26-06-2013, 01:06 PM
COST OF PROJECT AND MEANS OF FINANCING
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INTRODUCTION
A project is concerned finance is the basic prerequisite. Without proper financial arrangement an entrepreneur is finding difficult to go ahead with his project. Funds requirement should be optimum so as to avoid the problems of both under and over capitalisation. So the cost project should be accurately estimated. Once the estimation of cost of project is over, the next step is to find out the sources of financing. After identifying the various available sources, a finance mix should be finalised. The selected finance mix should be optimum from the point of view of cost, control and flexibility.
COST OF PROJECT
The cost of project represents the total of all items of outlay associated with a project which are supported by long-term funds. The major cost elements of a project are the following:
Land and site development
Buildings and civil works
Plant and machinery
Technical know-how and engineering fees
Expenses on foreign technicians and training for Indian technicians abroad.
Miscellaneous fixed assets
Preliminary and capital issue expenses
Margin money for working capital
Initial cash losses
Land and site development
This includes basic cost of land, premium payable on lease hold, cost of levelling and development, cost of laying approach roads, cost of gates, cost of tube wells etc. The cost of land varies considerably from one location to another location. Similarly the expenditure on site development also varies according to topography of the land.
Buildings and civil works
This includes buildings for the main plant and equipment, building for auxiliary services like work shops, laboratory etc., godowns, warehouses, quarters for staff etc. The cost of buildings and civil works depends on the kinds of structures required. Once the kinds of structures required are specified, cost estimates are based on the plinth area and rates for various types of structures.
Plant and machinery
The cost of plant and machinery is the most significant component of the project cost. This includes the cost of imported machinery and its allied cost, cost of indigenous machinery, cost of stores and spares and installation and foundation charges. The cost of the plant and machinery is based on the latest available quotation adjusted for possible escalation.
Technical know-how and Engineering fees
Often it is necessary to engage technical consultants or collaborators from India 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, and so on. So the amount payable for obtaining the technical know-how and engineering services for setting up the project is an important component of the project cost.
MEANS OF FINANCING
To meet the cost of project the following means of finance are available:
share capital
term loans
debenture capital
deferred credit
incentive sources
miscellaneous sources
Share capital
There are two types of share capital-equity capital and preference capital. Equity capital represents the contribution made by the owners of the business, the equity shareholders, who enjoy the rewards and bear risks of ownership. Equity capital being the risk capital carries no fixed rate of dividend. Preference capital represents the contribution made by preference shareholders and the dividend paid on it is generally fixed.
Term Loans
Term loans are provided by financial institutions and commercial banks represents secured borrowings which are a very important source for financing new projects as well as expansion, modernization, and renovation schemes of existing firms. There are two broad types of term loans available in India: rupee term loans and foreign currency term loans. While the former are given for financing land, building, civil works, indigenous plant and machinery, and so on, the latter are provided for meeting the foreign currency expenditures towards the import of equipment and technical know how.
WORKING CAPITAL
Working capital is the amount of money required by an enterprise for carrying out its day to day operations. The money invested in current assets like raw materials, finished products, debtors etc is known as working capital. The current assets in aggregate refer to gross working capital and the excess of current assets over current liabilities are called net working capital. The working capital is of two types: permanent working capital and variable working capital. Usually the permanent working capital is financed by long-term source of finance and variable working capital by short-term sources. The short-term sources of finance primarily include the following:
1.Loans from banks
2.Public deposits
3.Trade credit
4.Pledging and factoring
5.Bank overdraft
6.Cash credit
7.Bills discounting
8.Advances from customers
9.Accruals
PLANNING CAPITAL STRUCTURE
Project financing is usually discussed after project selection. But, in practice project financing is considered from the time of project conception. Indeed project financing is tangled with project planning, analysis, and selection. As the project proposal progresses through the stages of planning, analysis, and selection, the outline of project financing become clearer.
A capital project involves investment in land, plant and machinery, miscellaneous fixed assets, technical know-how, distribution network, and working capital. Hence capital project may be regarded as a mini firm. So the issues to be considered in financing a project are identical to those considered in financing a business firm.