Welcome To The Project Appraisal and Finance by DR R Soundara Rajan

Welcome to the
Project Appraisal and finance by Dr R Soundara Rajan

BE(Hons),AICWA,ACS,MBA,PGDCA, PGDSADP, TICK IT,CQA, Mphil, PhD
Lecture-1
1.
Learning Objectives:
Understand the issues in project selection and basic
requirement for planning the project

2.
Outline teaching schedule:
Overview of project and project Planning Capital investment importance and difficulties Facet of project analysis Key issues in major investment decisions
3.
Assessment criteria
Explain the issues in capital investment and planning process of a project
Success comes after hard work
Capital Investments : Importance and Difficulties

Importance
Importance Long term effects Irreversibility Substantial outlays- integrated steel plant requires several thousand crores
Difficulties
Measurement problems Uncertainty- Impossible to predict what will happen in future Temporal spread- cost and benefit spread over 10-20 years
Types of Investments
Mandatory Investments Statutory like pollution control, fire fighting
Replacement investments- replace worn out equipment
Expansion investmentsincrease capacity
Diversification investments- new products
R & D investmentsdevelop new products and process
Miscellaneous investmentsinterior decoration, landscape gardens
Capital Budgeting Process

Planning-Strategy, screening, feasibility, viability etc.
Analysis- marketing, technical, financial, economic and ecological
Selection Project worthwhile?- Apply Payback, ARR, NPV, IRR, BCR
Financing- Equity, debt
Implementation- Engineering design, Contract, Constructions, Training, Commissioning
Review- Actual performance with projected performance
Levels of Decision Making

Operating decisions
Administrative decisions
Middle level management Semi-structured
Strategic decisions
Top level management Unstructured
Where is the decision taken
Lower level management Routine
How structured is the decision
What is the level of resource commitment
Minor resource commitment
Moderate resource commitment
Major resource commitment
What is the time horizon
Short-term
Medium-term
Long-term
Key Issues in Project Analysis

Potential Market
Market Analysis
Market Share Technical Viability
Technical Analysis
Sensible Choices Risk
Financial Analysis Economic Analysis Ecological Analysis

Restoration Measures Return Benefits and Costs in Shadow Prices Other Impacts Environmental Damage
Feasibility Study : A Schematic Diagram

P
Generation of Ideas Initial Screening
r
e l i m i n a r y
Is the Idea Prima Facie Promising Yes Plan Feasibility Analysis Terminate Conduct Market Analysis Conduct Technical Analysis No
W o r k
Conduct Financial Analysis

E v a
A n a
Conduct Economic and Ecological Analysis Is the Project Worthwhile ? Yes Prepare Funding Proposal No Terminate
l
u a t i o n
l
y s i s
Key issues in major Investment Decisions

Investment story- Firms enjoys comparative advantage visa vis its competitors- positive NPV Risks- Risk associated and ability to handle DCF Value- NPV, IRR Financing- Financing Mix
Objective of Capital Budgeting

Finance theory rests on the premise that managers should manage their firms resources with the objective of enhancing the firms market value. This goal has been eloquently defended by distinguished finance scholars, economists, and practitioners.
The quest for value drives scarce resources to their most productive uses and their most efficient users. The more effectively resources are deployed, the more robust will be the economic growth and the rate of improvement in our standard of living.
Basic Considerations : Risk and Return
Investment decisions
Return Market value of the firm
Financing decisions
Risk
Common Weaknesses in Capital Budgeting

Poor alignment between strategy and capital budgeting
Deficiencies in analytical techniques Poor identification of base case
Inadequate treatment of risk

Improper evaluation of options Lack of uniformity in assumptions
Neglect of side effects

No linkage between compensation and financial measures Reverse financial engineering
Weak integration between capital budgeting and expense budgeting

Inadequate post - audits
SUMMING UP
1.
Essentially a capital project represents a scheme for investing resources that can be analyzed and appraised reasonably independently. The basic characteristic of a capital project is that it typically involves a current outlay (or current and future outlays) of funds in the expectation of a stream of benefits extending far into the future. Capital expenditure decisions often represent the most important decisions taken by a firm. Their importance stems from three inter-related reasons: long-term effects, irreversibility, and substantial outlays. While capital expenditure decisions are extremely important, they pose difficulties which stem from three principal sources: measurement problems, uncertainty, and temporal spread. Capital budgeting is a complex process which may be divided into six broad phases: planning, analysis, selection, financing, implementation and review.
2.
3.
4.
5.
6.
One can look at capital budgeting decisions at three levels: operating, administrative, and strategic. The important facets of project analysis are: market analysis, technical analysis, financial analysis, economic analysis, and ecological analysis. Financial theory, in general, rests on the premise that the goal of financial management should be to maximize the present wealth of the firms equity shareholders. Business firms may pursue other goals. When these other goals conflict with the goal of maximizing the wealth of equity shareholders, the trade-off has to be understood. The common weaknesses found in capital budgeting systems in practice are:
I. II. III. IV. V. VI.
7.
8.
9.
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.
Oh may divine protect us both, the teacher and the disciple. May he nourish us both. May we work together with great energy. May our study be vigourous and fruitful. May we not hate each other

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Welcome To The Project Appraisal and Finance by DR R Soundara Rajan

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Welcome to the

Project Appraisal and finance by Dr R Soundara Rajan

requirement for planning the project

Outline teaching schedule:

Success comes after hard work

Capital Investments : Importance and Difficulties

Replacement investments- replace worn out equipment

Expansion investmentsincrease capacity

Diversification investments- new products

R & D investmentsdevelop new products and process

Miscellaneous investmentsinterior decoration, landscape gardens

Capital Budgeting Process

Analysis- marketing, technical, financial, economic and ecological

Selection Project worthwhile?- Apply Payback, ARR, NPV, IRR, BCR

Financing- Equity, debt

Implementation- Engineering design, Contract, Constructions, Training, Commissioning

Review- Actual performance with projected performance

Levels of Decision Making

Where is the decision taken

Lower level management Routine

How structured is the decision

What is the level of resource commitment

Minor resource commitment

Moderate resource commitment

Major resource commitment

What is the time horizon

Key Issues in Project Analysis

Financial Analysis Economic Analysis Ecological Analysis

Feasibility Study : A Schematic Diagram

Generation of Ideas Initial Screening

Conduct Financial Analysis

Key issues in major Investment Decisions

Objective of Capital Budgeting

Basic Considerations : Risk and Return

Return Market value of the firm

Common Weaknesses in Capital Budgeting

Inadequate treatment of risk

Neglect of side effects

Weak integration between capital budgeting and expense budgeting

poor alignment between strategy and capital budgeting;

deficiencies in analytical techniques;

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