Project

Of

Project Management

On

Feasibility Study (Finance)

Submitted To: Submitted by:

Prof. S.R. Prasad Hari Mohan Dwivedi

PGDM 2010-12

Reg. no. 6106

Declaration

I Hari Mohan Dwivedi, hereby declare that the Project Title Financing the Manufacturing Industry is an original work carried out under the guidance of Prof. S.R.Prasad.

The report submitted is a bonafide work of my own effort and has not been submitted to any institute or published before.

Signature of the Student

(Hari Mohan Dwivedi)

DATE: 20th Jan, 2012

PLACE: Hyderabad

Faculty Guide Certificate

I Prof. S.R. Prasad certify Mr. Hari Mohan Dwivedi that the work done and the

training undertaken by him is genuine to the best of my knowledge and acceptable.

Signature of the faculty

(Prof. S.R. Prasad)

DATE:

PLACE: Hyderabad

Acknowledgement

I would like to express our gratitude to all those who gave us the possibility to

complete this project. I am very much thankful to our Faculty guide Prof. S.R.

Prasad, for showing us the path to commence this project in the first instance, to

do the necessary research work and to help for using departmental data. He looked

closely at the final version of the project for correction and offered suggestion for

improvement.

Signature of the Student

(Hari Mohan Dwivedi)

DATE: 20th Jan, 2012

PLACE: Hyderabad

INDEX

Chapter 1 Executive Description………..

Limitation of study………….

Chapter 2 Industry Profile…………

Company profile………..

Chapter 3 Analysis & Calculation…..

Chapter 4 Finding, Suggestion & Recommendations

Chapter 5 Conclusion & Bibliography……

CHAPTER- 1

EXECUTIVE DESCRIPTION

Executive Description :-

As a part of curriculum, every student studying PGDM has to undertake a project

on a particular subject assigned to him/her. Accordingly I have been assigned the

project work on the study of Project Financing in Banking Sector.

As it is rightly said that finance is the life blood of every business so every

business need funds for smooth running of its activities and bank is the one of the

source through which the business get funds, before financing the bank appraise

the projects and if the projects meet the requirement of the bank rules than only

they will finance.

Project financing is commonly used as a financing method in capital-intensive

industries for projects requiring large investments of funds, such as the

construction of Power plants, Pipelines, Transportation Systems, Mining Facilities,

Industrial Facilities and Heavy Manufacturing Plants.

The core area of this project focuses on the financial appraisal of SL flow controls,

which has started Manufacturing of industrial valves. Financial appraisal which

mainly leads to the feasibility study consisting of capital budgeting calculations.

Objective

“Financial appraisal of project”

Sub Objectives -

1. To know the risks involved in projects financing.

2. To appraise the projects using financial tools.

3. The payback period is within the debt life of the project.

4. The net present value of the project is positive, The positive net present

value will result only if the project generates cash inflows at a rate higher

than the opportunity cost of capital . Since the Net Present Value of the

above project is positive, the proposal can be accepted.

5. The internal rate of the return is higher than what accepted so the project is

accepted.

Limitation of the study:-

Some of the information is confidential in nature that could not divulge for study.

Rationale behind choosing this topic:

Project financing is a comparatively new field for Indian banks,at present scenario

India is becoming developed country so because of that many projects are going

on that may be infrastructure, power generation, mining etc. considering all these

the projects must need finance, to fulfill these objectives the project undertaken

companies raise the funds through capital market, debt market and through

banks. Whenever bank wants to finance these types of projects it must study the

feasibility of the project and then it will go for financing that project. Because of

this it is very necessary to study the process of project financed by the bank so I

choose this topic to study how SBI study the projects and the method of financing

the projects.

CHAPTER -2

INDUSTRY AND COMPANY PROFILE

Industry profile:

The manufacturing industry in India has all the qualities which enhance economic

development, increase the productivity of the manufacturing industry and face

competition from the global markets. The Manufacturing industry in India is

believed to have the potential of improving the economic condition of India.

