1. IPM. PM in India.2. PMP.3. PMBOK.

Homework

10 June 2010

Project Planning and PhasesProject Planning and Phases

Project Planning and Phases

Phases of Capital BudgetingProject Analysis FacetsResource Allocation FrameworkGeneration & Screening of Project

Ideas

Capital Budgeting =

… may be defined as the firm’s

decision to invest its funds in the project to get the benefitover the years.

… the major consideration in taking a capital budgeting decision is to evaluate its returns as compared to its investment.

Capital Budgeting

Planning

Analysis

Selection

Implementation

Review

Capital Budgeting: Phases

Planning

Capital Budgeting: Phases / Planning

Capital Budgeting: Phases / Analysis

Planning: Worthwhile.

Gathering and summarizing Gathering and summarizing relevant info about relevant info about

various various project project proposals which are proposals which are

being considered.being considered.

Analysis

Capital Budgeting: Phases / Selection

Planning n Analysis: Worthwhile n Selected.

Criteria to judge the suitability of the Criteria to judge the suitability of the project:project:

II Non-discountingNon-discounting

IIII DiscountingDiscounting

Selection

Capital Budgeting: Phases / Selection

Capital Budgeting: Phases / Selection

Why $ should have time value?

$ can be invested productively to generate additional $ can be invested productively to generate additional return.return.

Inflation: lower purchasing power in the future.Inflation: lower purchasing power in the future. Since the future is uncertain, individuals prefer current Since the future is uncertain, individuals prefer current

consumption to future consumption.consumption to future consumption.

Non-discounting criteria: ignore time value of money

Capital Budgeting: Phases / Selection

Consider time value of money. Give a clear cut decision rule. All the cash flows are considered, including

working capital and salvage value. The risk associated with future uncertainties

can be easily incorporated by adjusting the required rate of return.

Advantages of Discounted Cash Flow Techniques

Capital Budgeting: Phases / Impl.

ImplementationI Adequate Formulation of Project.II Assignment of Responsibilities.III Use of Network Techniques.

Implementation

Capital Budgeting: Phases / Review

Feedback device may be proved useful bkz:

• It throws the light on how realistic were the assumptions.• Provides experience which is highly valuable in future

decision making.• It suggests corrective action to be taken in the light of

actual performance.• It helps in uncovering judgmental biases

Review

Project Analysis

Project Analysis Facets:

•Market Analysis•Financial Analysis•Ecological Analysis•Technical Analysis•Economical Analysis

Project Analysis: Market Analysis

Future:1. Aggregate demand of the proposed product/service?2. Market share of the project under appraisal?

• Past consumption trends n present level• Past n present supply position• Imports and Exports• Level of competition• Elasticity of demand• Consumer behavior, motivation,

attitude, preferences n requirements• Administrative, technical n legal

constraints.

Project Analysis: Tech Analysis

DeterminesDetermines if the pre-requisites for successful project

implementation have been considered and good choices have been made.

? preliminary test? availability of raw materials, power n other inputs? suitable production process? appropriate machines n equipments? proposed layout of the plant n building is

appropriate? proposed technology is appropriate from social

point of view.

Project Analysis: Financial Analysis

Questions:

• Cost of the project• Preparation of cost estimates• Means of financing• Financial institutions• Financial projections• Cost of capital• Project profitability• Break-even point• Cash flows of the project• Projected financial position• Level of risk

Project Analysis: Economic Analysis

• Contribution to economic development

• Contribution to region development

• Direct economic benefits and costs of the project in terms of efficiency prices

• Distribution of income in society• Savings and investments in the

society Improving employment opportunities, self-sufficiency and social order

Impact of the project:

Project Analysis: Ecological Analysis

• What is the likely damage caused by the project to the environment?

• What is the cost of measures required to control the damage to the environment within acceptable limits?

