Why Project Appraisal Instead of Credit Facility Wise Appraisal:
Project is a way of organizing resources. Whenever a business has to be started funds are needed. Funds can be owned funds of Promoters or can be borrowed by them. Banks lend money according to the purpose – various means in which those funds shall be applied. Normally business procures funds for purposes like to finance working capital or to purchase fixed assets.
But in project finance focus shifts from viability of business as a whole is thrust area and all financial needs are catered by the financial institutions. Lenders examine viability of venture in totality and aim of the project report is to make them think for the proposal. Project appraisal is a shift from security oriented approach to purpose (viability) oriented approach. Project viability is the best security and collateral is the second way out. If principal security fails (i.e. viability) that means project has failed. For project financing two critical areas are ‘Disbursement on right time’ and ‘Monitoring of project over its full life’. Project Appraisal is a systematic and Comprehensive review of : a. Technical, b. Managerial, c. Financial, d. Market, e. Economic and f. Environmental Aspects of a project.
Aspects of Project Appraisal:- Acceptance of Project report by bankers becomes the first point and concludes that project can be considered for financial assistance.
Technical Appraisal: Under technical appraisal appraiser study a. Basic Infrastructure, b. Licensing/Registration, c. Technology / Technical Process and d. Availability of production resources. In other words this includes study of manufacturing process, technical arrangement, size (capacity) of plant, Layout of plant and Location of plant.
Location: Location of plant has to be decided keeping in view availability of factors of production like labour, raw material, electricity, water and other utilities. Importance has to be assigned to all factors while appraisal. Location has to be decided keeping in view cost of land to be purchased. Purchase or leasing options are to be considered keeping in view the outlay apportioned for project establishment.
Technical Know How: Best possible technology must be acquired by the promoters. Royalty terms of know how has to be reasonable and royalty agreement has to be seen in totality before permitting project. Know how must have been acquired/available for the whole life of the project. Quality of product to be manufactured through production has to be good enough to grab market. Last but not the least technology should be flexible enough to be changed as per the requirement. New products could be produced with changes in plant.
Size of the Plant: Capacity of the plant is defined in various industry in various ways Like :
according to output in Cement, Pulp and Paper Industry, according to input (Qty of Raw Material) in Sugar Mill and Oil Mills, Number of Machines in Looms and Spinning mills. Normally large size production is economical since it provides economy of scale. Size of the plant also depends on absorbing capacity of the market.
Product Mix/ Product Range : Product mix or range has to be decided on the basis of market potential. Product range may include various sizes and quality of the product. Shoes, Garments, nails, screw etc. all products have different range and mix. Product differentiation may be achieved by changes in quality of the product. There must be flexibility in production process to change mix or range according to changes in market conditions. Such production process may require additional investment but it seems to be desirable.
Selection of Plant or Process : Plant may be Indigenous or Imported. For indigenous plant Report of supplier and existing users has to be obtained. For imported plants Banker credit report should also be obtained in addition to previously mentioned reports. If used plant is purchased then report on existing condition, remaining life and serviceability over remaining life to be adjudged by experts.
Plant Layout : This is also very important aspect which has to be kept in mind. Batch manufacturing plant requires sufficient storage place, manufacturing of explosives may require storage place outside plant, Smooth and Logical flow of the production has to be assured.
Raw Material : Raw material must be available during whole course of manufacturing, Source of procurement should be more than one and Un interrupted production must be assured.
Labour : Required labour may be Skilled/Semi Skilled/Unskilled, all type of labour must be available for un interrupted manufacturing. If labour are procured from outside then proper arrangement for their accommodation, fooding etc to be made. Training has to conducted for labour and they should be trained as per the requirement of the job.
Utilities : Essential utilities must be in place like power, water, fuel, transportation etc. Power shedding and rationing if applicable care must be taken for them before project implementation. In case of expected interruption in manufacturing process provision for alternate supply must be made.
License and Statutory Requirement : There can be various licenses for various industries like SME – DIC, Steam Generating Units (Generating more than 3Kg/Sq Cm) – Boiler IBR, Food Processing – FPO, Pharmaceuticals – FDA etc.
Commercial/Market Appraisal :
Demand : Actual consumption, Likely consumption has to be taken care off
Supply : Capacity and Actual production of plant has to considered
Distribution : Channel, Cost and Transport availability needs attention
Pricing : Domestic and International pricing need to assessed
Commercial Appraisal consist of : a. General Market Prospects and analysis of peer firms, size of the market and share of unit, c. Pricing of product, d. Raw material requirement and marketing strategy of the firm (Skimming/ penetration etc.)
Managerial Appraisal : This appraisal is appraisal of man behind the project. Confidence regarding management team is reflected in 5 Cs : Characted, Capacity, Capital, Collateral and Conditions. Managerial Appraisal is appraisal of a. Entrepreneur, b. Board of Directors, c. Chief Executive and d. Departmental Head. Integrity,
Experience, Capability, Vision Ethic and Values of managerial person are looked into while appraising the project. Understanding Management is an art. Competent person must do each job.
Financial Appraisal : Financial viability and sustainability is judged by a. analysis of past working results, b. Project Cost and means of finance, c. Cash Flow and Profitability projections, d. Ratio Analysis, e. NPV/IRR analysis and Cost Benefit Analysis.
Environment Appraisal : Impact of environment on the project and vice versa is looked into under it.
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