Page 144 - DMGT521_PROJECT_MANAGEMENT

Unit 9: Financial Estimates and Projections

6. Total Cost of Production: This is simply the sum of cost of production, total administrative Notes
expenses, total sales expenses, and royalty and know how payable.
7. Expected Sales: The figures of expected sales are drawn from the estimates of sales and
production prepared earlier in the financial analysis and projection exercise.
8. Gross Profit before Interest: This represents the difference between expected sales and
total cost of production.
9. Total Financial Expenses: Financial expenses consist of interest on term loans, interest on
bank borrowings, commitment charges on term loans, and commission for bank
guarantees. The principal financial expenses, of course, are interest on term loans and
interest on bank borrowings.

10. Depreciation: This is an important item, particularly for capital intensive projects. In
figuring out the depreciation charge, the following points should be borne in mind:
Contingency margin and pre operative expenses provided in estimating the cost of project
should be added to the fixed assets proportionately to ascertain the value of fixed assets
for determining the depreciation charge.

Preliminary expenses in excess of 2.5 per cent of the project cost (excluding working
capital margin) should be added to fixed assets proportionately to ascertain the value of
fixed assets for determining the depreciation charge.
The Income Tax Act specifies that the written down value method should be used for tax
purposes. It further specifies the rate of depreciation applicable to different kinds of assets.

For company law (financial reporting) purposes, the method of depreciation may be
either the Written Down Value (WDV) method or the straight line (SL) method. From 1988
onwards the depreciation rates under the Companies Act have been delinked from those
under the Income Tax Act.
11. Other Income: This represents income arising from transactions not part of the normal
operations of the firm.

Example: Examples of such transactions are: sale of machinery, disposal of scrap, etc.
Except disposal of scrap, which can be reasonably anticipated and estimated, the effects of other
non-operating transactions can hardly be estimated. Of course, when non-operating transactions
result in a deficit, other income would be negative–put differently, there will, be a non-operating
loss.
12. Write-off of Preliminary Expenses: Preliminary expenses up to 2.5 per cent of the cost of
project or capital employed, whichever is higher, can be amortised in ten equal annual
instalments.
13. Profit-Loss before Taxation: This is equal to: operating profit + other income – write-off of
preliminary expenses.
14. Provision for Taxation: To figure out the tax burden, a sound understanding of the Income
Tax Act a complicated legislation and relevant case laws is required. While calculating the
taxable income, a variety of incentives and concessions have to be taken into account.
Once the taxable income, as per the Income Tax Act, is calculated, the tax burden can be
figured out fairly easily by applying the appropriate tax rates.
15. Profit after Taxation: This is simply profit/loss before taxation minus provision for
taxation. A part of profit after tax is usually paid out as dividend – dividend on preference
capital and dividend on equity capital.

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