techniques. The former is one where the forecast is
directly based on historical data and can be carried out
in a mechanical fashion. It assumes that the past trend
and relationship will continue in the future also.
Qualitative techniques aim at forecasting changes in a
basic pattern as well as the pattern itself. Qualitative
techniques are used for forecasting the turning point in
a pattern; for example, the expected decline in demand
of a product, which has touched the maturity point.

The choice of A forecasting technique is of vital


importance because historical data analysed by them
112
may have different patterns, and also the future for
which the forecast is made may have some of the
factors in variation, compared to what they were during
the relevant period of the historical data. This section,
for fear of digressing into side j topics, does not
emphasise techniques per se, but attempts to drive home
a point to the readers that one cannot just take 'any
technique' for forecasting. A need-based choice would
minimise errors in judgement.

The following section is therefore, divided into two !


points:
(a) Pattern based forecast, and (b) causal model based
forecast

Pattern Based Forecast


In cases where one or a few independent factors may
not have an explanatory power for demand, just the
pattern can be studied for forecast. Let us first consider
various patterns

113
Types of patterns: Patterns can be divided into four
groups; namely, horizontal patterns, seasonal patterns,
cyclical patterns and trend patterns. Figures 1.a to l.d
give a pictorial presentation of these patterns.

In the long term, the business cycle effect on demand


will show a cyclical pattern, whereas quarterly sales
may show a seasonal pattern. The horizontal data
pattern indicates the product maturity, whereas the trend
data pattern shows long term growth orientation in the
114
demand of the product. The demand forecast for a
project should cover the period encompassing more
than one business cycle and check the cyclical effect on
demand. Moreover, the trend (growth) pattern over the
long period (two to three business cycles period) should
be considered for forecasting the demand.

The right time of undertaking projects is essential for


ensuring better profitability. A study of the cyclical data
pattern would clearly show that the project should be
undertaken at a particular point in the business cycle, so
that it will be ready for commercial exploitation
(commissioning) when the upward phase of the cycle
begins.

Methods of pattern based forecasting: The second point


is about various methods for forecasting the future
based on the historical data pattern. Some of the
important methods include:
1. mean
2. naive
3. moving average
4. exponential smoothing
5. auto-regression/moving average
6. regression

A simple arithmetic mean of the historical data can be


taken as the forecast for the next period, if the
horizontal data pattern is observed. However, it has to
be ensured that the period does not represent the end of
115
product maturity.

The naive method of forecasting use' the most recently


observed value as a forecast. This method, which has
most apparent demerits, can be used for forecasting (or
setting a target for) say the sales in the next one week.
In the project feasibility report the naive method is
given no recognition.

The moving average method is more useful in


forecasting for a fairly short period. This method
reduces the randomness in variation, because the
average of the last few observation Is considered as the
forecast value, unlike the last observation in naive
method.

In the exponential smoothing method, exponentially


decreasing weights are assigned to various observations
so that the more recent values receive more weightage
than older values. (The moving average method
assumes equal weights for each value). There are many
approaches to the exponential smoothing method.
These variations seek to make adjustments for such
things as trend and seasonal patterns. They are called
higher form of exponential smoothing. In the case of the
project feasibility report, it is most likely that the
project would be found attractive if a rising trend
pattern in demand is observed. Higher forms of
exponential smoothing are required for handling the
trend pattern of data. Double moving average and
116
double exponential smoothing methods are prescribed
for it.

The auto-regressive moving average (ARMA) method


adopts a procedure where, along with past values and
their weights, past errors in the forecast (deviation of
actual from forecast) are also weighed. This ensures
minimum error in the forecast. The procedure
developed by Box and Jenkins is most commonly used
in this method. The filtering method also falls in the
same class.

Regression and its variations are useful in handling the


trend data pattern. A best-fit line can be drawn in such a
way that the distances of data points on both sides of
the line are approximately equal. Time is on the X-axis
and values on the Y-axis. The extension of the line to
the next time period indicates the forecast value. The
distance of data points from the best-fit line indicates
error. Time is considered a causal variable in this case
otherwise; the best-fit line and other regression methods
are more suitable, if the forecast variable is found
dependent on some other casual variable.

Casual Model Based Forecast

Forecasting methods described in previous pages can be


applied, if all other factors which can possibly influence
the I demand, remain constant in the forecast period, or,
demand is a function of time. In many cases, the
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demand of a particular product can have explanatory
factors. The behaviour of one or more factors may be
responsible for the change in demand. Many methods
can be employed for forecasting variables of such
nature. They can be grouped as explanatory models, or
causal models. Some of these methods are listed below:

1. Regression and correlation


2. Coefficient of correlation
3. Decomposition method
4. Input-output tables
5. Econometric models
6. Consumption level method
7. Consumption co-efficient (end use) method
8. Leading indicator method.

Regression techniques are useful when the forecast


variables is dependent on some other independent
variable. This relationship is assumed to be linear.. The
basic mathematical function is written as:
Y = a + bx (eq. 3)

The best-fit line, least square method and regression are


grouped together, as they are based on the same logic
expressed in the above mathematical function. If more
than one independent (casual) variable is likely to have
a bearing on a dependent fact, then multiple regression
analysis should be carried out. Sometimes, it may not
be possible to pinpoint that one is a dependent variable
and the other independent, although they may be
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related. In such cases the two variables are said to be
correlated.

