Page 138 - DMGT521_PROJECT_MANAGEMENT

Unit 9: Financial Estimates and Projections

9.1.5 Cost of Stores and Spares Notes

Foundation and Installation Charges
The cost of the plant and machinery is based on the latest available quotation adjusted for
possible escalation. Generally, the provision for escalation is equal to the following product:
(latest rate of annual inflation applicable to the plant and machinery) × (length of the delivery
period).

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, detailed engineering, and so on. While the
amount payable for obtaining the technical know-how and engineering services for setting up
the project is a component of the project cost, the royalty payable annually, which is typically a
percentage of sales, is an operating expense taken into account in the preparation of the projected
profitability statements.

Expenses on Foreign Technicians and Training of Indian Technicians Abroad

Services of foreign technicians may be required in India 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 Indian technicians who require training
abroad must also be included here.

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, railway siding, diesel generating sets, transformers, boilers, piping
systems, laboratory equipment, workshop equipment, effluent treatment plants, firefighting
equipment, and so on. Expenses incurred for the procurement or use of patents, licences, trade
marks, copyrights, etc. and deposits made with the electricity board may also be included here.

Preliminary and Capital Issue Expenses

Expenses incurred for identifying the project, conducting the market survey, preparing the
feasibility report, drafting the memorandum and articles of association, and incorporating the
company are, referred to as preliminary expenses.
Expenses borne in connection with the raising of capital from the public are referred to as capital
issue expenses. The major components of capital issue expenses are: underwriting commission,
brokerage, fees to managers and registrars, printing and postage expenses, advertising and
publicity expenses, listing fees, and stamp duty.

Pre-operative Expenses

Expenses of the following types incurred till the commencement of commercial production are
referred to as pre-operative expenses: (i) establishment expenses, (ii) rent, rates, and taxes,
(iii) travelling expenses, (iv) interest and commitment charges on-borrowings, (v) insurance
charges, (vi) mortgage expenses, (vii) interest on deferred payments, (viii) start-up expenses,
and (ix) miscellaneous expenses.

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