Professional Documents
Culture Documents
termed as capital budgeting. Capital budgeting is the art of finding assets that are worth more than they cost, to achieve a predetermined goal i.e. optimizing the wealth of a business enterprise. The investment proposals need to be related to the underlying corporate objectives and strategies.
Kinds of Projects
Balancing Projects
Modernization Projects Replacement Projects
Expansion Projects
Diversification Projects
Classification of Projects
National and international projects Industrial and non industrial projects Project based on level of technology
- High technology projects - Conventional technology projects - low technology projects Projects based on size - large Projects - Medium Projects - Small projects
- public sector projects - private sector projects - joint sector projects Projects according to purpose - Balancing Project - Modernization Projects - Replacement/renewal projects - Expansion Projects - Diversification projects - rehabilitation ( of sick units) projects - upgradation projects - maintenance projects - Mergers and acquisition - new project
mentality
Time Schedule Parameters Mile Stone Work Package Control Activity Control
qualifications,experience,interest,etc. b) Rough estimate of project cost and promoters capacity to mobilize the necessary resources to the proposed project. c) Clear idea about market size and growth potential.
d) The availability of inputs and proximity of market for final products. e) Costinvolvedinproduction,administration,and marketing. f) Availability of technology and plant and machinery. g) Risks involved with the project.
Proximity Of Inputs Proximity Of Market Availability of Water Availability Of Transportation Availability Of Power Communication Facilities Government Policies Manpower Availability Weather and Climatic Condition Environmental Factors and Other Regulations General living Conditions
Selection of Technology
Plant Capacity
Principal Inputs Investment Outlay
SWOT Analysis
a) b) c) d)
e) f) g) h) i) j) k) l) m) n)
Internal resources Availability of funds in capital market Extent of support from banks and financial institution existing and proposed level of investments and its impact on ROI,EPS and market value of firm The business and financial risk attached to afirm Technology developed internally or possibility to obtain reliable technical know-how at cheaper cost Brand loyalty of existing proucts Source of raw material and other infrastructure facilities Market share,distribution net work Severity of competition Cost of production and managerial competence Cost of capital Governmental clearances and permissions Macro and micro economic environment in which business operates
Zero date
zero date project means a date is fixed up from which the implementation of the projects begins.The progress in implementation of the projects is monitored by taking zero date as a base for counting the time as well as cost of project. Financial closure The entrepreneur will prepare and submit a detailed project report called techno-economic feasibility report to the financial institution for obtaining term loans for project financing.on the basis of this report ,he will obtain the governmental clearances,statutory permissions.
Project visibility
the project activities starts prior to the zero date. Much of the time spent on planning the project
the total project work is broken down according to the various componenets and will establish the connection between various components is termed as work breakdown structure. Brown field project A project implemented in the precints of a working plant/working facilityis known as brown field project(BEP)
Resource levelling
Resource levelling is usage of resources during the project durationwith minimum variation in resource requirements without extending the project completion time. Project execution plan Project execution plan (PEP) refers to that exercise of matching the project hardware and software with the executing agencies through a viable work system.
d)
e)
normally branded as CAT schedule and RAT schedule. CAT schedule stands for activity target schedule'. RAT schedule stands for reserved activity target schedule. The CAT schedule is used for progressing of the executing agencies whereas the RAT schedule are those that are to be achieved. the project manager will try to maintain a distance between two schedules so that CAT schedule does not swallow the RAT schedule. A CAT schedule is detailed and developed in squared network form and RAT schedule is maintained in s curve form. The RAT schedule will contain only the key milestones whereas the CAT schedule will have all important activities.
f) The RAT schedule is based on some in built allowances for delays. This allowance is not to be disclosed to execution agencies. The RAT schedule is for taking care of all uncertainties in execution of projects. g) If the achievement of key milestones is delayed beyond the RAT schedule, then only slippage will be accepted for reporting to the financial institutions and the general public. h) The CAT and RAT schedule should be revised every time the cost estimates are revised to keep the gap of allowance.
of an order, project or program to be completed on target date. o Dates are predefined for various major activities like positioning of materials, specific contributory tasks to be accomplished, subassemblies and subprojects are to be completed. o It is useful control technique. o It is a more detailed management oriented charting technique for monitoring progress.
of the technique and functions in the various sphere of an organization with a view to exploring channels of performance improvement so that the value in a particular product can bettered. In other words it is an analytical technique, designed to examine all the facets and cost of a product, in order to determine whether or not any item of cost can be reduced or eliminated, while retaining all functional, performance and quality requirements. Value engineering may be applied in the design and development stage and concentrates mainly on reduction of direct cost of production.
assumptions as to sales,profitability,costs,investments,technical estimates, work performance ,project implementation schedules. o Risk and uncertainty involved o The risk awareness culture is to be developed at all project management team to fight against any adversaries occur in implementation of the project.
