PROJECT APPRAISAL & MARKETING MANAGEMENT

Presented by:

Gupta Jai Khanna Sumit Takkar Prachi Taneja Shresht Badola Vidit Chawla

Prateek

CONCEPT OF PROJECT APPRAISAL

It is the analysis of costs and benefits of a proposed project with the goal of assuring a rational allocation of limited funds among alternatives investment opportunities in view of achieving certain specified goals. It is ex-ante analysis. It identifies and values the expected costs and benefits of a project. Project evaluation is ex-post analysis of an executed project.

METHODS OF PROJECT APPRAISAL

Payback Period Average Rate of Return Net Present Value Benefit-cost Ratio Internal Rate of Return

Apart from these a public sector project is appraised employing Social Cost Benefit Analysis so as to highlight its significance to nations economy or society.

CASH FLOWS AS COSTS AND BENEFITS

Generally the resources committed to an investment proposal are referred to as its costs and gain or income derived from it over a future period as benefits. Costs are cash outflows and benefits are cash inflows.

PAY BACK PERIOD

The payback period is the length of time required to recover the initial cash outlay on the project.

Forex: If a project involves a cash outlay of Rs 200000 and the annual cash inflows are Rs. 50000, Rs.80000, Rs 60000 and Rs 40000 during its economic life of four years , the payback period is 3.25yrs. During 3 yrs and the three months , the project cost can be recovered with the cash inflows. Hence it is the payback period. If the above mentioned project return constant annual cash inflows of Rs 80000 for four years then the payback period is 2.5yrs (Rs 200000/ Rs 80000). Formula Original cost of Investment Payback Period = Annual cash inflows

SELECTION CRITERIA

Among the mutually exclusive or alternative projects whose PBs are lower than the cutoff period, the project with the shorter PB would be selected. For payback period of 4yrs the payback ratio is . Thus larger the payback ratio, better the project.

SUITABILITY
1 When the project has shorter gestation period and the project cost is small. 2 When a firm suffers from shortage of cash and depends on internal generation of cash. 3 It also suitable when the project belongs to high risk category. 4 Suitable for deciding upon overseas investments when there is political uncertainty in such countries.

MERITS
1 It is easy to operate and simple to understand. 2 This method is preferred on the ground that returns beyond three or four years are so uncertain that it is better to disregard them altogether in a planning decisions. 3 This method is also useful to a concern which is short of cash and is eager to get back the cash invested in a capital expenditure project. 4 The results comparatively more accurate.

DEMERITS
1 It does not consider the earnings beyond the payback period. 2 This method is that it ignores the time value of money.

NET PRESENT VALUE METHOD

EXAMPLE
An investment proposal requires an investment of Rs.50000 in the beginning and another cash outflow of Rs.30000 after 3 years. The projected cash inflows from the proposal are as follows: Year1 Rs.24000 Year2 Rs.32000 Year4 Rs.48000 Year5 Rs.32000 The desired rate of return is 10%.

SOLUTION
Year 0 Cash Flows -50000 PVF @ 10% 1.000 PV of Cash Flows -50000

1
2 3

24000
32000 -30000

0.909
0.826 0.751

21816
26432 -22530

4
5

48000
32000

0.683
0.621 NPV =

32784
19872 28374

DECISION RULE
Accept

the proposal if the NPV is positive and reject the proposal if the NPV is negative. case of Accept-Reject situation, all proposals which have positive NPV are qualified for being accepted. case of ranking of mutually exclusive proposals, the proposal with the highest positive NPV is given top priority and the proposal with the lowest positive NPV is given the lowest priority.

In

In

MERITS
NPV

criterion automatically allows for the recovery of the initial investment. method recognizes the time value of money and considers all cash flows over the entire economic life of the project. is consistent with the objective of maximizing the welfare of the owners.

NPV

It

DEMERITS

NPV method is difficult to use. Selection of a discount rate.