Company profile:

We are pleased to introduce our “M/S SL Flow Control Group” and the

company is commenced its business in the year 2012 and the ISO 9001:2008

certified as one of manufacturer and exporter of Industrial Valves for specialized

fields like : Oil & Gas, Marine, Offshore, Petrochemical, Textiles, Chemicals,

Pharmaceuticals, Engineering, Power, and General Industry in India. We are

providing complete solutions for any difficult application. We are supplying

quality valves to many countries as well as to domestic market. SL valves reflect

our job to satisfy customer’s requirements. 

  ISI & IBR CERTIFIED VALVES ARE AVAILABLE HERE.

 

We can provide Third Party inspection from Lloyds, TUV, EIL, PDIL, SGS,

H & G, and Tata Projects etc.

Working on CE.

Well documented and implemented Quality Plan.

Process parameters well controlled.

Various tests facilities available in house.

Name : M/S SL Flow Control

Address : 98/A, 2A1, Sri Laxmi Business house near

Airport road Gokul road, Secundrabad.

Nature of Business : Manufacturing of industrial valves.

Status : Proprietary Concern.

Name of the promoter : Sri Verendra.B.Koujalagi.

Cost of the project : Rs 221.41 lakhs

Employment potential : 30 employees

Our Infrastructure

Our company have a state-of-the-art manufacturing unit, which helps in

delivering qualitative range of industrial valves. Our manufacturing unit is also

helpful in product development and production. our company is committed to

offer new age concept-to-application solutions to our esteemed clients, with

continuous upgrades in our design, prototypic, testing, quality assurance and

foundry operations. Our manufacturing unit also has in house latest state of the

art equipments for manufacturing, measuring & testing in accordance to

international standards.

Our Manufacturing Unit

Our company have a state-of-the-art manufacturing unit, which helps in

delivering qualitative range of industrial valves. Our manufacturing unit is also

helpful in product development and production. our company is committed to

offer new age concept-to-application solutions to our esteemed clients, with

continuous upgrades in our design, prototypic, testing, quality assurance and

foundry operations. Our manufacturing unit also have in house latest state of the

art equipments for manufacturing, measuring & testing in accordance to

international standards.

Our Efficient Team

We have a team of self-motivated employees, who are dedicatedly engaged in

the manufacturing of industrial valves. Our team is the most important strength

of our company, who works towards meeting various operations of the company.

Warehousing & Packing Facility:

• Wide range of industrial valves.

• International quality standards.

• Safe packaging.

• Dedicated work force.• Use of advanced technology.

• Customization facilities.

• Offer market-leading • Use of qualitative raw • Ethical business

prices. material. policies.

• Wide network areas. • Prompt Delivery. • R & D.

Theoretical Background For The Project Work

Project Financing

INTRODUCTION:

Project financing is an innovative and timely financing technique that has been

used on many high-profile corporate projects, including Euro Disneyland and the

Euro tunnel. Employing a carefully engineered financing mix, it has long been

used to fund large-scale natural resource projects, from pipelines and refineries to

electric-generating facilities and hydroelectric projects. Increasingly, project

financing is emerging as the preferred alternative to conventional methods of

financing infrastructure and other large-scale projects worldwide.

MEANING-

Project financing involves non-recourse financing of the development and

construction of a particular project in which the lender looks principally to the

revenues expected to be generated by the project for the repayment of its loan and

to the assets of the project as collateral for its loan rather than to the general credit

of the project sponsor.

RATIONALE-

Project financing is commonly used as a financing method in capital-intensive

industries for projects requiring large investments of funds, such as the

construction of power plants, pipelines, transportation systems, mining facilities,

industrial facilities and heavy manufacturing plants. The sponsors of such projects

frequently are not sufficiently creditworthy to obtain traditional financing or are

unwilling to take the risks and assume the debt obligations associated with

traditional financings. Project financing permits the risks associated with such

projects to be allocated among a number of parties at levels acceptable to each

party.

