Project Management for ITM - NEW

8/8/2019 Project Management for ITM - NEW

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PROJECT APPRAISAL


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INTRODUCTION

Project appraisal is a process of detailed examination of

several aspects of a given project before recommending the same.

TECHNICAL APPRAISAL

Technical appraisal broadly involves a critical study of the

following aspects, viz.,

1. Selection of process / technology

2. Scale of operations

3. Raw Material

4. Technical Know-how

5. Collaboration agreements

6. Product mix

7. Selection and procurement of plant and machinery

8. Plant layout

9. Location of the project

10. Project scheduling and implementation


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SELECTION OF PROCESS / TECHNOLOGY

For manufacturing a product, more than one process /

technology may be available. The choice of technology also

depends upon the quality and quantity of the product proposed tobe manufactured.

A new technology that is protected by patent rights etc.

can be obtained either by licensing arrangement or the

technology can be purchased outright.

Technology can be purchased outright if the cost of

acquisition is affordable.

Appropriate Technology: A technology appropriate for one

country may not be the ideal one for another country. The term

appropriate technology refers that technology that is suitable for

the local economic, social and cultural conditions.Does the technology makes use of the locally available raw

material?

Can the technology by implemented and maintained by the

locally available man power?

Is the technology in tune with the local social and cultural

conditions?

Does the technology protects ecological balance etc.?


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SCALE OF OPERATIONS

Scale of operations is signified by the size of the plant. Economic size

of the plant varies from project to project. Economic size of the plant for a

given project can be arrived at by an analysis of capital and operating costs asa function of the plant size.

Other factors like special problems of fabrication of equipments,

transportation and erection of equipments, problems associated with

availability of production inputs on a sustained basis etc. also impose

restrictions on the plant size.

RAW MATERIAL

Selection of Raw Material: A product can be manufactured using alternative

raw materials and with alternative processes. Since the manufacturing process

and the machinery / equipment to be used also to a larger extent depend upon

the raw material.

TECHNICAL KNOW-HOW

When technical know-how for the project is provided by expert

consultants, it must be ascertained whether the consultant has the requisite

knowledge and experience and whether he has already executed similar

projects successfully.


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COLLABORATION AGREEMENTS

a. The competence and reputation of the collaborators needs to be

ascertained through possible sources including the Indian embassies

abroad and the collaborators bankers.

b. The technology proposed to be imported should suit to the localconditions.

c. The collaboration agreement should have necessary approval of the

Government of India.

d. There should not be any restrictive clause in the agreement that import

of equipment / machinery required for the project should be

channelised through the collaborators.e. The design of the machinery should be made available to the project

promoter to facilitate future procurement and / or fabrication of the

machinery in India at a later stage.

f. The agreement should provide a clause that any dispute arising out of

interpretation of the agreement, failure to comply with the clauses

contained in the agreement etc. shall be decided only by courts with inIndia.

g. The collaboration agreement should not impose any restriction on the

exports of goods produced.

h. It must be ensured that the collaboration agreement does not infringe

upon any patent rights.

i. It is better to have a buy-back arrangement with the technicalcollaborator.


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PRODUCT MIX

Customers differ in their needs and preferences. Hence variations in

size and quality of products are necessary to satisfy the varying needs andpreferences of customers.

Selection and Procurement of Plant and Machinery

Capacity of each machinery is to be decided by making a rough

estimate, as under: thumb rules should be avoided.

a. Take into consideration the output planned.

b. Arrive at the machine hours required for each type of

operation

c. Arrive at the machine capacity after giving necessary

allowances for machinery maintenance / break down, rest timefor workers, set up time for machines, time lost during change

of shifts etc.

d. After having arrived at the capacity of the machinery as above,

make a survey of the machinery available in the market with

regard to capacity and choose that capacity which is either

equal to or just above the capacity theoretically arrived at.


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PROCUREMENT OF MACHINERY

The quality of output depends upon the quality of machinery used in

processing the raw materials (apart from the quality of raw material itself).

