Project Appraisal to Working Capital Essay Example

Project Appraisal to Working Capital Essay Example Project Appraisal to Working Capital Essay Project Appraisal to Working Capital Essay GOI came out with a new textile policy that outlines the direction of policy reforms to be followed in near term. The steps outlined in the policy are geared mainly towards removing the bias in policy towards the small scale sectors and promoting modernization. Technical Feasibility Location and site The site chosen for the cotton spinning unit is in Gujarat which has many advantages such as ? Project located in well developed industrial area where land availability and conversion of land and getting necessary approval is easy. ?Low labor cost ?Easy availability of skilled and semi skilled labor ?Favorable industrial environment ?One of the new textile hub in India ?Peaceful labor environment ?All infrastructural facilities such as roads, natural gas for power plant and effluent discharge facility with water. Technology and Manufacturing process The company has initiated the process of setting up world class integrated textile plant in order to make it one of the leading textile companies in the country. The adoption of new and latest technology will transform their manufacturing process into an efficient mode. NC textiles proposes to set up a spinning unit with a capacity of 52224 spindles, fully automated with almost non touch manufacturing process, automation would also reduce the number of workmen resulting in non dependence on workmen. The report explains the entire manufacturing process in detail and how the production would be carried out. Availability of raw materials Cotton: The main raw material for the plant is cotton which is easily available in Indian markets at reasonable prices. Fuel: Company has made provisions to establish captive power plants of matching requirements. The supply line of gas is already available. Power: The power demand for the spinning unit has been estimated to be about 4 MW. The power requirements will be met by installing a 4 MW gas based captive power plant by the company itself. Firefighting: Appropriate equipment and gadgets such as carbon dioxide and dry powder extinguishers are considered. Plant lighting: The entire plant area, work shed will be provisioned with adequate luminous lighting as per laid down industry standards. Further, all internal transport routes and general working areas are provided with adequate lighting. Pollution control measures The provision of water treatment plant and effluent treatment plant of matching capacities has been made to recover and recycle the water and minimize the water requirement. Financials Project cost and Means of Finance The total cost of the project is estimated to be 211 crores which will be financed through DER of 2. 2. The company proposes to bring in additional capital from its existing operations amounting to 60 crores which becomes the part of promoter’s contribution. The table below gives the project cost and means of finance: ParticularsCotton spinning unit at Gujarat (Rs lacs) Location XYZ Capacity 52224 spindles Cost of project Land 500 Building 2050 Plant and machinery13978 Misc. fixed assets2207 Total 18 735 Preliminary expenses375 Interest during construction1281 Contingency expenses335 Margin money for working capital380 Total 2410 Grand total21100 Means of finance Internal sources6000 Term loan15100 Grand total21100 From the above table, it can be concluded that the cost of the project has been estimated to be around 21100 lacs which the company is planning to finance through debt of Rs 15100 lacs and equity of Rs 6000 lacs. The DER for the project comes to around 2. 52. Overall comments on plant and machinery The cost of entire plant and machinery is estimated at 13978 lacs inclusive of freight, insurance, and taxes including custom duty. The suppliers for most of the equipments have already been finalized after suitable negotiations. The comparative analysis related to the cost of plant and equipment has found to be comparable with other projects of similar capacity. Finally, the proposed plant, machinery and equipments are suitable for the envisaged production capacity and incorporate the well established and proven technology. Breakeven analysis As per the estimates, the company is to achieve breakeven point at the sales of Rs 7137 lacs at the capacity utilization of 90% in the year 2014. This is illustrated in the following table (Rs in lacs) Capacity 90 % (2014)Variable (%)Fixed (%)Variable costsFixed costs Sales (A)10499 Expenses Raw materials3929100%3929 Power and fuel713100%713 Wages 35080%20%28070 Factory overheads24280%20%19349 Adm. Expenses20880%20%16642 Interest 1794100%1794 Depreciation 1592100%1592 Total 88275281 (B)3547 Contribution (A- B)5218 Breakeven (sales)7137 Break even (capacity)67. 98% DSCR calculation DSCR helps to understand the debt servicing capability of the company. Generally, higher the ratio, greater is the ability of the company to pay its debt. The project of cotton spinning unit will start its commercial operations in 2013 and start generating revenue. The profit that will be generated will first be used to pay off its debts in the form of installments and interest. This ratio forms a crucial part from banker’s point of view as it helps the bank to know the financial status of the company in near future. The profits generated in future are calculated based on certain assumptions which are the used to calculate DSCR (Rs in Lacs). Year ending 31 march20132014 EBITDA46955058 PAT549947 Depreciation18291829 Deferred tax liability189182 Interest19071657 Total44744616 Interest19071657 Installment18881888 Total37943544 DSCR1. 181. 30 ISCR2. 52. 79 The above table shows two ratios DSCR (debt service coverage ratio) which seems to be reasonable and it can be said that the company will be able to service its debt without any difficulty. ISCR (interest service coverage ratio) tells the ability of the company to pay the interest on debt on time. The above values of this ratio seem to be satisfactory without causing any problem to the com pany. Normally, the above ratios are calculated for the entire period of debt (period for which the debt service is availed) and the average of these ratios is considered for bank’s purpose. Management The project is being promoted by one of the largest companies in the country, NC textiles. The promoters have long experience of setting up of new textile projects, running and operating plants with complete range of textile fabrics, backed by well qualified team of professional and management personnel. The management has a good track record of execution of projects of similar costs and has serviced its debts timely. The vast experience of the management personnel is the major strength of the company which makes it eligible for sanctioning of loan. The company has planned expansion with the best technology and machinery from suppliers of good reputation to become competitive in international market. The company is also known for maintaining good industrial relations and has a very good reputation in the domestic market. Economic The project has also been considered useful for the society as a whole. The project would be creating a large number of employment opportunities for the locals thus providing self sufficiency and financial support to the workers. This distribution of income would ultimately lead to increase in saving and the standard of living for the people. Finally, the project aims to develop textiles of world class quality that will be able to give stiff competition to international brands and thus leading to the growth of Indian economy. The above section explains the appraisal system followed at PNB. This appraisal is carried out by the technical cell of the bank and it is based on this report that the viability of the project is determined. The techno-economic viability of the project is of major concern for the bank and forms an important step in decision making. The appraisal system at PNB is very crucial for sanctioning of financing facility and with the help of it, the bank gets to know in depth detail of the company and the project being undertaken. CREDIT RISK RATING What is Credit Risk? The risk that the borrower might fail to meet the obligations towards the bank in accordance with the agreed terms and conditions is called credit risk. It measures the inability or unwillingness of the borrower to pay its debt. Identification of credit risk forms the crucial part of risk management and is very important for the bank. It helps the bank in determining the potential defaulters and abstain the bank from providing financing facility to such borrowers or in case they provide, than provide them at a higher r