PRINCIPLE ADVANTAGE AND OBJECTIVES-

NON RECOURSE

The typical project financing involves a loan to enable the sponsor to construct a

project where the loan is completely "non-recourse" to the sponsor, i.e., the

sponsor has no obligation to make payments on the project loan if revenues

generated by the project are insufficient to cover the principal and interest

payments on the loan. In order to minimize the risks associated with a non-

recourse loan, a lender typically will require indirect credit supports in the form of

guarantees, warranties and other covenants from the sponsor, its affiliates and other

third parties involved with the project

MAXIMIZE LEVERAGE

In a project financing, the sponsor typically seeks to finance the costs of

development and construction of the project on a highly leveraged basis.

Frequently, such costs are financed using 80 to 100 percent debt. High leverage in

a non-recourse project financing permits a sponsor to put less in funds at risk,

permits a sponsor to finance the project without diluting its equity investment in

the project and, in certain circumstances, also may permit reductions in the cost of

capital by substituting lower-cost, tax-deductible interest for higher-cost, taxable

returns on equity.

DISADVANTAGES-

Project financings are extremely complex. It may take a much longer period of

time to structure, negotiate and document a project financing than a traditional

financing, and the legal fees and related costs associated with a project financing

can be very high. Because the risks assumed by lenders may be greater in a non-

recourse project financing than in a more traditional financing, the cost of capital

may be greater than with a traditional financing.

PROCESS OF PROJECT FINANCING:

Feasibility Study

As one of the first steps in a project financing is hiring of a technical consultant

and he will prepare a feasibility study showing the financial viability of the project.

Frequently, a prospective lender will hire its own independent consultants to

prepare an independent feasibility study before the lender will commit to lend

funds for the project.

Contents

The feasibility study should analyze every technical, financial and other aspect of

the project, including the time-frame for completion of the various phases of the

project development, and should clearly set forth all of the financial and other

assumptions upon which the conclusions of the study are based, Among the more

important items contained in a feasibility study are:

1. Description of project

2. Description of sponsor(s).

3. Sponsors' Agreements.

4. Project site.

5. Governmental arrangements.

6. Source of funds.

7. Feedstock Agreements.

8. Construction Contract.

9. Management of project.

10.Capital costs.

11.Working capital.

12.Equity sourcing.

13.Debt sourcing.

14.Financial projections.

15.Market study.

16.Assumptions.

Principal Agreements in a Project Financing

Construction:- These are follows…

Project Description- The construction contract should set forth a detailed

description of all the Work necessary to complete the project

Price:- Most project financing construction contracts are fixed-price

contracts although some projects may be built on a cost-plus basis. If the

contract is not fixed-price, additional debt or equity contributions may be

necessary to complete the project, and the project agreements should

clearly indicate the party or parties responsible for such contributions.

Payment- Payments typically are made on a "milestone" or "completed

work" basis, with a retain age. This payment procedure provides an

incentive for the contractor to keep on schedule and useful monitoring

points for the owner and the lender.

Completion Date- The construction completion date, together with any time

extensions resulting from an event of force majeure, must be consistent with

the parties' obligations under the other project documents. If construction is

not finished by the completion date, the contractor typically is required to

pay liquidated damages to cover debt service for each day until the project is

completed. If construction is completed early, the contractor frequently is

entitled to an early completion bonus.

Performance Guarantees- The contractor typically will guarantee that the

project will be able to meet certain performance standards when

completed. Such standards must be set at levels to assure that the project will

generate sufficient revenues for debt service, operating costs and a return on

equity. Such guarantees are measured by performance tests conducted by the

contractor at the end of construction. If the project does not meet the

guaranteed levels of performance, the contractor typically is required to

make liquidated damages payments to the sponsor. If project performance

exceeds the guaranteed minimum levels, the contractor may be entitled to

bonus payments.

Feedstock Supply Agreements .

The project company will enter into one or more feedstock supply agreements for

the supply of raw materials, energy or other resources over the life of the project.