Uninterrupted production is again ensured only by high quality machines that

do not break down so often.PLANT LAYOUT

The efficiency of a manufacturing operation depends upon the layout the plant

and machinery. Plant-layout is the arrangement of the various production

facilities within the production area.

a. The layout should be such that future expansion can be done withoutmuch alteration of the existing layout.

b. The layout should facilitate effective supervision of work.

c. Equipments causing pollution should be arranged to be located away

from other plant and machinery. For example generator is a major

source of noise pollution. Generator can not be placed amidst other

machinery since the noise generated will spoil the entire atmosphere of

the plant. Hence generally generator is housed in a separate shedaway from the main plant. Equipments that generate fumes are

normally placed separately, preferably along the side of walls so that

proper exhaust and ducting arrangements can be made easily for

driving out the fumes.

d. There should be adequate clearance between adjacent machinery and

between the wall and machinery to enable undertaking of regularinspection and maintenance work.


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LOCATION OF PROJECTS

REGIONAL FACTORS

a. Raw Materials

b. Proximity to Market

c. Availability of Labour

d. Availability of Supporting Industries

e. Availability of Infrastructural facilities.

POWER

Power intensive industries should be located at places where

regular power supply is available.

WATER

Water requirement for the project should be correctly arrived at.

TRANSPORT FACILITIES

f. Locating industries in backward / most-backward areas, growth

centre areas.

g. Climatic factors


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SITE FACTORS

After having chosen a region that is comparatively more advantageous

for the location of a project, for choosing a particular site in the chosen region.

i. Choice of Location

ii. Choice of Location based on tangible factors.

PROJECT SCHEDULING

Scheduling is nothing but the arrangement of activities of the project

in the order of time in which they are to be performed.

The schedule which broadly indicates the logical sequence of events would be

as under.

1.Land acquisition

2.Site Development

3.Preparing building plans, estimates, designs, getting necessary

approvals and entrusting the construction work to contractors.

4.Construction of building, machinery foundation and other related civil

works and completion of the same.

5.Placing order for machinery.

6.Receipt of machinery at site

7.Erection of machinery

8.Commissioning of plant and taking trial runs

9.Commencement of regular commercial production


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COMMERCIAL APPRAISAL

The Commercial appraisal is concerned with market for the

product / service.

Commercial approved (or market appraisal) of a project is donestudying the commercial successfulness of the product / service

offered by the project from the following angles.

a. Demand for the product

b. Supply position for the product

c. Distribution channelsd. Pricing of the product

e. Government policies.


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PROJECT RISKANALYSIS

In project appraisal, risk analysis play an important part. Allprojects are prone to some kind of risk or the other.

The following list of elements will give an idea of the

assumptions on which any project appraisal is based on.

Periodic cash inflows (the cash inflows are assumed by assuming

the selling price of the producer over a period of time and the plant

output over the said period)

Periodic cash outflows (the cash outflows are assumed by assuming

the purchase price of raw materials, the cost of power, labour etc.)

Life of machinery

Salvage value of machinery.


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RISK VS UNCERTAINLY

Risk can be defined as the variability of return from an investment. If the

probabilities of possible outcomes of a given problem are known, we can

conclude that the problem outcomes of a gives words the problem is risky.

KINDS OF PROJECT RISKS

Project Completion Risk : Completing the project in time and within the

estimated cost itself is a major achievement.

Resource Risk : Raw materials, power, fuel, manpower etc.

Price Risk : Price fluctuations of both inputs and outputs.

Technology Risk: Technology risk may appear in two forms. A project that is

based on unproven technology (i.e. a technology that is proved at

laboratory level but not proved at commercial level) may have hidden

defects which may make the project a non-starter.

Political Risk : The saying goes Do not fight with King and God The King

(i.e., the Government) acts as a watch dog of the countrys economy and

frames rules and regulations for regulating the countrys economy.

Interest Rate Risk: Fluctuations in interest rate may bring in an adverse effect.

Exchange Rate Risk : Exchange rate risk (also called currency risk) is the risk

arising from currency fluctuations


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TECHNIQUES OF RISK ANALYSIS

Though there are many mathematical techniques available for risk

analysis, the following are the simple tools that come handy for

analyzing small and medium sized projects.

Break Even Analysis

SensitivityAnalysis

Decision TreeAnalysis

Monte-Carlo Technique

Game Theory

Break Even Analysis: The financial viability of a project is estimated by

making various assumptions like the cost of raw material, cost of

consumables, cost of labour, expected sales realization, expected

capacity utilization of the plant etc.

