PROJECT FORMULATION AND APPRAISAL

Assignment

Any company that has to survive in a competitive environment cannot remain complacent with the present. It has to continuously bring about change in order to adapt to the altered environment.

Investment opportunities in India are today perhaps at a peak. Supported by India’s natural strengths, the country offers investment opportunities in excess of $500 billion in diverse sectors over the next five years.

Projects that are endeavors to create unique products and services are basically the instruments leading to organizational growth. Projects have a long term impact on the character of the organization. Projects create wealth not only for the organization but also for the nation. Projects, therefore, form a very important part of the organization’s strategy for survival & growth and therefore are the main concern of the corporate management.

Realizing the tremendous opportunities, the most of the pragmatic organizations are planning to invest in new projects. Every project starts with the perception of an opportunity. The better this is characterized, the easier it will be to judge the levels of expenditure and risk that are justified. Identifying the pattern by which technology creates new products & services and exploiting them early gives the company a significant competitive advantage.

In the light of your studies prepare an assignment on project formulation, evaluation and appraisal of a hypothetical project by covering the following:

1. Market Analysis 
2. Technical Analysis 
3. Financial Analysis

INTRODUCTION

The project evaluation process involves more than just determining a project's expected revenues and profitability; it also involves a study of the key factors that affect a project and their financial impact on the project. In addition, a project evaluation includes strategic evaluation, economic evaluation and social impact evaluation (Refer Exhibit I).

ASPECTS OF PROJECT APPRAISAL Source: Desai Vasant, “Project Management,” Pg. No. 153

While the financial evaluation of a project aims at ascertaining the most efficient strategy for delivering the desired output, the strategic evaluation ensures that the project is consistent with the output objectives of the firm.

PROJECT EVALUATION TECHNIQUES Source: Pamela Peterson “Financial Management and Analysis,” Pg. No. 433

The economic evaluation of the project, however, seeks to ensure that the delivered output is benefiting the public at large. The evaluation of social impact aims at ensuring that the consequences of a project (in terms of employment, output, savings and so on) are beneficial to the public.

A HYPOTHETICAL CASE STUDY

Govindam Infrastructure Company is focusing on investments in emerging retail sector throughout India. It has proposed to develop a commercial space in Panaji-Goa. This gives an opportunity to enter a market not tested so far by the big players in retail sector and reap benefits of the first footer.

Goa State has established itself among the fastest growing industrial & commercial centers in India. It has made impressive progress in all round development, measured by socio-economic indicators and ranks among the leading union territory states of India. This is one of the most urbanized states in India. Tourism and mining are the main sectors of the state economy. Sizeable percentage of population works in the Middle East and western countries and brings home not only valuable foreign exchange kitty but also a new consumer test of those places. The tourists from India and all over the world are spending much on leisure while on holidays in Goa. This brings us a good opportunity to invest in retail sector. 

MARKET ANALYSIS 

Situational analysis

Company proposes to develop a Shopping Mall in Panaji-Goa. The market is mainly consisting small-scale retail outlets, virtually monopolized by the sellers. The market also lacks presence of strong cooperative sector. Due to scattered and satellite patterns of development, the city lacks cohesive and homogenous volume of population compared to other Indian cities. However, excellent infrastructure, importance of capital place, large base of floating population, high purchasing power of consumers and higher level of consumer spending gives a solid base for investment decision.
Hence, we decided to develop a commercial space it consisting mainly of following facilities.
• Hyper market dealing in grocery, and household items
• Branded clothes, textile products, cosmetics.
• Processed agriculture, horticulture, floriculture products.
• Beverages and restaurant.
• Consumer durable goods etc.
• Handicrafts and antiques 

 Secondary Information

Economic Profile of Goa: The Eleventh Finance commission Report, 2000 ranked Goa as the premier state in terms of social and economic infrastructure. Goa is an attractive destination for foreign Direct Investment (FDI). The contribution of FDI to the state’s economy has increased tenfold in the past years.

