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LRPs & AEC Training April 2013 High Mountains Agribusiness and Livelihood Improvement Project (HIMALI) 1
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Local Resource Persons Training: Conceptual information on the Financial Aspects of the Project

Jan 22, 2015

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This presentation comes from the HIMALI Local Resource Person (LRP) Training. In this presentation the HIMALI team provided instruction on how to properly prepare grant application tables, profit & loss accounts, balance sheets, and basic cash flow. The Local Resource Person develops the business plans that is acceptable to HIMALI and government officials. Their primary responsibility is to identify proponents and to help them apply for HIMALI grants. LRPs also work to gain grant support. The LRP will cooperate with the district DCCI and District Project Coordinator, based either at the District Agricultural Development Office (DADO) (Solukhumbu, Manang, Dolpa, Mugu and Humla) or at the District Livestock Services Office (DLSO) (Sankhuwasabha, Dolakha, Rasuwa, Mustang, Jumla); and with AEC district planning specialists. They also work closely with the Social mobilizers, as well as with Roster Specialists based in Kathmandu.
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  • 1. High Mountains Agribusiness and Livelihood Improvement Project (HIMALI)LRPs & AEC TrainingApril 20131

2. AGENDA Introduction Preparing Grant Application Table Accounting Convention Preparing Profit & Loss Account Preparing Balance sheet Preparing Basic Cash flow Financial Appraisal Case StudyConclusionPage 2Training Session-LRP & AECHIMALI 3. Introduction What is a business? An organisation which uses economic resources (capital) to create goods or services which customers will buy. A business is an organization providing jobs for people A business invest money in resources (building, machinery, employees) in order to make even more money (profit) to its owners. Legally registered with the Regulatory BodiesPage 3Training Session-LRP & AECHIMALI 4. Introduction Objectives of Business SurvivalGrowthPage 4ProfitTraining Session-LRP & AECSocial ResponsibilityHIMALI 5. Introduction Type of Business Sole Traders Partnerships Single person working for oneself Partnership occur when two or more sole traders decide to share the risks and rewards of a business together Maximum of 50 peopleLimited Liability Page 5Public Limited Private Limited Single Shareholder Multi ShareholdersTraining Session-LRP & AECHIMALI 6. Introduction Eligible Business for Grant Production, processing, value-adding, and manufacture of finished mountain products; Collection, storage, grading, quality management, packing for distribution and marketing; Agro-tourism including local-produced food services, handicrafts, and agricultural and natural resource experience-based tourism services products; Facilities for aggregating and exporting agro-products from HIMALI mountain districts, and draft animal services and way-station facilities;Page 6Training Session-LRP & AECHIMALI 7. Introduction Eligible Business for Grant Page 7Tracks, culverts, short road connections that are essential for agribusiness development and that are co-funded by the concerned farmer groups or agribusiness (i.e. not general public tracks and roads); Small-scale irrigation and water harvesting works that are owned, managed and maintained by registered farmer groups; Nurseries, planting and small civil works for community forestry and rangeland business resource development, including for timber, grazing and MAPs. Training Session-LRP & AECHIMALI 8. Introduction Not Eligible Business for Grants Page 8Purchase or lease of land Business operating and trading capital (Except for limited working capital) Speculative investment Study toursTraining Session-LRP & AECHIMALI 9. Introduction Finance of business Page 9Share capital from Owners Loan from Banks Government Donors Bonds Public Private InvestorTraining Session-LRP & AECHIMALI 10. Introduction Why to Finance? Page 10Return of profit Dividend Increase in wealth (Share Price) Interest Employment Development & WelfareTraining Session-LRP & AECHIMALI 11. Introduction Use of Finance for the business?EntrepreneurshipLand LaborCapitalPage 11Training Session-LRP & AECKnowledgeHIMALI 12. Introduction Need of Projected