Break even point (BEP) refers to the level of operation at which the

project will earns profit nor incurs loss. Calculation ofBEP for the

given cost and price levels indicate the minimum capacity utilization

that the project should aim at in order to be in a no-profit, no-loss

situation.


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Fixed Costs: All projects incur certain costs that are fixed in nature.

These costs remain constant irrespective of the changed in the volume

of output. Following are some of the fixed costs:

Rent payable for land

Rent payable for factory / office premises

Insurance premium on fixed assets

Interest payable on long-term borrowing / deposits

Administrative expenses

Annual maintenance charges payable for machinery maintenance

Depreciation

Property tax etc.

Variable Costs: These are those costs that vary directly with the level of

output. Raw material cost is a variable cost since it depends on thelevel of output. Some other variable costs are as under.

Consumable stores

Power, Fuel, water charges

Selling expenses etc.


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SENSITIVITYANALYSIS

It is a technique that measures the change in the profitability of a

project caused by changes in the factors that affect the each inflows ofthe project. If a small change in one factor leads to a major change in

the profitability of the proposed investment, the project is considered

more sensitive to that factor; in other words, the project is more risky.

Other things being equal, a project that is less sensitive is preferable to

projects that are more sensitive.

DECISION TREEANALYSIS:

Decision tree approach is a graphical technique that can be used

for analyzing the pros and cons of alternative decisions and choosing

the best possible course of action. In real life situation, decision aretaken under conditions of uncertainty.

A decision tree is a diagrammatic representation of the logical

relationship between the different parts of a complex situation and the

possible outcomes of different decisions.


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A decision tree is made up of nodes and branches. Nodes and of

two types, viz.,

Decision node (also called decision point)

and Chance node (also called chance point orchance event)

A decision point is represented by a square and a chance point is

represented by a Circle, Different alternatives available for the given

situation emerges from the decision point. At each chance point, thedifferent possible outcomes of one of the alternative decisions are

marked.

EXPECTED MONETARY VALUE (EMV):

The effectiveness of any decision is measured only in terms of

money. Hence, the outcomes of all decisions are measured in terms of

the expected monetary value (EMV). EMV provides a common base for

comparing the outcomes of different decisions and choosing the one

that is found more advantageous.


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RULE FOR DRAWING DECISION TREE:

Identify all the alternative decisions available at the initial decision

point (i.e., at decision point - I)

Identify all possible subsequent decisions points

Identify all possible chance points and the likely outcomes at the

change points

Develop a decision tree diagram showing in sequence the

decision points and chance points. Construct the decision tree

diagram from the left to the right. Denote the decision point by a

square and the chance points by a circle.

After constructing the decision tree, work backwards (i.e., from

the right to the left) computing the EMV of each change point and

each decision point till the initial decision point is reached

Determine the best alternative at the initial decision point.


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MONTE CARIO SIMULATION:

Monte Carlo is a code name given by Von Newmann and Ulam to

the technique of solving problems using random numbers. Monte

Carlo technique can be used to solve a variety of problems

involving stochastic situations (a stochastic situation is one

where some of all parameters of the problem are described by

random variable)

The steps involved in Monte Carlo technique are as under:

1. From the given probability of occurrence of events, establish

cumulative probability.

2. Assign tag numbers to the events in such a way that the tag

numbers represent the cumulative probability.

3. Obtain random numbers from a random number table.

4. Correlate the random numbers with the tag numbers assigned to

the events and identify the value for the respective events.


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GAME THEORY

In real life situation, business firms compete with one another.

Game theory deals with situations in which two intelligent

opponents have conflicting interests. To achieve their goals, thetwo firms will form strategies. The strategy that one firm forms will

depend upon the strategy that the other firm has already formed /

in the process of forming. The approach to such competitive

problems was developed by Von Neumann who named it Game

Theory

The number of competitors are finite. (the competitors are also

known as players)

Each player has a finite number of strategies

All the players need not necessarily have the same number of

strategies.

Each player chooses a single course of action from the list ofstrategies available to him.All the players are assumed to make

their choice simultaneously so that no player known the choices of

his opponent until he is already committed to his choice.

The objective of the Game Theory is to develop a rational

criterion for the selection of a strategy / strategies by each player.


