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TREND PROJECTION METHOD

TREND PROJECTION METHOD LEAST SQUARE METHODEXPONENTIAL SOOTHING METHODMOVING AVERAGE METHODLEAST SQUARE METHODLINEAR RELATIONSHIP : Yt = a + b tWhere t is the time variableYt is the demand for the year tIntercept : a Slope : b b= TY n (mean T) (mean Y) T2 n (mean T) 2 a = (mean Y) b (mean T)

Other RelationshipsExponential Relationship: Y = a ebtPolynomial RelationshipCobb Douglas relationship : Y = a tbLogarithmic relationship : log Y = log a + b log tExponential Soothing MethodForecasts are made in the light of observed errorsIf the forecast value for year t is FtIf the actual value for year t is St If Ft < St , Ft+1is set higher that Ft If Ft > St , Ft+1is set lower that FtFt+1 = Ft + (St - Ft ) T St Ft St-Ft Ft+1

1 28 29 -1 F2= 29 + 0.2 (-1) = 28.8 2 29 28.8 0.2 F3 = 28.8 + 0.2(0.2)=28.84

MOVING AVERAGE METHODFORECAST FOR THE NEXT PERIOD IS EQUAL TO THE AVERAGE OF THE SALES FOR SEVERAL PRECEDING PERIODSFt+1is the forecast for the next periodSt is the sales for the current periodn is the period over which averaging is donePRICE ELASTICITY OF DEMANDIT MEASURES THE RESPONSIVENESS OF DEMAND TO VARIATIONS IN PRICE

EP = Q2 Q1 X (P1 + P2) P2 P1 Q2 + Q1If P1 = Rs. 600 Q1= 10000 P2 = 800 Q2= 9000Then E = (9000 10000) x (600 + 800) = -0.37 800 600 9000 + 10000INCOME ELASTICITY OF DEMANDRESPONSIVENESS OF DEMAND TO VARIATIONS IN INCOMEEI = Q2 Q1 X I1 + I2 I2 I1 Q2 + Q1IF Q1 = 30 Q2=55 I1 = 1000 I2 = 1020THEN Ei = 4.81Financial estimates and projectionsBOOK T 2 CHAPTER 6FINANCIAL ANALYSISCOST OF THE PROJECT

MEANS OF FINANCE

ESTIMATES OF SALES AND PRODUCTION

WORKING CAPITAL REQUIREMENT

PROFITABILITY PROJECTIONS

CASH FLOW STATEMENT AND BALANCE SHEET

COST OF THE PROJECTLAND AND SITE DEVELOPMENTBUILDING AND SITE DEVELOPMENTPLANT AND MACHINERYTECHNICAL KNOW-HOW AND ENGINEERING FEESEXPENSES ON FOREIGN TECHNICIANS AND TRAINING MISC. FIXED ASSETSPRELIMINARY AND CAPITAL ISSUE EXPENSESPRE-OPERATIVE EXPENSESMARGIN MONEY FOR WORKING CAPITAL MGMT.INITIAL CASH LOSSESLAND AND SITE DEVELOPMENTBASIC COST OF LANDPREMIUM PAYABLE ON LEASEHOLDCOST OF LEVELLING AND DEVELOPMENTCOST OF LAYING APPROACH ROAD AND INTERNAL ROADSCOST OF COMPOUND WALL AND GATESCOST OF TUBE WELLSBUILDINGS AND CIVIL WORKSBUILDINGS FOR THE MAIN PLANT AND EQUIPMENTBUILDING FOR AUXILIARY SERVICESGODOWN, WAREHOUSES, OPEN YARD FACILITIESNON-FACTORY BUILDINGS LIKE CANTEEN, GUEST HOUSES, TIME OFFICE ETC,QUARTERS FOR ESSENTIAL STAFFSILOS, TANKS, WELLS, BASINS ETC.GARAGES, SEWAGES. DRAINAGE OTHER CIVIL ENGINEERING WORKS

PLANT AND MACHINERYCOST OF IMPORTED MACHINERYCOST OF INDIGENOUS MACHINERYCOST OF SPARESCOST OF STORES FOUNDATION AND INSTALLATION CHARGESTECHNICAL KNOW-HOW AND ENGINEERING FEESCONSULTANCY FEESPREPARATION OF PROJECT REPORTSCHOICE OF TECHNOLOGYSELECTION OF PLANT AND MACHINERYDETAILED ENGINEERING PAYMENT OF ROYALTY FEES AS A PERCENTAGE OF SALES