Financial Statement? Projected Financial statement helps Investor to make decision on financing by providing information on: Risk of the Business Use of Investment (Finance) Financial performance of the business over the time (Return) Financial position of the business Cash position and cash generation ability of the business Management Market & product Page 12Training Session-LRP & AECHIMALI 13. Introduction Components of Projected Financial Statement Profit & Loss Account- performance over a given period Balance sheet- financial picture on a given day Cash Flow Statement- performance over a given period Notes to Accounts- Explain above StatementsPage 13Training Session-LRP & AECHIMALI 14. Introduction Desirable Qualities of Projected Financial Statement Page 14Relevance Reliability Completeness Timeliness ComparabilityTraining Session-LRP & AECHIMALI 15. Grant Application Table Page 15A table showing details of eligible business development cost that are applied for grant to HIMALI Project Facilitate management of HIMALI Project Derived from Production Plan Should clearly show the contribution of business & grant Should be expressed in NRs and USD as well For Business development cost below USD 50,000, HIMALI project will provide grant up to 80% of cost For Business development cost above USD 50,000, HIMALI project will provide grant up to 50% of costTraining Session-LRP & AECHIMALI 16. Grant Application Table The following principles will be applied for HIMALI grant share: For business proposals originating from proponents registered in the respective project district and based on the priority list of raw material/commodity, the grant share will be as defined in the Project Administration Manual (PAM); For business proposals originating from proponents registered in the project district but not based on the priority list of raw material/commodities, the grant share will be 50%; and For business proposals originating from proponents not registered in the project district but based on the priority list of raw material/commodity, the grant share will be 50%. The maximum grant share will be $250,000 in all cases. Page 16Training Session-LRP & AECHIMALI 17. Grant Application Table Cost that should not be included Purchase or lease of land Business operating and trading capital (Except for limited working capital) Speculative investment Study toursPage 17Training Session-LRP & AECHIMALI 18. Grant Application Table Limited Working Capital Page 18HIMALI grant resources may be used to finance limited working capital to cover material inputs which are required to bring the business in operation and generate the first cycle of revenue. However, the eligibility for working capital shall be limited to a maximum of two years.Training Session-LRP & AECHIMALI 19. Grant Application Table Business development cost are dependent on: Page 19Business opportunity (Demand of product & services) Availability of market Availability of market intermediaries Environment & resources Competition Managerial skills & knowhow Availability of raw materials Availability of skilled & unskilled labours Legislation Availability of capital Profitability Training Session-LRP & AECHIMALI 20. Grant Application Table Trout Farming Business opportunity: More than 10,000 tourist in a year in Mustang Around 5000 households in the Mustang Demand of around 15 ton in the district which is not being met No competition till datePage 20Training Session-LRP & AECHIMALI 21. Grant Application Table Trout Farming Availability of market and market intermediaries Existing fresh houses in each market Traders available in district who are willing to distribute the products Accessibility of road to all the marketPage 21Training Session-LRP & AECHIMALI 22. Grant Application Table Trout Farming Environment & Resources Leased a land 30 km south of Jomsom, the headquarter of Mustang district and about 50 km north from Beni, the headquarter of Myagdi district at an altitude of 2013 mt. The site is located on the road corridor of BeniJomsom highway which is highly accessible for input supplying and trout marketing. The site contains natural cold springs and waterfalls having a temperature range of 80C to 180C all round the year and water flow at the rate of over 50 liters per second which is favorable for trout farming. There is no possibility of flooding at the site Page 22Training Session-LRP & AECHIMALI 23. Grant Application Table Trout Farming Environment & Resources A feasibility of trout farming in Mustang District, completed in 2012 by a Government technical team from 'Rastriya Prakritik Tatha Kritim Jalasya Matsya Bikas Karyakaram' , Kendriya Matsya Bahawan, Balaju', Kathmandu, described the potential for rainbow trout farming in Mustang District and confirmed that rainbow trout farming can be successfully done at sites below Kobang VDC where the cold water temperature ranges from 8-18 degrees Celsius and the dissolved oxygen content in the water is >7 ppm.Page 23Training Session-LRP & AECHIMALI 24. Grant Application Table Trout Farming Managerial skills & knowhow Taken training of rearing trout fish Have toured numbers of trout farms Trout Expert and Entrepreneurs available for advicePage 24Training Session-LRP & AECHIMALI 25. Grant Application Table Trout Farming Competition No competition till date Trout farm only in Pokhara who sells all its trouts in Pokhara (Current situation: Demand not met by supply in Pokhara)Page 25Training Session-LRP & AECHIMALI 26. Grant Application Table Trout Farming Availability of raw materials The trout fry will be supplied from the trout breeding farm of Sardi Khola, Pokhara Trout feed will be purchased from a feed company in Pokhara or Butwal.Page 26Training Session-LRP & AECHIMALI 27. Grant Application Table Trout Farming Availability of skilled & unskilled labours 2 person available with past experience of working in trout farm 2 unskilled person available who will attend the training on trout farming 1 person available skilled in administrating and account keeping of the businessPage 27Training Session-LRP & AECHIMALI 28. Grant Application Table Trout Farming Availability of capital Page 28Bank balance of NRs. 25,00,000 for initial investment and running the business Rest will be financed by HIMALI projectTraining Session-LRP & AECHIMALI 29. Grant Application Table Trout Farming Legislation Page 29Confirmation that Annapurna Conservation will give the permission The business will be registered in Small Cottage and Industry Development Centre The business will be registered in tax office Confirmation on Approval from Community Confirmation on Approval from VDCTraining Session-LRP & AECHIMALI 30. Grant Application Table Trout Farming Decision- Considering all the factors Produce & sell ard. 7.5 ton of trout fish each yearPage 30Training Session-LRP & AECHIMALI 31. Grant Application Table Identify all the business develop cost that are required to bring the business into operation Land Lease Cost Business Registration Cost Civil Works Raceway Construction Site Leveling Concrete Raceway Inlet canal construction Construction of equipment and feed store roomPage 31Training Session-LRP & AECHIMALI 32. Grant Application Table Identify all the business develop cost that are required to bring the business into operation Machineries & Equipments Water supply pipes, valves, and fittings Hand nets Buckets (50 L) Defreeze machine Electric meter, Coil and Parts set Fries of Trout Feeding Cost Medical Cost Labour Cost Page 32Training Session-LRP & AECHIMALI 33. Grant Application Table Quantify the business development cost in money & units Page 33The units/quantity should be based on the size of production plan. The purchase rate of civil construction should be based on Engineering valuation. The purchase rate of machineries, equipments, raw materials should be based on 3 competitive quotations.Training Session-LRP & AECHIMALI 34. Grant Application Table Fill up the template of grant application table Page 34Only eligible cost should be included In this case: Land lease cost will not be included Proponent has decided that he will cover the business registration cost The proponent has decided that he will apply for grant for civil cost, machinery & equipment cost. He will bear other cost from his own capitalTraining Session-LRP & AECHIMALI 35. Grant Application Table Page 35Filled up Grant Application TableTraining Session-LRP & AECHIMALI 36. Break of 5 minutes36 37. Accounting Convention Accounting practice has developed gradually over a matter of centuries. The following concepts & assumption are used for preparing the accounts. Business Entity Going Concern Accruals or Matching Prudence Consistency concept Materiality Substance over form Money Measurement Historical Cost Convention Stable