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SWOT ANALYSIS

STRENGTHS:

Locational advantage of the organization nearness to the

sources of raw material, nearness to location of end users etc.

Goodwill developed among clients

Buy-back arrangements

Lower capital investment on the existing plant (i.e., setting

up

a similar plant would have become much costlier)

Good network of dealers and distributors already

established

WEAKNESSES:

Technological obsolescence

Scarcity of raw material

Comparatively less international price for similar products

Locational disadvantage resulting in higher freight costs for

transportation of raw materials / finished products


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OPPORTUNITIES

Cost of raw material becoming cheaper

Liberalisation of import of raw material (where the cost of

imported raw material is cheaper)Growth in per capita income and growth in consumption

level

Advent of cost saving production technology

THREATS

Import of competitive products becoming cheaper

Liberalisation of import of competitive products (when the

cost

of imported goods is cheaper)

Withdrawal of existing incentives by the GovernmentRaw material becoming costlier

General recession in the economy resulting in slowing down

of consumption

New entrants entering the field in a big way

Stringent pollution control measures adopted by the

Government


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PROJECT COSTESTIMATION


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COST OF THE PROJECT

Correct estimation of the capital cost of a project is the foundation over

which the edifice of financial appraisal stands.

Components of capital cost of a project : The following are the componentsthat consistute the capital cost of any project.

i. Land

ii. Land development

iii. Buildings

iv. Plant and machinery

v. Electricalsvi. Transport and erection charges

vii. Know-how / consultancy fees

viii.Miscellaneous assets

ix. Preliminary and preoperative expenses

x. Provision for contingencies

xi. Margin money for working capitalORDER OF MAGNITUDE ESTIMATE

a. Investment per Unit of Output

b. Turnover Ratio

c. Inflation Index

d. Six-tenth Factor

e. Location Index


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PROJECTFINANCING


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INTRODUCTION

Project financing may be defined as the raising of funds required

to finance an economically separable capital investment proposalin which the lenders mainly rely on the estimated cash flow from

the project to service their loans.

SOURCES OF FINANCE

1. Ordinary shares2. Preference shares

3. Debentures

4. Bonds

5. Term Loans

6. Deferred Credits

7. Capital Investment Subsidy8. Lease Financing

9. Unsecured Loans

10. InternalAccruals

11. Bridge Loans

12. Public Deposits


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ROLE OF FINANCIAL INSTITUTIONS IN PROJECT FINANCING

Normally projects are financed by a combination of equity and

debt. This is more so in respect of larger projects, for the reason

that arranging for equity capital to fund the entire project may notbe feasible.

Whatever may be the approach to lending, the lending decision is

primarily governed by three considerations, viz.,

1. The capacity of the project to repay the loan along with interestobligations, out of its own cash generations.

2. The value of security offered for the loan

3. The integrity and willingness of the borrower to repay the loan in

time.

COVENANTS ATTACHED TO LENDING

The bank / financial institution that extends term loan for the

setting up of a project imposes certain conditions to be fulfilled by

the borrower and these conditions (covenants) are contained in

the term loan sanction orders / mortgage deeds executed by the

borrower in favour of the bank / financial institution.


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PROJECT APPRAISAL I

FINANCIAL ANALYSIS

OF PROJECTS


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INTRODUCTION

A project should earn sufficient return on the investment. The very

idea of promoting a project by an entrepreneur is to earnattractive returns on investment on the project. Projects

sponsored / undertaken by Government may take into account

social cost benefits. All other projects have the prime motive of

getting maximum return on investment.

Financial analysis broadly falls under two categories viz.,

Non-discounted cash flow techniques.

Discounted cash flow techniques

The further subdivision within these two techniques are as under:

Non-discounted cash flow techniques:

Payback period (PB) method.

Accounting rate of return (ARR) method.


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Discounted cash flow techniques

Net Present Value (NPV) method

Profitability Index (PI) method

Internal Rate of Return (IRR) method Benefit Cost Ratio (BCR) method

PAYBACK PERIOD METHOD

This is one of the widely recognized and simple method of

evaluating investment proposals. Payback period is defined as thelength of time required to recover the original investment on the

project, through cash flows earned.

