Projects Chp1

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Projects

Planning, Analysis, Financing, Implementation and Review


Projects
Planning, Analysis, Financing, Implementation and Review

Part 1: Planning
Chapter 1: Overview
Chapter 2: Capital Allocation Framework
Chapter 3: Generating and Screening of Project Ideas

Part 1I: Analysis


Chapter 4: Market and Demand Analysis
Chapter 5: Technical Analysis
Chapter 6: Financial Estimates and Projections
Projects
Planning, Analysis, Financing, Implementation and Review

Part III: Selection: Basic Techniques


Chapter 7: The Time Value of Money
Chapter 8: Investment Criteria
Chapter 9: Project Cash Flows
Chapter 10: The Cost of Capital

Part IV: Selection: Advanced Techniques


Chapter 15: Multiple Projects and Constraints

Part V: Financing
Chapter 18: Financing of Projects
Projects
Planning, Analysis, Financing, Implementation and Review

Part 1: Planning
Chapter 1: Overview
Chapter 2: Capital Allocation Framework
Chapter 3: Generating and Screening of Project Ideas
Overview
1.1 Capital Investments: Importance and Difficulties

Capital Expenditure, Investment an Budgeting:


An expenditure which is shown as an asset in the balance sheet.
A budget, a collection of predictions, involving a current outlay (or current
and future outlays) of funds in the expectation of a stream of benefits
existing far into the future.
Overview
1.1 Capital Investments: Importance and Difficulties

Capital Expenditure, Investment an Budgeting:


Process through which different projects are evaluated.

It is the firms formal process for the acquisition and investment of


capital. It involves firm’s decision to invest its current funds for addition,
disposition, modification and replacement of fixed assets.

It is long term planning for making and financing proposed capital


outlays.
Charles T. Horngreen
Overview
1.1 Capital Investments: Importance and Difficulties

Importance:
Long Term Effects
Irreversibility
Substantial Outlays

Difficulties:
Measurement Problems
Uncertainty
Temporal Spread
Overview
1.2 Types of Capital Investments

Physical Land, building, plant. Machinery, vehicle

Monetary Deposits, bonds, equity shares

Intangible R& D, training, market development,


franchises
Overview
1.2 Types of Capital Investments

Strategic Has a significant impact on direction of the


firm
Tactical To implement a current strategy
Overview
1.2 Types of Capital Investments

Mandatory Statutory, regulatory health & safety


requirement
Replacement Replace worn out equipment

Expansion Increase the capacity

Diversification Produce new products/services

R&D Develop new product / processes

Miscellaneous Catch all category


Overview
1.3 Phases of Capital Budgeting

Planning

Analysis

Selection

Financing

Implementation

Review
Overview
1.3 Phases of Capital Budgeting

Planning

Project proposals cannot be generated in isolation. They have to fit with


corporate goals, its vision, mission and strategic plan.

A profitable investment plan is not just born, someone has to suggest


it.The firm should ensure that it has searched and identified potentially
lucrative opportunities and proposals.
Overview
1.3 Phases of Capital Budgeting

Analysis

After preliminary screening, detailed analysis of marketing, technical,


financial, economic, and ecological aspects is undertaken.
Overview
1.3 Phases of Capital Budgeting

Selection

Is the project worthwhile?


Overview
1.3 Phases of Capital Budgeting

Selection

Criterion Accept Reject


Payback Period PBP < target period PBP > target period

Accounting Rate ARR > target rate ARR < target rate
of Return
Net Present Value NPV > 0 NPV < 0

Internal Rate of IRR > cost of capital IRR < cost of capital
Return
Benefit Cost Ratio BCR > 1 BCR < 1
Overview
1.3 Phases of Capital Budgeting

Financing

Debt or equity financing?


Overview
1.3 Phases of Capital Budgeting

Implementation

Project and engineering design


Negotiations and contracting
Construction
Training
Plant commissioning
Overview
1.3 Phases of Capital Budgeting

Review
Overview
1.4 Levels of Decision Making

Operating Administrative Strategic

Where is the Lower level Middle level Top level


decision taken?
How structured Routine Semi-structured Unstructured
is the decision?
What is the level Minor Moderate Major
of resource
commitment?
What is the time Short-term Medium-term Long-term
horizon?
Overview
1.4 Levels of Decision Making

Capital budgeting decision

Operating Minor office equipment

Administrative Balancing equipment

Strategic Diversification project


Overview
1.4 Facets of Project Analysis

Market analysis
Technical Analysis
Financial Analysis
Economic Analysis
Ecological Analysis
Overview
1.4 Facets of Project Analysis
Key Issues in Project Analysis

Potential Market
Market Analysis
Market Share
Technical Viability
Technical Analysis
Sensible Choices
Risk
Financial Analysis
Return
Benefits and Costs in Shadow Prices
Economic Analysis
Other Impacts
Environmental Damage
Ecological Analysis
Restoration Damage
Overview
1.5 Feasibility Study: A Schematic Diagram
Generation of Ideas

Initial Screening

Is the idea Prima Facie Promising?


Yes No
Pre Feasibility Analysis
Terminate

Market Analysis Technical Analysis

Economic and Ecological Analysis

Is the Project Worthwhile?


Yes No
Prepare Funding Proposal
Terminate
Overview
1.7 Objectives of Capital Budgeting

Alternatives
Other Concerns of the Business
Basic Considerations: Risk and Return
Overview
1.8 Common Weaknesses in Capital Budgeting

Poor Alignment between Strategy and Capital Budgeting


Deficiencies in Analytical Techniques
No Linkage between Compensation and Financial
Measures
Reverse Financial Engineering
Weak Integration between Capital Budgeting and Expense
Budgeting
Inadequate Post Audits
Overview
1.8 Common Weaknesses in Capital Budgeting

Deficiencies in Analytical Techniques

The Base Case is Poorly Identified


Risk is Treated Inadequately
Options are Not Properly Evaluated
There is Lack of Uniformity in Assumptions
Side Effects are Ignored

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