Under the NPV criterion, profitability is not related to the capital required.

BENEFIT/COST RATIO (BCR)

BCR is the ratio of gross discounted benefits to gross discounted costs. This method may be an extension of NPV and expressed in coefficient or in percentage. Another name of BCR is Profitability Index (PI). Symbolically, this could be expressed as follows: BCR = B/C *100 where, B = gross discounted benefits, and C = gross discounted cost

Salient feature of BCR is that it can explain the NPV position of an investment, i.e. if BCR = 1, then NPV is zero if BCR > 1, then NPV is positive if BCR < 1, then NPV is negative BCR is particularly useful in ranking the projects on the basis of their profitability.

AVERAGE RATE OF RETURN METHOD(ARR)

It

is also Known as Return on Investment Method.

on investment is the ratio of earnings after depreciation to original cost of investment.
Average earnings or return

Return

ARR =

--------------------------------------------------------------------------------------------------------------------

* 100

Average amount invested

EXAMPLE
Calculate the average rate of return for project A and B from the following Particulars Project A Project B information
Investment (Rs) Expected life (in years) Net earnings (after depreciation and taxes) Years 1 2 3 4 5 Total 25000 4 37000 5

2500 1875 1875 1250

3750 3750 2500 1250 1250 12500

7500

If the desired rate of return is 12%, which project should be selected? Solution:
Particulars Project A (in Rs) 7500/4 = 1875 Project B (in Rs) 12500/5 =2500 (37500 + 0)/2 = 18750

Average Return

Average Investment

(25000 + 0)/2 = 12500

(1875 * 100)/12500
Average Rate of return = 15%

(2500* 100) / 18750 = 13.33%

DECISION RULE

A project with the highest rate of return on investment is selected on condition that such rate is above the standard rate set, or the cut-off rate.
Risk and inflation could be provided for by adding a certain percentage to the desired rate of return.

MERITS OF ARR METHOD

Easy

to understand and simple to operate

Takes into account earnings over the entire economic life of the project This is really a profitability concept since it considers net earnings after depreciation.

DEMERITS OF ARR METHOD

It

ignores time value of money

Another problem is regarding reasonable rate of return on investments

INTERNAL RATE OF RETURN (IRR)

DEFINATION
IRR is defined as that rate of interest when used to discount the cash flows of an investment, reduce its NPV to zero i.e. where the present value of inflows equates with the present value of outflows

FORMULA

Net Present Value = Cash inflow x PVAF % , n Cash outflow Or CF0 X PVF % , n + CF1 X PVF % , n +.....+ CFn x PVF % , n Cash outflow
IRR = L + A/A-B (H-L) (INTERPOLATION) L = Lower discount rate where NPV is +ve H = Higher discount rate where NPV is -ve A = NPV at lower discount rate B = NPV at higher discount rate

YEAR

CASH FLOWS

PVF of 22%

PVF of 24%

1
2 3 4 5

11,000
15,000 20,000 16,000 8,000

0.820
0.672 0.551 0.451 0.370

0.806
0.650 0.524 0.423 0.341

OUTFLOW = RS. 40000

MERITS

Recognises TVM and consider cash flows over the entire life of the project. Psychological appeal to the use as it is expressed in % form. Unlike NPV, the discount rate (COC) is not required in this method

Focuses on firms objective of maximizing the owners wealth.

DEMERITS
Involves problems complicated computation

It assumes that the reinvestment rate of cash flows is at IRR which may be different for different projects considered by a firm.
It may yield inconsistent results with NPV if the projects differ in their expected lives, or cash flows, or timing of cash flows.

