Financial Estimates and Projections Investment Criteria Financing of Projects.

1. Project Management
SUDHEER NANDI

2. PROJECT MANAGEMENT –II
 Financial Estimates and Projections
 Investment Criteria
 Financing of Projects.

3. Financial Analysis
What is Financial Analysis .......!
 Financial analysis is the process of evaluating Businesses, projects, budgets, and
other finance-related transactions to determine their performance and suitability.
What is a financial projection……….?
 A financial projection is a Forecast of future Revenues and Expenses. Typically the
projection will account for internal or historical data and will include a prediction
of external market factors.
 Business forecasting refers to the statistical analysis of the past and current
movement in the given time series so as to obtain clues about the future pattern.
 Planning is not potential without forecasting. Conjecture are drawn form earlier
period and current relevant experiences under scientific forecasting.
FEASIBILITY
DESIGN
PLANNING CLOSEOUT
DEVELOPMENT OPERATIONS
Project Management Phase
Financing & Evaluation Risk

4.  Revenue: Income, especially when of an organization and of a substantial nature.
 Debt :A sum of money that is owed or due.
 Senior debt :Senior debt is debt and obligations which are prioritized for repayment in the case of
bankruptcy. Senior debt has the highest priority and therefore the lowest risk. Thus, this type of
debt typically carries or offers lower interest rates.
 Cash flow : Cash flow is the net amount of cash and cash-equivalents being transferred into and out
of a business. At the most fundamental level, a company's ability to create value for shareholders is
determined by its ability to generate positive cash flows, or more specifically, maximize long-term
free cash flow (FCF).
 Equity : Equity is ownership of an asset of value. Ownership is created when the owner contributes
to the financing of the asset purchase. Another way to finance the asset purchase is with debt. The
amount of equity used to purchase an asset is relative to the amount of debt.
 Capital: wealth in the form of money or other assets owned by a person or organization or available
for a purpose such as starting a company or investing.
 Asset : a useful and desirable thing or quality: Organizational ability is an asset, items of
ownership convertible into cash; total resources of a person or business, as cash, notes and accounts
receivable, securities, inventories, goodwill, fixtures, machinery, or real estate (opposed to
liabilities).
 Liabilities : Liabilities in accounting is a company's financial obligations, like the money a
business owes its suppliers, wages payable and loans owing, which can be found on a business'
balance sheet.
 Disbursement is an act of paying out money and includes the actual delivery of funds from a bank
account or other funds.
 Shareholder, also referred to as a stockholder, is a person, company, or institution that owns at least
one share of a company's stock, which is known as equity. Because shareholders are essentially
owners in a company, they reap the benefits of a business' success.
Financial Analysis

5. Financial Estimates and Projections
Projection Process
Through
preparation
of
Foundation
Estimation of
Future
Collection of
Results
Comparison
of Results
Refining the
Forecast
Forecasting
Key to
Success
Pivotal role
in
Organization
Development
of Business
Implementati
on of Project
Primacy to
Planning
Co-
ordination
What Makes a Good Forecast?
 Timely
 As accurate as possible
 Reliable
 Meaningful units
 The method should be easy to use and
understand in most cases.

6. Financial Estimates and Projections
PROJECTION /FORECASTS ………..! WHO USES …..?
Marketing managers use sales
forecasts to determine
Optimal sales force
allocation
Plan promotions and
advertising
Set sales goals
Production planners
needs forecasts in order
Schedule production
activities
Order
materials
Establish inventory labels
Plan shipments
Forecast can help the
Government …..!
Developing an understanding of
available funding.
Evaluating financial risk.
Assessing the likelihood that
services can be sustained.
Assessing the level at which
capital investment can be
made
Identifying future commitments and
resource demands.
Identifying the key variables that cause changes in the level of
revenue and Expenditures.
Production managers
long –range forecasts to
make strategic.
Decisions about products
process and facilities.
short- range forecasts to
assist them in making
decisions about
production issues
$ Please provide some insight using PEST /PESTLE model

7. Financial Estimates and Projections
Projection
Technique
Judgmental
Model
Delphi
Method
Time series
methods
Moving
Average
Exponential
smoothing
Seasonality
Models
Causal
Methods
Regression
Analysis
•Forecasts /Projection is made on the basis of events happened in the past that are similar to
current events.
•Judgmental of executive option :The opinion of experts like Sales, Finance, purchase and
the like is sought under this method and the meritorious one is accepted.