Monetary UnitPage 37Training Session-LRP & AECHIMALI 38. Accounting Convention The following concepts & assumption are used for preparing the accounts. Objectivity Realisation Duality Time IntervalPage 38Training Session-LRP & AECHIMALI 39. Accounting Convention Business Entity Concept States that a business is treated as a separate entity from its owners for accounting profit Going Concern Assumes that business will continue to exist for the foreseeable future while preparing financial statements Accrual Basis Under accrual basis, the effects of transactions and other events are recognized when they occur (and not as cash or its equivalent are received or paid)Page 39Training Session-LRP & AECHIMALI 40. Accounting Convention Matching Concept The profit & loss account has to match the revenue earned to the cost of earning that revenue Cost of Goods sold (Production less sales= closing stock) Prepayments Accrual Expenses Prudence Concept The inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expense are not understatedPage 40Training Session-LRP & AECHIMALI 41. Accounting Convention Consistency The presentation and classification of the items on the financial statements should stay the same from one period to the next. Materiality and aggregation All material items should be disclosed in the financial statements Amounts which are immaterial can be aggregated with amounts of similar nature or function and need not be presented separately.Page 41Training Session-LRP & AECHIMALI 42. Accounting Convention Substance over form The principle that transactions and other events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form Money Measurement States that accounts will only deal with those items to which a monetary values can be attributed Historical Cost Convention Means that transactions are recorded at the cost when they occurPage 42Training Session-LRP & AECHIMALI 43. Accounting Convention Stable Monetary Unit It is assumed that the value of the monetary unit to express financial statements remains constant over the time Objectivity Means that accountant must be free from bias Realisation Means that revenue and profits are recognized when realised Duality Every transaction has two effects. i.e. Double entry bookkeeping Time Interval Must be prepared covering time. i.e. One yearPage 43Training Session-LRP & AECHIMALI 44. Profit & Loss Account A Profit and Loss Account shows the following information for a business over a period of time (norm. one yr): Page 44Sales Revenue earned by the business Costs of Production that the business has paid Shows other expenses incurred for earning revenue Profit/ (loss) earned by the business HIMALI require 5 years of projected profit & loss account Prepared under Accrual Basis & Matching ConceptTraining Session-LRP & AECHIMALI 45. Profit & Loss Account Sales Less Cost of Sales = Gross Profit Less Expenses / OverheadsX x x xLess Taxx=Net Profit/ (loss)xPage 45Training Session-LRP & AECHIMALI 46. Profit & Loss Account Sales Revenue earned from sales of goods/products or services even though cash may not have been received by the business Number of items sold X selling price per item.Cost of Sales / Cost of Goods Sold costs directly involved in producing product eg. materials, direct labour.Gross Profit Highly significant figure as it represents the profit made from sale of goods/services Sales revenue cost of sales .Page 46Training Session-LRP & AECHIMALI 47. Profit & Loss Account Other Expenses indirect / fixed costs / overheads, i.e. costs that are not directly involved with producing and are not included in cost of goods sold.Gross Profit -Other expenses-Tax = Net Profit.Page 47Training Session-LRP & AECHIMALI 48. Profit & Loss Account Trout Farm Estimate the revenue for five years Annual Revenues Trout (200 gm)Unit Kg2013 7,4802014 7,4802015 7,4802016 7,4802017 7,480 Quantify the revenue in term of money ProductTrout (200 gm)Page 48Unit RateKg2013Amount (NRs.) 2014 2015 20162017700 5,236,000 5,236,000 5,236,000 5,236,000 5,236,000Training Session-LRP & AECHIMALI 49. Profit & Loss Account Trout Farm Identify the cost of sales (Raw materials, and other inputs) Raw material, and other inputs Trout fry Feed Antibiotics and other vet medicinesPage 49Unit No. Kg NRs.2014201520162017201846,750 18,99046,750 18,99046750 18,99046,750 18,99046,750 18,99011111Training Session-LRP & AECHIMALI 50. Profit & Loss