TECHNO – ECONOMIC FEASIBILITY REPORT ( TEFR ) OF AN INDUSTRIAL PROJECT / PROJECT REPORT( contents and sequence )

By: V S RANGARAJAN Posted on: 2008-02-27 ** Print Article ** ** Copy Article ** - Category Feed

Article Summary: Is a ‘Plan of action report’ (normally printed and bound) which could be used for setting up an industrial project / business activity. It is a Blue print of the business proposed to be set up

TECHNO – ECONOMIC FEASIBILITY REPORT ( TEFR ) OF AN INDUSTRIAL PROJECT / PROJECT REPORT( contents and sequence )

A) INTRODUCTION

Is a ‘Plan of action report’ (normally printed and bound) which could be used for setting up an industrial project / business activity. It is a Blue print of the business proposed to be set up

This report could be prepared either by engaging the Project Consultants or by the company itself employing expert key personnel as Project Managers

The setting up of the manufacturing activity / business activity could be classified into three stages

1) Pre implementation stage ( project identification, Project report preparation, obtaining the necessary approvals, etc )
2) Implementation stage ( organizing and installing land, building, machines, etc)
3) Post implementation stage ( managing the business, expansion, diversification, modernization, integration, etc )
Preparation of a TEFR / Project report comes during Pre – implementation stage

B) BENEFITS OF TEFR

Is a checklist to confirm that all the functional aspects of the manufacturing activity / business is studied prior to implementation, to ensure that the proposed business will be a successful venture

Guideline report which helps the management in easy monitoring and managing project implementation and production activity

Helps to convince the bankers, partners, Government and others to avail necessary help

Avoids unit becoming sick. ‘Well planned job is half done’. Avoids unit becoming born sick

C) CONTENTS OF THE REPORT

It is a feasibility report studies the feasibility of the following aspects of the business ultimately to ensure profitability of the proposed business

I) Management capability to manage the business
II) Government clearance / approval feasibility
III) Marketability of the product to the extent of production proposed
IV) Technical feasibility of production
V) Financial viability to ensure profit

D) DETAILS OF THE BUSINESS ASPECTS ARE DISCUSSED IN THE FOLLOWING


I) MANAGEMENT CAPABILITY TO IMPLEMENT THE PROJECT AND MANAGE IT EFFICIENTLY

1) Constitution of the company
2) List of Promoters
3) Personal details of the Promoters ( Name, address, age, physical and mental fitness, Qualification and experience, other business activities )
4) Financial status of the Promoters
5) Stake of the Promoters / equity participation details
6) The relationship between partners
7) Organization chart / defining clearly Authorities and Responsibilities
8) Details of the key personnel
9) Write up on the type of skilled persons required for the project and their availability
10) Bankers / Auditors details




II) GOVERNMENT CLEARENCES TO BE OBTAINED

1) License for Production ( Drug control office )
2) License for exports ( product banned, export duty, quota, etc )
3) License for imports of machines / raw materials / other materials, etc (banned, import duty, quota, etc )
4) Foreign countries policies relevant to the business
5) Labour law
6) Factories act / industries act / boiler act
7) Register of companies / Register of firms
8) Income Tax act ( export earnings non taxable )
9) Excise Duty ( applicable only after achieving a particular turn over, investment level, etc )
10) sales Tax
11) ISO certification
12) Maximum Retail Price
13) Storing the raw material, other materials
14) Packaging / transporting
15) Investment subsidy provided by Government
16) Location of the project ( agricultural / residential / industrial )
17) Export processing zones
18) Government reservation list for SSI sector ( for purchase to the Government organisations
19) and many more depending on the type of industry proposed to be started

III) MARKETING ASPECTS

III .1) ESTABLISHING THE FUTURE DEMAND / SUPPLY GAP IN QUANTITY TERMS

PROJECTING THE FUTURE DEMAND

Study the past demand pattern

Consumption ( Original Equipment Manufacturer Market ( OEM ) / Replacement Market )

Market Size

Exports

Role of Competition ( Substitute, Brand, Industry and Buying Power )

Studying the Present Trend ( existing ) and Future expected ( likely ) demand considering the above mentioned factors

Arriving at the Market Potential considering Product Mix / quantiy


PROJECTING THE FUTURE SUPPLY

Study the past supply pattern


Production Sector wise ( un organized sector / organized sector )

Capacity Utilisation

Number of Units ( coming up / closing down )

Imports

Studying the Present Supply ( existing ) and Future expected supply ( likely ) on the above mentioned factors

Arriving at the expected supply Potential

PROJECTED DEMAND SUPPLY GAP

Thus the Demand Supply Gap is established. After ensuring that the Projected Demand is very much on the higher side compared to the Projected Supply the company takes the decision of setting up the project. Otherwise it should not consider implementing the project