Frequently, feedstock supply agreements are structured on a "put-or-pay" basis,

which means that the supplier must either supply the feedstock or pay the project

company the difference in costs incurred in obtaining the feedstock from another

source. The price provisions of feedstock supply agreements must assure that the

cost of the feedstock is fixed within an acceptable range and consistent with the

financial projections of the project.

Operations and Maintenance Agreement -

The project company typically will enter into a long-term agreement for

the day-to-day operation and maintenance of the project facilities with a company

having the technical and financial expertise to operate the project in accordance

with the cost and production specifications for the project. The operator may be

an independent company, or it may be one of the sponsors . The operator typically

will be paid a fixed compensation and may be entitled to bonus payments for

extraordinary project performance and be required to pay liquidated damages for

project performance below specified levels.

Loan and Security Agreement.

The borrower in a project financing typically is the project company formed by

the sponsor(s) to own the project. The loan agreement will set forth the basic

terms of the loan and will contain general provisions relating to maturity, interest

rate and fees. The typical project financing loan agreement also will contain

provisions such as-

Disbursement Controls. These frequently take the form of conditions precedent to

each drawdown, requiring the borrower to present invoices, builders’ certificates or

other evidence as to the need for and use of the funds.

1. Progress Reports.:- The lender may require periodic reports certified

by an independent consultant on the status of construction progress.

2. Covenants Not to Amend:- The borrower will covenant not to amend

or waive any of its rights under the construction, feedstock, off take,

operations and maintenance, or other principal agreements without the

consent of the lender.

3. Completion Covenants:-These require the borrower to complete the

project in accordance with project plans and specifications and

prohibit the borrower from materially altering the project plans

without the consent of the lender.

4. Dividend Restrictions. These covenants place restrictions on the

payment of dividends or other distributions by the borrower until debt

service obligations are satisfied.

5. Debt and Guarantee Restrictions. The borrower may be prohibited

from incurring additional debt or from guaranteeing other obligations

6. Financial Covenants. Such covenants require the maintenance of

working capital and liquidity ratios, debt service coverage ratios, debt

service reserves and other financial ratios to protect the credit of the

borrower.

7. Subordination. Lenders typically require other participants in the

project to enter into a subordination agreement under which certain

payments to such participants from the borrower under project

agreements are restricted (either absolutely or partially) and made

subordinate to the payment of debt service.

8. Security. The project loan typically will be secured by multiple forms

of collateral, including:----

Mortgage on the project facilities and real property. Assignment of operating revenues. Pledge of bank deposits Assignment of any letters of credit or performance or completion bonds

relating to the project. Project under which borrower is the beneficiary. Liens on the borrower's personal property Assignment of insurance proceeds Assignment of all project agreements Pledge of stock in Project Company or assignment of partnership interests. Assignment of any patents, trademarks or other intellectual property owned

by the borrower.

1. Site Lease Agreements .

The project company typically enters into long- term lease for the life of the

project relating to the real property on which the project is to be located. Rental

payments may be set in advance at a fixed rate or may be tied to project

performance.

2. Insurance.

The general categories of insurance available in connection with project financings

are:

Standard Insurance- The following types of insurance typically are obtained for

all project financings and cover the most common types of losses that a project

may suffer.

1. Property Damage, including transportation, fire and extended casualty.2. Boiler and Machinery.3. Comprehensive General Liability.4. Worker's Compensation.5. Automobile Liability and Physical Damage.6. Excess Liability.

Optional Insurance . The following types of insurance often are obtained in

connection with a project financing. Coverages such as these are more expensive

than standard insurance and require more tailoring to meet the specific needs of the

project

1. Business Interruption.2. Performance Bonds.3. Cost Overrun/Delayed Opening.4. Design Errors and Omissions5. System Performance (Efficiency).6. Pollution Liability.

