FM II _ Project Identification

8/3/2019 FM II _ Project Identification

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Financial Management II

Investment (Project) Identification &

Feasibility Analysis

Lokesh Jain, CFPCM


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Project Identification

A project is defined as a non-routine-repetitive one-

off undertaking normally with discrete time, financial

and technical performance goals.

A project can be considered to be any series ofactivities and tasks that:

have a specific objective to be completed within certain

specifications;

have defined start and end dates;

have funding limits (if applicable); and

consume resources (i.e. money, time, equipment).


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Project Identification

A project is for setting up a plant and when the plant

becomes operational, the project is treated as

completed. A project is neither a physical objective

nor is it the end-result. It has something to do withthe activities that go on, which must be the same,

whether it is to build a nuclear power plant or

launching a new detergent

A project first emerges as a concept and follows

various stages, till it gets commissioned.


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Project Learning Component


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Types of Projects

a) New projects

b) Expansion projects

c) Modernization projects

d) Diversification projects

e) Other projects


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PROJECT LIFE CYCLE

a) Concept or initialization phase

b) Project definition phase

c) Growth or organization phase

d) Implementation phase

e) Project shutdown or cleanup phase


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Identification Of Project Opportunities

Product / service

Technology

Equipment

Scale of production

Market

Time phasing

Location


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PROJECT OBJECTIVES


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PROJECT CLASSIFICATION

Projects of different sectors

Industrial and Non-Industrial Projects

Projects belonging to core sector

Balancing

Integrating

Modernization

Expansion

Diversification

Rehabilitation/reconstruction


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FEASIBILITY STUDIES

To implement any project an entrepreneur needs tocarry out different types of feasibility studies. These

feasibility studies evaluate all the risks and returns

and try to balance them and help the entrepreneurto finalize his plans.


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TYPES OFFEASIBILITY STUDIES

Managerial Feasibility

Economic Feasibility

Commercial Feasibility

Financial Feasibility

Technical Feasibility

Social Feasibility

Market Feasibility


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FINANCIAL ANALYSIS

A wide range of criteria are available to judge theworthiness of investment projects. They fall into two

broad categories:

Discounting criteria

1. Net Present value

2. Benefit cost ratio

3.Internal rate of return Non-discounting criteria

1. Payback period

2. Accounting rate of return.


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NET PRESENT VALUE

The NPV of a project is the sum of the present values of all cashflows-positive as well as negative that are expected to occur

over the life of the project

NPV = CFt

t=0 (1+k) t

where,

CFt = cash flow at the end of the year t

n = life of the project

r = discount rate


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RULES FOR CONSIDERATION OF PROJECT

The proposal for investment will be acceptedif the NPV is positive, and rejected if the

NPV is negative.

If the NPV is zero then the project is in anindifferent position.

If a choice has to be made between two

projects, the project with higher NPV will be

accepted for investment.


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BENEFIT COST RATIO

BCR = PVB/I

Where PVB = Present value of benefits

I = Initial Investment


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If BCR =1, the decision will be indifferent If BCR > 1, The Investment decision can be

accepter

If BCR < 1, The Investment decision should berejected


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INTERNAL RATE OF RETURN (IRR)

IRR of a project is the discountrate whichmakes its NPV = 0.

In the NPV calculation we assume that the

discount rate is known and determine the

NPV.

In IRR Calculation we set the NPV= 0 and

determine the discount rate that satisfies

this condition


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If IRR > 1 accept the investment decision If IRR < 1, reject the investment decision

BENEFITS

IRR is closely related to NPV.

This method is easy to understand and

interpret.


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MODIFIED INTERNAL RATE OF RETURN

MIRRHere,

PV OF CASH OUTFLOW

= Terminal value of cash inflow

________________________

(1 + MIRR)


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PAY BACK METHOD

This method is the length of time required torecover the initial cash outlay on the project.


The shorter the pay back period, the project will

be more desirable for consideration


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ACCOUNTING RATE OF RETURN- (ARR)

ARR = PROFIT AFTER TAX

___________________

BOOK VALUE OF INVESTMENT


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SUITABILITY

For small sized projects, it is best to use Pay back andARR method and for larger projects, IRR method is

suitable.


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SENSETIVITY ANALYSIS

A means of identifying the project variables which,when varied, have the greatest effect on projectacceptability.


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Thank You

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FM II _ Project Identification