A project report may be defined as a document with respect to any investment proposal based on
certain information and factual data for the purpose of appraising the project. It states as to what
business is intended to be undertaken by the entrepreneur and whether it would be physically
possible, financially viable, commercially profitable and socially desirable to do such a business.
Project report is an essential document for procuring assistance from financial institutions and for
fulfilling other formalities for implementation of the project. The project report (Detailed
Feasibility Report) is based on a preliminary report or pre-investment report. Thus the project
report is a post investment decision report.
Project Evaluation helps the organization improve its projects management skills on future projects.
It helps to know whether the project is moving according to plan or not. It brings into light the
project’s strengths and weaknesses. It gives the management a good idea of how the project is
progressing. Thus project evaluation measures the success of a project.
It is derived from the Latin word ‘Valuere’. It means determination of value of an activity or
a thing. It is the process of appraising the progress and performance in relation to the project’s
initial or revised plan. It also appraises the project against the project goals and objectives. It
measures how far the objectives have been achieved so far.
It is the final stage of project management. The process of measuring the progress made and
assessment of the results of a project is known as project evaluation.
ADVANTAGES
1) This method considers all the cash flows over the entire life of the project.
2) Cost of capital need not be calculated.
3) IRR gives a true picture of the profitability of the project even in the absence of cost of
capital.
4) Projects having different degrees of risk can easily be compared.
5) It takes into account the time value of money.
DISADVANTAGES
1) It is difficult to understand and use in practice because it involves tedious and
complicated calculation.
2) Sometimes it may yield negative rate or multiple rates which is rather confusing.
3) It is applicable mainly in large projects.
4) It yields results inconsistent with the NPV method if projects differ in their expected life
span, investment timing of cash flows
NPV indicates the present value of the cash flows of a project at a particular discount rate. IRR
attempts to ascertain the interest rate at which the present value of cash inflow is made equal to the
initial investment. IRR is a time adjusted rate of return which equates present value of cash inflows,
with original cash outflow
IRR was first introduced by Joel Dean. In IRR, we try discounting at different discount rates until
we reach the rate at which the present value of cash inflows to present value of cash outflows
(investment). Thus, internal rate of return is the rate at which total present value of future cash
flows is equal to initial investment. In other words, it is the rate at which NPV is zero. This rate is
called the internal rate because it exclusively depends on the initial outlay and cash proceeds
associated with the project and not by any other rate outside the investment.
ADVANTAGES
It is very scientific and logical
It is based upon the real profitability of projects.
It is very useful to compare the projects having different investments.
It reflects time value of money.
It considers all cash flows during the life of the project
DISADVANTAGES
It is comparatively difficult to understand and follow
This method is not in accordance with accounting principals
It cannot be used for comparing those projects having unequal lives.
It is difficult to estimate effective life of a project.
Two projects having different investment outlay cannot be compared by Net Present Value
method because it indicates the NPV in absolute terms. In such a situation Benefit Cost Ratio
should be applied. It is the ratio of benefits (cash inflows) to (cash outflows). It is the ratio present
value of cash inflows to present value of cash outflows. Thus it measures present value of returns.
This method is also known as Profitability Index or Present Value Index Method.
ADVANTAGES
It takes into account the time value of money.
It focuses attention on the objective of maximization of the wealth of the project.
It considers the cash flow stream over the entire life of the project.
It is highly useful in case of mutually exclusive projects.
This method is most suitable when cash inflows are not uniform.
This method is generally preferred by economists
DISADVANTAGES
It involves complicated calculations.
It is difficult to select the discount rate.
This method is not suitable in case of projects involving different amounts of investment.
The relative desirability of project will change with a change in the discount rate.
Not suitable in case of two projects having different useful lives.
NPV method involves discounting future cash
flows to present values. The cash outflow (i.e., initial investment whose present value is the same)
is deducted from the sum of the present values of future cash inflows (returns or benefits). The
balance amount is NPV which may be either positive or negative. If the NPV is positive, it means
that the actual rate of return is more than the discount rate and it contributes to the wealth of the
share holders. A negative NPV indicates that the project is not even covering the cost of capital. It
means that the actual rate of return is less than the discount rate.