EXPENSES OF FOREIGN TECHNICIANS AND TRAININGSFOREIGN TECHNICIANS ARE REQUIRED FOR SETTING UP OF PLANT AND SUPERVISIONEXPENSES ON TRAINING TO INDIAN TECHNICIANSMISC. FIXED ASSETSFURNITUREOFFICE MACHINERY AND EQUIPMENTTOOLSVEHICLESRAILWAY SIDINGDIESEL GENERATING SETSEFFLUENT TREATMENT PLANTSFIRE FIGHTING EQUIPMENT

PRELIMINARY CAPITAL ISSUE EXPENSESIDENTIFYING THE PROJECTCONDUCTING MARKET SURVEYPREPARING FEASIBILITY REPORTINCORPORATING THE COMPANYRAISING CAPITAL FROM THE PUBLIC: COMMISSION, BROKERAGE, FEES TO MANAGERS AND REGISTRARS, PRINITING AND POSTAGE, ADVERTISING ETC.PRE-OPERATIVE EXPENSESEXPENSES INCURRED TILL THE COMMENCEMENT OF PRODUCTIONESTABLISHMENT EXPENSESRENT, TAXESTRAVELLING EXPENSESINTEREST AND COMMITMENT CHARGES ON BORROWINGINSURANCE CHARGES MORTGAGE EXPENSESSTART UP EXPENSES PROVISION FOR CONTINGENCIESFIRM COST: THOSE WHICH HAVE ALREADY BEEN ACQUIRED OR FOR WHICH DEFINITE ARRANGEMENTS HAVE BEEN MADENON FIRM COST : 10 %OVERALL : 10 % FOR ALL ITEMSMargin money for working capitalWORKING CAPITAL IS PROVIDED BY COMMERCIAL BANKS AND TRADE CREDITORSSOME PORTION NEED TO BE MET OUT FROM LONG TERM FINANCEMARGIN MONEY IS UTILIZED FOR MEETING OVERRUNS IN CAPITAL COSTFINANCIAL INSTITUTIONS BLOCK A PORTION OF LOAN EQUAL TO MARGIN MONEY WHICH IS RELEASED WHEN THE PROJECT IS COMPLETEDINITIAL CASH LOSSESMANY OF THE PROJECTS INCUR CASH LOSSES IN THE INITIAL YEARSPROVISION IS MADE FOR SUCH LOSSES TO AVOID LIQUIDITY PRESSURESMEANS OF FINANCESHARE CAPITALTERM LOANSDEBENTURE CAPITALDEFERRED CREDITINCENTIVE SOURCESMISC. SOURCESSHARE CAPITALEQUITY CAPITAL: CONTRIBUTIONS MADE BY THE OWNERS OF THE BUSINESS, EQUITY SHAREHOLDERS. IT CARRIES NO FIXED RATE OF DIVIDENDPREFERENCE CAPITAL: CONTRIBUTION MADE BY PREFERENCE SHAREHOLDERSIT CARRIES FIXED RATE OF DIVIDENDTERM LOANSPROVIDED BY FINANCIAL INSTITUTIONS AND COMMERCIAL BANKSSECURED BORROWINGS FOR FINANCING NEW PROJECTS, EXPANSION, MODERNISATION, RENOVATION ETC.RUPEE TERM LOANFOREIGN CURRENCY TERM LOANDEBENTURE CAPITALFOR RAISING DEBT CAPITALCONVERTIBLE DEBENTURE: DEBENTURES WHICH ARE CONVERTIBLE TO EQUITY SHARES EITHER PARTLY OR WHOLLY NON-CONVERTIBLE DEBENTURE: STRAIGHT DEBT INSTRUMENTS, CARRY FIXED RATE OF INTEREST AND MATURITY PERIOD : 5-9 YEARSDEFERRED CREDITPAYMENT FOR PLANT AND MACHINERY CAN BE DELAYED OVER A PERIOD OF TIME

INCENTIVE SOURCES: GOVERNMENT AND ITS AGENCIES PROVIDE FINANCIAL SUPPORT AS AN INCENTIVE TO PROMOTERSseed capital assistance : low interest rateDeferment or exemption : tax holidays for limited periodMISC. SOURCES: UNSECURED LOANS, PUBLIC DEPOSITS, LEASING AND HIRE PURCHASE FINANCE

