Production Technology of Agril. Machinery 3(2+1)

LESSON 20. TECHNO ECONOMIC FEASIBILITY OF PROJECT REPORT

1.1  What is a preliminary project report?

Preliminary project report, in short PPR, is simple brief data – sheet that gives you an insight into the following:

(i) How much money, man-power & material would be required to setup project?

(ii) What type of machines would be required?

(iii) What are sources of technology that would be required? And

(iv) What would be the economic gains from the project?

In short, PPR is a brief outline of the project that tells you quickly about the viability of the project, so as to help you decide whether it is pursuing further or not.

1.2 Why preliminary project report?

At the stage of preparing a PPR you may have in mind not just one venture/product, but 3 or 4 ideas to choose from. Since it calls for considerable time and resources to prepare a Detailed Project Report (DPR) it would not be advisable to prepare a DR for every product ideas that may be floating in your mind.

Even if you could prepare DPR for all the product ideas that you have in mind, the time required to do so would be so much that it would make the first DPR obsolete or outdated by the time you complete all DPRs.

Further, the money, time and information required to prepare DPRs for all the product ideas that you have in mind only to examine their viability may make the very exercise of DPR preparation unviable. This does not mean that PPR can substitute a DPR. It only means that is desirable to prepare a PPR prior to spending resources on preparation of a DPR.

i. You get enough data quickly to fill up the required for provisional registration of your unit with the stage government. It is a must before commencing various times consuming formalities connected with planning and setting up of a small-scale unit.

ii. The data you get from PPR will help you in completing certain formalities in anticipation of setting up a project. For example, if you want to set up an electronic unit, you have to your production programme approved from the concerned State/Central Government department. For this you have to supply data about the projected production level and raw-material requirement, which you could get from PPR.

iii. The data collected by preparing a PPR forms a good take-off point for preparing a DPR when you desire to do so.

iv. It will help you identify in advance the infrastructural requirement for your project and sound the concerned government agencies accordingly so that you can get necessary facilities such as land / shed at the right time.

v. Finally, the major contribution of a PPR at the nascent stage of your entrepreneurial career is that it instils confidence in you and motivates you to stare the time-consuming process of data collection and preparation of a DPR.

1.3 How to prepare a PPR?

To help you prepare a PPR systematically, a proforma is adjoined to this section at Annexure-l. A quick perusal of the poform will indicate that the information called for could be collected and presented quickly as well as systematically.

Let us now see how best one can prepare a PPR as pre the enclosed proforma .Let us precede point-to-point as it appears in the proforma.

a) In this section titled ‘General’ there is an item ‘location’. You may not be in the position to pinpoint the exact location, but then, you should indicate the city/industrial estate where u wants to set up the unit. What is important is geographical area, is appropriate after taking into account the availability of raw-material, labour, marketing etc. and the cost involved in transportation of raw-material/finished goods if they are freight sensitive. Further, you will have to indicate whether you will be setting up the unit in rented premises or in the industrial area or in a place owned by you. This information will help you adviser/counsellor in identifying your requirement of land/shed so as to make certain advance arrangement with concerned agency that provides land/shed.

b) The information called for under this point pertain to your educational qualification, experience etc. These are readily available and therefore, can be presented easily. This information will help the adviser to understand whether the project proposition vis-a-vis the background is likely to be acceptable to the institutions.

c) This point deals with various details of the proposed project in terms of raw-material requirement, production programme etc. Here, you may be required to move around and collect the information since you will not be having it readily. For example, more than not, you may not know the specification or even the names of the machinery you need. In such a case, you must approach you adviser/other knowledgeable persons ask them for their guidance on the sources for getting the necessary information.

You may refer to ready –made project profiles available with the trainer or District Industries Centre or any good library .You can even approach people trading in the product and get information from them. You may visit one or more existing units manufacturing the same product that you need. Though difficult, it is the best source of collecting information that you need.3

The manufactures/suppliers of machinery can also give quite a good amount of information. A chat with the consultant of the State Technical Consultancy Organisation (there are 17 such organisations in the country) could prove fruitful.

