mba-iv-project, appraisal, planning & control [12mbafm425]-notes

PROJECT APPRAISAL, PLANNING AND CONTROL 12MBAFM425

Dept. of MBA

Subject Name: PROJECT APPRAISAL, PLANNING AND CONTROL

Sub Code: 12MBAFM425 IA Marks: 50

No. of Lecture Hrs/week: 04 Exam Hrs : 03 Hours

Total No. of Lecture Hrs: 56 Exam Marks: 100

Module I (4 Hours)

Planning & Analysis Overview: Phases of capital budgeting – Levels of decision making –

objective. Resource Allocation Framework: Key criteria for allocation of resource – elementary

investment strategies – portfolio planning tools – strategic position and action evaluation –

aspects relating to conglomerate diversification – interface between strategic planning and

capital budgeting.

Module II (6 Hours)

Generation and screening of project ideas: Generation of ideas – monitoring the environment

– regulatory framework for projects – corporate appraisal – preliminary screening – project

rating index – sources of positive NPV – qualities of a successful entrepreneur – the porter model

for estimation of profit potential of industries.

Market and demand analysis: Situational analysis and specification of objectives – collection of

secondary information – conduct of market survey – characterization of the market – demand

forecasting – market planning.

Technical analysis: Study of material inputs and utilities – manufacturing process and technology

– product mixes – plant capacity – location and site – machinery and equipment – structures and

civil works – project charts and layouts – work schedule

Module III (12 Hours)

Financial Analysis: Estimation of cost of project and means of financing – estimates of sales

and production – cost of production – working capital requirement and its financing – estimates

of working results – breakeven points – projected cash flow statement – projected balance sheet.

Project cash flows: Basic principles of measurement of cash flows – components of the cash

flow streams – viewing a project from different points of view – definition of cash flows by

financial institutions and planning commission – biases in cash flow estimation.


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Appraisal criteria: Net Present Value – benefit cost ratio – internal rate of returns urgency –

payback period – accounting rate of returns – investment appraisal in practice.

Module IV (10 Hours)

Types and measure of risk – simple estimation of risk – sensitivity analysis – scenario analysis

– montecarlo simulation – decision tree analysis – selection of project – risk analysis in practice.

Special decision situations: Choice between mutually exclusive projects of unequal life – optimal

timing decision – determination of economic life – inter-relationships between investment and

financing aspects – inflation and capital budgeting.

Analysis of firm and market risk: Portfolio theory and capital budgeting – capital asset pricing

model – estimation of key factors – CAPM and Capital budgeting

Module V (5 Hours)

Social Cost Benefit Analysis(SCBA): Rationale for SCBA – UNIDO approach to SCBA –

Little and Mirle approach to SCBA.

Module VI (4 Hours)

Multiple projects and constraints: Constraints – methods of ranking – mathematical

programming approach – linear programming model – Qualitative Analysis: Qualitative factors

in capital budgeting – strategic aspects – strategic planning and financial analysis – informational

asymmetry and capital budgeting – organizational considerations. Environmental appraisal of

projects: types and dimensions of a project – meaning and scope of environment – Environment

– Environmental resources values – environmental impact assessment and environmental impact

statement.

Module VII (5 Hours)

Project financing in India: Means of finance – norms and policies of financial institutions –

SEBI guidelines – Sample financing plans – structure of financial institutions in India – schemes

of assistance – term loans procedures – project appraisal by financial institutions.


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Module VIII (10 Hours)

Project Management: Forms of project organization – project planning – project control –

human aspects of project management – prerequisites for successful project implementation.

Network techniques for project management – development of project network – time estimation

– determination of critical path – scheduling when resources are limit – PERT and CPM models

– Network cost system (Only problems on resources allocation and resources leveling)

Project review and administrative aspects: Initial review – performance evaluation –

abandonment analysis – administrative aspects of capital budgeting – evaluating the capital

budgeting system of an organization.

Contents

Sl No: Module Page No

1 Planning & Analysis Overview 4 - 16

2 Generation and screening of project ideas 17 - 28

3 Financial Analysis 29 - 36

4 Types and measure of risk 37 - 41

5 Social Cost Benefit Analysis(SCBA) 42 – 43

6 Multiple projects and constraints 44 – 56

7 Project financing in India 57 – 68

8 Project Management 69 – 77


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Module I (4 Hours)

Planning & Analysis Overview: Phases of capital budgeting – Levels of decision making –

objective. Resource Allocation Framework: Key criteria for allocation of resource – elementary

investment strategies – portfolio planning tools – strategic position and action evaluation –

aspects relating to conglomerate diversification – interface between strategic planning and

capital budgeting.