Average Rate of Return (ARR) Method (orAccounting Rate of

Return Method)

The average rate of return is also called the accounting rate of return.

(Profit after tax)

Average rate of return = --------------------------------------------

(Book value of investment)


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NET PRESENT VALUE (NPV) METHOD

This method is one of the discounted cash flow techniques and it

recognize the time value of money.

Net present value [Present value of all [Present value of

(NPV) of Cash Flow = future cash in flows - cash out flow]

over the life of the project.]

PROFITABILITY INDEX (PI) METHOD

If there are two projects that require the same amount of

investment, the project with a higher net present value can be chosen.

INTERNAL RATE OF RETURN (IRR) METHOD

The internal rate of return of a project is the discount rate that

makes the net present value equal to Zero. In other words, internal rate

of return is that rate of discount which would equate the present value

of cash out flows (investments on the project) to the present value of

cash inflows (the benefits over the life of the project).


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PROJECT APPRAISAL II

FINANCIAL

PROJECTIONS


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INTRODUCTION

The following financial projections are done in financial appraisal

of projects to ascertain the financial viability.

a. Cost of production and profitability estimate

b. Cash flow estimate

c. Projected balance sheet

The above three projections are interrelated

PROFITABILITY ESTIMATE

This is an estimate of expected sales realizations and expected

expenses to be incurred by the enterprise. If the expected sales

realization is greater than the expected expenses, the unit is

expected to earn profit.

CAPACITY UTILIZATION

A plant may have a capacity to produce say 1,000 units of a

proposed product in a year.


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RAW MATERIALS

The requirement of raw material depends upon the

projected output. If the capacity utilization of the plant forthe first year of operation is assumed at, say 50%, then, the

raw material requirement for the production of products

equal to 50% of the installed capacity of the plant.

POWER, FUEL, WATER

Electric power requirement is to be calculated keeping in

view of the manufacturing process. Some of the equipments

may be in operation only for a few hours in a shift while

some equipment may be running throughout. These factorsare to be carefully looked into while arriving at the power

requirement. The expenses required to be spent on power

charge is arrived at by multiplying the total power

requirement with the prevailing power tariff.


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CONSUMABLES

These are materials that are consumed during production process

and they can not be traced in the final product. Consumablesdepend upon the nature of production process and type of

machinery.

The following are some of the examples for consumables.

a. Welding electrodes used inAre welding componentsb. Welding wires and oxy-acetelene gas used in gas welding

c. Drill bits used in drilling machines

d. Graphite electrodes used inArc furnaces

e. Grinding stones

f. Grease, emery sheets, etc.

WAGES AND SALARIES

Wages and salaries for all the employees in the production and

allied departments are to be accounted for.


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REPAIRS AND MAINTENANCE

Both building and machinery require periodical maintenance.

RENT, INSURANCE

Rent for leased premises shall be calculated as per the terms of

the lease agreement.

FACTORY SUPERVISION

This is the salary payable to factory supervisory staff and it shall

be ascertained in the same lines as it is arrived at for the head

wages and salaries.

DEPRECIATION

The term depreciation denotes the decrease in the value of fixed

assets with the passage of time.


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PROJECT PLANNING

ANDSCHEDULING


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INTRODUCTION

The process of project planning involves the following main steps.

a. Defining the objectives of the project

b. Making forecasts for achieving the goals

c. Identifying the alternative courses of action for

achieving the goals

d. Evaluating the resources available to the organization

e. Evaluating the available alternative courses of actionsand selecting the course of action/actions that are most

suited to achieve the desired results, taking into

account resource constraints, if any.

PROJECT SCHEDULING

Project scheduling refers to the process of laying out all the

actual activities of the project in the time order in which they are

to be performed, keeping in view of the logical sequence of the

activities.


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The logical sequence of activities of a project would be as under.

Company registration

Obtaining industrial licenses / import licenses

Appointment of consultant

Resource mobilization

Land acquisition and site development.

Preparing civil work designs, plans and estimates and entrusting

the construction work to civil contractors.

Preparing design specifications and placing order for plant and

machinery.

Transport of plant and machinery to the project site.

Erection of machinery

Commissioning the plant and taking trial run.

Commencing regular commercial production.