In sort, what is important you should identify the sources of information and get into action at the first instance to collect necessary information. You can utilise the time devoted for market survey for collecting such information. You need to keep in mind certain points while connecting and presenting such information pertaining to point No.2 as noted below.

d) While listing down the machinery, care has to be taken to indicate the power requirement. This could be useful for further calculations. While arriving at the total cost of the machinery, you have to take into account the cost of transportation, sales tax, insurance, handing charges etc. In short, you have to consider the ‘landed cost’ i.e. cost of machinery plus all other expanses till reach the factory site.

e) At this stage, it is not necessary in detail each component of the landed cost of the machinery. What can be done depending on the nature of the machinery and sources of supply, rough estimates in terms of 20% or so of the quoted price of the machinery can be made and added to the total cost of the machinery. Any extra charges for installation/erection of the machinery must also form a part of the cost under this head.

f) Here, the items that you propose to manufacture and the quantity to be produced in a year must be indicated. The moment you have a list of machinery, you can calculate the quantity of goods that can be produced in a year based on the capacity f machinery. Further, while indicating production for the year,

It is not advisable to assume that you shall be able to produce 100% of what the machinery can produce at its maximum capacity in a year.

Suppose a machine can produce 100 kgs of an item per day (8 hrs.), it would be wrong to assume that the annual production would be 30,000 kgs, (we normally calculate annual production on the basis working days in a year). It is so because that in a given year, the machinery may break down calling for repairs and consequently, calling for a shut-down or there may be power-cuts or raw-material shortage. Thus, considering such eventualities the total quantity to be produced in a year may be calculated, as a thumb-rule at 70% or 80% or so the equipment capacity.

Col.No.4 of Item 2.2 in the proforma deals with sales revenue which can be calculated by multiplying the annual production with the selling price per unit. While deciding the selling price, there is no need to go into details of product cost at this stage. What you have to do is to look at the market price of the product which you intend to manufacture and deduct any commission or discount at the retailer and whole-sales level so that you can get an idea of ex-factory price.

g) This point deals with details on raw-materials. You are required to indicate item-wise requirement of raw-materials in terms of quantity and value. Further, the sources of procurement of these raw-materials i.e. places from where you intend to buy these materials should be indicated. This exercise will help you in indentifying where the raw materials would be easily available and whether it is necessary for you procure raw-materials form far-off places. While giving the list of raw-materials required for production, raw-materials required for packing, materials/stores required for maintenance of machinery (for example, grease, cotton waste etc.)And those materials required for testing (for example, chemical used for testing if tour unit needs a testing laboratory).

h) Under this head ‘Utilities’, those inputs that do not form a part of the end product but facilitate the production are included, such items are electricity, coal, furnace oil, diesel/petrol, compressed air, water and the like. Though only 3 items are mentioned under this head in the proforma, you should take care to identify all the utilities that your unit would need and account for the same.

As far as electricity is concerned, you should take into account the power required for lighting of factory premises and to run motors or generate heat.

i) This point deals with man-power requirements. There are just 3 classification based on skill-level under this head in the proforma. Your man power requirement will be for

a) Operation machinery

b) Assembly of final product, packing and supervision

c) Selling/marketing staff

d) Office work

While taking into account the wages/salaries, you must keep in mind the wages offered by other manufacture in the field and the Minimum wages Act. In case you decide to take help or employ you own family members, you must take into account their salaries also. You can safely add 20% or so over and above the wages to account for additional benefits that you have to provide for you workers

j) This point deals with market study which forms the most important part of the PPR. Market study/market survey has been dealt with separately elsewhere. The only thing that you have to keep in mind is that the PPR will be incomplete without a market survey report. Such a survey report would tell you where you would stand in the market when you start manufacturing the product. It also answers one of the three major questions i.e. ‘CAN I SELL IT?’ While answering this question, the survey coupled with PPR would also answer the other question, i.e. ‘CAN YOU EARN OUT OF IT?’

k) This point deals with the Cost of the Project and Profitability. By the time you start working on this point, the information that you would have collected so far would help you a making necessary calculations as explained below:

1. The cost you have to incur on purchase and installation of machinery;
2. Cost of land/shed irrespective of whether they are already owned by you or whether you have to purchase them on ownership/lease basis.
3. Payment, if any, to be made for acquisition of technical know-how
4. All expenses other than those indicated above such as preparation of project report, market survey, travelling expenses for data collection, deposit to be given to electricity board/telephone department etc. All these expenses can collectively be termed as preliminary and pre-operative expanses.

l) This deals with Working Capacity which refers to the value of all forms of assets such as:

1. Stock of Raw materials
2. Stock of Finished Goods
3. Value of goods that are under process i.e., semi-finished goods
4. Money you have to receive from you customers for the goods you have sold them on credit.
5. The can you have to maintain to meet day-to-day.