Project Risks

Project finance is finance for a particular project, such as a mine, toll road, railway,

pipeline, power station, ship, hospital or prison, which is repaid from the cash-flow

of that project. Project finance is different from traditional forms of finance

because the financier principally looks to the assets and revenue of the project in

order to secure and service the loan. In contrast to an ordinary borrowing situation,

in a project financing the financier usually has little or no recourse to the non-

project assets of the borrower or the sponsors of the project. In this situation, the

credit risk associated with the borrower is not as important as in an ordinary loan

transaction; what is most important is the identification, analysis, allocation and

management of every risk associated with the project.

The following details shows the manner in which risks are approached by

financiers in a project finance transaction. Such risk minimization lies at the

heart of project finance.

In a no recourse or limited recourse project financing, the risks for a financier are

great. Since the loan can only be repaid when the project is operational, if a major

part of the project fails, the financiers are likely to lose a substantial amount of

money. The assets that remain are usually highly specialized and possibly in a

remote location. If saleable, they may have little value outside the project.

Therefore, it is not surprising that financiers, and their advisers, go to substantial

efforts to ensure that the risks associated with the project are reduced or eliminated

as far as possible. It is also not surprising that because of the risks involved, the

cost of such finance is generally higher and it is more time consuming for such

finance to be provided.

Risk minimization process

Financiers are concerned with minimizing the dangers of any events which could

have a negative impact on the financial performance of the project, in particular,

events which could result in:

1) The project not being completed on time, on budget, or at all;

2) The project not operating at its full capacity;

3) The project failing to generate sufficient revenue to service the debt; or

4) The project prematurely coming to an end.

The minimization of such risks involves a three step process.

1) The first step requires the identification and analysis of all the risks that may

bear upon the project.

2) The second step is the allocation of those risks among the parties.

3) The last step involves the creation of mechanisms to manage the risks.

If a risk to the financiers cannot be minimized, the financiers will need to build it

into the interest rate margin for the loan.

If the proposal involves financing of a new project, the commercial, economic

and financial viability and other aspects are to be examined as indicated

below-

Statutory clearance from various government depts/agencies

License/ clearance /permits as applicable

Details of sources of energy requirements, power, fuel etc..

Pollution control clearance

Cost of project and source of finance

Buildup of fixed assets.

Arrangements proposed for raising debt and equity

Capital structure

Feasibility of arrangements to access capital market

Feasibility of the projections/estimates of sales cost of production and profit

covering the period of repayment.

Break-even point in terms of sales value and percentage of installed

capacity under a normal production year.

Cash flows and fund flows

Whether profitability is adequate to meet stipulated repayments with

reference to Debt Service Coverage Ratio, Return on Investment.

Industry profile and prospectus

Critical factors of industry and whether the assessment of these and

management plans in this regard are acceptable

Technical feasibility with reference to report of technical consultants, if

available

CHAPTER-3

ANALYSIS AND CALCULATION OF PROJECT

The further part has been dealt with respect to the project of SL flow controls.

Cost of the project

Cost of the project Amount(Lakhs)

