Date post: | 18-Nov-2014 |
Category: |
Technology |
Upload: | dmkanchepalya |
View: | 4,021 times |
Download: | 5 times |
Module 1
This module gives an overview of project planning and analysis, and capital budgeting. It is divided into five sections, namely
Capital expenditures: importance and difficulties
Phases of capital budgeting Generation and screening of project ideas Facets of project analysis Resource allocation framework
Capital expenditure are those expenditure which are capital in nature
The following are the importance of capital expenditure:
They have long term effect Irreversible in nature Substantial outlays involved
The following are the difficulty involved in capital expenditure decisions:
o Measurement problems
o Uncertainty
o Temporal spread
Capital budgeting is a complex process which may be divided into five phases:
Planning
Analysis
Selection
Implementation
Review
Planning
Articulation of firms broad investment strategy
type of investment
identification of individual project opportunities
Generation and screening of project proposals
Prima facie worthwhile to justify feasibility study
what aspects of project are critical to study
Analysis
A detailed analysis of the marketing, technical, financial, economical, and ecological aspects
Focuses on gathering, preparing and summarizing relevant information
The stream of cost and benefits can be defined
Selection
Is the project worthwhile? Wide range of appraisal criteria is
used to judge the worthiness of a project
Such criteria are divided into non-discounting and discounting technique
Implementation
Refers to conversion of blue print into reality In case of industrial project, implementation involves setting
of manufacturing facilities Project and engineering design Negotiations and contracting Construction Training Plant commissioning (starting up the plant) Translating an investment proposal into a concrete project is
a complex, time-consuming and risky task For expeditious implementation at a reasonable cost, the
following are helpful: Adequate formulation of Project Use of the principles of Responsibility Accounting Use of Network Techniques
Review
Performance review should be done periodically to compare actual performance with the projected performance
Feedback device is useful in in several way: how realistic were the assumptions
provides a documented log of experience that is
highly valuable in future decision making suggests corrective action to be taken in the light of
actual performance helps in uncovering judgemental biases induces a desired caution among project sponsors
Generation and screening of project ideas
Generation of ideas Monitoring the environment Corporate appraisal Scouting for project ideas Preliminary screening
Generation of project ideas
The search of promising ideas is the 1st step towards establishing a successful venture
The key success of any venture is getting the right idea at right time
Identification of such opportunities requires imagination, sensitivity to environmental changes, and realistic assessment of what the firm can do
significant technological breakthroughs, combining existing fields of technology or offering variants of present products or services, periodic SOWT analysis, fostering conductive organizational climate to tap the creativity of employee facilitates the generation of ideas
Monitoring the Environment
Promising investment idea enables a firm/entrepreneur to exploit opportunities in the environment
For the purpose of monitoring, business environment may be divided into:
1. Economic sector 2. Governmental sector 3. Technological sector 4. Socio-demographic sector 5. Competition 6. Supplier sector
Economic sector
State of the economy Overall rate of growth Cyclical fluctuations Inflation rate Linkage with the world economy Trade surplus/deficits Balance of payment situation
Governmental sector
Industrial policy Government programmes and projects Tax framework Subsidies, incentives and concessions Import and export policies Financing norms Lending conditions of financial institutions and commercial banks
Technological sector
Emergence of new technologies Access to technical know-how,
foreign as well as indigenous Receptiveness on the part of
industry
Socio-demographic sector
Population trends Age shifts in population Income distribution Educational profile Employment of women Attitude towards consumption and
investment
Competition
Number of firms in the industry and their market share (of the top five or four)
Degree of homogeneity and differentiation among products
Entry barriers Comparison with substitutes Marketing policies and practices
Supplier sector
Availability and costs of raw-materials and sub-assemblies
Availability and costs energy Availability and costs of money
Corporate appraisal
A realistic appraisal of corporate strengths and weakness is essential for identification of investment opportunities which can be profitably exploited
The broad areas of corporate appraisals are:
1. Marketing and Distribution 2. Production and Operations 3. Research and Development 4. Corporate Resources and Personnel 5. Finance and Accounting
Marketing and Distribution
Market image Product line Market share Distribution network Customer loyalty Marketing and distribution costs
Production and Operations
Condition and capacity of plant and machinery
Availability of raw materials, sub-assemblies, and power
Degree of vertical integration Locational advantage Cost structure
Research and Development
Research facilities, laboratories and equipment, modeling and testing facilities
Capability of the firm to invest in R&D Presence of well known researchers and
scientists Track record of new product
developments Coordination between research and
operations
Corporate resources and personnel
Corporate image Clout with governmental and
regulatory agencies Dynamism of top management Competence and commitment of
employees State of industrial relations
Finance and Accounting
Financial leverage and borrowing capacity
Cost of capital Tax situation Relations with shareholders and
creditors Accounting and control system
cash flows and liquidity
Scouting for project ideas
Project managers perform numerous activities to generate more and more project ideas
Some suggestions are: Analyze the performance of existing industries Observe the inputs and outputs of various industries Analysis of Exports and Imports Study plan outlays and Government guidelines look at the suggestions of Financial and Development
agencies Study social and economic trends Study new technological developments Explore the possibility of reviving sick units Identify unfulfilled psychological needs Attend trade fairs
Preliminary Screening
After a pool of ideas are generated the project manager starts to screen them initially
Some kind of preliminary screening is required to eliminate ideas which prima facie are not promising
Preliminary screening is a process of rejection rather than a process of selection
The following aspects may be looked into: Compatibility with the promoter Consistency with Government Priorities Availability of inputs Adequacy of market demand Reasonableness of cost Acceptable risk level
Compatibility with the Promoter
Project idea must be compatible with the interest, personality and resources of entrepreneur
According to Murphy, a real opportunity has three characteristics:
1. It fits the personality of the entrepreneur
3. It is accessible to him 2. It offers him the prospect of rapid
growth and high return on invested capital
Consistency with Government Priorities
The project ideas must be feasible given the national goals and government regulatory framework
The following question may raised in this context: Is the project consistent with national goals and
priorities? Are there any environmental effects contrary to
governmental regulations? Can the foreign exchange requirements of the
project be easily accommodated? Will there be any difficulty in obtaining the
license for the project?
Availability of Inputs
The following questions are needed to be answered:
Are the capital requirements of the project within manageable limits?
Can the technical know-how required for the project be obtained?
Are the raw materials required for the project available domestically at a reasonable cost? If the raw materials have to be imported, will there be problems?
Is the power supply for the project reasonably obtained from external sources and captive power sources?
Acceptability of Risk level
A project is critically dependent on the risk characterizing it
The assessment of risk is a difficult task, and the following factors should be considered:
Vulnerability to business cycle Technological changes Competition from substitutes Competition from imports Governmental control over price and
distribution
Project Rating Index
Is an evaluation method that helps management to carry out the process of preliminary screening
In this method, management identifies factors for rating projects and assigns a weight to each factor. The projects are then measured against these factors and assigned a score. If the project gets the score below the desired value the project is rejected.
Construction of Rating Index
Factors Factor Weight
Rating FactorScoreVG-5 G-4 A-3 P-2 VP-1
Technical know-how
0.25 √ 0.75
Adequacy of market 0.15 √ 0.45
Input Availability 0.10 √ 0.40
Consistency withGovt. policies
0.20 √ 0.80
Reasonableness of cost of raw materials
0.30 √ 0.60
Rating Index 3.00
Source of Positive Net Present Value
Project managers prefers to select project ideas that give higher returns than the investment made
The net present value is defined as the present value of the future revenues minus future costs
Sometimes sources of positive net present value acts as entry barriers. Hence, an understanding of entry barriers is helpful in identifying positive net present value
There six main entry barriers that result in positive NPV projects, namely:
1. Economies of scale 2. Product differentiation 3. Cost advantage 4. Marketing reach 5. Technological edge 6. Government policy