As regards the stock of raw materials, you must find out how time it takes to procure    the raw materials and accordingly decide how many days, requirement of raw-material you need to stock. The same is to be shown under Col.No.3 of point No.4.2. With this information and the information that is already available under item No.2.3 which tells you the annual raw-material requirement, you can easily decide the quantity and value of raw-materials that you need to stock.

You have to do the same exercise keeping in need how many days of output i.e., requirement of buyers will enable cost savings/convenience in transportation of finished goods from your factory. While indicating the value of finished goods, you can take its ex-factory price into account at this stage without giving into the intricacies of calculating the ‘cost value’ of the finished goods. As far as semi-finished goods are concerned, you must find out how many days it takes to convert raw-material into finished goods. While assessing the value for the semi-finished goods, you can take the average of raw-materials cost and the ex-factory price of finished goods without going the details of calculation.

As regards debtors you must find out to what extent the existing manufactures in the field offer credit to the buyers(normally such credit facilities range from 30 to 50 days).For example, it the existing manufactures are offering 30 days credit facility, you can safely assume that your buyers will be expecting at least 30 days credit. In other words, you would get the payment for the goods that you sell today only after 30 days. Since you know the annual production from point No.2.1, you can calculate production in terms of quantity and value for 30 days period which gives you can  the figure pertaining to the total ‘debtors’ for calculation of working capital. As regards cash on hand, you have to make a rough estimate of how much case you would require i.e., payment to workers, conveyance expenses etc. which forms a part of the working capital.

m) This point deals with the total cost of the project which is the summation of Fixed Capital and Working Capital. The total of point No 4.1 and 4.2 will give you the necessary

n) Having worked out the total cost of the project, you must identify the sources for financing the project. The fixed capital can be financed to the extent of say about 75% to 80% by way of ‘long-term loan’ from State Finance Corporation of Commercial Banks. The funds for working capital to the extent of an about 60% to 75% of the requirement would come from commercial banks as ‘Working Capital Loan’. If your unit is coming up in a backward area, you will be eligible for capital subsidy to the extent of 10% to 25% of the Fixed Capital depending upon the location and the government policy for that location. Your own investment which should be around 10-20% of the projected cost will also form a source such as, deposits/loans from friends and relatives. You have to keep in mind that the loan compound as far as possible should not exceed 70-80% of the total projected cost. The total ‘Means of should much with the total ‘Cost of the Project’ as it appears in point No.4.2

o)  This point deals with the project profitability. There are 9 items under this need

(i) This point deals with the manufacturing expenses which can be calculated by adding the total under point Nos.2.3, 2.4, and 2.5.

(ii) This deals with selling and distribution expenses. Here, you have to include commission payable to the salesmen in case you have to appoint sales staff under such persons. Further, you may have to add a lump sum amount towards advertisement and publicity expenses. In case you are supplying the goods at the door-steps of the buyers you have to take into account the transportation cost from the factory to the buyers ‘place. All these items of cost together constitute ‘Sales and distribution Expenses.’

(iii) As regards ’Administrative Expenses’ the various expenses on postage, stationery, telephone and telegram charges etc. will have to be included.

(iv) This deals with interest which is in two parts one is the interest on Term Loan and the other on Working Capital. Form point No.4.4 you know the amount on Term Loan. You can calculate the interest on that amount @ 12.5% to 14.5% depending upon the quantum of loan, the lending agency and scheme under which you avail the loan. Further, the interest on Working Capital can be calculated on the amount that appears in point No.4.4 @ to 16.5% the interest being stipulated by the lending agency.

(v) As regards, deprecation, a flat of 15 % of the value of machinery and 5% of the value of building may be taken into account.

(vi) Further you have to make a provision for certain expenses which cannot be put under the tite Miscellaneous Expenses. For this purpose, you can make an estimate on lump sum basis.

(vii) All the aforesaid items of cost put together will give you have the total cost per year which is to be indicated in Point No.7 under item No.4.5.

(viii) This deals with sales Revenue which can be obtained from Point No.2.2.

(ix) As regards income. You should find out the appropriate rate of tax applicable to you from you tax advised. Accordingly, the tax is to be calculated for which you may need trainer’s help.

(xi) This New profit is arrival at after deducting the Tax from the Gross Profit.

(o) This point deals with certain details about the promoter of the project, revelant to the financing institution. These details will help the counsellor as well as the representative from the financial to ascertain whether the project proposal vis-à-vis the promoter’s background is acceptable for funding.

 

References:

Ashish Shrivastav, Project Report-Techno Economic Feasibility

Ex. Manager, Centre for Entrepreneurship Development Madhya Pradesh, Bhopal