Project

Something that is contemplated,

devised, or planned; plan; scheme.
 Project appraisal
Project appraisal is the process of assessing, in a
structured way, the case for proceeding with a
project or proposal. In short, project appraisal is
the effort of calculating a project's viability. It
often involves comparing various options, using
economic appraisal or some other decision
analysis technique.
 Project appraisal

Systematic and comprehensive review of the

economic, environmental, financial, social, technical
and other such aspects of a project to determine if it
will meet its objectives.
Tools/methods for financial
analysis/decision making
 Payback Period
 Net Present Value
 Internal Rate of Return(IRR)
 Profitability Index
 Ratio Analysis
 Cash flow statement
 Funds flow statement
 Comparative statement
 Payback Period

This method determines how long it

will take for the cash inflows to
recoup the initial investment.
 Example

Proposed purchase of labor-saving machine

Initial cost = Rs18,000
Life = 5 years
Salvage value = Rs 0
Cash savings = Rs 5,000 per year
Discount rate = 10%
 Payback period

The payback period is:

$18,000 / $5,000 per year = 3.6 years
 Unequal cash flows

Initial Investment Rs 18,000

Cash flow for next 5 years are Rs2000,
Rs4000, Rs4000, Rs6000, Rs9000
Find the payback period
16000+2000
9000 12
(12/9000)x2000 4+0.22=4.2 years
 IMPORTANT:

While the payback period is relatively

simple to determine and gives us a rough
estimate of how long it will take to recoup
the cost of a project, it possesses a major
shortcoming—it doesn’t consider the time
value of money, while the NPV approach,
profitability index, and IRR do.
 Net Present Value (NPV)
Analysis utilizes the discounted cash flow
method to determine whether to undertake or
reject a particular capital investment project. In
utilizing NPV analysis to evaluate a proposed
project, you must determine the present value
of all future cash inflows and outflows. We will
compare this to the present value of the cash
flows at the time the project is made
 Internal rate of return (IRR)
The internal rate of return is another method that
considers the time value of money. It is the rate of
return that will cause the present value of the
project to equal the present value of the expected
annual cash inflows. That is the same as saying that
NPV equals zero. We have to use the trial and error
approach to determine this manually; most business
calculators, however, can calculate the IRR, and
some good computer programs are available.
 Profitability Index
This measure allows managers to
compare alternative projects with
different initial investments. The
profitability index is computed by taking
the present value of cash flows and
dividing it by the initial investment. The
alternative with the highest profitability
index is usually the best alternative.
 Profitability Index

Profitability Index
=
PV of cash flows / initial investment
 Ratio Analysis
Ratio analysis refers to the
analysis of various pieces of
financial information in the
financial statements of a
business. They are mainly
used by external analysts to determine various
aspects of a business, such as its profitability,
liquidity, and solvency.
 Types/Categories of Financial Ratios

•1.Liquidity ratios: Liquidity ratios measure a

company’s ability to meet its debt obligations
using its current assets. Some common liquidity
ratios include the quick ratio, the cash ratio, and
the current ratio.
•Liquidity ratios are used by banks, creditors,
and suppliers to determine if a client has the
ability to honour their financial obligations as
they come due.
•2. Solvency ratios: Solvency ratios measure a
company’s long-term financial viability. These
ratios compare the debt levels of a company to
its assets, equity, or annual earnings.
•Important solvency ratios include the debt to
capital ratio, debt ratio, interest coverage ratio,
and equity multiplier.
•Solvency ratios are mainly used by
governments, banks, employees,
and institutional investors.
•3. Profitability Ratios: Profitability ratios measure a
business’ ability to earn profits, relative to their associated
expenses.
•Recording a higher profitability ratio than in the previous
financial reporting period shows that the business is
improving financially.
•A profitability ratio can also be compared to a similar
firm’s ratio to determine how profitable the business is
relative to its competitors.
•Some examples of important profitability ratios include
the return on equity ratio, return on assets, profit margin,
gross margin, and return on capital employed.
•4. Efficiency ratios: Efficiency ratios measure how well the
business is using its assets and liabilities to generate sales
and earn profits.
•They calculate the use of inventory, machinery utilization,
turnover of liabilities, as well as the usage of equity.
•These ratios are important because, when there is an
improvement in the efficiency ratios, the business stands
to generate more revenues and profits.
•Some of the important efficiency ratios include the asset
turnover ratio, inventory turnover, payables turnover,
working capital turnover, fixed asset turnover, and
receivables turnover ratio.
5. Coverage ratios: Coverage ratios measure a business’
ability to service its debts and other obligations.
Analysts can use the coverage ratios across several
reporting periods to draw a trend that predicts the
company’s financial position in the future.
A higher coverage ratio means that a business can
service its debts and associated obligations with
greater ease.
Key coverage ratios include the debt coverage ratio,
interest coverage, fixed charge coverage, and EBIDTA
coverage.
•6. Market prospect ratios: Market prospect ratios help
investors to predict how much they will earn from
specific investments.
•The earnings can be in the form of higher stock value or
future dividends.
• Investors can use current earnings and dividends to help
determine the probable future stock price and the
dividends they may expect to earn.
•Key market prospect ratios include dividend yield,
earnings per share, the price-to-earnings ratio, and the
dividend payout ratio.
•
 Cash Flow Statement

The statement of cash flows is one of the main

financial statements. (The other financial
statements are the balance sheet, income
statement, statement of comprehensive income,
and statement of stockholders' equity.)
The cash flow statement reports the cash generated
and used during the time interval specified in its
heading. Generally, the period of time is the same
as the income statement.
 Fund Flow Statement

• Fund Flow Statement implies a snapshot of the movement of

funds, i.e. inflow or outflows of the firm’s financial assets for a
specific period. It represents, “from where the funds are received
and where the funds are utilised” by the company during a
particular period.

•Preparation of Fund Flow Statement

•Step 1: Preparation of Statement of Changes in Working Capital
•Step 2: Determination of Funds from Operations
•Step 3: Preparation of Fund Flow Statement
 Comparative statement
•Comparative financial statements are the complete
set of financial statements that an entity issues,
revealing information for more than one reporting
period. The financial statements that may be included
in this package are:
•The income statement (showing results for multiple
periods)
•The balance sheet (showing the financial position of
the entity as of more than one balance sheet date)
•The statement of cash flows (showing the cash flows
for more than one period)