ADVANTAGES
It is simple to understand and easy to apply.
It is very important for cash forecasting, budgeting and cash flow analysis.
It minimizes the possibility of losses through obsolescence.
It takes into account liquidity.
It is easier for projects yielding returns in initial years
DISADVANTAGES
It ignores the time value of money.
It completely ignores cash inflows after the payback period.
This method does not measures profitability of projects..It insist only on recovery of the
cost of the project.
It does not measure the rate of return.
It may become misleading because it is based on a single factor.
The most important and popular of these can be classified into two broad categories as follows:
NON-DISCOUNTING TECHNIQUES OR TRADITIONAL METHODS: - It does not
take into consideration the time value of money. Important traditional methods may be
discussed as follows:
A) URGENCY METHOD: - Urgency or degree of necessity plays an important role and project
that cannot be postponed is undertaken first.
Merits
It is a very simple technique.
It is useful in case of short term projects requiring lesser investment.
Demerits
Selection is not made on the basis of economical consideration but just on the basis of
situation.
It is not based on scientific analysis.
B) PAY BACK METHOD: It is cash based technique. It is a period over which the investment
would be paid back. It is a breakeven point of the project, where the accumulated returns equal
investment. It is also called ‘pay-out’ or ‘pay-off’ period or ‘recoupment’ or ‘replacement
period’.
There are mainly seven aspects of project appraisal. They are:
1) Technical Feasibility: - It includes detailed estimates of the goods and services needed
for the project- land, machineries and equipments, raw material, trained labour etc. Location of the
project should be given special attention in relevance to technical feasibility. Another important
feature of technical feasibility relates the type of technology to be adopted for the project.
2) Economic Viability: - It is a study on capital cost, working capital, operating cost and
revenue, marketing, profitability etc. It also includes an appraisal of anticipated demand and
capacity utilization.
3) Commercial Viability: - T he appraisal of commercial aspects of a project involves a
study of the proposed arrangements for the purchase of raw materials and sale of finished products
etc. The main objective is to see that the proposed arrangements will ensure that the best value is
obtained for money spent.
4) Financial Feasibility:- It seeks to ascertain whether the project is financially viable
regarding the cost of project, cost of production and profitability, cash flow estimate and Performa
balance sheet. It will study whether the project will satisfy the return expectations of those who
provide the capital.
5) Managerial Competence: - Proper evaluation of managerial ability and talent is an
essential part of appraisal of a project. While evaluating the management, back ground of the
entrepreneur and promoters, their character and integrity, past record of promotion etc are studied.
6) Social Consideration: - The social objective of a project are also considered keeping in
view of the interests of the public. The projects which offers large employment potential, which are
located in backward areas or projects which will stimulate small industries or growth of ancillary
industries are given special consideration.
7) Ecological Analysis: - It is necessary to ensure whether the project causes pollution,
whether it disturbs the equilibrium of ecology and whether it fits into the environment.
8) Project Risk Analysis:- Project face a host of risk such as project completion risk,
resource risk, price risk, technology risk, political risk, interest rate risk etc. An analysis of such
risks is helpful in the appraisal of a project.
The project has to be appraised in relation to the feasibility of the technical, economic,
financial, commercial, managerial, social and other aspects of the project. It is defined as critical
and careful second look at the project by a person not associated with the project preparation. The
objective of a project appraisal is to decide whether to accept or reject an investment proposal.
It analyses availability of raw material, skills and expertise, capital, market etc. It should be
noted that any project must be technically feasible, financially sound, economically viable and
socially acceptable. The feasibility report contains only important information obtained from
technical analysis, financial analysis, economic analysis; social cost benefit analysis etc.It forms the
basis for investment appraisal and decision making.
There are basically two sources available for financing project- internal sources and external
sources. If the size of the project is large, the fund requirement will have to be financed from
external sources. The technique of raising capital from multiple sources is known as layered
financing. The following shows the various sources of project finance
A) SOURCES OF LONG TERM FUND (FINANCE FIXED CAPITAL REQUIREMENT):-
1) Issue of shares.
2) Issue of debentures.