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SCHEDULING TECHNIQUES :

As we have seen above, a project consists of many activities,

which have some logical interrelationship between themselves.A

llactivities consume resources of three kinds viz., time, men and

materials (or money). The project scheduling techniques are

concerned with the resource time. One of the objectives of

project management is to optimize the use of resources.

Scheduling techniques offer solution to optimatisation of project

time.

BAR CHARTS :

Bar chart is a pictorial representation showing the various

activities involved in a project. The chart has two co-ordinateaxes; one axis represents the activities and the other axis

represents the time required for completion of the individual

activities. Bar chart was first conceived and developed by Henry

L. Gantt and hence bar chart is also sometimes referred as Gantt

chart, in the name of the person who popularized the concept.


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PROGRAMME PROGRESS CHARTS

The Bar chart that we have discussed in the previous paragraph

depicts the proposed activities of a project with their estimated time

duration.

LIMITATIONS OF BAR CHART

Bar charts are difficult to update when there are many changes.

When there are changes between the plan and the actual

achievement, bar charts become quickly obsolete.

Bar charts do not equate time with cost; hence time-cost relationship

cannot be derived from them.

Bar charts do not provide methods for optimizing resource allocation.

In view of the above limitations, bar charts are useful only for small

projects and cannot be effectively used for medium sized and large

projects.


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NETWORK BASED SCHEDULING

Network Diagram

It is a graphical flow plan of the activities that must be

accomplished for completing the project. It arranges the activities

in logical sequence, following the precedence succulence

relationships between the activities.

There are two popular network-scheduling techniques. They are

a. Critical Path Method (CPM) and

b. Programme Evaluation Review Technique (PERT)

CPM was developed in the year 1957, by Morgan R. Walker of

DU Pont and James E. Kelly of Remington Rand.

PERT was developed in the year 1958 by the US Navy.


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Activity

An activity is any identifiable job that has a beginning and an end.

An activity consumes time, manpower and material resources.

The following are some examples of activities.

1. Excavation of foundation

2. Placing of foundation concrete

3. Construction of walls4. Construction of roofing

5. Wiring and electrification work.

Event

An event (also called node) is the beginning or end of an activity.

An event does not consume time, manpower or material

resources. An event represents a specific point in time. Event is

represented by a circle. Thus the two circles placed at the

beginning and at the end of an activity are called events.


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Relationship Among Activities : As we have already said, a network is a

graphical representation of the logical sequence of all the

activities of a project. A project is a collection of various activities

and the activities are interrelated among themselves. There are

three possible relationships between the different activities.

Skip Numbering : Large projects involve a large number of activities.

Since all the activities can not be correctly foreseen and included

in the network, the network for large projects may need

modifications during execution of projects.

Critical Path Method : A network represents the logical sequence of

activities contained in a Each path in a network will have a

different duration. The path that has the longest duration is called

the critical path and the activities that lie on the critical path are

called critical activities. It is the critical path that sets the overall

duration of the project.

Finding Critical path in Large Network : The method of finding out the

number of paths available in a given network connecting the initial

and end events, finding the time duration of all the available paths

and identifying the critical path is suitable for smaller networks.


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PROGRAMME EVALUATION AND REVIEW TECHNIQUE (PERT)

The critical path method (CPM) uses only one time estimate for

each activity.

a. Optimistic time estimate

b. Pessimistic time estimate and

c. Most likely time estimate

a. Optimistic Time Estimate :It is the shortest possible time in which an activity can be

completed under ideal conditions.

b. Pessimistic Time Estimate :

It is the maximum possible time that it would take to complete

an activity under worst conditions.

c. Most likely Time Estimate:

It lies between optimistic and pessimistic time estimates. It is

the time in which an activity can be completed under normal

conditions.


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RESOURCEALLOCATION

One of the main problems faced by a project manageris resource allocation. With the help of the network

techniques explained earlier, the project manager can

identify the critical activities. For completing the

project in time, he must have the required resources at

his disposal.

RESOURCE LEVELLING

There are situations demanding that the project shouldbe completed by a specified due date. The due-date

for project completion is decided by the management

for various reasons.


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PROJECTORGANIZATION


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INTRODUCTION

1. Functional Organization

2. Product Organization and

3. Matric OrganizationFUNCTIONAL ORGANIZATION

Functional Organization is the most basic and logical form of

organizational structure.