Account Trout Farm Trout Fry Based on the size of Raceway Of the 46,750 trout fry that are stocked, about 20 % mortality will be expected before the trout reach 200 grams (marketable size). Technical Parameter: 1 cubic meter of the raceway can stock about 300400 fry (1-2 gm size) and the same volume can stock 150-200 developing fry (> 50 gm and < 150 gm size), and the same volume of raceway can stock about 50-80 gram trout (>150 gm and < 250 gm). The 16 raceways totaling about 744 cubic meters of water will be stocked with 46,750 trout fry (each 1-2 grams) and will be used to produce about 7480 kilograms of trout (that is, about 10.05 kg per cubic meter). Page 50Training Session-LRP & AECHIMALI 51. Profit & Loss Account Trout Farm Trout Feed MonthMonth #1 Month #2 Month #3 Month #4 Month #5 Month #6 Month #7 Month #8 Month #9 Month #10 Month #11 Month #12 Total Feed Fed Page 51Average Weight of Number of Fish Quantity of Fish % Body Weight Quantity of Feed Trout (grams) to be Fed to be Fed Fed/Day Fed per Month (kg) (kg)1.5 10 20 40 60 80 100 120 140 160 180 20046,750 39,738 39,270 38,802 38,335 37,868 37,400 37,400 37,400 37,400 37,400 37,400Training Session-LRP & AEC70 397 785 1,552 2,300 3,029 3,740 4,488 5,236 5,984 6,732 7,4805% 5.00% 2.00% 2.00% 2.00% 2.00% 1.50% 1.50% 1.25% 1.50% 1.25% 1.25%105 596 471 931 1,380 1,818 1,683 2,020 1,964 2,693 2,525 2,805 18,990 HIMALI 52. Profit & Loss Account Trout Farm Quantify the cost of sales in term of money Raw material, and other inputsUnit RateTrout fryNo.FeedKgAntibiotics and other vet medicinesL/S 50,000Total Cost82013Amount (NRs.) 2014 2015 20162017374,000374,000374,000374,000374,000120 2,278,784 2,278,784 2,278,784 2,278,784 2,278,784 50,00050,00050,00050,00050,0002,987,632 2,987,632 2,987,632 2,987,632 2,987,632*Note: The above cost include transportation cost of raw materialsPage 52Training Session-LRP & AECHIMALI 53. Profit & Loss Account Trout Farm Calculate Gross Profit (Revenue less Cost of Goods Sold)Description Total Annual Revenues Cost of Revenue (Operating Cost) Gross ProfitPage 5320132014Value (NRs.) 2015201620175,236,0005,236,0005,236,000 5,236,000 5,236,0002,702,7842,702,7842,702,784 2,702,784 2,702,7842,533,2162,533,2162,533,216 2,533,216 2,533,216Training Session-LRP & AECHIMALI 54. Profit & Loss Account Trout Farm Identify the other costs to run the business Page 54Salaries Land Lease Cost Selling & Distribution Marketing Cost Depreciation of Fixed Assets Insurance Cost Maintenance cost Utility Cost (Electricity) Stationeries Cost Miscellaneous CostTraining Session-LRP & AECHIMALI 55. Profit & Loss Account Trout Farm Quantify the Other Costs Salaries Cost Name of PersonnelUnitGita PunMonthShyam GurungMonthHari GurungMonthDan BahadurMonthFarukMonthRateQuantities (Months) 2013 2014 2015 2016 20172017120001313131313 156,000 156,000 156,000 156,000 156,00080001313131313 104,000 104,000 104,000 104,000 104,0008,0001313131313 104,000 104,000 104,000 104,000 104,0008,0001313131313 104,000 104,000 104,000 104,000 104,0008,0001313131313 104,000 104,000 104,000 104,000 104,000Total CostPage 552013Amount (NRs.) 2014 2015 2016Training Session-LRP & AEC572,000 572,000 572,000 572,000 572,000HIMALI 56. Profit & Loss Account Trout Farm Quantify the Other Costs Depreciation: Particular2013Opening Balance Civil Work 1,854,320 Machinery and Equipment 99,000 Less: Depreciation Depreciation on Civil Work (10%- 10 years) 185,432 Depreciation on Machinery & Equipment (20%19,800 5 years) Less: Scrap Value Closing Balance Civil Work 1,668,888 Machinery and Equipment 79,20020142015201620171,668,888 79,2001,483,456 59,4001,298,024 39,6001,112,592 19,800185,432185,432185,432185,43219,80019,80019,80019,800 927,1601,483,456 59,4001,298,024 39,6001,112,592 19,800-Note: Depreciation is the useful allocation of fixed assets over the useful life of assets. The useful life of assets should be determined by the Management.Page 56Training Session-LRP & AECHIMALI 57. Profit & Loss Account Trout Farm Filled up Profit & Loss AccountPage 57Training Session-LRP & AECHIMALI 58. Break58 59. Balance Sheet Simply a list of all the assets owned and all the liabilities and capital owed by a business at a given moment in time A snapshot of the financial position of the business at a particular moment of time. Prepared at the end of the accounting period to which the financial statements relate. The balance sheet