like contract management,configuaration management, time managemnt,cost,fund,materials,men and communications management. o It is prepared in such a way that interacting agencies are able to see their roles and mutual relationships as per the common goal.
implementation and within the estimated cost. o The project manger should be conversant with the different time savings and the extra cost involved with project. o The following three option are available: 1. Most efficient project 2. Scheduled plan 3. Shortest duration plan
the accumulation, monitoring and control of capital expenditure of big project consists of the following steps 1. Budget 2. Allocation of job order No./Capex No 3. Collection of cost against each Capex No 4. Control of cost 5. Proper reporting
traditional analysis involves comparison of actual costs with budgeted costs to determine the variance. Performance analysis (BUGDETED Actual) it a modern approach where analysis is done for the project as a whole projects on schedule,behind,and ahead of schedule. it indicates whether cost of a project as a whole project is as per budget
it is a technique is a technique used for administration of a project which consists of several activities having a definite interrelationship among them. Each activity identified by means of a starting event and a finishing event so that normal duration of the activity can be determined. o The project manager should decide a) Which tasks must be done first before others can be started? b) Which tasks could be done at the same time? c) Which tasks must be started as soon as possible and completed on schedule if the completion date for the entire project is to be achieved?
To ascertain the normal duration for completion of all the activities comprised in the project II. To minimize the cost of the project by proper marshalling of the resources III. To obtain the cost time trade off t
I.
Feasibility study report (pre-investment study report) Before a project investment is finalizes, the entrepreneur
will conduct a feasibility study to confirm about the techno-commercial strength of project and prepares a report called feasibility report. It contains the followings a) Study of the configuration of the project idea in all aspects b) Identifying the type and size of the project with justification c) Study of location
j) Lack of reliable technology k) Lack of flexibility l) Financial soundness of participating investors m) Unforeseen competition
d) Study of demand of products/services e) Survey of material requirement f) Project schedule g) Project cost and sources of finance h) Profitability and cash flow analysis I ) Cost benefit analysis j) Identifying and quantifying risk element k) Social costs and benefits l) Study of economic, political and legal environment
Market survey
o Before understanding any new project it is customary to
undertake a market survey. o Market survey is the other name of market research. The effectiveness of market survey depends oni. Potential buyers ii. Buyers intention iii. Cost effectiveness a) cost of identifying buyers b) buyers willingness to disclose intention c) buyers propensity to carry out their intention
institutions Reliability of contractors Hurdles from the local people near the project site Political disturbance Foreign exchange rate variation Unable to quantify the risk properly Location disadvantage Uncertainty of markets and change in consumer preferences
J) Lack of reliable technology k) Lack of flexibility l) Financial soundness of participating investors m) Unforeseen competition
Reasons for project failure the a) Substantial overrun of the project which makes
b) c) d) e) f) g) h) i)
project not feasible to implement further Changes in technology during the implementation of the project Wrongful estimation of cost of project and its profitability Lack of experienced management team Lack of delegation of authority and responsibility Lack of proper project monitoring system Failure to obtain government clearances and permissions Unfaithfulness of the promoter Lack of sufficient knowledge about the project to promoter.
Techniques for project control a) Watch and measure the achievement at short
b) c) d) e) f)
intervals Ascertain current variances and predict future variances Ascertain root cause of variances Take actions to offset the ill-effects of past variances Prevent future potential variances Track and measure the quantitative output and cost inputs
g) Evaluate targets, output and input in financial terms h) Special monitoring of essential tasks by using techniques like red lists, hotline reports to draw top managements attention. i) Introduction of incentives for good performance j) Doing away with red-tapism and bureaucratic procedures k)Periodic review meetings and taking appropriate actions
actual import content of product and F.O.B value of product b) Customs and central excise duties paid on raw material used for manufacture of export products are reimbursable c) Raw materials are supplied at controlled prices for specified export products d) Priority is accorded by railways for transport of goods meant for export
e) Export credit guarantee corporation (ECGC) offers special assistance by way of protecting from credit risk f)Insurance against loss in export of goods and services.ECGC also provides guarantee to banks and financial institutions to enable exporters to obtain better facilities from them g)Financial facilities at special concessional rates of interest are given by commercial banks h)100% foreign equity participation is allowed but the company should be an Indian company. i) Imports of capital goods/components and raw materials are exempted from import duty j) Single point clearance with simplified procedures k)Relaxations are allowed in respect of sales tax, property tax,octroi l)Tax holiday is available for 100% export oriented units
Incentives for small scale a) Small scale industries units need not obtain
b)
c)
d) e)
industrial licenses for certain category of items manufactured Number of products and services have been exclusively reserved for small scale units. Government provides comprehensive assistance to small entrepreneurs through various organizations like industries development organization. Priority and assistance is provided in allotment of land State finance corporations provides loan
since corporate tax is a very vital element, the magnitude and timing of the tax burden associated with projects should be carefully assessed. The tax incentives and benefits and tax implications have a major role to play in project investment decision.