POPULATION (2001 census)	13,47,668
MALES	6,87,248
FEMALES	6,60,420
URBAN POPULATION %	49.47
LITERACY RATE ( census 2001 ) in %	82
MALE LITERACY in %	88.4
MALE LITERACY in numbers	5,41,032
FEMALE LITERACY in %	75.4
FEMALE LITERACY in numbers	4,44,530

Census of India has projected population by Sex i.e. 16,28,000 for Goa as on 1st March – 2008

Sr. No.	District	Total/Rural/Urban	No. of Households	Persons	Male	Females
1	North Goa	Total	1,64,129	7,58,573	3,88,502	3,70,071
2	North Goa	Rural	88,265	4,16,824	2,11,543	2,05,281
3	North Goa	Urban	75,864	3,41,749	1,76,959	1,64,790
4	South Goa	Total	1,30,683	5,89,095	2,98,746	2,90,349
5	South Goa	Rural	56,964	2,60,267	1,29,002	1,31,265
6	South Goa	Urban	73,719	3,28,828	1,69,744	1,59,084

Source of information: Census of India

All India pattern of consumption in 2006-07: (Ref. annexure no.lII)

Out of every rupee spent in 2006-07 by the average urban Indian on consumption, 39 paise were spent on food. Of this, 9 paisa was spent on cereals and cereal substitutes, 7 paisa on milk and milk products, 6 paise on beverages, refreshments and processed food, and 4 paise on vegetables. There was little difference between rural and urban households in the share of the budget allocated to fuel and light (10% for rural, 9% for urban) and clothing, including bedding and footwear (7% for rural, 6% for urban).

The average urban Indian differed noticeably from the rural mainly by spending only 9 paise out of one rupee on cereals, but as much as 14 paise on consumer services, 7 paise on education and 5 paise on rent. In fact the urban Indian devoted only 39 paise of the rupee on food, spending a smaller portion of the rupee than the rural Indian on every food group except the category "beverages, refreshments and processed food".

Percentage of population below specific MPCE: (Ref. annexure no.lll & VI)

In 2006-07, roughly one-half (50.3%) of the rural population of India had MPCE less than RS.580 (column 2 of Table P1) compared to only 17.4% of the urban population column 6). For urban India, the median level of MPCE was Rs.990. 

Average MPCE on groups of items of consumption: (Ref. annexure no.IV)

 For urban area applicable to Group of union territories shall be applicable to Goa.
Average MPCE for urban area applicable to Goa may be considered as 1944.88 for food and non-food group of expenditure

DEMAND FORECASTING

Demand forecast was done using casual method of forecasting. As the project involves products of direct consumption, Consumption Level Method suits best to forecast demand of the products

Estimate based on income and price elasticity of demand: (Ref. annexure no. I & IV)

Aggregate demand can be worked out from secondary information available with us (ref. Annexure)

a) Total population as per 2001 census                                : 13,47,668 for Goa

b) Projected population for the Year 2008                         : 16,28,000 for Goa

c) Growth rate per year:                                                       : (1628000-1347668) x100
                                                                                                         1347668 x 8yrs.

d) Projected population for the Year 2010                         : 16, 28,000 x (1 +2.6)2

  = 21100734

e) Projected population for north Goa in the Year 2010   : 7,58,573 x (1+2.6)2

 = 9831106 - Aggregate demand

f) Rise in level of disposable income                                                :

Per capita income in the year-2000-01 =Rs. 49693

Per capita income in the year-2004-05 =Rs. 58184

Rise in level of disposable income =17%

g) Supply of primary articles of consumption in the year-2001 =156.9

            (All India fig.)                         In the year-2005 =170.1

Rise in level of supply i.e. (+) 8.40% in the year-1992 =5.80kg

In the year-2005 =7.20kg

Rise in level of supply i.e. (+) 24.13% in the year-1992 =13.50kg

In the year-2005 =16.30kg

Rise in level of supply i.e. (+) 20.74% in the year-1992 =24.50metre

In the year-2005 =31.40metre

Rise in level of supply i.e. (+) 28.16% in the year-1992 =709.00gm

In the year-2005 =690.00gm

Fall in level of supply i.e. (-) 2.67%

I) MPCE for urban area (all India) in the year-1987              =139.73

In the year-2007 =517.25

Change in MPCE = 2.7times

Conclusion: (Ref. annexure no.lI)

1)         From above study, we can project- Aggregate demand =. (+) 2.60%

2)         From above study, we can project- Rise in level of income = (+) 17.00%

3)         From above study, we can project- Rise in Aggregate supply (avg.) = (+) 15.75%

4)         From above study, we can project- Rise in MPCE    = (+) 2.70 times

Hence, we project sufficient demand exists that needs to be fulfilled.