ESTIMATES FOR SALES AND PRODUCTIONCONSIDERATIONS FOR ESTIMATING SALES REVENUE:REASONABLE ASSUMPTION WITH RESPECT TO CAPACITY UTILIZATIONASSUME PRODUCTION EQUAL TO SALESSELLING PRICE REALISABLE BY THE COMPANY NET OF EXCISE DUTY, DEALERS COMMISSIONCHANGES IN SELLING PRICE MATCHED BY PROPORTIONATE CHANGE IN COST OF PRODUCTIONCOST OF PRODUCTIONMATERIAL COSTUTILITIES COSTLABOUR COSTFACTORY OVERHEAD COSTWORKING CAPITAL REQUIREMENTRAW MATERIALS AND COMPONENTSWORK IN PROGRESSFINISHED GOODSDEBTORSOPERATING EXPENSESCONSUMABLE ITEMS

MAXIMUM PERMISSIBLE AMOUNT OF BANK FINANCE FOR WORKING CAPITAL = CURRENT ASSETS NON BANK CURRENT LIABILITIES (LIKE TRADE CREDIT AND PROVISIONS)25% OF CURRENT ASSESTS MUST BE SUPPORTED BY LONG TERM SOURCES OF FINANCECURRENT ASSETS MARGIN RAW MATERIALS 10-15% WORK IN PROCESS 20-40% FINISHED GOODS 30-50% DEBTORS 3050%PROFITABILITY PROJECTIONSA. COST OF PRODUCTIONB. TOTAL ADMINISTRATIVE EXPENSESC. TOTAL SALES EXPENSESD. ROYALTY AND KNOW-HOW PAYABLEE. TOTAL COST OF PRODUCTION (SUM OF ABOVE)F. EXPECTED SALESG. GROSS PROFIT BEFORE INTERESTH.TOTAL FINANCIAL EXPENSES (INTEREST PAYMENTS)I. DEPRECIATIONJ. OPERATING PROFIT (G-H-I)K. OTHER INCOMEL. PRELIMINARY EXPENSES WRITTEN OFFM. PROFIT / LOSS BEFORE TAXATION (J + K L)N. PROVISION FOR TAXATIONO. PROFIT AFTER TAX (M N)Less Dividend on Preferential capital, equity capitalP. RETAINED PROFITQ. NET CASH ACCRUAL (P+I+L)

PROJECTED CASH FLOW STATEMENTMOVEMENT OF CASH INTO AND OUT OF THE FIRM AND ITS NET IMPACT ON THE CASH BALANCE WITHIN THE FIRM

SOURCES OF FUNDSSHARE ISSUEPROFIT BEFORE TAXATION WITH INTEREST ADDEDDEPRECIATION PROVISION FOR THE YEARDEVELOPMENT REBATE RESERVE INCREASE IN SECURED, MEDIUM AND LONG TERM BORROWINGS FOR THE PROJECTOTHER MEDIUM AND LONG TERM LOANS INCREASE IN UNSECURED LOANS AND DEPOSITSINCREASE IN BANK BORROWINGS FOR WORKING CAPITALINCREASE IN LIABILITIES FOR DEFERRED PAYMENTS TO MACHINERY SUPPLIERSSALE OF FIXED ASSETSSALE OF INVESTMENTSOTHER INCOMETOTAL (A)

DISPOSITION OF FUNDSCAPITAL EXPENDITURE FOR THE PROJECTOTHER NORMAL CAPITAL EXPENDITUREINCREASE IN WORKING CAPITALDECREASE IN SECURED MEDIUM AND LONG TERM BORROWINGSDECREASE IN UNSECURED LOANS AND DEPOSITSDECREASE IN BANK BORROWINGS FOR WORKING CAPITALDECREASE IN LIABILITIES FOR DEFERRED PAYMENTS TO MACHINERY SUPPLIERSINCREASE IN INVESTMENTS IN OTHER COMPANIES

INTEREST ON TERM LOANSINTEREST ON BANK BORROWINGS FOR WORKING CAPITALTAXATIONDIVIDENDS : EQUITY, PREFERENTIALOTHER EXPENDITURE