is divided into two halves. Capital and liabilities in one half and assets in the other Statement of the outstanding balances on the ledger accounts for the capital, liabilities and assets of the business. Balance of Items in balance sheet are carried forward each year.Page 59Training Session-LRP & AECHIMALI 60. Balance SheetPage 60Training Session-LRP & AECHIMALI 61. Balance Sheet Assets Resources controlled by the business to earn future economic benefits for the business Assets are divided by two way Non Current & Current Assets Tangible & Intangible Assets Assets in Balance sheet are categorized by non-current and current assets.Page 61Training Session-LRP & AECHIMALI 62. Balance Sheet Assets Non Current Assets: An asset acquired for continuing use within the business, with a view to earning income or making profits from its use, either directly or indirectly Eg. Machineries, Furniture, Vehicles, building etc. Current Assets: Assets that are realizable within one year and are continually flowing through the business. Assets that take one of the following form Items owned by the business with the intention of turning them into cash in a short time Cash, including money in the bank owned by the businessPage 62Training Session-LRP & AECHIMALI 63. Balance Sheet Assets Current Assets:ReceivableCashInventory/ ProductPage 63Training Session-LRP & AECHIMALI 64. Balance Sheet Assets Quick Quiz: AssetBusinessNon Current / Current AssetsVanDelivery FirmNon Current AssetsMachineManufacturing Company Non Current AssetsCarCar TradersCurrent AssetsShort InvestmentLaw FirmCurrent AssetsPage 64Training Session-LRP & AECHIMALI 65. Balance Sheet Liabilities A liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future. Liabilities are categorized into: Non current liability Current liabilityPage 65Training Session-LRP & AECHIMALI 66. Balance Sheet Liabilities Non current liability A non-current liability is a debt which is not payable within the short term (One Year) Eg. Loan, Debenture etc. Current Liability Debts of the business that must be paid within a short period of time Eg. Trade payable, bank over draft, tax payable, accrued expenses payable etc.Page 66Training Session-LRP & AECHIMALI 67. Balance Sheet Capital & Equity Capital is the money invested in a business by the Entrepreneur/Shareholder. Capital is a long-term source of finance. In return for their investment, Entrepreneur/shareholders gain a share of the ownership of the company. Once the investment has been made, it is the company that owns the money provided. The shareholder obtains a return on this investment through dividends (payments out of profits) and/or increases in the value of the company when it is eventually sold. Consist of: Share Capital Grant Retained Earnings (Profit retained by business for further investment) Reserves Page 67Training Session-LRP & AECHIMALI 68. Balance Sheet Preparing Balance sheetPage 68Training Session-LRP & AECHIMALI 69. Break69 70. Financial Appraisal Financial Performance measure in private sectorObjectivesPage 70Financial performance measureTraining Session-LRP & AECLong and short term measureHIMALI 71. Financial Appraisal Primary objectives of profit-seeking business Page 71Maximizing shareholders wealth Current earning, future earning, dividend policy, relative risk of their investment Survival & growth Profits and shareholder valueTraining Session-LRP & AECHIMALI 72. Financial Appraisal Financial Performance Measure ROCELiquidity & Gearing RatioEPS Numerical MeasuresIRREBITDANPVPage 72Training Session-LRP & AECHIMALI 73. Financial Appraisal Characteristic of good performance measures: Measure performance from a financial, nonfinancial, qualitative and quantitative Attuned to the needs of decision makers Attention to the accuracy of data and calculation of measures Allow stakeholders to independently judge an organisations performance Identify where improvements should be made and what resources are requiredPage 73Training Session-LRP & AECHIMALI 74. Financial Appraisal General Rule:These measures are meaningful when compared with: Other time period Other measures of performance Other companies Other industries budgetPage 74Training Session-LRP & AECHIMALI 75. Financial Appraisal Profitability Ratios/Measures ROCE: Profit/Capital employed Gross profit Margin: Gross profit/sales x 100% Net profit margin: Net profit/sales x 100% Asset