Chapter 7 Financial Evaluation

ARSI UNIVERSITY College of Business and
Economics Department of Management MBA

Program (Regular)
COURSE TITLE: Project Management
GROUP 1 Assignment
Member Name Id No
1. Abebe Fanta……………..GS/R/0165/14
2. Tadele Tefera……………GS/R/0018/14
3. Mersha Kassaye…….…...GS/R/0014/14
4. Jemal Gena…………..…..GS/R/0164/14
SUBMITTED: TO TEGENU YAE. (PHD)
January, 2023
ASELLA, ETHIOPIA
1
lOMoAR cPSD| 21221397
UNIT 7:
FINANCIAL EVALUATION
Contents
7.0. Aims and Objectives7..1.. Introduction
7..2.. Cost of Project
7..3.. Means of Financing the Project
7..4.. Production costs
7..5.. Estimation of Sales and Production
7..6.. Estimation of Material s Costs
7..7.. Estimation of Labor Costs
1.INTRODUCTION
Project is evaluated (or analyzed) from financial point
of view and economic point of view. Financial
analysis of the project is concerned with the analysis
of the profitability of the project based on monetary
costs and benefits. On the other hand, economic
analysis of the project deals with project analysis
based on social costs and benefits.
2.COST OF PROJECT
Conceptually, the cost of project represents the total
of all items of outlay associated with a project which
are supported by long-term funds. It is the sum of the
outlays on the following:
1. Land and Site Development
The cost of land and site development is the sum of the
following:
Basic cost of land including
conveyance and other allied charges
Premium payable on leasehold and conveyance
charges
Cost of leveling and development
Cost of laying approach
roads and internal roads
Cost of gates
Cost of tube wells
The cost of land varies considerably from one location
to another. While it is very high in urban and even
semi-urban locations, it is relatively low in rural
locations. The expenditure on site development, too,
varies widely depending on the location and topography
of the land.
2. Buildings and Civil Works
Buildings and civil works cover the following:
Buildings for the main plant and equipment
Buildings for auxiliary services like steam
supply, workshops, laboratory, water supply,
etc.
Quarters for essential staff
Silos, tanks, wells, chests, basins,
cisterns, hoppers, bins, and other
structures necessary for installation of the
plant and equipment
Garages
Sewers, drainage, etc.
Other civil engineering works.
The cost of the buildings and civil works depends on

the kinds of structures required which, in turn, are
dictated largely by the requirements of the
manufacturing process.
3. Plant and Machinery
The cost of the plant and machinery, typically the
most significant component of the project cost,
consists of the following:
Cost of imported machinery: This is the sum of
(i) FOB (free on board) value, (ii) shipping,
freight, and insurance cost, (iii) import duty, and
(iv) clearing, loading, unloading, and
transportation charges.
Cost of indigenous machinery: This consists of (i)
FOR (free on rail) cost, (ii) taxes, if any, and (iii)
railway freight and transport charges to the site.
Cost of stores and spares
Foundation and installation charges
4. Technical Know-how and Engineering Fees

Often it is necessary to engage technical consultants of
collaborators from local and /or abroad for advice and help in
various technical matters like preparation of the project report,
choice of technology, selection of the plant and machinery,
detailed engineering, and so on.
5. Expenses on Foreign Technicians and
Training of Local Technicians Abroad
Services of foreign technicians may be required for
setting up the project and supervising the trial runs.
Expenses on their travel, boarding, and lodging
along with their salaries and allowances must be
shown here. Likewise, expenses on local technicians
who require training abroad must also be included
here.
6. Miscellaneous Fixed Assets

Fixed assets and machinery which are not part of
the direct manufacturing process may be referred to
as miscellaneous fixed assets. They include items
like furniture, office machinery and equipment,
tools, vehicles and so on.
7. Preliminary and Capital Issue Expenses
Expenses incurred for identifying the project,
conducting the market survey, preparing the
feasibility report and others.
8. Provision for Contingencies
A provision for contingencies is made to provide for
certain unforeseen expenses and price increase over
and above the normal inflation rate which is already
incorporated in the cost estimates.
9. Margin Money for Working Capital
The principal support for working capital is
provided by commercial banks and trade creditors.
However, a certain part of the working capital
requirement has to come from long- term sources of
finance. Referred to as the ‘margin money for
working capital’ this is an important element of the
project cost.
7.3 MEANS OF FINANCE

