PROJECT MANAGEMENT ASSIGNMENT (LESSON 3 AND 4) By: GROUP 1

LESSON – 3

A project is accomplished by performing a set of activities which are unique and non routine.

It consists of the following four important components:• Selection• Planning• Implementation• Completion

Project selection has three parts:• Project Identification• Project Appraisal• Project selection

Project appraisal is a process of detailed examination of several aspects of a given project. In short, it is the effort of calculating a project's viability.

Choice of technical process and/or appropriate technology.

Size and scale of operations. Project design and network analysis for the

assessment of project implementation schedule.

Aspects relating to effluent disposal, byproducts utilisation etc.

Estimation of project cost, profitability etc.

Scope of Project Appraisal

Project Appraisal

MarketFinancialTechnical

EcologicalEconomical

Technical - Involves scale of the project and the process adopted

Economical - Benefits and cost analysis Financial - Determines the financial viability

for sound implementation and efficient operation

Ecological - Environmental aspects and restoration measures

Market - Potential and share of market

Overview of Project appraisal

1. Selection of process/technology: for eg. cement can be manufactured either by wet process or by dry process.

2. Scale of operations: signified by the size of the plant.

3. Raw material: a) Selection-for eg. Precipitated CaCO3 can be produced using either limestone or shell lime. b) Availability - for eg. Jute industry in India is developed in jute growing region.

Technical Appraisal

4.Technical know-how - provided by the expert consultants. They must have requisite knowledge and experience.

5.Selection and procurement of plant and machinery

6.Plant layout - It is the arrangement of the various production facilities within the production area.

7.Location of the project-Factors influencing are: raw materials, proximity to market, availability of labour, availability of infrastructure facilities, transportation facility etc.

8.Project scheduling and implementation

MARKET APPRAISAL

It is concerned with the market for the product/service. The idea of promoting a project is to produce some product or service and to market the same to the consumers and earning a profit thereby.

It is done on the basis of following angles:1.Demand for the product2.Supply position for the product3.Distribution channel4.Pricing for the product5.Government policies

Market analysis should cover the following major aspects:

a) Analysis of market opportunity and specifying marketing objectives which involves total size of the market and shared that can be secured.

b) Planning the process of marketing the product

c) Organisation of the marketing process

d) Control of the implementation of the marketing plan which facilitates taking corrective action when the actual results deviates from the expectations.

ECONOMIC APPRAISAL

Measures the effect of the project on the whole economy.

Also known as socio economic appraisal as this analysis deserves consideration especially in public projects unlike private entrepreneurs.

Government policies are made such that its limited resources are used to its maximum limit for the upliftment of country’s economy.

ECONOMIC ASPECTS

INCREASED OUTPUT

ENHANCED SERVICES

INCREASED EMPLOYMENT

LARGE GOVRNMENT REVENUES

HIGHER EARNINGS

INCREASED NATIONAL INCOME

ECOLOGICAL APPRAISAL The the term used to describe the

assessment of the environmental consequences of proposed policies, plans or programs.

Environmental parameters consist of components of environment and can be grouped into major components.

FINANCIAL APPRAISAL

It consists of two major areas:a) Arriving at the cost of the projectb) Arriving at the appropriate means of

financing the project.

Financial Aspects of the project appraisal covers the following areas:i. Cost analysis - cost of production is worked outii. Pricing - This strategy concerns the fixing of the products price. The price of the product is inversely related to demand.

iii. Financing - concerned with raising the funds from places where the rate of interest is lower and, making their most efficient use.

iv. Income at expenditure - concerned with the estimation regarding the income expected and expenditure involved in the project. This helps in ascertaining the cost involved in production and profit expected.

FI NANCIAL

APPRAISAL

FINANCIAL SOUNDNESS

EFFICIENT OPERATION

COST OF PRODUCTION

PROSPECTS OF MARKETING

PROFITABILITY

BUDGETING AND PRICING

Financial analysis broadly falls under two categories viz.

a) Non discounted cash flow technique Pay back period

b) Discounted cash flow technique Net present value(NPV) Internal rate of return(IRR)

The length of time required to recover the original investment on the project through cash flows earned is called pay back period.

The cash inflow includes operating profit ,less income tax payable and depreciation.

Payback period is usually expressed in years. Calculated by Net Cash Flow for each year. For e.g. Net Cash Flow Year 1 = Cash Inflow Year 1 - Cash Outflow Year 1.Then Cumulative Cash Flow = (Net Cash Flow Year 1 + Net Cash Flow Year 2 + Net Cash Flow Year 3 ... etc.)

PAY BACK PERIOD

This method is one of the discounted cash flow techniques and it recognizes the time value of money.

NPV = (Present value of all future cash in flows over the life of the project)-(Present value of cash out flow)

NPV is used in capital budgeting to analyze the profitability of an investment or project.

If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.

Net Present Value(NPV)

It is that rate of discount which would equate the present value of cash outflows (Investment on the project) to the present value of cash inflows (the benefits over the life of the project)

In other words IRR is the discount rate that makes the net present value equal to zero.

If the IRR is greater than the cost of capital, accept the project.

If the IRR is less than the cost of capital, reject the project.

Internal Rate of Return(IRR)

The blue curve shows the net present value for discount rates (r) from 0 to 0.1 (0% to 10%). The red dots are the two points we get from our measures. The left red dot shows the net present value at the discount rate of 0.05 (5%). The right red dot shows the internal rate of return, because it is where the curve crosses the horizontal line indicating an NPV of 0. That right red dot is between the 0.05 and 0.06 marks on the r axis, so the internal rate of return is between 0.05 and 0.06.

NPV of a project is actually dependent upon the rate of

interest. The physical meaning of the chart is that if IRR is higher than zero ( NPV ), then the project is worthwhile to consider and it means we get more than the bank rate of interest for our investment money in the project.

FINANCIAL APPRAISAL

Now we will focus more on financial appraisal.Financial criteria of Interest: Net present value Internal Rate of Return Equivalent annual cost Pay back period Discounted pay back

LESSON – 4

Debt repayment criteria

Benefit / Cost ratio of discounted cash flows-A BCR is the ratio of the benefits of a project or proposal, expressed in monetary terms, relative to its costs, also expressed in monetary terms.

Debt service coverage ratio – It gives the ratio of debt to equity. It is a mere indication of financial leverage.

Cash Flow

ROI= average annual profit X 100 total investment

For Project A:ROI= (10000/100,000) X 100= 10%For Project B:ROI=(6000/2,00,000) X 100=3%For Project C:ROI=(12000/1,00,000) X 100=12%

Return On Investment(ROI)

Pay Back Period

Now suppose we have interest rate of 10% & 12% so NPV will be calculated asfollows:For project A:

For Project B :

For Project C:

After comparing all the 3 projects A,B & C we came to this conclusion that :

10% interest rate is more preferable than 12% interest rate in all the projects.

C project is the best to work with among all the three projects.

Conclusion

REFERENCES: Project management – By K. NAGARAJAN Chapter 3,6,7 (New age international publisher) Project management – By VASANT DESAI C

hapter 11,14 (Himalaya publisher house) www.net/kinshookc/environmental-appraisal

-of-projects www.investopedia.com/terms/p/paybackperi

od.asp hspm.sph.sc.edu/courses/econ/invest/

invest.html