TECHNICAL ANALYSIS

DETAILS OF FACILITIES:

The proposed shopping mall may have outlets as detailed below

- Departmental Store

- Fashion and Shoes

- Health and Beauty

- Food

- Sports and outdoor

- Electrical and phones

- Jewellerys

- Gifts and Music

- Children

- Miscellaneous

Arrangements for process &technical knowhow:

• The project work may be taken up on E.P.C Contract basis in a time bound manner.

• Technical collaboration may be made for commissioning and training of personnel.

• Various systems such as crowd control, display and information

systems, for shops parking areas, lounge; passages are to be provided.

• Plants and Machineries for processing, material packaging, labeling, is required.

• Sound arrangements for Power back up, air-conditioning, Escalators, capsule lifts, waste disposal etc required to be planned complying all the regulations. 

Capacity strategy:

• The only limiting factor from aggregate demand point of view discussed in the last chapter is population growth rate. This is lesser than other Indian states; hence, we should adopt 'CHASING' strategy.

• The projected demand and existing demand to be diverted may take longer time span. 

Location of Site:

• The project site is located in the capital city of Panaji. The proposed site is situated in the EDC Plaza behind central bus stand and hence a very convenient and crowd pulling location.

• Proximity to markets geographically, the place is centrally located between the two districts of the state. The city is being an important cultural, political and economic centre attracts sizeable population from all over the state and huge flow of domestic and worldwide tourist ready to spend.

• Proximity to Raw material sources: The neighboring districts of Sindhudurg Kolhapur and Belgaon offers cheap sources of commodities agriculture produce and dairy products. Supply of beverages is locally available and further can be strengthened through tie up with local producers. Supply of Consumer durables Garments and textile products can be directly arranged through supply agreements with the manufacturers.

• Industrial infrastructure: Goa has one of the best infrastructures in place. Uninterrupted power supply at reasonable tariff, advanced telecommunication facilities, Road network with better quality riding surface, Convenient Railway network, proximity to port and inland navigation are available.

• Urban infrastructure: Apart from industrial infrastructure, proper urban facilities are available such as housing schooling hospitals, banks etc.

• Labour situation & Availability: The city boasts better quality and educated labour force suitable for trading activities. The level of labour union activism is low due to migration, heterogeneous mix of labour force from different geography etc.

• Govt. policies: As per data published by RBI, FDI Equity inflows (from April 2000 to September 2008) in Goa are RS.1 047crore, which is 0.33% of total FDI inflows in India and ranks ninth in attracting investment. This is quite significant considering size of the state and economy.

• Climatic condition: Except two months of active heavy monsoon, climate is moderate and hardly disrupts economic activities taking place. It does not pose any significant challenge to our proposed business. 

Proposed Site

• The site is completely developed by the EDC (Economic Development Corporation) of Goa. The site is a leveled plot with flat topography. It is located near the city entry point and emerging fast as a central business zone. The place has become popular and very convenient to the people all over Goa due to location near the main bus stand.
• Many of the business activities are concentrated in this area due to its suitability. A foundation stratum is marshy soil due to reclamation of backwater area and hence needs extra cost. Supply of power, water is available in the vicinity and a waste disposal system available in the area. 

Work schedule planning:

The work schedules shall be thoroughly prepared and correlated to activities and time estimates.

Buildings and Structures

Following activities required with distinct and meticulous planning of the interior and exterior. The total area required as per break up tabulated here.

