4project financing planning-3

8/7/2019 4project financing Planning-3

1/35

Planning


2/35

Planningy Overview

y Resource Allocation Framework

y Generation and Screening of Project Ideas.


3/35

Overviewsy A mini-steel plant is considering building a new Arc

Furnace:

y An insurance company is planning to install a computer

system for information processing.

y Government of India is thinking of an ambitious plan tolink Ganges and Cavery rivers.


4/35

y Gautam a graduate student is planning to buy amoped

y Involves - A capital expenditure decision

y Importance and difficulties.y Phase of capital budgetingy Levels of decision makingy Facets of project analysisy Objectives of capital budgeting


5/35


6/35

Measurement

Problem

Uncertainty Temporal

spread

Difficulties

Cost Benefit


7/35


8/35

Analysisy Marketingy Technical

y Financial

y Economic

y Ecological


9/35

Selection

Appraisal Criteria

Non Discounting Discounting

Pay back period

Accounting Rate of return

Net present value

Internal rate of return

Benefit Cost Ratio


10/35

Criteria Accept Reject

PBP PBP < target period PBP > target periodARR ARR > Target rate ARR 0 NPV < 0

IRR IRR > Cost of capital IRR 1 BCR < 1


11/35

Implementation


12/35

Stage Concerned With

Project and

engineering

designs

Site probing and prospecting preparation of blue

prints, and plant designs, plant engineering,

selection of specific machineries and equipment

Negotiations

and Contracting

Negotiable and drawing up of legal contracts with

respect to project financing, acquistion of

technology, construction of building and civil

works, provision of utilities, supply of machineryand equipment, marketing arrangements etc

Construction Site preparation, construction of building & civil

works, erection and installation of machinery &

equipmentTraining Training of engineers, technicians and workers

Plant

Commissioning

Start up of the plant


13/35

y Translation of an investment proposal in to a concrete

project is a complex, time consuming & risk fraught

task. Delay in implementation can lead to substantial

cost overruns. For expeditious implementation at a

reasonable cost, the following are helpful-


14/35

Adequate

formulation ofproject

Home-work in

term of

preliminary

studies

Comprehensive

and detailed

formulation of

project


15/35

Use of principles

of

Responsibility

Accounting

Time Frame Cost Limit


16/35


17/35

Key issues in Project Analysis

y

Market Analysisy Potential market

y Market Share

y Technical Analysis

y Technical viability

y Sensible choices

y Financial Analysis

y Risk

y Return


18/35

Key issues in Project Analysisy Economic Analysis

y Benefit and costs in shadow prices

y Other impact

y Economical Analysis

y Environment damage

y Restoration measures


19/35

Feasibility Study: A Schematic Diagram

General of ideas

Initial Screening

Is the idea primafacie promising

Plan feasibility

AnalysisTerminate


20/35

Plan feasibility Analysis

Conduct Market Analysis Conduct Technical Analysis

Conduct financial Analysis

Conduct Economic and Ecological Analysis

Is the project is

worthwhile

Prepare finding

Proposal

Terminate


21/35

Resource Allocation

Frameworky In an HBR article, Seymour Tilles wroke The most

tangible expression of a companys strategy is its

allocation of funds. Few things determine the future of

the company as directly as the way it spends its money.

Those activities which are treated generously are

presumably the real basis of the companys future.


22/35

Research Allocation

Frameworky Key criteria

y Elementary investment strategies

yPortfolio planning tools

y Strategic position and action evolution

y Diversification debate


23/35

Key Criteria

Profitability Risk Growth

Unit of

Measurement

Unit of

measurement

Unit of

measurement

ROE = PAT

Net worth

Range of possible

outcomes

Difference betweenhighest and lowest

outcomes

i.e Range of return of equity

- Assets

- Networth

- Profits-Dividends

- So on.


24/35

Elementary Investment

Strategies Replacement and Modernization

Capacity expansion

Vertical integration

Concentric diversification

Conglomerate diversification

Disinvestments


25/35

Portfolio Planning Toolsy BCG Product Portfolio matrix

y General Electrics Stoplight Matrix


26/35

BCG Product Portfolio matrix

Relative

Market Share

High Low

High Stars Question

marks

Low Cash Cows Dogs

Industry

Growth

Rate


27/35

Cash cows(Funds

generated)

Dogs on

disinvestments(Funds released)

Stars Question

Marks


28/35

Stars Question marks

Cash cows

Dogs


29/35

General Electrics Stoplight

MatixBusiness Strength

Strong Average Weak

High Invest Invest Hold

Medium Invest Hold Divest

Low Hold Divest Divest


30/35

Functions of Planningy It provides a basis for organizing work on the project

and allocating responsibilities to individuals.

y It is a means of communication and coordinationbetween all those involved in the project.

y It induces people to look a head.

y It instills a sense of urgency and time consciousness

y It establishes the basis for monitoring and control.


31/35

Areas of Planningy Planning the project work

yPlanning the manpower and organisation

y Planning the money

y Planning the information system.


32/35

The work break-down

structure helps iny Effective planning by dividing the work into manageable

elements which can be planned budgeted andcontrolled

yAssignment of responsibilities for work element toproject personnel and outside agencies.

y Development of control and information system


33/35

Life Cycle of a Projecty Project development and preliminary engineering.

y Bidding and contract negotiation

yEngineering design

y Purchase and procurement

y Construction

y Commissioning


34/35

Tools of Planning

Bar charts/ Gantt Chart

y Simple to understand

y Used to show progress

y Can be used manpowerplanning

Limitations

y Cannot show interrelationshipamong activities in complexprojects

y Physical limit to the size

y Frequent changes & updatingis not possible

Network Technique

y Effectively handleinterrelationship

y Identify the activities whichare critical- on time

yCan handle complex andlarge projects

y Easily computerized &updated

Limitations

y Not easily understood byproject personnel

y Operational schedule is notdefined. i.e. who does, what& when


35/35

y For a large project a hierarchy of plans, having varying

levels of details need to be prepared.

4project financing planning-3

Documents