PRODUCTION ORGANIZATION

The advantage of product organization is that all the activities,

skills and expertise required to produce and market a particular

product (or a group of related products) are grouped together

under a single head.

MATRIX ORGANIZATION

This form of organization is ideally suited for enterprise that are

project-driven, i.e., enterprises whose activities centers around

handling projects like construction companies, companies

offering turn-key projects etc.,


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PROJECT EVALUATION

AND POST PROJECTEVALUATION

(POST AUDIT)


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PROJECT EVALUATION

To evaluate means to assess. Thus, project evaluation is an

assessment of the project during the course of implementation.

PROJECT EVALUATION OBJECTIVES

1. To verify if the progress of project implementation is as planned

and to take corrective measures if the project progress lags

behind the schedule.

2. To ascertain whether the actual costs are within the budgeted

costs at the different stages of implementation and to take

steps to contain costs if the actual costs escalate over the

budgeted costs.

3. To ensure that the quality standards of the project are reached

without any compromise.

4. To identify any unexpected problem areas and to plan for

managing such situations appropriately.


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5. To appraise the clients about the progress of the project and to

keep them informed about the project status.

6. To bring about overall improvement in project performance.

7. To watch whether the project objectives are met and to suggest

corrective measures if the objectives are found to get

defeated.

8. To give confidence to the project team members and toreassure the organizations commitment to the project.

OBJECTIVES OF POSTAUDIT

The adequacy of contingency provision made in the project

cost estimate to take care of unforeseen expenditures.

The normal project implementation time for different projects

The comparative project cost for similar projects


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OPTIONS

INPROJECTS


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CALL OPTION : A call option gives the option-holder (i.e., the buyer of

the option) the right to buy the specified amount or quantity of the

underlying asset before a specified date at a specified price. It

must be noted that the option-holder has the right to buy but hasno obligation to buy.

PUT OPTION : A put option gives the option-holder (i.e., the buyer of

the option) the right to sell the specified amount or quantity of the

underlying asset before a specified date at a specified price.

EUROPEAN OPTION : An European option is one that can be exercised

only on the expiry date. For example, a 3-month European option

purchased on January 1st can be exercised only on 1stApril.

AMERICAN OPTION : An American option is one that can be exercisedat any time on or before the expiry date. For example, a 3-month

American option purchased on January 1st can be exercised on

any day on or before 1stApril. It is the option-holder who decides

as to when to exercise his option.


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TOPICS OF INTEREST

ON PROJECTMANAGEMENT

BANK GUARANTEE


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BANK GUARANTEE

1. Financial Guarantee

2. Performance Guarantee and

3. Deferred Payment Guarantee

FINANCIAL GUARANTEE

When a bank gives financial guarantee on behalf of its customer,

the bank undertakes to discharge some monetary obligation of its

customer.

PERFORMANCE GUARANTEE

These are the guarantees issued by a bank for the performance of

a specific contract or obligation.

BOOT (Build, Own, Operate, Transfer) Projects

Boot project have their origin in Turkey, where the formula for

building up of mega projects was tried in 1980-s. There are two

parties to a BOOT project, viz., the principal project promoter

(usually, the Government) and a private participant.

BOO (B ild O O ) P j


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BOO (Build, Own, Operate) Projects

The private investors execute the project, own and operate the

infrastructural assets created for the whole life.

BOLT (Build, Operate, Lease, Transfer) Projects

The private investors build and operate the project for a specified

period of time.

COST OVERRUN

The term cost overrun means increase in project cost over and

above the estimated project cost. Delayed implementation of

project (time overrun) invariably results in cost overrun due to the

following reasons.

1. Due to time delay, the cost of project components may get

increased in view of the effects of inflation.

2. Delayed implementation beyond the planned duration means

employing labour for more period than envisaged leading to

increased expenditure on labour.


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CREDIT RATING

The dictionary ofBusiness and Economics by Christian Ammer

and Dean S. Ammer (The Free Press, Newyork, 1977) defines

credit rating as an evaluation of the financial trust worthiness of a

company or individual particularly with regard to meeting some

obligation. Rating commenced in the year 1909, when John

Moody, a financial analyst published ratings on bonds issued by

railroad companies, using rating symbols ranging fromAaa to C.In 1910, John Moody extended his ratings to utility and industrial

bonds.