TYPES OF RISKS INVOLVED

Risks related to errors in forecasting

Risks related enterprise

to

factors

external

to

the

OVERRUN ANALYSIS

Overrun means forward slippage in time and/or cost. So, it is of two types:

Time overrun
Cost overrun

IMPLICATIONS OF OVERRUNS
Macro level Implications :Stunted economic growth Drain on public exchequer Difficulty in discharging social obligations Inflationary reaction

Micro level Implications :Financing additional costs Reduced financial soundness Increased cost of production Industrial Sickness

MARKETING MANAGEMENT & ENTREPRENEUR

MARKETING DEFINED
Marketing is the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives. -----American Marketing Association

Marketing

is the link between you and your customers

Achieved by creating, developing and maintaining profitable relationships between customers and your company.
A marketers job is to understand, influence and serve people.

PASSIO

CHARACTERSTICS OF PASSIO
LIMITED SMALL

RESOURCES

SIZE

NEWNESS

CHARACTERSTICS OF ENTREPRENURIAL MARKETING

Proactive orientation Innovativeness Customer focus Opportunity focus Risk management Value creation

Market Research
Field survey Systematic Observation Focus groups Secondary sources

Forecasting Demand
Define the total market

Divide total demand into distinct market segments Forecast drivers of demand in each segment Match with own product to come up with possible sales of own product in that segment Total the forecasted sales in the segments that can be profitably targeted

MARKET SEGMENTATION

We promise our customer to deliver, reliable and stylish jeans ware. Focusing mainly on youth. Products meeting market demand. High qualitaty products.

Geographic: METRO CITIES SEMI URBAN CITIES

Demographic: age15-35 years Family sizeyoung, married Gendermale, female Incomemiddle & upper middle EducationDOSENT MATTER

Behavioral: Occasionsregular, freshers, farewell Benefitsquality, service

POSITIONING

Positioning our offerings so the target market recognizes the companys distinctive offer and image. Our brand is PASSIO and target customers are lifestyle oriented youth. Benefitscomfort & style

Attractiveness of a Segment
Is the product able to deliver the value sought by a segment, better than the competition? Can the segment be easily identified? Is the segment big enough in terms of potential revenue? How easy is it to reach the segment with the positioning communication and with the product?

MARKETING MIX
A planned mix of the controllable elements of a product's marketing plan commonly termed as 4Ps: product, price, place, and promotion. These four elements are adjusted until the right combination is found that serves the needs of the product's customers, while generating optimum income.

PRODUCT

A product is seen as an item that satisfies what a consumer needs or wants. It is a tangible good or an intangible service. Product-Mix involves planning, devloping & producing the right type of the products marketed by the firm. It deals with product range, durablity & other qualities Emphasis should also be laid on branding, packaging, color, & other featurs.

PRICE

Pricing Considerations
Assess what value customers place on the product. Look for variations in the way customers value the product. Identify a pricing structure. Consider competitors reactions. Monitor realised prices. Assess customers emotional response to prices.

OUR PRICING STRATAGEY

VALUE PRICING

PLACE

Place is synonymous
with distribution. It refers to providing the product at a place which is convenient for consumers to access.

This includes the actual place it is purchased (the shop, the telephone, the web page, the warehouse) as well as the actual route of distribution.

Distribution Alternatives Go directly to the consumer Go directly to the retailer: bypass distributor

Use sales agents

Participate in establisher channel structure Set up your own intermediaries

TYPES OF CHANNEL CHOSEN

COMPANY FACTORY

RETAILER

PROMOTION

A business' total marketing communications programme is called the "promotional mix" and consists of a blend of advertising, personal selling, sales promotion and public relations tools.

Our promotional objectives:

sales increases new product acceptance

creation of brand equity

Positioning creation of a corporate image.

GOVERNMENT ASSISTANCE IN MARKETING OF GOODS OF SMALL SCALE INDUSTRIES

Provide assistance in marketing through National Small Industries Corporation by providing an umbrella branding. Encouraging top quality standards and ISO 9000 certification.

Setting up Technology Up-gradation Funds.

The Marketing Development Assistance (MDA) was established to help SSI in 2001. The Purchase Preference Scheme was launched to provide priority to small business units during departmental purchases of the government.