8. Financial Estimates and Projections
•Survey method : Quantitative and qualitative information is collected from field survey and
from this forecasting is done
•Sales person’s opinion : Sales persons are closer toe the consumers and their opinions are
taken into consideration for correct sales trend.
•Business Barometers :Index numbers indicate the direction of the business and can give
advance signals for likely changes in the future.
•Expectations of consumer : A survey is conducted in order to know the future needs of
consumers and an overall forecast is made. This is also known as “Marketing research
Method”.
•Time series analysis : In this method, future activities are the extension of the past. Forecasts
are based on the assumptions that the business conditions affecting its steady growth or decline
are reasonably expected to remain unchanged in the future.
•Delphi method : It is developed by Rand Corporation to forecast the military events. It is used
when past data are not available. Opinions are taken from experts through questionnaire and
then summarized and again given to experts for expected future evaluations.

9.  Extrapolation : Estimation of future behavior from the known data. Careful study of
the past behavior is essential for correct forecasting.
 Regression analysis : It is use to find the effect of changes of relative movements of
two or more inter- related variables.
 Input and output analysis : In this method forecast can be made if the relationship
between input and output is known.
 Econometric models : Various cause variables are responsible for effect on one
variable. The best example is Gross Domestic Product(GDP)
Financial Estimates and Projections
IN BUSINESS WE NEEED
KNOW.
•Your Turnover
•Your Margin
•Your Net profit
MEN
MONEY MACHINARY

10. Financial Estimates and Projections
• Estimate Current Assets
• Estimate Capital Assets
• Estimate Start-up Expenses
Starting Costs
• Total Assets (from above)
• Planned Investment (Equity)
• Planned Loans (Liabilities)
• Balance Sheet Formula
• Assets = Liabilities + Equity
Starting Balance Sheet
• Start-up Expenses (from above)
• Forecast Revenue
• Forecast Cost of Goods
• Forecast Overhead Expenses
• Revenue – Expenses = Net Profit
Income Statement
• Estimate Monthly Sales
• Adjust Monthly Sales for AR
• Account for loans & investments
• Calculate Total Receipts
• Estimate Monthly Purchase Adjust for AP
• Estimate Monthly Overheads & Estimate Loan Repayment
• Forward Start-up Costs ;Calculate Disbursements
• Starting Balance+ Receipts- Disbursement = Ending Balance
Cash Flow

11. Project Financing
Definition
 Lending to a single purpose entity for the acquisition
and /or construction of a revenue-generating asset
with limited or no recourse to the sponsor
 Repayment of the loan is solely from the revenues
generated from operation of the asset owned by the
entity
 Security for the loan
 the revenue generating asset
 all shares and interests in the entity
 real property
 all contacts, permits
 authorizations, etc.; and,
 all other instruments necessary for continuing
project operations
Steps
Project Identification &
Resource Allocation
Risk Allocation & Project
Structuring
Bidding & Mandating Contracts
Due Diligence & Documentation
Execution & Monitoring
Construction Monitoring
Term Loan Conversion & Ongoing
Monitoring
Financing Project
•Project finance refers to the funding of long-term projects, such as public infrastructure or
services, industrial projects, and others through a specific financial structure. Finances can
consist of a mix of debt and equity. The cash flows from the project enable servicing of the
debt and repayment of debt and equity.

12. Financing Project
Is my project
bankable?
Is the project
viable?
5.Design the
model
1.Define &
Structure
the problem
2.Define the
input &output
variables of
the model
3.Decide who
will use the
model and
how often
4.Understand the
financial and
mathematical aspects
of the model
6.Create the
spreadsheet
8.Protect
the model
9.Document
the model
10.Update the model
as necessary
7.Test the
model
Steps in a financial model (Ref: Sengupta)

13. • The analysis of project finance transactions is a complex procedure.
• Risks analyzed include
 Economic risk.
 Construction.
 Operating
 Technology risk.
 Legal.
 Political.
 Regulatory risk.
• Frequently, the participants in each transaction analyze such risks in minute detail and
put in place structural enhancements that seek to mitigate them.
There are three methods in Project Financing:
 Cost Share Financing or Low interest loan financing.
 Debts Financing.
 Equity Financing.
• 𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑃𝑒𝑟𝑖𝑜𝑑 =
Financing Project
Project
Viability
RISK
Allocation
BANKA
BILITY
Project bankability
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝑈𝑛𝑖𝑓𝑜𝑟𝑚 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤

14. Financing Project
PROJECT LENDERS
Government
Sponsors
Off taker Other suppliers
& Contractors
Equity/
Shareholder
Loans
Repayment
Loans
Project Company
$
$
$
$
CURRENT LIABILITY
Account Payable
Accrued Expense
Note Payable
LONG –TERM LIABILITY
Senior Debt
Subordinated Debt
Other Long-term
liabilities
Balance sheet liabilities

