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REPLACEMENT ANALYSIS
WHAT IS A PROJECT
HOW DO WE DEFINE A PROJECT
In economic sense, a Project is an activity which is under taken to
generate additional production and resources of an economy.
A project is defined as one time major activity demanding the
commitment of varied skills and resources to achieve a specific
goal.
Project includes both setting up of a new unit or substantial
expansion of existing units of production.
Project is thus a combination of human and non-human resources
integrated together in a time bound temporary organization to
achieve a specific objective.
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CHARACTERISTICS OF A PROJECT:
1.
Project is a one time activity which will never be repeated in exactly the same manner.
2.
A project has a definite start and finish i.e., a project is executed in a definite time bound schedule.
3.
A project demands the investment (current outlay) and the benefits are spread for a number of future periods.
4.
A project has a definable goals or end results that can be defined in terms of cost, schedule and performance
requirements.
5.
Once the project goals are achieved, the project team will be either disbanded or re-constituted for another new project.
6.
Project passes through several distinct activities which constitute a project life cycle.
PROJECT IDENTIFICATION:
An entrepreneur has a wide choice of projects. The various
aspects of the choice of the project include:
1. The product
2. Market
3. Technology
4. Equipment
5. Scale of Production
6. Time of phasing, and
7. Location
The selection of the project involves a detailed analysis of the
environment in which it operates.
Both objective as well as subjective analysis of various factors
have an influence on the selection of a project.
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SWOT ANALYSIS
It is a strategic planning method used to evaluate the Strengths,
Weaknesses, Opportunities and Threats involved in a project or
in business ventures:
1. Strengths: Characteristics of business or team that give it an
advantage over others in industry.
2. Weaknesses: Are the characteristics that place the firm at a
disadvantage relative to others.
3. Opportunities: External chances that make greater sales or profits
in the environment.
4. Threats: External elements in the environment that could cause
trouble for the business.
PROJECT FEASABILITY:
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Market Feasibility
Demand pattern for the
product & market
share of proposed product
Economic Feasibility
Cost Benefit Ratio,
Social Cost Benefit
analysis
PROJECT
FEASABILITY
Technical Feasibility
Production Technology ,
process selection.
capacity of plant,
location, layout selection
of plant & machinery
Financial Feasibility
Cost of project & means
of finance. Profitability, cash
flows and risk analysis
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PROJECT FEASABILITY:
MARKET FEASABILITY ( Appraisal):
1. Marketing appraisal is concerned with determination of the aggregate
demand for the proposed product, and market share of the project
under appraisal it is going to capture.
2. If there is no significant demand (exists) and there is no positive sign
of increasing trend, then the projects market feasibility does not exist.
3. Hence there is no point in continuation of the project.
TECHNICAL FEASABILITY ( Appraisal):
1. Technical & engineering analysis of the proposed project is done
continually when the project is formulated.
2. Technical appraisal seeks to determine whether the pre-requisite for the
successful commissioning of the project have been considered and
reasonably good choices have been made with respect to location, size,
and processes, etc.
3. It also helps to locate sources of suppliers of raw materials and fixing up
of the final cost of the project.
(cont.)
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TYPES OF INVESTMENT
(CAPITAL INVESTMENT)
(CAPITAL FINANCING)
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BOND RETIREMENT:
1. Bonds represent debt. It has to be repaid in the following
manner:
(a) Interest on them has to be paid periodically
(b) When the bonds become due the principal amount
must be repaid to the bondholder.
2. For this, normally, a systematic program is adopted for
repayment of a bond when it becomes due.
3. Normally, a corporation periodically sets aside definite sums
of money, that with the interest they earn, will accumulate to
the amount needed to retire the bonds at the time they
become due.
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Div
Po
When the future price of the share is assumed to grow at a rate of g
( expressed as a decimal) each year, the return of the equity can be
approximated as:
ea = Div + g
Po
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PREFERRED STOCK:
Preferred stock owners have certain additional privileges & restrictions
not available to the holder of common stock holder.
These are:
1. Preferred stock owners are guaranteed a dividend on their stock
(usually a % of its par value), before the holders of the common
stock may receive any return.
2. In case of dissolution of the corporation, the assets may be used to
satisfy the claims of the preferred stock holders, before those of
common stock holders.
3. Preferred stock holders may have voting rights also.
4. Selection to Board of Directors, if dividends are not paid for a
certain period.
5. Dividend rate is fixed. In many areas it is like long term bonds.
Market value is less likely to fluctuate.
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END OF LECTURE
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