Sr. No.	Sections	Built up area Requirement in( Sqmt)
1	Departmental stores	3000.00
2	Fashion and stores	500.00
3	Health and Beauty	500.00
4	Food	1500.00
5	Sports and Outdoor	500.00
6	Electrical and phones	500.00
7	jwellery	500.00
8	Gifts and usic	500.00
9	Children	500.00
10	Miscellaneous	500.00
11	Administration and Security	500.00
12	Processing & Packaging	1000.00
13	Health, Ventilation and air conditioning system (HVAC)	500.00
	Total	10500.00
14	Parking	5000.00

FINANCIAL ANALYSIS

COST OF PROJECT

Sr. No.	Component of Project	Quantity in Sqmt	Unit rate / Cost percentage of development	Cost
Land and Building
1	Land cost	10000.00	5000.00/ sqmt	7,20,00,000.00
2	Buildings ( with area @ 2100.00 sqmt per floor Keeping @ 0.2 FSI permissible for future needs)	10500.00	15000.00 / sqmt	7,50,00,000.00 2,37,00,000.00
3	Parking and Landscape Development etc.	7900.00	3000.00/sqmt                      3000.00/sqmt	2,37,00,000.00
4	Architect / Consultants		@ 2% of (1,2& 3)3	34,14,000
Other Expenses
1	Plants & Machineries Plant utilities		As per quotation                                                   As per quotation	2,00,00,000.00
2	Technical Know - how fee		As per quotation	50,00,000.00
3	Misc. Fixed assets		As per quotation	50,00,000.00
4	Preliminary and capital issue expenses		As per quotation	10,00,000.00
			Total	20,51,14,000.00
5	Pre Operative Expenses		@2%	41,02,280.00
6	Provision for Contingencies		@3%	61,53,420.00
		Total Cost of the Project		21,53,69,700

Calculation of Revenue

Year	1910	1921	1931	1940	1950	1960	1971	1981	1991	2001	2011
Population Growth Rate	2.36	(3.55)	7.62	7.05	1.21	7.77	34.77	26.74	16.08	15.21
Three Months Moving Average				2.14	3.71	5.29	5.34	14.58	23.09	25.86	19.34
Two Months Moving Average			0.59	2.04	7.34	4.13	4.49	21.27	30.75	21.41	15.64

Population forecast of Year 2011

Sum of square error (three months)                = 2.14² + 3.71² + 5.29² + 5.34² + 14.58² + 25.86²

                                                                                             = 216.83

Sum of square error (three months)                = 0.59² + 2.04² + 7.34² + 4.13² + 4.49² + 21.27² +                                                                      30.75² + 21.41²  

                                                                        = 243.99

1.         Hence, we can assume, population growth rate applicable to year – 2011 i.e. 19.34% due to lower average square error i.e. 216.83

2.         Projected population in the year 2011 i.e. 50 percentage of North Goa district plus 50% of south Goa district, which will serve as a consumer base.

( 1,34,7668/2) x 19.34 / 100 = 2,60,638

4. Expected sales per Month ( Revenue)                                                               

Here, we assume 10% of the population  uses this mail mall to fulfill  their needs    Hence = 10% 260638 = 26063.00 Nos.                                                        MPCE for Goa = Rs. 1974.88 for urban india in the year 2007. (Ref. group of UTs as per ANNEXURE NO.)                                               

Expected sales per month = 26063.00 nos x 1974.88/2 =      2,57,35,648.72/-          Hence , expected sales per annum Rs.30,88,27,783.60

Calculation of Costs

Assuming total cost @ 80% of expected sales per annum

Sr. No.	Item Description	Estimated Amount
1	Total Material cost @ 60%	14,82,37,336.00
2	Total utilities cost @ 5%	1,23,53,111.00
3	Total Labour cost @ 10%	2,47,06,222.00
4	Total Overheads @5%	1,23,53,111.00
5	Total service cost @ 5%	1,23,53,111.00
6	Total Administrative cost @ 5%	1,23,53,111.00
7	Total Sales Expenses @ 5%	1,23,53,111.00
8	Total Royalty payable @55	1,23,53.111.00
9	Gross Total	24,70,62,227.00

Financial Structure

Mode of Finance	Percentage	Amount Rs. In Cr.
Equity	@ 50%	10.78
Term Loan	@ 50%	10.77
Total	100%	21.55

 

Operating Cost with Yearly Breakup

Cost of the project Rs. 21,53,69,700.00. Period of completion of Project- 2 Year.