Building 25.00

Land 22.00

Machinery 83.38

Electrification 6.50

Electricity Deposit 5.00

Preliminary Expenses

- Technical know how 5.00

- Personnel training 2.00

-Patterns 5.00 12.00

Net Working Captial 67.53

Total 221.41

Means of finance Amounts in lakhs

Repayment Period and debt service coverage

A) Projections of performance and profitability

Particulars 2012 2013 2014 2015 2016

A) Sales 300.00 330.00 363.00 399.30 439.23

Less: Excise 34.51 37.96 41.76 45.94 50.53

Net sales 265.49 292.04 321.24 353.36 388.70

B) cost of Production

1.Raw material consumed 185.84 204.42 224.87 247.35 272.09

2.Power & Fuel 6.00 6.60 7.26 7.99 8.78

3.Direct labor & wages 12.24 13.46 14.81 16.29 17.92

4.consumable stores 0.60 0.66 0.73 0.80 0.88

5.Repair & Maintenance 1.20 1.32 1.65 2.48 3.47

6.Other manufacturingexpences 0.72 0.79 1.11 1.55 2.17

7.Depreciation 24.97 19.10 14.66 11.30 8.75

8.Preliminary expenses w/off 2.40 2.40 2.40 2.40 2.40

Total Cost of Production 233.47 248.76 267.49 290.16 316.46

Add: Opening stock 0.00 4.50 4.78 5.14 5.58

Less: Closing Stock 4.50 4.78 5.14 5.58 6.09

D)Cost of goods sold 229.47 248.78 267.13 289.72 315.96

E) Gross Profit (B-D) 36.02 43.56 54.11 63.64 72.74

F) Interest on

1) Term Loan 12.80 10.03 7.26 4.50 1.73

Term loan 102.50

Working Captial loan 50.00

Own Contribution 51.38

Margin Money for working Capital 17.53

Total 221.41

2) Working Captial 6.75 6.75 6.75 6.75 6.75

Total 19.55 16.78 14.01 11.25 8.48

G) Selling, administration Exp 1.20 1.32 1.45 1.60 1.76

H)Profit Before Taxation(E-

(F+G))

15.27 25.45 38.65 50.80 62.51

I) Provision for Taxation 4.58 7.64 11.59 15.24 18.75

J) Profit after tax (H-I) 10.69 17.82 27.05 35.56 43.75

K) Depreciation 24.97 19.10 14.66 11.30 8.75

L) Net Cash accruals( J+K) 35.66 36.92 41.72 46.86 52.5

B) Projected Cash Flow Statement

SL.NO Particulars 2012 2013 2014 2015 2016

A) Sources of funds

1.Net profit before interest and tax 34.82 42.24 52.66 62.04 70.99

2. Depreciation 24.97 19.10 14.66 11.30 8.75

3.Promoters capital 51.38

4.own contribution towards 5.00

5.term loan 102.50

6.working capital loan 50.00

7.Sundry creditior 7.74 0.77 0.85 0.94 1.03

8.Amortisationofpreliminaryexpences 2.40 2.40 2.40 2.40 2.40

Total: 278.8 64.52 70.58 76.68 83.17

B) Application of funds

1. Buldings 25.00

2. Land 22.00

3.Macinary 83.38

4.Electrification 6.50

5.Electricity Deposit 5.00

6.Preliminary Expenditure

6. Increase in receivables 44.25 4.42 4.87 5.35 5.89

7.incerase in stock of material 30.97 3.10 3.41 3.75 4.12

9.increase in stock of finished goods 4.50 0.28 0.36 0.44 0.51

10.Drawing/ Dividend 3.00 10.00 15.00 15.00 20.00

11.interest on loans 19.55 16.78 14.01 11.25 8.48

12.income tax 0.00 4.58 7.64 11.59 15.24

13.Repayment of term loans 20.5 20.5 20.5 20.5 20.5

Total 276.65 59.67 65.79 67.88 74.74

Surplus/deficit 2.15 4.85 4.79 8.80 8.43

Opening Balance 0.00 2,15 7.00 11.80 20.6

Add: surplus/ deficit 2.15 4.85 4.79 8.80 8.43

Closing Balance 2.15 7.00 11.80 20.6 29.03

Projectd Balance Sheet

SL.N

O

Particulars 2012 2013 2014 2015 2016

A Captial & Liability

Promoter captial 0.00 64.07 71.88 83.94 104.49

Own contribution 56.38 0.00 0.00 0.00 0.00

Less Drawings 3,00 10.00 15.00 15.00 20.00

Equity 53.38 54.07 56.88 68,94 84.49

Retained Earning 10.69 17.82 27.05 35.56 43.75

64.07 71.88 83.94 104.49 128.25

Term loan(Debt) 82.00 61.50 41.00 20.50 0.00

Sundry creditors 7.74 8.52 9.37 10.31 11.34

Working Captial loan 50.00 50.00 50.00 50.00 50.00

Provision for tax 4.58 7.64 11.59 15.24 18.75

Grand Total 203.39 199.54 195.90 200.54 208.34

Assets:

Fixed assets 89.91 70.81 56.14 44.84 36.09

Land 22.00 22.00 22.00 22.00 22.00

Electricity deposit 5.00 5.00 5.00 5.00 5.00

Cash & Bank Balances 2.15 7.00 11.80 20.6 29.03

Receivables 44.25 48.67 53.54 58.89 64.78

Stock of material 30.97 34.07 37.48 41.23 45.35

Stock of finished goods 4.50 4.78 5.14 5.58 6.09

Preliminary expences not w/off 9.60 7.20 4.80 2.40 0.00

Grand Total 208.39 199.54 195.9 200.54 208.34

Capital investment evaluation methods

Successful completion of a project mainly depends on the selection criteria adopted

while choosing the project in the initial phases itself and the choice of a project

must be based on a sound ‘financial assessment’ and not based on ‘impressions’.

Among the several criteria available for financial assessment of projects,

Discounted Cash Flow (DCF) techniques are being widely used in both public and

private sectors. Usually the basic criterion used in project appraisal is Internal Rate

of Returns (IRR), which is the most popular DCF technique used in the country.

Therefore, an attempt is made to analyse other alternative project appraisal

methods available for catering to the requirements of vivid circumstances.

Emphasis is given for DCF techniques as they were proved to be the best

techniques for project appraisal all over the world.

1) Pay Back Period (PBP) Method:

Pay back period is the minimum period required to cover the initial cost and

a project with minimum PBP is acceptable in this model. This is a very useful tool

to decide rapidly if it is worth to do a small investment by a local manager and also

helps to reduce the risk of bad choices. But the basic economic principles involved

in PBP method are not as reliable as the other methods like NPV etc. The most

important drawback of PWP method is, it is insensitive to changes in timing with

in the payback period and ignores the cash flows beyond the PBP. This method

also lacks a ‘natural’ bench mark against which comparisons can be made among

various projects. Discounted PBP method gives a more accurate period to cover the

initial cost but doesn’t overcome the above drawbacks. However this is a very

good method to use in combination with other methods.

Payback Period = Total cashoutflow/ Annual cash inflow

The recovery of the investment is in the 3rd year and 0.64 month.

Interpretation-

Year Cash Flows (in

lakhs)

Cumulative cash flows

2004 35.66 35.66

2005 36.92 72.58

2006 41.72 114.3

2007 46.86 161.16

2008 52.50 213.66

The Pay back period is a measure of liquidity of investments rather than their

profitability. Since the period within which the total cost of the period is less than

the completion period, the project can be accepted. It means that the firm will be

able to pay the dues out of their inflows. Therefore the project is said to be

feasible.

2) Average Rate of Return-

The average rate of return (ARR) method of evaluating proposed capital

expenditure is also known as the accounting rate of return method. It is also known

as Return on Investment, as it uses the information revealed by financial

statements, to measure the profitability of an investment. The accounting rate of

return can be found out by dividing the average after-tax profit by the average

investment. It is given by the formula

Average Rate Of Return= Avg annual profit after tax/ Avg investment(100)

Average rate of return = 213.66/ 5* 100

152.5/ 2

Average rate of return = 42.732 * 100

76.25

Average rate of return = 56.04%.

Interpretation-

Here the ARR is more consistent as the ARR is quite higher ( more than average)

and the project can be accepted.

3) Net Present value-

It is calculated by discounting the future cash flows of the project to the present

value with the required rate of return to finance the cost of capital. A project is

acceptable if the capital value of the project is less than or equal to the net present

value of cash flows over the operating life cycle of the project. This method is

highly useful when selection has to be made among many projects, which are

mutually exclusive, and there are no budgetary constraints. Selection of projects

with the largest positive NPV will yield highest returns. But this method is useful

only to determine whether a project is acceptable or not but doesn’t indicate which

project is best under budgetary constraints. It is difficult to rank different

compatible projects with NPV as there is no account for ‘scale’ of investment

while calculating NPV.