3) Term loans from specialized financial institutions like IFCI, IBRD etc.
4) Venture capital.
B) SOURCES OF MEDIUM TERM FUNDS (FINANCE FIXED WORKING CAPITAL
REQUIREMENT):-
1) Public deposits.
2 ) Deferred credits.
3) Lease finance.
4) Subsidy and other incentives/assistance from the government.
5) Hire purchase.
C) SOURCES OF SHORT TERM FUNDS (FINANCE WORKING CAPITAL
REQUIREMENT):-
1) Trade credit.
2) Commercial banks.
3) Accounts receivable.
The important means of finance are discussed as follows:
1) SHARE CAPITAL: - Shares may be issued by a company after its incorporation or by an
existing company. There are two types of share capital.
A) Equity Share Capital: - It represents the contribution made by the equity shareholders.
The advantage of raising equity capital is that the company need not mortgage any of its assets to
secure it from the market.
B) Preference Share Capital: - They enjoy a preferential right in respect of dividend and
also repayment of capital in case of winding up in priority to equity shareholders. Financing
through preference shares is much cheaper than the equity shares. -
2) DEBENTURE CAPITAL: - It refers to borrowings. Debenture holders being creditors have
neither voting powers nor control in policy making. They get a fixed rate of interest even if the
company incurs losses.
3) TERM LOANS: - It is granted on the basis of a formal agreement between the borrower and the
lending institution. Long term capital provided directly by a lender in the form of a negotiated
contract according to all details of the agreement is called term loan.
4) VENTURE CAPITAL: - It refers to giving capital to enterprise that has risk and adventure. It is
a financial investment in a highly risky project with the objective of earning a high rate of return.
5) PUBLIC DEPOSITS: - A company can raise deposits to meet its capital needs directly from the
public at an interest rate generally above the bank rate.
6) DEFERRED CREDITS: - Under this arrangement payments to suppliers of plant and
equipments are made in agreed instalments over a specified period of time at some agreed rate of
interest on the outstanding balance.
7) INCENTIVE SOURCES: - The government and its agencies may provide financial support as
incentives to certain types of promoters or for setting up industrial units in certain locations.
8) LEASE FINANCING: - it can be explained as a contract between the owner of the asset and the
user of the asset whereby the owner of the asset gives it to the user for a consideration. The owner
of the asset is called the lessor and the user of the asset is called the lessee. The consideration which
is required to be paid by the lessee for using the asset is called lease rental.
9) INSTITUTIONAL FINANCE: - There are several financial institutions for giving financial
assistance to entrepreneurs. Some of them are IDBI, IFCI, SIDBI, NABARD etc.
It depends upon the following factors:
Character of business.
Size and volume of business.
Length of processing period.
Turnover.
Terms of purchase and sales.
Seasonal variation.
Importance of labour.
Cash flow.
Stock.
Cyclical fluctuation
It is broadly classified into two- permanent working capital and variable working capital.
1)Permanent Or Fixed Working Capital :- It is the minimum amount of working capital
required to ensure effective utilization of fixed assets and support the normal operation of the
business. It is again divided into two.
(A) Initial Working Capital- It is the capital with which the project is commenced.
(B) Regular Working Capital: - It is the minimum amount of the liquid capital to
keep up the circulating capital from cash to inventories, to receivables and back again
to cash.
2) Variable Working Capital: - This is the additional capital needed to meet seasonal and
special needs. It is again divided into two.
(A) Seasonal Working Capital: - It refers to the additional working capital required
during busy seasons.
(B) Special Working Capital: - It may be required to carry on a special sales
campaign or financing slow moving stock or financing a period of strike or lockout etc.
It consists of funds invested in current assets. There are two concepts of working capital.
One is gross concept and the other is net concept. Gross concept working capital refers to the
amount of funds invested in current assets. Working capital is equal to total current assets. Net
concept working capital refers to the excess of current assets over current liabilities. Working
capital is equal to current assets minus current liabilities.
The amount of fixed capital requirement of a project depends on the following factors:
Nature of project.
Size of the project.
Diversity of production line.
Method of production.
Method of acquiring fixed assets