Capital Investment or Project

“Capital Expenditure or capital Investment Involves a current outlay (or future outlay) of funds

on the expectation of a stream of benefits extending far into the future”.

PHASES OF CAPITAL BUDGETING

Capital budgeting is a complex process that may be divided into six broad phases:

1. Planning

2. Analysis

3. Selection

4. Financing

5. Implementation

6. Review

Capital Budgeting Process


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1. Planning:

It is concerned with the articulation of its broad investment strategy and the generation

and preliminary screening of project proposals.

This provides the framework, which shapes, guides, and circumscribes the identification

of individual project opportunities.

2. Analysis

If the preliminary screening suggests that the project is prima facie worthwhile, a detailed

analysis of the marketing, technical, economic, and ecological aspects is undertaken.

The focus of this phase is on gathering, preparing, and summarizing relevant information

about various project proposals, which are being considered for inclusion in the capital

budget.

3. Selection

It addresses the question--- Is the project worthwhile? A wide range of appraisal criteria

has been suggested to judge the worthwhile ness of a project.

They are divided into two broad categories, viz., non-discounting criteria (e.g. payback

period and accounting rate of return) and discounting criteria (e.g. net present value, the

internal rate of return)

4. Financing

Two broad sources of finance for a project are equity and debt. Equity consists of paid-

up-capital, share premium and retaining earnings.

Debt consists of term loans, debentures and working capital advances.

Flexibility, risk, income, control and taxes are the key business considerations that

influence the capital structure decision and the choice of specific instruments of

financing.


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5. Implementation

It involves setting up of manufacturing facilities, consists of several stages: (i)

project and engineering designs, (ii) negotiations and contracting (iii) construction, (iv) training

and (v) plant commissioning.

6. Review

Performance review should be done periodically to compare actual performance with

projected performance.

A feedback device is useful in several ways: (i) it throws light on how realistic were the

assumptions underlying the project; (ii) it provides a documented log of experience that is

highly valuable in future decision-making; (iii) it suggests corrective action to be taken in

the light of actual performance; (iv) it helps in uncovering judgmental biases; (v) it

induces a desired caution among project sponsors.

Levels of Decision Making

Gordon, Miller and Mintzberg defined three levels of decision making:operating, adminstrative

and strategic decisions. The key characteristics of decisions at these levels as described below:

Characteristics Operating Administrative Strategic

decisions decisions decisions

1. Level of decision Lower level Middle level Top level

2. Structure of decision Routine Semi-structured Unstructured

3. Level of resource

commitment Minor Moderate Major

4. Time Horizon Short-term Medium-term Long-term


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Capital Allocation

Capital is scarce and hence must be allocated among competing claims very judiciously. The

identification, evaluation and selection of individual investment proposals is usually guided by a

capital allocation framework, defined explicitly or implicitly by top mgt. The capital allocation

framework of a firm spells out the kinds of businesses the firm wants to be in, the strategy of the

firm.

Key Criteria

The following three key criteria we should see, before going to capital investment. They are:

1. Profitability

2. Risk

3. Growth

1. Profitability

It is the principal driving force for business activity. Profitability reflects the

relationship between profit and investment.

Profit After Tax / Net worth

2. Risk

It reflects variability: How much do individual outcomes deviate from the

expected value? A simple measure of variability is the range of possible outcomes, which

is simply the difference between highest and lowest outcomes.

3. Growth

Business firms actively pursue and achieve growth over a period of time. This is

manifested in the increase of revenues, assets, net worth, profits, dividends and so on.

Elementary Investment Options

The following are the elementary investment options:

1. Replacement & Modernization

2. Capacity expansion

3. Vertical Integration

4. Concentric diversification

5. Conglomerate diversification

6. Divestment


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1. Replacement & Modernization

It meant to maintain the production capacity of the firm, improve quality and reduce

costs.

Competitive strength of the firm will improve.

If such investments are neglected, the existence of firm in the market is difficult. Eg.