TOTAL (B)OPENING BALANCE OF CASH IN HAND AND AT BANKNET SURPLUS / DEFICIT (A B)CLOSING BALANCE OF CASH IN HAND AND AT BANKEXAMPLELIABILITIESSHARE CAPITAL : 100RESERVE AND SURPLUS : 20SECURED LOANS : 80UNSECURED LOANS : 50CURRENT LIABILITIES : 90PROVISIONS : 20ASSETS1.FIXED ASSETS 1802. INVESTMENTS 03. CURRENT ASSETS 180 CASH 20 RECEIVABLES 80 INVENTORIES 80

PROJECTED INCOME STATEMENT AND DISTRIBUTION OF EARNINGS SALES : 400COST OF GOODS SOLD :300DEPRECIATION: 20PROFIT BEFORE INTEREST AND TAXES: 80INTEREST: 20PROFIT BEFORE TAX: 60TAX: 30PROFIT AFTER TAX: 30DIVIDENDS: 10RETAINED EARNINGS: 20 COMPANY PLANSRAISE SECURED TERM LOAN OF 20REPAY PREVIOUS TERM LOAN OF 5INCREASE UNSECURED LOANS BY 10CURRENT LIABILITIES AND PROVISIONS ARE EXPECTED TO REMAIN UNCHANGEDACQUIRE FIXED ASSESTS WORTH 30INCREASE IN INVENTORIES BY 10RECEIVABLES ARE EXPECTED TO INCREASE BY 15OTHER ASSEST WOULD REMAIN UNCHANGEDDIVIDEND PAYMENT : 10PROJECTED CASH FLOW STATEMENT FOR ABOVE PROBLEMSOURCES OF FUNDSPROFIT BEFORE TAX AND INTEREST: 80DEPRECIATION 20INCREASE IN SECURED LOAN20-515INCREASE IN UNSECURED LOAN10TOTAL 125DISPOSITION OF FUNDSCAPITAL EXPENDITURE 30INCREASE IN WORKING CAPITAL 25INTEREST 20TAXATION 30DIVIDEND EQUITY 10 TOTAL 115 OPENING BALANCE OF CASH IN HAND AND AT BANK : 20NET SURPLUS : 125 115 = 10CLOSING BALANCE OF CASH IN HAND AND AT BANK : 20 + 10 = 30PROJECTED BALANCE SHEETBALANCE SHEET SHOWS THE BALANCES IN VARIOUS ASSETS AND LIABILITY ACCOUNTSIT REFLECTS THE FINANCIAL CONDITION OF THE FIRM AT A GIVEN POINT OF TIME

LIABILITIES ASSESTSSHARE CAPITAL FIXED ASSETSRESERVES AND SURPLUS INVESTMENTSSECURED LOANS CURRENT ASSETSLOANS AND ADVANCESUNSECURED LOANS MISC. EXPENDITURE AND LOSSES CURRENT LIABILITIESAND PROVISIONS

LIABILITIES: SHOWS SOURCES OF FINANCE EMPLOYED BY THE BUSINESSSHARE CAPITAL: CONSISTS OF PAID-UP EQUITY AND PREFERENCE CAPITALRESERVES AND SURPLUS: ACCUMULATED EARNINGS AS SHOWN IN DIFFERENT ACCOUNTS LIKE DEBENTURE REDEMPTION RESERVE, GENERAL RESERVESECURED LOANS: BORROWINGS OF THE FIRM AGAINST WHICH SECURITY HAS BEEN PROVIDED. INCLUDES DEBENTURES, TERM LOANS, LOANS FROM COMMERCIAL BANKS UNSECURED LOANS: BORROWINGS AGAINST WHICH NO SPECIFIC SECURITY HAS BEEN PROVIDED. INCLUDES PUBLIC DEPOSITS, LOANS FROM PROMOTERSCURRENT LIABILITIES: PAYABLES FROM ACQUIRING MATERIALS AND SUPPLIES USED IN PRODUCTION, ACCRUALS FROM WAGES, SALARIES AND RENTALSPROVISIONS: TAX PROVISION, PROVISION FOR PROVIDENT FUND, PROVISION FOR PENSION AND GRATUITY, PROVISION FOR PROPOSED DIVIDENDSASSET SIDE OF BALANCE SHEET: SHOWS HOW FUNDS ARE USED IN THE BUSINESSFIXED ASSETS: TANGIBLE LONG FIXED RESOURCES USED FOR PRODUCING GOODS AND SERVICES. SHOWN AT ORIGINAL COST LESS ACCUMULATED DEPRECIATIONINVESTMENTS: REPRESENT FINANCIAL SECURITIES OWNED BY THE FIRMCURRENT ASSETS, LOANS AND ADVANCES: CONSIST OF CASH, DEBTORS, INVENTORIES, LOANS AND ADVANCES MADE BY THE FIRMMISCELLENEOUS EXPENDITURES AND LOSSES:OUTLAYS NOT COVERED ABOVE AND ACCUMULATED LOSSESPROJECTED BALANCE SHEET FOR ABOVE PROBLEMCATEGORY O.B CHANGES C.B.LIABILITIESSHARE CAPITAL 100 - 100RESERVES & SURPLUS 20 + 20 40SECURED LOANS 80 + 20-5 95UNSECURED LOANS 50 + 10 60CURRENT LAIBILITIES 90 90PROVISIONS 20 20 TOTAL 405 ASSETS