Year Cash

Flows(lakhs)

PV factor

@10%

Total present value

1 35.66 0.909 32.414

2 36.92 0.826 30.495

3 41.72 0.751 31.290

4 46.86 0.683 32.005

5 52.50 0.621 32.603

Total PV - 158.807

Less- Initial

outlay

152.5

Net Present - - 6.307

Value

Interpretation-

The acceptance rule using NPV method is to accept the investment proposal if

its net present value is positive (NPV > 0) and to reject it if the NPV is negative

(NPV<0). Positive NPV’s contribute to the net wealth of the shareholders which

should result in the increased price of a firm’s share. The positive net present value

will result only if the project generates cash inflows at a rate higher than the

opportunity cost of capital . Since the Net Present Value of the above project is

positive, the proposal can be accepted.

4)Profitability Index-

It is also known as Benefit –Cost Ratio. It is similar to NPV approach. The

profitability index approach measures the present value of returns per rupee

invested, While the NPV is based on the difference between the present value of

the future cash inflows and the present value of cash outlays. It may be defined as

the ratio which is obtained dividing the present value of cash inflows by the

present value of cash outlays. It is given by the formula:

Present value of cash inflows

Profitabillity Index = Present value of cash outflows

Profitabillity Index =158.807/152.5 = 1.041

Interpretation-

Using the profitability index, a project will qualify for acceptance if its PI exceeds

one (PI>1). When PI is greater than or equal to or less than 1, the net present value

is greater than or equal to or less than zero respectively. Since the Profitability

Index of the above project shows the PI greater than 1 and hence the project should

be accepted.

CHAPTER-4

FINDINGS, SUGGESTIONS AND

RECOMMENDATIONS

Findings and Suggestions:

This analysis part is related to the financial viability of the project SL Flow Controls:-

Through ratio analysis I analyzed that the liquidity position of the firm is

good and it is maintaining the standard ratio..

Debt Equity ratio is in decreasing trend, it shows that the firm is reducing its

liability portion by paying the loan year on year so the financial risk less.

Profitability ratios related to sales and capital employed are in increasing

trend, it shows that the sales are increasing and the firm using its resources

efficiently.

Debt Service Coverage Ratio is also in increasing trend, it shows that the

firms ability to make the loan repayments on time over the debt life of the

project.

The payback period is within the debt life of the project.

The net present value of the project is positive, The positive net present

value will result only if the project generates cash inflows at a rate higher

than the opportunity cost of capital . Since the Net Present Value of the

above project is positive, the proposal can be accepted.

The internal rate of the return is higher than what accepted so the project

is accepted

The bank finances the projects only through term loans.

Interest rates are fixed depending upon the projects which is known as

State Bank advance rate.

When the clients fail to pay the interest, 3 months from the due date the

term loan granted will be treated as Non Performing Assets.

Every firm starting up a new project should make an insurance policy

with the same bank itself.

Recommendations:-

Bank check only financial, technical and commercial feasibility of the

project and it should not consider sensitivity analysis and social cost

benefit analysis of the project so bank should consider this because these

are also important from the point of view of risk and economy growth.

Bank should be caution about the availability of security and ensure

honesty of both borrower and guarantor so as to avoid the account

becoming the loss assets.

CHAPTER-5

CONCLUSION AND BIBLIOGRAPHY

Conclusion:-

The project undertaken has helped a lot in understanding the concept of project

financing in nationalized bank with reference to state bank of India. The project

financing is an important aspect which helps in increasing the profit of the banks.

Project financing is a vast subject and it is very difficult to apply all the aspect in

all type of project when bank want to finance, and it is very difficult to cover all

aspect in this project.

To sum up it would not be out of way to mention here that the state bank of India

has given a special impetus on “Project Financing” .the concerted efforts of the

management and staff of state bank of India has helped the bank in achieving

remarkable progress in almost all important aspects.

Finally the success of project financing would mostly depend on the proper

analysis of the projects before financing.

Bibliography

The data is collected from the list of books and web site given below

www.sbi.com.

www.Google.com