Turnover: Sales/capital employed EBITDAPage 75Training Session-LRP & AECHIMALI 76. Financial Appraisal Net Present Value Performance measure based on discounted cash flow (DCF) Looks at the present value (PV) of all cash inflows less the PV of all the cash outflows of a project Represents the increase in value of an organization today as the result of accepting the project being reviewed Prime decision rule: Any project that generate a positive NPV is viable.Page 76Training Session-LRP & AECHIMALI 77. Financial Appraisal Net Present Value AdvantagesDisadvantagesStrong correlation with shareholder valueDifficult to calculate/understandConsider the time value of moneyDoes not easily allow two projects of very different scales to be comparedRisk can be allowed by adjusting cost Based on assumption about cash of capital flow, timing of cash flow and appropriate cost of capital Shareholders are interested in cash flows and profit maximization Cash flow are less subject to manipulation & subjective than accounting profit Page 77Training Session-LRP & AECHIMALI 78. Financial Appraisal Net Present Value: TestDEMAC invest in a new machine at the beginning of year 1 which costs NRs. 15,000. It is estimated that following net cash will flow to DEMAC. Calculate the NPV assuming 15% cost of capital. Year Net cash flow12341,5002,7504,0005,7005 7,500Discount Formula: 1/(1+r)^n Where r= rate of discount and n=number of years Page 78Training Session-LRP & AECHIMALI 79. Financial Appraisal Net Present Value: Answer YearCash flowDF (15%)PV0-15,0001-15,00011,5000.8701,30522,7500.7562,07934,0000.6582,63245,7000.5723,26057,5000.4973,727TotalPage 79Training Session-LRP & AEC-1,997HIMALI 80. Financial Appraisal IRR: Internal Rate of Return The IRR is the discount rate when NPV=0 When presented with uncertainty over the cost of capital, some managers prefer to assess project by IRR Accept the project if its IRR> businesss cost of capital Steps to calculate IRR: Calculate NPV using any rate close to cost of capital Having calculated the NPV using the first rate, if NPV is positive, use a second rate that is higher than first rate If NPV is negative, use a second rate that is less than the first rate. Use the two NPV values to calculate IRRPage 80Training Session-LRP & AECHIMALI 81. Financial Appraisal IRR: Internal Rate of ReturnFormula of IRR: a+ {(A/A-B)(b-a)}% Where a= the lower of the two rates used b= the higher of the two rate used A=the NPV obtained using rate a B=the NPV obtained using rate bPage 81Training Session-LRP & AECHIMALI 82. Financial Appraisal IRR: TestDEMAC invest in a new machine at the beginning of year 1 which costs NRs. 15,000. It is estimated that following net cash will flow to DEMAC. Calculate the IRR (cost of capital= 15%) Year Net cash flow12341,5002,7504,0005,7005 7,500Discount Formula: 1/(1+r)^n Where r= rate of discount and n=number of yearsPage 82Training Session-LRP & AECHIMALI 83. Financial Appraisal IRR: Answer YearCash flowDF (15%)PV @15%DF (10%)PV@ 10%0-15,0001-15,0001-1500011,5000.8701,3050.909090911363.63636422,7500.7562,0790.826446282272.72727334,0000.6582,6320.75131483005.25920445,7000.5723,2600.683013463893.17669657,5000.4973,7270.620921324656.909923Total-1,997191.7094585Answer: IRR=10.4% Page 83Training Session-LRP & AECHIMALI 84. Financial Appraisal Liquidity & Gearing Indicators Liquidity is the amount of cash a company can obtain quickly to settle its debts Companies can be highly profitable but get into trouble when they run out of cash. Therefore liquidity needs to be considered alongside profitability when appraising a companys situation Financial gearing is the use of debt finance to increase the return on equity used. High gearing increases the risk in the company.Page 84Training Session-LRP & AECHIMALI 85. Financial Appraisal Liquidity Ratio: Current Ratio: Current Asset/Current Liability Finished goods period: (Average value of finished goods/cost of sales) x 365 Receivable period: (Av. Receivable/Sales) x 365 Payable period: (Av. Payables/purchases) x 365Gearing Ratio: Gearing=(Long term debt/shareholder capital) x 100% Interest Cover= PBIT/Interest CostPage 85Training Session-LRP & AECHIMALI 86. Break86 87. Financial Appraisal Practical WorkPlease appraise the project Thami Poultry Time: 1 hourPage 87Training Session-LRP & AECHIMALI 88. ConclusionFeedback of the work shopPage 88Training Session-LRP & AECHIMALI