Project Planning and Control

Meaning of capital budgeting

• Capital budgeting is the art of finding assts that are worth more than they cost, to achieve a predetermined goal i.e. optimizing the wealth of a business enterprise.

Capital Investment process

1. Search for investment opportunities2. Screening the alternatives3. Analysis of feasible alternatives4. Evaluation of alternatives5. Authorization6. Implementation and control

Kinds of projects

• Balancing projects• Modernization projects• Replacement projects• Expansion projects• Diversification projects

Project Organization Structure and Management Systems

• Matrix organization structure• Task force organization structure

Stages in setting up of a project

Initial selection of project ideas• Promoter’s profile, qualification, experience• Estimate of project cost• Market size and growth potential• Availability of inputs• Costs involved in production, administration

and marketing• Risk involved in the project

Selection of project location

• Proximity of inputs• Proximity of market• Availability of [power• Availability of transportation• Communication facilities• Government policies• Manpower availability• Weather and climatic conditions• Environmental factors and other regulations

Selection of project site

• Availability of land• Proximity to city• Industrial area developed by government • Physical features for the site• Utility connections like power, water etc.• Railway siding, approach roads facility for

disposal of effluents

Soil and topography Choice of technology• Plant capacity• Principal inputs• Investment outlays and production costs• Product mix• Ease of absorption

SWOT analysis• Internal financial resources• Availability of funds in the capital market• Extern of support form banks and financial institutions• Business and financial risk attached to the firm• Brand loyalty of existing products• Source of raw materials and other infrastructure facilities• Market share and distribution network• Severity of competition• Cost of production and managerial competence• Cost of capital• Government clearances and permissions

Zero date

• A date is fixed up from which the implementation of the project begins, which is a base for counting the time as well a s cost of project

Financial closure

• After the necessary government clearances obtained and after entering into loan agreements, the project in all aspects ready for implementation and this state of readiness for monetary support of project is called financial closure

Project visibility• A project can be seen by the people only at the

end of its implementation stageWork breakdown structureIt is the total project work broken down according

to various components and will establish the connection between various components

Brown field projectA project implemented in the grounds of a working

plante.g. Modernization and expansion project

Resource levellingIt is the usage of resources during the project

duration with minimum variation in resource requirements without extending the project completion time.

Project execution plan• Contracting plan• Work packaging plan• Organisation plan• Systems and procedure plan

CAT scheduleCommitted activity target schedule used for

assessing the progress executing agencies.RAT schedule Revised activity target scheduleLine of balance:It is a planning and monitoring the progress of

an order, project or program to be completed by a target date.

Value engineering reviewSystematic analysis and evaluation of the

techniques and functions in various spheres of an organization with a view to identify and eliminate unnecessary function and thereby reduction of cost which do not add value

Risk aware cultureTime and cost trade off

Variance analysis:It involves comparison of the actual costs with

budgeted costs to determine the variancePerformance analysis:It is an analysis done for the project as a whole and

for individual part of the project, as regards time and cost, whether it is as per schedule or not.

Network analysis:Techniques used for administration of projects

which consist of several activities having a definite interrelationship among them.

Objectives of network analysis:

• To ascertain normal duration for completion of all the activities comprised in the project

• To minimize the cost of the project by proper deployment of the resources.

• To obtain the cost time trade off

Market survey

Feasibility studyProject feasibility is a test by which an investment is evaluated.Types of Feasibilities• Market Feasibility: Demand and price estimates are determined from the

market feasibility study. The market feasibility study for a product already selling in the

market consists of:• Study of economic factors and indicators;• Demand estimation;• Supply estimation;• Identification of critical success factors; and• Estimation of demand-supply gap, which is as follows:Demand Surplus: Minimum = Min demand – Max supplyLikely = Likely demand – Likely supplyMaximum = Max demand – Likely supply

Technical Feasibility

• The commercial side of technical details has to be studied along with the technical aspects so that commercial viability of the technology can be evaluated. Project costs along with operating costs are derived from technical feasibility study.

Financial Feasibility

• Financial feasibility study requires detailed financial analysis based on certain assumptions, workings and calculations like Projections for prices and cost, Period of estimation, Financing alternatives, Financial statements and Computation of ratios such as debt-service coverage ratio (DSCR), net present value (NPV) or internal rate of return (IRR), Projected balance sheet and cash flow statement.

Contents of a Project Report

• Details about Promoters;• Industry Analysis;• Economic Analysis;• Cost of Project;• Inputs regarding raw material, suppliers, etc;• Technical Analysis;• Financial Analysis;• Social Cost Benefit Analysis;• SWOT Analysis; and• Project Implementation Schedule.

Cost benefit analysis

• An analytical tool in decision making which enables a systematic comparison to be made between the estimated cost of undertaking o project and estimated value and benefits which may arise from the operation of such a project.

CBA procedure

• Determine problem to be considered• Ascertain alternative solutions to problem• Estimate and analyze costs and benefits• Appraise estimated costs and benefits• Decide on optimal solution

Techniques of CBA

(a) Discounted cash flow techniques• NPV• Internal rate of return(b) Benefit /cost comparison(c) Benefit/cost ratio

Social cost benefit analysis

• Social cost benefits analysis is an approach for evaluation of projects. A technique for appraising isolated projects from the point of view of society as a whole. It assesses gains/losses to society as a whole from the acceptance of a particular project. Social gains/losses (quantifiable/measurable) regarded as additions to and subtractions from something that the society desires.

Economic appraisal techniques of project

Economic rate of returnA discount rate at which the cash inflows and cash

outflows of the project are equated.ERR is determined on the basis of shadow prices which

reflect the real cost of inputs to the nation and the real benefit of output to the nation instead of market prices.

Shadow price: Opportunity cost of an activity or project to a society, computed where the actual price is not known or, if known, does not reflect the real sacrifice made

Domestic resource costs

• DRC measures the resource cost of manufacturing a product as compared to importing/exporting cost to it. DRC is computed as the quantum of domestic resources or costs deployed in production i.e. the costs incurred in production to the net foreign exchange saved or earned.

• DRC= Vale added at domestic prices X Exg.rate value added at world prices

Effective rate of protection

• It indicates the degree of protection given by the national economy to the indigenous product, which is indicated by the favorable difference in value addition at domestic prices as compared with international prices.

ERP= Value added at domestic prices-Value added at world prices/ prices-Value added at world prices X100