Ensure sustainability:Ensure sustainability:

+ better life for man+ conservation of the diversity of this planet

Resource Allocation

Resource Allocation Framework:

• Key Criteria• Elementary Investment Strategy• Portfolio Planning Tools• SPACE• Debate Over Diversification

Resource Allocation Framework

3 Key CriteriaBasic objective of the company is to maximize the wealth of shareholders.

Profitability =relationship between

Profit & InvestmentMeasuring profitability:

Profit after tax------------------Tax Net-worth

Resource Allocation Framework

Elementary Investment Strategy

Resource Allocation Framework

Portfolio Planning Tools

Resource Allocation Framework

Strategic Position n Action Evaluation(SPACE)

Resource Allocation Framework

Debate Over Diversification

Resource Allocation Framework

Interface Between Strategic Planning and Capital Budgeting

Environment assessment

Managerial Vision, Values and Attitudes Corporate

Appraisal

Strategic Plan

Capital Budgeting

Strategies (Product, Market, Production,

…)

Project Ideas

Generation and Screening of Project

Ideas

• Generation of ideas• Monitoring the environment• Corporate appraisal• Scouting for project ideas• Preliminary screening• Project rating index• Sources of positive net present value

Project Ideas

Generation of Ideas

E.g. SWOTSWOT Strengths

WeaknessesOpportunitiesThreats

Project Ideas

Monitoring the Environment

Economic Sector

• Overall growth rate• Growth rate of primary n

secondary sectors• Cyclical fluctuations• Inflation rate• Balance n Payment

situation• Linkage with world

economy

Project Ideas

Monitoring the Environment

Government Sector • Industrial policy• Government projects• Import n export policies• Financial norms• Lending conditions of

financial institutions

Project Ideas

Monitoring the Environment

Tech Sector

• Emergence of new technologies

• Access to technical know how

Project Ideas

Monitoring the Environment

Socio-demographic Sector

• Population trends• Distribution of Income• Women Entrepreneurship• Attitudes towards

consumption n investment

Project Ideas

Monitoring the Environment

Competition Sector

• Number of firms in the industry

• Homogeneity n differentiation among product

• Marketing policies n practices

• Comparison with substitutes in terms of quality, price

Project Ideas

Monitoring the Environment

Supplier Sector

• Availability and cost of raw materials, energy, etc.

Project Ideas

Corporate Appraisal

Marketing n distribution

1. Market Share2. Product Line3. Distribution Network4. Customer Loyalty5. Marketing n Distribution

costs

Project Ideas

Corporate Appraisal

Production n Operations

1. Plant capacity n conditions2. Availability of raw material3. Locational advantage

Project Ideas

Corporate Appraisal

Research n Development

1. Research capabilities of the firm

2. New product developments3. Coordination between

research n operations

Project Ideas

Corporate Appraisal

Personnel

1. Competence n commitment of employees

2. Dynamism of top management

3. State of industrial relations

Project Ideas

Corporate Appraisal

Finance n Accounting

1. Financial leverage n borrowing capacity

2. Cost of capital3. Relations with shareholders n

creditors4. Accounting n control system

oAnalyze the Existing PerformanceoExamine the Inputs n Outputs of Various

IndustriesoStudy the Government’s GuidelinesoAnalyze economic n Social Trendso Identify Unfulfilled Psychological Needs

Project Ideas

Scouting for Project Ideas

oCompatibility with the EntrepreneuroConsistency with Governmental PrioritiesoAvailability of InputsoAdequacy of MarketoReasonable Cost

Preliminary Screening

Project Ideas

o Identify relevant factors for project ratingoAssign weights to these factorsoRate the project proposal on various factorsoMultiply the factor rating with the factor

weight to the factor scoreoAdd all the factor scores to get the overall

project rating index

Project Ideas

Project Rating Index

oEconomies of ScaleoProduct DifferentiationoCost AdvantageoMarketing ResearchoTechnological

AdvancementoGovernment Policy

Project Ideas

Sources of Positive Net Present Value• Effective advertisement• High quality n

dependability• Innovative product• Better service

• Favorable location• Effective cost control n cost

reduction• Monopoly over low cost materials

• Import restrictions• Special tax relief• Restrictive licensing• Environmental control

Project Ideas

Competitive Analysis

Homework: 17.06.2010

1. Strategy.2. Portfolio.3. SWOT.