The co-efficient of correlation is the square root of the I


explained variation from Y over the total variation. This
can be mathematically written as explained variation.

r2 = Explained variation = (Y-y)2 (eq. 4)


Total Variation (Y+y)2

Total variation Co-efficient of correlation can be


between + 1 and -1;

The Decomposition method attempts to explain the


pattern or the change in it with the factors responsible
for it. A pattern or the change in it can' be broken down
(decomposed) into a few factors. This decomposition is
mathematically represented as:

S=TxCxIxR (eq. 5)

Where : T = the trend factor


S = The forecast
C = the cyclical factor
I = the seasonal factor
R = randomness

Input-output tables have their own place in forecasting.


These tables use co-efficients, which are assumed to
remain constant. For example, the savings rate and GNP
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growth relations are used in planned economies for
preparing their annual plans. Such tables can be used
for projections of some demand.

Many econometric models are also developed for


measuring the impact rate of change in the casual
variable. In a way simple and multiple regression
equations are part of econometric models. Unlike a
single equation in simple regression, in the
econometric models that is several equations require
to be solved simultaneously. These models are based on
discovering and measuring the interrelationships that
exist in the economy, and are particularly suitable for
answering what if questions. In most broad economic
and business situations, particularly in demand
forecasting as a part of the project feasibility study,
many factors may have a is interrelation with demand.
This can expressed as below:

Sales = f(GNP, price, advertising)


Production Cost = f (production, inventory levels)
Selling Expenses = f (advertising, other selling
expenses
Price = f(cost, selling expenses,
competition)
Advertising = f (sales, profitability, competition)

As it would appear, the complexity of econometric


model is high and goes up with additional casual
variables. Obviously, smaller and medium size firms
120
cannot afford to use these models. They can however,
avail econometric forecasting services on a subscription
basis. There are quite a few econometric models
developed for specific application. For example,K.T.
Wise (1975) developed a model for the price and
demand supply of steel scrap.

Consumption level methods are useful for estimating


the demand of consumer goods items. The demand for a
particular product might be elastic to the income and/or
the price. Therefore, we get two models, one based on
the income elasticity of demand and the other based on
the price elasticity of demand. In both the cases the
elasticity is measured and then applied to the casual
variable. Income j elasticity is measured as follows:

Q2-Q1 I1+I2
Ei = ------- x ------ (eq-6)
I2-I1 Q1Q2

where, E1= income elasticity of demand


Q1 = quantity demand in the base period
Q2= quantity demand m the following year

11 = income (per capita) level in the base year


12 = income (per capita') level in the following year

The next step is the calculation of the change in per


capita consumption using the following equation.
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Per capita consumption
=1+ (change in income level x Ei) (eq. 7)

In the last step the total national demand is calculated


by multiplying the forecast of the per capita,
consumption with the estimated population. For
example,

The projected population is 95 crores

The present population is 90 crores the base


population 88 crores

the cement consumption per head in the base year


is 10 kg.
the cement consumption per head in the following
year is 10.3 kg.

the base year per capita income is Rs. 1970

the following year per capita income is Rs. 2,000

the projected per capita income in real terms five


years from now is Rs. 2,200

E1 = 10.3-10 x 1980 + 2000


2000-1980 10 + 10.3
0.3 3980
= —— x ——
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20 20.3
= 2.94
Per capita consumption=1+{(2200/2000 x 100) x 2.94}
= 1.294kg

Finally, the total demand in the economy will be, 95


crores population x 1.294 kg.
= 123 crores of kg approximately

The price elasticity of demand is similarly studied and


included in the demand forecasting. The first formula of
E1 will change to Ep, I (for income will change to P (for
price). The subsequent two steps of determining the per
capita consumption and the total demand are the same
as in income elasticity of demand.

The consumption co-efficient (end-use) method is


recommended for forecasting the demand for
intermediate goods. Usually intermediate goods have
multiple end uses. First, the demand for each end-use
product is estimated (based on the application of some
forecasting method), then the correlation of
consumption of the intermediate product with the end-
use product is defined, and finally, the demand of
intermediate goods is forecast. For example, cement has
two broad groups of the end-use segment; household
and infrastructure. Both activities can be estimated
separately and the demand for cement can be derived.
Steel is also an intermediate product. The construction
industry, railways, automobile industry and others
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consume it. The end-use method of forecasting is
suitable in estimating the demand for such products.

The leading indicator method is useful where the


demand for a product follows a particular indicator but
with a difference in timing. To avoid reliance on a
single series, composites of many leading indicators are
usually constructed. However, in the project situation
this lead indicator method has less significance, as it
can be suitably applied for forecasting only short-term
fluctuations in demand.

Finally, one should remember that there is no foolproof


method of forecasting demand without any error. Trends
may change due to change in ca 1 variables. The ca al
variables and their correlation with forecast variables
may also change. Therefore, probabilistic theories are
developed. The judicious use of qualitative analysis
along with quantitative techniques of forecasting is
highly recommended. Manager play a role in supplying
qualitative variables in the process of estimating
demand.

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