15. What are the different types of financing you can think of?
• Capital contribution
• Asset financing
• Working capital financing
• Project financing
• Grants – Tied and Untied
• Internal generation
What are the different forms financing can take?
• Equity
• Debt
– Term loans – Overdraft – Cash credit – Bill discounting – Packing credit – Unsecured loan
• Grant/Subsidy
Unique features of project financing
 For a project (specific objective, specific duration, expected returns)
 Distinct from general finance
 – Different set of risks – Future looking
 Long term or medium term
 Can be a mix of different financial products
 Can happen in multiple phases (tranches)
Financing Project
Current
Assets
Cash account
Account
receivable.
Inventories
Fixed
Assets
Property
Plant
Equipment
Balance Sheet Assets

16. Financing Project
Project finance cash flows waterfall
Debt Service
Equity
distributions
Project
Revenue
Operational
Expenses
Maintenance and
debt service
reserves
•Taxes
•Salaries
•Fuel
•Senior debt
•Subordinated debt
Dividends
•Shareholder
loans
*SPV special purpose vehicle
Pre-finanical Close
Model
•Feasibility
•Bidding
•Financial Structuring
•Financial close
Post-finanical Close
Model
•Operation phase model
•Returns to lenders and
investors
•Budgeting tool for spv
•Off-taker payment tool
Model stage development flow chart

17. Financing Project
Inputs
•Project costs and funding
structure.
•Phase s project durations
(construction &
operation).
•Technical Assumptions
•Financial And Economic
assumptions.
•Operating revenues and
costs.
•Loan drawings and debt
service.
•Taxation and accounting
Calculations
•CAPEX-Phase cost.
•WACC
•Equity drawdown
•Debt drawdown.
•Interest calculations.
•Debt repayment .
•Income statement .
•Balance sheet
•Cash flow statement
•Financial and Economic
performance indicators
•Lenders cover ratios.
•Investors returns
Reports &
Summary.
•Graphs.
•Project and Equity NPV.
•Project and Equity IRR.
•Project and ERR.
•Cash flow summary .
•Summary of project
costs and funding.
•Lenders cover ratios
•Financial and
economical performance
indicators
•Risk analysis results
•One page key inputs
and results summary.
Typical Project finance model layout and components.
CAPEX –Capital Expenditure;OPEX- operation Expenditure
WACC- Weighted Average cost all sources of capital
NPV- Net present Value ; IRR –Internal rate of return
ERR- External rate of return ; DCF-Discounted Cash Flow

18. Net Present Value
 NPV = –Initial Cost + Market Value
 NPV = – Initial Cost + PV(Expected Future CF’s)
where r reflects the risk of the project’s cash flows
Note that this is a generic formula, and we really use the tools from time value of money
(annuities, perpetuities, etc.) from before.
 Net Present Value (NPV) Rule:
◦ NPV > 0 Accept the project.
◦ NPV < 0 Reject the project.
More on the Appropriate Discount Rate, r
 Discount rate = opportunity cost of capital
◦ Expected rate of return given up by investing in the project
◦ Reflects the risk of the cash flows from the project
 Discount rate does not reflect the risk of the firm or the risk of the firm’s previous projects
(remember: the past is irrelevant)


T
0
=
t
t
t
T
1
=
t
t
t
r)
+
(1
CF
=
r)
+
(1
CF
+
Cost
-
=
NPV
Investment Criteria

19. Using the NPV Rule
 Your firm is considering whether to invest in a new product. The costs associated with
introducing this new product and the expected cash flows over the next four years are
listed below. (Assume these cash flows are 100% likely). The appropriate discount rate
for these cash flows is 20% per year. Should the firm invest in this new product?
Costs: ($ million)
Promotion and advertising 100
Production & related costs 400
Other 100
Total Cost 600
 Initial Cost: $600 million and r = 20%
 The cash flows ($million) over the next four years:
 Year 1: $200; Year 2: $220; Year 3: $225; Year 4: $210
 Should the firm proceed with the project?
Investment Criteria

20. Using NPV, concluded
Year Cash Flow
Present Value
Factor PV(Cash Flow)
0 (600.00) 1.00 (600.00)
1 $200.00
2 $220.00
3 $225.00
4 $210.00
NPV =
(1.20)1 166.67
(1.20)2 152.78
(1.20)3 130.21
(1.20)4 101.27
(49.07)
Investment Criteria