For the year ending December 2011

Opening Balance – Rs. 30,88,27,784.60 + 11,23,225.00	Rs. 30,99,51,009.00
Add -
Cash – Interest earned @ 9.5% on Rs. 11,23,225	Rs. 1,06,706.00
Less –
Cash – for Purchase of material, wages and other expenses	Rs. 24,70,62,227.00
Cash – Release of security deposit ( defect liability ) @ 15% of Rs 21,53,69,700.00	Rs. 3,23,05,455.00
Cash – for repayment of loan @ 11% and 05 years term	Rs. 3,62,,91,046.00
Closing Balance	Rs. (56,01,013)

For the year ending December 2012

Opening Balance – Rs. ( 56,01,013) + Rs. 30,88,27,784.60	Rs. 30,32,26,771.00
Add-
Cash – Interest earned	NIL
Less-
Cash for purchase of material, wages and other expenses	Rs.24,70,62,227.00
Cash- for repayment of loan @ 11% and 05 years term	Rs. 3,62,91,046.00
Closing Balance	Rs. 1,98,73,498.00

For the year ending December 2013

Opening balance – Rs. 1,98,73,498.00 +Rs. 30,88,27,784.60	Rs. 32,87,01,282.00
Add-
Cash – Interest earned @9.5% on Rs. 19873498.00	Rs. 18,87,982.00
Less-
Cash – for purchase of material, wages and other Expenses	Rs. 24,70,62,227.00
Cash – for repayment of loan @ 11% and 05 years term	Rs.3,62,91,046.00
Closing Balance	Rs. 4,72,35,991.00

EVALUATION OF FINANCIAL VIABILITY

Pay Back Method

Payback period = cash investment / cash returned per year

            For Cash, investment of rs. 10,76,84,850.00 per annum

            Cash returned in 2012 is Rs. 1,98,73,498.00

            Cash returned in 2012 is Rs. 4,72,35,991.00

           

Cash to be returned at the end of 5th year     = 10,76,84,850.00 – 1,98,73,498.00 –                                                                                        4,72,35,991.00

                                                                        = 4,05,75,361.00

Assuming earnings remain same in the sixth year, period required to recover above amount Rs. ( 4,05,75,361.00 / 4,72,35,991.00)/12 = 10.3 , Say 3 Months

Hence, Payback period for the project is 05 years and 10 Months

Net Present Value Method

NPV = [ CF1 / (1+K) ] + [ CF2 / ( 1+K) ] + [CF3 / ( 1+K) ]+…up to CF5 – INVEST

            Here,  PV1 = Rs. 12,33,08,800.50 / ( 1+ 0.11)           = 11,10,89,009.50

                        PV2 = Rs. 11,23,225.00 / ( 1+ 0.11)2             = 9,11,634.00

                        PV3 = Rs. (56,01,013) / ( 1+ 0.11)3               = (40,95,42.43)

                        PV4 = Rs. 1,98,73,498.00 / ( 1+ 0.11)            = 1,30,91,288.70

                        PV5 = Rs. 4,72,35,991.00 / (1+0.11)              = 2,80,32,261.59

                                                                 Sum of PVs            = 14,90,28,782.00

Hence NPV = 14,90,28,782.00 – Rs. 10,76,84,850.00          = Rs. 4,13,43,931.96

As the value of NPV is Positive, investment is advisable for the project.

References:

1. Project financing in corporate sector by C.G. Karandikar / G.M Dave

2. Construction Finance management ( NCP 29 ) by NICMAR

3. Project formulation and Appraisal ( PGPM – 21) By NICMAR

4. Website: http:/indiabudget.nic.in

5. Website: Census of india

6. NSS 63rd Round ( July 2006 – June 2007)