III.B) THE SCOPE OF MARKETING THE PRODUCT TO 1) CONSUMER MARKET 2) INDUSTRIAL MARKET 3) EXPORT MARKET 4) GOVERNMENT MARKET AND 5) INSTITUTIONAL MARKET WILL BE STUDIED IN DETAIL TO ARRIVE AT APPROPRIATE STRATEGY SECTOR WISE AFTER STUDYING THE PROFITABILITY AND THE COMPANIES CAPABILITY

III.C) THE MARKETING MIX ( PRODUCT, PRICE, PLACE, PROMOTION ) OF COMPETITOR’S COMPANIES STUDIED TO ARRIVE AT AN APPROPRIATE STRATEGY OF THE COMPANY

III.D) SCOPE FOR ANCILLARY STATUS UNIT TO MOTHER UNIT, MARKETING TIE UP ARRANGEMENT, OPENING SHOW ROOMS, OBTAINING JOB WORK, CAPTIVE CONSUMPTION, ETC STUDIED

IV) TECHNICAL ASPECTS

1) Quality parameters of the products proposed to be produced
2) Product Specifications
3) Quantity to be produced in each variety
4) Proposed Technology
5) Highlights on the proposed technology
6) Process of Manufacture
7) Production Line Balancing
8) List of Machines and Accessories, spare parts, etc
9) Supplier Selection
10) Raw material ( cost, quantity, quality, source, etc ) and other materials
11) Man power requirement and their remuneration
12) Utilities / service departments/ electricity / water / effluent treatment /
13) Location / land / building / other building
14) Schedule of implementation

v) FINANCIAL FEASIBILITY

V.A)ESTIMATION OF THE PROJECT COST

1) Cost of Land
( provision for expansion, stamp duty, brokerage, leveling, etc )
2) Cost of Building
( process shed, canteen, office, ther areas )
3) Cost of Machines
( production m/cs, maintenance, material handling, utilities, etc )
4) Contingencies
( provision for unforeseen expenses, escalation )
5) Preliminary and
Pre operative expenses
( start up expenses, salary during trial production, samples, Advertisement expenses, etc )
6) Miscellaneous fixed assets ( office equipments, furniture, etc )
7) Margin money for working capital ( 25% of total of raw material, work in progress, finished goods, sundry debtors )

TOTAL OF item 1)2)3)4)5)6)AND 7)

V.B)MEANS OF FINANCE

1) Promoter’s Capital ( 25% of the Project cost )
2) Term loan from Bank
( 60% of the total of fixed assets ( ie ) cost of land plus cost of building plus cost of machines plus cost provision for contingencies )
3) Investment Subsidy
( 15% of the total of the fixed assets )

TOTAL OF item 1) 2) 3) IS Means of finance


V.C)DEBT EQUITY RATIO

Term loan component is Debt
Promoter’s capital and Investment subsidy components is the Equity

V.D)SECURITY MARGIN ( 65% OF FIXED ASSET VALUE )

V.E)PROMOTER’S CONTRIBUTION ( about 25% of the Project Cost )








V.E) COST OF PRODUCTION AND PROFITABILITY ESTIMATES
FOR THE FUTURE FIVE YEARS


PRODUCTION COST PROJECTED / ESTIMATED

YEAR 1 2 3 4 5

RAW MATERIASLS
ELECTRICITY
SALARY AND WAGES
REPAIRS AND MAINTENANCE
ADMINISTRATIVE EXPENSES
DEPRECIATION
INTEREST ON TERM LOAN
INTEREST ON WORKING CAPITAL
SELLING EXPENSES

TOTAL COST OF PRODUCTION

SALES REVENUE EXPECTED

YEAR 1 2 3 4 5
PRODUCTION IN UNITS
SELLING PRICE
SALES REVENUE

OPERATING PROFIT = SALES REVENUE ----- OPERATING
PROFIT


V.F) PROFITABILITY ESTIMATES / FINANCIAL INDICATORS

1) PROFIT ON SALES ( TO COMPARE WITH COMETITORS )
2) PROFIT ON INVESTMENT ( TO COMPARE WITH DIFFERENT INVESTMENT OPTIONS )
3) BREAK EVEN POINT ( IDEAL WILL BE 35% TO 55% ). LESSER THE BREAK EVEN POINT BETTER IS THE VIABILITY OF THE UNIT
4) DET SERVICE COVERAGE RATIO ( IDEAL WILL BE 2.0:1.0 )
5) SENSITIVITY ANALYSIS ( BY CHANGING THE MAJOR COST INPUT HOW IS THE PROFITABILITY IS AFFECTED )
6) INTERNAL RATE OF RETURN ( IRR )

VI) CONCLUSION

If the proposed project is found feasible from all the above aspects the appraiser recommends for implementation of the project

Article Source: http://www.upublish.info

About the Author:
V S RANGARAJAN
EDUCATIONAL QUALIFICATION B TECH, MBA, MPHIL, ( PH D ) EXPERIENCE INDUSTRIAL CONSULTANCY 18 YEARS INDUSTRY 3 YEARS TEACHING 5 YEARS

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