21.  Payback period = the length of time until the accumulated cash flows from the
investment are equal to or exceed the original cost
 Payback rule: If the calculated payback period is less than or equal to some pre-
specified payback period, then accept the project. Otherwise reject it.
Investment Criteria
Example: Payback
Example: Consider the previous investment project. The initial cost is $600 million.
It has been decided that the project should be accepted if the payback period is 3
years or less. Using the payback rule, should this project be undertaken
Year Cash Flow Accumulated Cash Flow
1 $200.00 $200
2 220.00
3 225.00
4 210.00
$420
$645 > $600
$855

22. Analyzing the Payback Rule
Consider the following table. The payback period cutoff is two years. Both projects cost
$250. Which would you pick using the payback rule? Why?
Year Long Short
1 $100.00 $200.00
2 100.00 100.00
3 100.00 0.00
4 100.00 0.00
Which project would you pick using the NPV rule? Assume the appropriate
discount rate is 20%.
Advantages and Disadvantages of the Payback Rule
Advantages & Disadvantages
Popular among many large companies
Commonly used when the:
•capital investment is small
•merits of the project are so obvious that more formal analysis is unnecessary
Investment Criteria

23. The Discounted Payback Rule
 Discounted Payback period: The length of time until the accumulated discounted cash flows from
the investment equal or exceed the original cost. (We will assume that cash flows are generated
continuously during a period).
 The Discounted Payback Rule: An investment is accepted if its calculated discounted payback
period is less than or equal to some pre-specified number of years.
Example: Consider the previous investment project analyzed with the NPV rule. The initial cost is
$600 million. The discounted payback period cutoff is 3 years. The appropriate discount rate for
these cash flows is 20%. Using the discounted payback rule, should the firm invest in the new
product?
Investment Criteria
Year Cash Flow Present Value
Factor
Discounted
Accumulated
Cash Flow
1 $200.00
2 $220.00
3 $225.00
4 $210.00
(1.20)1 166.67
(1.20)2 152.78 319.45
(1.20)3 130.21
449.66
(1.20)4 101.27 550.93

24. Internal Rate of Return (IRR) Rule
IRR is that discount rate, r, that makes the NPV equal to zero. In other words, it makes the
present value of future cash flows equal to the initial cost of the investment.



T
0
=
t
t
t
T
0
=
t
t
t
IRR)
+
(1
CF
0
r)
+
(1
CF
=
NPV
Investment Criteria
Accept the project if the IRR is greater than the required rate of return (discount rate).
Otherwise, reject the project.
Calculating IRR: Like Yield-to-Maturity, IRR is difficult to calculate.
•Need financial calculator
•Trial and error
•Excel or Lotus Spreadsheet
•Easy to first calculate NPV then use the answer to get a first good guess about the
IRR!!!

25. IRR Illustrated
Initial outlay = -$200
Year Cash flow
1 50
2 100
3 150
Find the IRR such that NPV = 0
50 100 150
0 = -200 + + +
(1+IRR)1 (1+IRR)2 (1+IRR)3
50 100 150
200 = + +
(1+IRR)1 (1+IRR)2 (1+IRR)3
Investment Criteria

26.  IRR Illustrated
 Trial and Error
Discount rates NPV
0% $100
5% 68
10% 41
15% 18
20% –2
IRR is just under 20% -- about 19.44%
Investment Criteria
Year Cash flow
0 – $200
1 50
2 100
3 150
4 0
Discount rate
2% 6% 10% 14% 18%
120
100
80
60
40
20
Net present value
0
– 20
– 40
22%
IRR
Net Present Value Profile

27. Comparison of IRR and NPV
 IRR and NPV rules lead to identical decisions IF the following conditions are satisfied:
◦ Conventional Cash Flows: The first cash flow (the initial investment) is negative and
all the remaining cash flows are positive
◦ Project is independent: A project is independent if the decision to accept or reject the
project does not affect the decision to accept or reject any other project.
 When one or both of these conditions are not met, problems with using the IRR rule can
result!
Unconventional Cash Flows
 Unconventional Cash Flows: Cash flows come first and investment cost is paid later. In
this case, the cash flows are like those of a loan and the IRR is like a borrowing rate.
Thus, in this case a lower IRR is better than a higher IRR.
 Multiple rates of return problem: Multiple sign changes in the cash flows introduce the
possibility that more than one discount rate makes the NPV of an investment project
zero.
Investment Criteria