FIXED ASSEST 180 + 30 20 190INVESTMENTS 0 0CURRENT ASSETS CASH 20 30INVENTORIES 80 + 10 90RECEIVABLES 80 + 15 95TOTAL 405 BALANCE SHEET OF SWARAJ LTD.LIABILITIESSHARE CAPITAL: 5RESERVES & SURPLUS: 4SECURED LOANS: 4UNSECURED LOANS: 3CURRENT LIABILITIES: 6PROVISIONS: 1TOTAL: 23

ASSETSFIXED ASSETS: 11INVESTMENTS: 0.5CURRENT ASSETS: 11.5CASH: 1RECEIVABLES : 4INVENTORIES : 6.5TOTAL: 23 PROJECTED INCOME STATEMENT AND DISTRIBUTION OF EARNINGS SALES: 25COST OF GOODS SOLD: 19DEPRECIATION: 1.5PROFIT BEFORE INT. & TAX: 4.5 INTEREST: 1.2PROFIT BEFORE TAX: 3.3TAX: 1.8PROFIT AFTER TAX: 1.5DIVIDENDS: 1.0RETAINED EARNINGS: 0.5PLANS FOR NEXT YEARINCREASE IN SECURED LOANS: 1REPAY PREVIOUS TERM LOAN: 0.5INCREASE IN CURRENT LIABILITIES AND PROVISIONS: 5% (6 + 1): 0.35

ACQUIRE FIXED ASSETS: 1.5INCREASE INVENTORIES: 0.5INCREASE IN RECEIVABLES5% (4): 0.2

PROJECTED CASH FLOW STATEMENTSOURCES OF FUNDPROFIT AFTER TAX AND INTEREST: 4.5DEPRECIATION: 1.5INCREASE IN SECURED LOAN (1-0.5): 0.5INCREASE IN CURRENT LIABILITY AND PROVISIONS: 0.35TOTAL: 6.85

DISPOSITION OF FUNDSCAPITAL EXPENDITURE: 1.5INCREASE IN WORKING CAPITAL (INVENTORIES & RECEIVABLES: 0.7INTEREST: 1.2TAXES: 1.8DIVIDEND: 1.0TOTAL: 6.2OPENING BALANCE OF CASH IN HAND AND AT BANK: : 1.0NET SURPLUS (6.85 6.2 = 0.65) : 0.65CLOSING BALANCE : 1.65PROJECTED BALANCE SHEETLIABILITIESO.B CHANGE C.B.SHARE CAPITAL 5 - 5RESERVES & SURPLUS 4 0.5 4.5SECURED LOANS 4 1 0.5=0.5 4.5UNSECURED LOANS 3 - 3CURRENT LIABILITIES 6 5% (0.3) 6.3PROVISIONS 1 5% (0.05) 1.05

TOTAL24.35 ASSETS O.B. CHANGE C.BFIXED ASSETS 11 1.5 1.5 =0 11INVESTMENTS 0.5 - 0.5CURRENT ASSETS 11.5 12.85CASH 1 1.65RECEIVABLES 4 +5% of 4 = 0.2 4.2INVENTORIES 6.5 + 0.5 7.0

TOTAL 24.35