To meet the cost of the project, the means of finance that are
available include Share capital, Term loans, Bonds, Deferred credit,
Incentive sources, and Miscellaneous sources.
1.Share Capital. There are two types of

share capital; namely, equity capital
(through the issuance of common stock)
and preference capital (through the
issuance of preferred stock). Equity capital
represents the contribution made by the
owners of the business,. Preference capital
represents the contribution made by
preference shareholders and the dividend
paid on it is generally fixed.
2. Term Loans. They are provided by
financial institutions and commercial banks.
Term loans represent secured borrowings
3. Bond capital. Bonds are instruments for
raising debt capital
4. Deferred Credit. Many a time the
suppliers of the plant and machinery offer a
deferred credit facility under which payment
for the purchase of the plant and machinery
can be made over a period of time.
5. Incentive Sources. The government and
its agencies may provide financial support
as an incentive to certain types of promoters
or for setting up industrial units in certain
locations.
6.Miscellaneous Sources. A small portion of the

project finance may come from miscellaneous
sources like unsecured loans, public deposits, and
leasing and hire purchase finance.
Planning the Means of Finance
The various means of finance that can be tapped for a
project have been descried above
The guidelines and considerations that should be borne
in mind for this purpose are as follows:
1.Norms of Regulatory Bodies and Financial
Institutions.
2.Key Business Considerations. The key business
considerations which are relevant for the project
financing decision are
Cost
risk
 control
 flexibility.
7.4. PRODUCTION COSTS
There are three major categories of manufacturing

costs. These are
1.Direct materials cost: - The acquisition costs of

all materials that are identified as part of the cost
object and that may be traced to the cost object
in an economically feasible way. Acquisition
costs of direct materials include inward delivery
charges, tax, and custom duties.
2.Direct labour. They are the labour of machine
operators and assembler.
3. Indirect manufacturing costs (manufacturing
overhead). -factory overhead, factory burden,
manufacturing overhead, and manufacturing
expenses.
7.5. ESTIMATES OF SALES AND PRODUCTION
1. Estimating Sales
The sales forecast is the starting point for the
projections of profitability. In estimating sales
revenues, the following should be taken into account:
1.Economic level (activities)
2.The project’s probable market share in each
distribution territory
3.Competitor’s and their capacities
4.Pricing strategies
5.The effect of inflation on prices
6.Advertising campaigns, promotional discounts, and
credit terms.
2. Estimating Production
Once sales projections are made, the next step is
production estimates.
Production may be estimated as follows:
Production = sales + Desired ending Inventory –
Beginning finished goods inventory For the first year
of operation, there is no beginning inventory. To
illustrate, assume that the sales are projected to be
100,000 units in the first year although the capacity is
180,000 units. It is estimated that there should be
finished goods inventory of 5000 units on hand at the
end of the first year. Estimated production would be:
Production = 100,000 + 5000 – 0 = 105,000 units
7.6 ESTIMATION OF MATERIAL COSTS
The costs of materials include the cost of raw

materials, chemicals, components, and consumable
stores required for production.
The following should be considered in estimating the
cost of materials:
1.The requirements of various material inputs per
unit of output.
When materials inputs requirements are established,

it is necessary to consider:
- Theoretical consumption norms
- Experience of the industry
- Performance guarantees
- Specification of machinery suppliers
2.The total requirements of various inputs
Total requirements = Requirements per unit X
Expected Production
3.The prices of material inputs

The prices of material inputs are defined in cost,
insurance, and freight (CIF)
4.The present costs of various material inputs
5.The seasonal fluctuations in prices
7.7. ESTIMATING LABOR COSTS
Labor cost includes the cost of all the manpower

employed in the factory. Labor cost is a function of
the number of employees and the rate of payment.

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ARSI UNIVERSITY College of Business and

Economics Department of Management MBA

COURSE TITLE: Project Management

SUBMITTED: TO TEGENU YAE. (PHD)

The cost of the buildings and civil works depends on

4. Technical Know-how and Engineering Fees

6. Miscellaneous Fixed Assets

7.3 MEANS OF FINANCE

1.Share Capital. There are two types of

6.Miscellaneous Sources. A small portion of the

There are three major categories of manufacturing

1.Direct materials cost: - The acquisition costs of

The costs of materials include the cost of raw

When materials inputs requirements are established,

3.The prices of material inputs

7.7. ESTIMATING LABOR COSTS

Labor cost includes the cost of all the manpower

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