28.  Investment criteria is simple manner “DECISION MAKING “ Whether or nor in project
Management .
 NPV( Net Present Value ) :
 Cash inflow
 Rate of discounted Cash flow .
Discount Rate in Financial term: Interest rate charged to commercial banks/ depository
institution for LOANS received from Central Reservoir windows.
 Make money or not .
• IRR :
 More dependent on the magnitude of case flows.
 Cash flow (IN/OUT) frequency it.
 Initial investment .
 IRR –Like Break even point depends magnitude & time of the Cash flow .
 NPV- How much money comes into your pocket .
 Every project & finance management Imperative to focus on maximizing NPV.
 IRR is static ; NPV is dynamic
 Mainly Project execute NPV .
 Cash flow : The movement of cash into or out of an account of a business; project or investment
1.operation. 2. investment . 3. Financing .
Investment Criteria

29.  Investment criterion means the criteria or the guidelines according to which the
Planning Authority distributes the total amount of the community's investible funds into
different channels. The main problem is to distribute the investible funds in the different
sectors of the economy.
The major investment criteria for selection of project: Financial theory and practice,
there are used five main criteria for selecting investment projects:
 Net present value (NPV) criterion,
 Internal rate of return (IRR) criterion,
 Return term (RT) criterion,
 Profitability ratio (PR) criterion and
 Supplementary return (SR) criterion.
Evaluation of Investment Proposals: 7 Methods | Financial Management:
1. Payback Period Method.
2. Accounting Rate of Return Method.
3. Net Present Value Method.
4. Internal Rate of Return Method.
5. Profitability Index Method.
6. Discounted Payback Period Method.
7. Adjusted Present Value Method.
Investment Criteria

30.  An investment project is a detailed proposal of an expenditure of liquid resources, with
the objective of taking actions that will lead to future profits. Its requires careful planning
and includes detailed descriptions of expenditures and incomes (sources and expected
amounts).
 There are Few main investment types, or asset classes, that you can choose from, each
with distinct characteristics, risks and benefits.
1. Growth investments.
2. Shares.
3. Property.
4. Defensive investments.
5. Cash.
6. Fixed interest.
 A project life cycle is the sequence of phases that a project goes through from its
initiation to its closure. The project lifecycle can be defined and modified as per the
needs and aspects of the organization.
Investment Criteria

31. Investment Criteria
key points for the profitability of a project
1. Hidden business management.
2. Structured installation.
3. Cost control.
4. Always keep track of the scope of the project.
5. Increase transparency and communication.
6. Evaluate regularly.
7. Use project management tools.
8. Present value of future cash flows.
 steps of capital investment analysis: Estimated the expected cash flow, assess the
riskiness of those flows, estimate the appropriate opportunity cost of capital, and
determine the project's profitability and breakeven characteristics.
 It should consider all cash flows to determine the true profitability of the project. 2. It
should provide for an objective and unambiguous way of separating good projects
from bad projects. 3. It should help ranking of projects according to their true
profitability.

32. Saving for their financial goals.(INDIAN)
Investment Criteria
Investment
avenues
Indians
Debt
mutual
funds
National
Pension
System
(NPS)
Public
Provident
Fund
(PPF)
Bank
fixed
deposit
(FD)~
Senior
Citizens'
Saving
Scheme
(SCSS)
Pradhan
Mantri Vaya
Vandana
Yojana
(PMVVY)
Real
Estate,
Gold &
other
forms.
What is Block chain & Digital currency? How banking institutes operate ?
What is transparency & investment communication? what are current financial issues in
India in Bank & government policy ?
Please go through Case study regarding Financial and pitfall in project management

33. REFERENCES
TEXTBOOKS
1. Prasanna Chandra- Project: A Planning Analysis- Tata McGraw Hill Book Company-
New Delh-
2. Cleland-Gray and Laudon- Project Management- Tata McGraw Hill Book Company-
New Delhi
REFERENCES
1. Jack R. Meredith.- Samuel J. Jr. Mantel.- Project Management - A Managerial Approach- John Wiley
Other source .
1. Financial management by Prassanna Chandra
2. Advanced Accountancy by S. M . Shukla
3. Financial forecasting tools & applications by Delta publish company
4. Management accounting by M.Y Khan and P. K. Jain.
5. Budgeting and Forecasting sales template by Jessica Ellis
6. Financial planning & forecasting prepared by Matt H Evans
7.Online course– https://www.edx.org/course/financial-decision-rules-project-michiganx-fin401x
8.Certificate course in Project Finance by Indian Institute of Banking and Finance –
http://iibf.org.in/pns_e_iibfc.asp

34. Thanks….