Peer Teaching

Topic
Inconsistency Between Teams And
Team Members During Preparation
of Appraisal (Financial Analysis)
Report
Organized by
Project Appraisal Directorate I
To be presented by
Daniel Girma
 BRAINSTORM
 Have you been noticed differences
between teams and your team
members while preparing appraisal
report?
 Why do our appraisal reports are
inconsistent, especially for similar
projects?
 Do you really believe that our
differences are acceptable and have
logical and/or technical ground?
 Shall we stay where we were or step
forward to avoid our
inconsistencies?
 ACKNOWLEDGE
 We have you been noticed differences
between teams and your team
members while preparing appraisal
report.?
 Why do our appraisal reports are
inconsistent., especially for similar
projects?
 Do you really some of our differences
aren’t acceptable and haven’t logical
and/or technical ground.?
 Shall we stay where we were or step
forward to avoid our
inconsistencies.?
 MAJOR AREAS

A. Investment Items
B. Basic Assumptions
C. Operating Cost Determination
D. Working Capital Determination
E. Other Areas
 A. INVESTMENT ITEMS
i. Land Lease Down Payment
 Land lease shall be considered as part of
equity contribution. But, which one?
 Prepaid land lease down payment
 Compensation for land tenants
 Any annual land lease payments made, etc
ii. Building and Construction
 Production halls, raw materials and finished
products store, office, workshops, residence,
auxiliary buildings, fence & site works, etc
 Inclusion and exclusion
 Required dimension (area)
 Machinery layout
 Estimated construction period (schedule)
 A. INVESTMENT ITEMS
iii. Machinery and Equipments
 For proper selection of machinery and
equipment, pro forma invoices with detail
specifications should be submitted. The
inconsistencies are: -
 Similar machineries but different price &
capacity
 Installation and commissioning cost
 Auxiliary equipments and spare parts, etc
iv. Vehicles
 Even though vehicle is crucial to transport
raw materials, finished products and
employees, determination of required type
and number is subjective due to: -
 Nature of the project
 Possibility of outsourcing
 A. INVESTMENT ITEMS
v. Office Furniture and Equipments
 OFE are crucial for smooth operation of the
project. But, similar to vehicle, determination
of required type and number is subjective
due to
 Nature of the project
 Proposed organ. structure & human resources
 Submitted pro forma invoices
 Facts on the ground
 B. BASIC ASSUMPTIONS
 Assumptions are building blocks of financial
projections. While developing assumptions, it is
important to understand that your financial
projection does not exist in vacuum.
 Assumptions can alter the decision that will be
made on the loan proposal. As a result, care
must be given.
i. Working
 Days per annum, shifts per day & hours per
day
ii. Production Capacity/ Yield & Product
Mix
 Manufacturing and agro processing projects
 Machine to labor integration
 Reliability of pro forma invoice
 B. BASIC ASSUMPTIONS
iii. Product Unit Selling Price
 There are various sources and/or applicable
unit pricing methods: -
 Market price
 Commodity study
 Feasibility study,
 Self determination, e.g. Cost build-up method
iv. Production Capacity Utilization Rate
 Observed variations are
 Initial production capacity utilization rate
 Annual growth rate (commonly 10%)
 What should be our bench mark?
C. OPERATING COST DETERMINATION
i. Direct Operating Costs
 Understating or overstating operating costs
considerably affects viability of the project.
 Inconsistencies are observed on the areas of
 Required inputs
 Input-output ratio
 Unit price of raw materials
 Wastage or scrap rate
 Packaging and bagging, etc…
ii. Indirect Operating Costs
 Human resource
 Organizational structure + Reference (FS, CS,
 Required positions SP)
 + Nature of the
Required number of employees
project
 Salary and wage scale + Size of the project
 Employee benefits + Facts on the ground
C. OPERATING COST DETERMINATION
ii. Indirect Operating Costs Cont…
 Fuel and lubricants
 For vehicles, forklift, generator, boiler, earth
moving machineries, etc
 Distance assumed to travel,
 Working days or hours assumed to operate
 Assumption for power interruption, etc…
 Rates of insurance premium, repair and
maintenance and spare parts
 Insurance premium: - Types of investment
require insurance coverage (e.g. crop, live
animal, etc…), and rate of premium
 Repair and maintenance: - Rate & starting
year
 Spare parts: - Types of investment require
spare parts, rate and starting year.
C. OPERATING COST DETERMINATION
ii. Indirect Operating Costs Cont…
 Depreciation and amortization
 Rates for some investments like land lease,
perennial crops, and other unrated items
 Existing assets: - remaining service life
 Other overhead expenses
 Employee benefits like travel and perdium,
fringe benefits, medical allowance, uniform &
protective
 Marketing expense- advertizing and promotion
 Office supplies
 Telephone, postage and internet
 Audit and legal fee
 Administrative expense
 Utility expenses
 Cleaning expense
 Miscellaneous expense
 D. OTHER AREAS
i. Working Capital Determination
 Working capital is the money that you will
need on a day-to-day basis to continue
operation.
 Without sufficient working capital is like going
on a road trip without enough fuel to reach
the next petrol station.
 So, care must be given for working capital
determination!
 Determination of coefficient of turn-over:-
minimum days of coverage
 Inclusion or exclusion of
• Finished goods
• Work in progress
• Raw material
 D. OTHER AREAS
ii. Supportive Schedules
 Implementation schedule
 Should define and schedule the major phases
of project work being carried.
 Key components of variations: -
• Breakdown and brief description of project
phase
• Required time frame for each activities
• Interdependencies of activities
• Deliverables and major activities of each
phase
 D. OTHER AREAS
ii. Supportive Schedules Cont…
 Equity release and disbursement schedule
 Released/disbursed based on the
implementation schedule (considering the flow
of activities)
 Fully utilize equity before any loan
disbursement
 Clearly state
• Purpose of equity release/ loan
disbursement
• Amount to be released/disbursed
• To whom equity release/loan disbursement
be made
• Condition for equity release/loan
disbursement
• Expected month of release/disbursement
 D. OTHER AREAS
ii. Supportive Schedules Cont…
 Loan repayment schedule
 The source of debt servicing (loan repayment)
is future cash flow of the project. As a result,
• Sufficient grace period should be given
• Should depend on the cash flow of the
project
• Cash generating period should be
considered
• Interest rate should be clearly stated
• Both pre operating and operating interests
should carefully be computed.
 D. OTHER AREAS
iii. Others
 Profit/loss statement
 Profit tax rate
 Tax exemption privilege
 Dividend/Withdrawal
 Relevance
 Rate
CONCLUSION AND RECOMMENDATION
LET US WORK HARD TO MINIMIZE
OUR INCONSISTENCIES!