DISASTER PROJECTS

These are projects that need to be completed at the shortest

possible time, inspite of the capital cost going up. The main aim is

to reduce the project time drastically. As time is the main criterion,

normally competitive bidding is avoided.


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ENTERPRISE RESOURCE PLANNING (ERP)

A small organization can be managed single handedly by its

promoter. As the organization grows in size and the volume of

operations increases, it becomes increasingly difficult to manage

by a single person.

Such an information system that takes a holistic view of the

organization will tie up all the functional departments of theorganization and will facilitate seamless flow of information

across the different departments and is called as Enterprise

Resource Planning (ERP) system.

The term Enterprise represents an undertaking in which a group

of people work with a common goal. The term Resource

represents factors like men, material, money, time and other

things that are required to run an enterprise and that are

consumed during the process of running an enterprise.


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The ERP System is a computer Software Program that supports

the ERP.

The following are some of the definition of ERP / ERP Software.

1. Enterprise Resource Planning (ERP) is an attempt to integrate all

departments and functions across an organization into a single

computer system that can serve all those departments particular

needs and also help achieve organisational goals.

2. ERP Software is an integrated software program that runs of a

single data base in such a way that the various departments can

share information easily among themselves and can communicate

with each other.

3. ERP software is set of programs that integrate a companys

operations and operate on a shared database.


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PROJECT FINANCING

Banks and financial institutions are the two institutions

that play a major role in project financing. A projectrequires resources. In other words, funds are required

to be set aside to create resources meant for the

execution of projects.

The financial requirement for the creation of fixedassets are made available by financial institutions and

banks in the form ofTerm-loan

Even when a project is executed by an existing firm for

meeting its specific requirements (like expansion,modernization, new product development etc.)

depending on the size of the project, it may also

require financial assistance in the form of Term-Loan.


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PROJECT LIFE CYCLE

All projects have a life cycle. The duration of life cycle will vary

depending on the type and nature of the project. The life cycle of

any project consists of four phases. The phases in project life

cycle are as under.

1. Conceptualization of project and defining the problem.

2. Planning of project activities and planning for resources3. Execution of Project

4. Termination of Project

VENTURE CAPITAL

The term Venture Capital comprises two words, viz., venture

and capital. The dictionary meaning of venture is a risky

undertaking and the term capital means the resources to start

the enterprise.

A project that the potential for substantial growth but that has a


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A project that the potential for substantial growth, but that has a

high risk proportion in view of its technology not having been

proved, will not generally attract investors since investors do not

want to take undue risk, however attractive the long term returns

may be. Hence, the need for a venture capitalist to nurse suchventures.

The main characteristics of venture capital investments are as under:

Investments are usually made in the equity capital of the

enterprise.

The venture capitalist does not interfere in the management of theenterprise.

Apart from equity finance, the venture capitalist may also extend

financial assistance in the form of quasi-equity, conditional loans

etc.

Venture capital investments are made only in high-risk, high-

growth projects.

Risk analysis forms the major part of project appraisal.

The venture capitalist opts to finance the venture only if he is

satisfied after his extensive analysis and appraisal that the risk

factors are offset by higher probability of success.

Investment is made usually in new ventures, i.e., in start-ups.

STAGES OF VENTURE CAPITAL FINANCING


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First Stage: A small amount of capital is provided to the entrepreneur to

finance his R&D efforts for product development, to prove a

concept, or to go for commercial production in a small level when

the product development stage has already been completedsuccessfully.

Second Stage: Once the first stage of financing has been successful,

the enterprise qualifies for the second stage of financing.

Third Stage: This is provided for the major expansion of the company.

The Indian Scene of Venture Capital Financial : The concept of venture

capital as a new area of financial service was first introduced in

the fiscal budget for the year 1986-87.

1. Technology Development and Information Company of India Ltd.,

(TDICI), Jointly promoted by ICICI and UTI.2. Venture capital division of IDBI.

3. Risk Capital and Technology Finance Corporation Ltd., (RCTC)

promoted by IFCI.

4. Gujarat Venture Capital Limited, promoted by the Gujarat

Industrial Investment Corporation Limited.

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Project Management for ITM - NEW