What Is The Meaning of Financial Appraisal?


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Financial Appraisal

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   Financial Appraisal:

          The appraisal of the financial aspects involves scrutiny of the following;

  1. Cost of the project & means of financing.
  2. Cash flow estimates.
  3. Projected balance sheets.

 

Cost of the Project & Means of Financing-

       The financial plan for meeting the cost of the project depends on how accurately the cost is estimated. The estimate will have to provide for;

  1. Land & site development.
  2. Plant & machinery.
  3. Technical know-how fees.
  4. Miscellaneous fixed assets.
  5. Preliminary expense.
  6. Pre-operative expense.
  7. Provision for contingencies.
  8. Interest during construction.
  9. Margin money for working capital.

     Cost of project having been accurately estimated, sources of finance should be identified. This is in the form of owned funds & borrowed funds. Borrowed funds or debt consists of term loan, public deposits, debentures, deferred payment guarantees etc. The debt-equity proportion of 2:1 should be generally adhered to.

 

Cash Flow Estimates-

       In the cash flow statement, profit is the most important source of inflow & profit depends on how accurately the cost of production & sales estimates have been arrived at. Profit that is considered as an inflow could increase or decrease depending on management policies followed in the borrowing unit.

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Projected Balance Sheets-

The projected balance sheets report the effect of the plan of operations on the assets, liabililties & capital of the business unit. In analyzing the projected balance sheets, attention is to be focused on the movement of funds & also analyse the impact of the term loan granted by the financial institution on the assets & liabilities of the business unit.

 

 

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