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Land and site development

Building and civil works


Plant and machinery

Technical knowhow and engg. fees


Expenses on foreign technicians and training

Indians abroad

Misc fixed assets Prelim and capital issue expenses Pre-op. expenses Contingencies Margin for working capital Initial cash loss

Long term

Intermediate term

Short term

Share capital
Equity
Par value Issue value Book value Market value Right to income Right to control Preemptive right Right in liquidation

Preference capital
Dividend paid from distributable profit Dividend non-tax deductable Dividend rate is fixed Higher claim for holders than equity holders No right to vote

Cumulating Call ability

Debentures
Trustee Security Interest /coupon rate Maturity period Call and put Convertability

Term loans
Foreign currency Indian currency
IFCI ICICI IDBI LIC/GIC UTI Ex-Im bank of India

Differed credits Incentive sources


Seed capital Tax deferment Subsidy

Misc. sources
Unsecured loans Leasing/hire purchase

Leasing
Operating lease
Low period no recovery of full cost Cancellable in short notice Lessor responsible for maintenance

Financial lease
Large period Lessee responsible for maintenance, taxes Right of lessee to renew Cost recovery

Hire Purchase
Asset purchased in installments Flat rate of interest

Accurals Trade Credits Working capital advances from banks


Cash credits & overdrafts Loans Discount of bills Security Margin amount

Public deposits Inter-corporate deposits Short term loans Commercial papers

No

high capacity initially

40-50% 50-80% 80-90%


No

adjustment for inventory of finished goods

Production=sales
Changes

in selling price to match cost of production

Cost of Production
Material cost
Quantity
Consumption Experience Specifications

Utilities cost Labour cost Factory overheads


Rent Taxes Insurance

Working capital requirements


Raw material and components Stock of goods in process

Stock of finished goods


Debtors Operating expenses

Working capital financing


Advances from commercial banks Trade credits Accurals and provisions Long term sources of financing (25% of CA supported by LT sources)

Cost of capital
Rate of return it must earn on its investments for market value of firm to remain unaffected or Rate of return required by investor on capital
Estimate cost of capital required Decision on leasing, long-term financing and working capital policy To maximize: cost of inputs should be minimized

Evaluation of cost of capital


Long term funds point of view
Components

n

Equity Preference capital Long term debt Deferred credits


k=avg. cost of capital wi= prop. Or wt. of ith source ki=cost of ith source

k wi ki
i 1

Cost of specific source


Rate of discount which equates present value of expected payments to that source with net funds received

Ct P t i 1 (1 k )
P=net funds received Ct=expected payment to the source at the end of year t n= maturity period

Financial appraisal
Valuation of project worth

Discounting
NPV B-C Ratio IRR

Non-discounting
Urgency Payback period Accounting rate of return

NPV
CF0 CFn CF1 CF2 NPV ....... 0 1 2 (1 k ) (1 k ) (1 k ) (1 k ) n
CFt= cash flow at the end of year t n = life of project k = cost of capital

NPV
Accept if NPV is + earn excess return

Reject if NPV is -
NPV =0 cash flow just enough to recoup the investment Assumption
Intermediate cash flow reinvested

Benefit cost ratio


PCB BCR I
PVB = I = NBCR = present value of benefits investments net benefit cost ratio

PCB NBCR 1 I

IRR
Rate of return of unrecovered investment balance Rate of return on initial investment

CF0 CFn CF1 CF2 0 ....... 0 1 2 (1 k ) (1 k ) (1 k ) (1 k ) n


Ft Ft 1 (1 r ) CFt
Ft = unrecovered investment balance at the end of year t

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