projects will have to: be cost effective and inexpensive Have low capital base Use advanced technology suitable for Indian conditions Be safe from pollution and nuclear radiation Be energy efficient Increase speed of delivery Ensure good customer relationship management
provisions for: using non-conventional energy, natural gas and coal where possible Partial replacement keeping pace with advanced technology Utmost safety in operation Conservation of resources Good quality control Ensuring excellence of end product Strategies for staying close to the customer Sticking to the expertise-core competence
essential goods and services Safe disposal of waste Adequate environmental protection
a)
b) c)
d) e)
Economies of scale by consolidation Thrust on core business, in other words, expand the business globally where corporate has strength. Upgrading products and technologies to ensure customer satisfaction with quality and reliable products and services. Reduce product development time and cycle time to bring efficiency. Cost effective solution, cost reduction and increasing value to customers.
f) Clear understanding of customers requirement and ensuring customers loyalty on-going basis. g) Down-sizing,delayering and business process reengineering to ensure efficiency in operations to service to customers. h) Deployment of techniques like total quality management, six sigma, activity based cost management etc. i) Strategic alliance with Indian and foreign companies, joint ventures with foreign companies, start new business or restore existing business.
Micro and Macro Considerations At National level At Sectorial level At Project level Macro considerations at national level a) Overall growth of all sectors b) Allocation of resources between sectors c) Boost up private and public sector d) Allocate the scarce resources e) Controlling fiscal, monetary framework f) Maintaining wage policy, exchange rate and
Micro considerations at sectorial level a) Ensuring the investment plan b) Ensuring a balance in implementation of multiple
c)
d)
e)
f)
projects New projects should be kept waiting Rational decisions should be made on the basis of past experience. Cost benefit analysis The investment plan should able bifurcate expense in core and non core projects.
bureaucratic delays Securing necessary approvals Failure to plan on important resources Evaluation stage Better evaluation Find lackings Wrong selection of project Wrong economic studies
choice of technology
availability by supplier Delay in completing engineering Improper scrutiny Contracting and procurement Improper preparation of tender documents Wrong selection of vendors More time consumption on importing material Absence of proper quality
e) Poor logistic planning construction stage a) Starting construction activities without proper planning b) Low productivity of contractors Commissioning and start up a) Delays in making available manuals b) Failure of equipments c) Defects in installation
master schedule/milestone network/master budget Time and resources schedule Procurement time schedule calendar time construction work schedule scheduling of contracting Crashing economic analysis Progress report Fund flow analysis etc
It is more sophisticated technique recently introduced in long term decision making in capital projects appraisal. It is defined as an analytical tool in decision making which enables a systematic comparison to be made between the estimated cost of undertaking of project and the estimated value and benefits which may arise from the operation of such a project.
CBA and investment decisions The concept of NPV may not be regarded as entirely
appropriate. CBA is essentially discounted cash flow analysis for public sector institutions. For a business assessing a project such comparison with the other investment opportunities currently available. The only factor which will influence the decision will be those costs and benefit incurred and received privately by the firm From society point of view road building has effects in the community which confer both costs and benefits on society as a whole e.g. increased traffic may create pollution of air and at the same time create jobs in the area around road
undertaken b) Which of the possible alternative projects should be selected c) Which time cycle would be most beneficial to the project.
CBA Procedure
1. Determine problem to be considered 2. Ascertain alternative solutions to problem 3. Estimate and analyze costs and benefits 4. Appraise estimated costs and benefits 5. Decide on optimal solution
Techniques of CBA a) Discounted cash flow techniques - Net present value(NPV) - Internal rate of return(IRR) b) Benefit/cost comparison c) Benefit/cost ratio
Benefits of CBA
1. 2. 3. 4. 1. 2. 3. 4.
Ensure value of money Social cost and benefits Protection from potential enemy Good health Limitations of CBA Inaccuracy in data input Difficult to forecast Difficult to quantify Difficulty in determining value of cost and benefits
Social cost benefit analysis social cost' is a sacrifice or detriment to society. social benefit is a compensation made to the society
in the form of increase in per capita income, employment opportunities,etc. Social cost benefit analysis (SCBA) is a systematic evaluation of an organizations social performance as distinguished from its economic performance. It is concerned with the possible influences on the social quality of life instead of economic quality of life. It is used to determine a) Which alternative or choice is socially viable b) Which alternative is the optimal or the best solution.
developing countries govt on development projects, the social cost benefit analysis has received increasing emphasis. To eliminate the trade offs between growth and equity, investment projects are divided into a) Capital intensive industrial project b) Infrastructure investments c) Agriculture and rural development projects Economic Rate of Return Domestic Resource Cost Effective Rate of Protection