Cotton Industry.

2. Capacity expansion

It will help to utilize full capacity or resources of a firm.

It will help to meet current demand of a firm and an increase in the market share.

Lower capital costs, familiarity with technology, production methods and market

conditions reduction in unit overhead costs are the advantages of capacity expansion.

3. Vertical Integration

Vertical integration may be of two types:

(i) Backward integration and (ii) Forward integration

(i) Backward integration

It involves the manufacture of raw materials and components required for the

existing operations of the company.

(ii) Forward integration

It involves the manufacture of products which use the existing products of

the company as the input.

Concentric Diversification

Adding of more products in the same line of product is called concentric

diversification.

Eg. Hero Honda, Splendor, Splendor +, Passion, Super Splendor etc.


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5. Conglomerate Diversification

It involves investment in fields unrelated to the existing line of business.

Eg. L & T invests in Shipping

It overcomes the limited growth opportunities and reduces the overall risk exposure of

the firm.

6. Divestment

It is the opposite of the investment and involves termination or liquidation of the plant or

a division of a firm.

Reasons for divestment are low or negative profitability, declining market share,

difficulty in managing etc.

Portfolio Planning Models

To guide the process of strategic planning and resource allocation, several portfolio

planning tools have been developed. Two such tools, highly relevant in the context of our

present discussion are:

1. BCG Product Portfolio Matrix

2. General Electric’s Stoplight Matrix

BCG Product Portfolio Matrix

It is a tool for strategic (product) planning and resource allocation. The Boston Consulting Group

(BCG) product portfolio matrix analyses products on the basis of (a) relative market share and

(b) industry growth rate.

The BCG matrix classifies products into four broad categories as follows:

BCG Product Portfolio Matrix

High Low

High Stars Question

Marks

Low Cash

Cows

Dogs


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1. Stars:

Products which enjoy a high market share and a high growth rate are referred to as stars.

Though they earn high profits, they require additional commitment of funds because of

the need to make further investments for expanding their production and sales.

2. Question Marks:

Products with high growth potential but low present market share are called question

marks. Additional resources are required to improve their market share and potentially convert

them into stars. Of course, their is no guarantee that this would happen.

3. Cash cows:

Products which enjoy a relatively high market share but low growth potential are called

cash cows. The generate substantial profits and cash flows but their investment requirements are

modest.

4. Dogs:

Products with low market share and limited growth potential are referred to as dogs.

Since the prospects for such products are bleak, it is advisable to phase them out rather than

continue with them.

From the above description, it is broadly clear that cash cows generate funds and

dogs if divested, release funds. Stars and question marks require further commitment of funds.

II. General Electric’s Stoplight Matrix

The General Electric Company of US developed a matrix for guiding resource allocation is

called the General Electric’s Stoplight Matrix. It describes various products or services or the

firm in terms of two key issues.


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1. Business Strength: How strong is the firm vis-à-vis its competitors?

2. Industry Attractiveness: What is the attractiveness or potential of the industry?

The commitment of funds to various products is guided by how they are rated In terms of the

above two dimensions. Products which are favorably placed call for divestment and products

which are placed in between qualify for modest investment.

STRATEGIC POSITION AND ACTION EVALUATION (SPACE)

SPACE is an approach to hammer out an appropriate strategic posture for a firm and its

individual businesses. SPACE involves a consideration of four dimensions:

1. Company’s competitive advantage

2. Company’s financial strength

3. Industry strength

Business Strength

Industry

Attractiveness

General Electric’s Stoplight Matrix


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4. Environmental stability

The factors determining competitive advantage, financial strength, industry strength and

environmental stability are shown as follows:


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Strategic Planning & Capital Budgeting

Capital expenditures, particularly the major ones, are supposed to sub serve the strategy of the

firm. Hence, the relationship between strategic planning and capital budgeting must be properly

recognized.

Capital budgeting may be viewed as a two-stage process. In the first stage promising

growth opportunities are identified through the use of strategic planning techniques and in the

second stage individual investment proposals are analyzed and evaluated in detail to determine

their worthiness.

Strategy involves matching a firm’s ‘strengths’ and ‘weaknesses’– its distinctive

competencies with the ‘opportunities’ and ‘threats’ present in the external environment.

Facets of Project Analysis


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The important facets of project analysis are:

1. Market Analysis

2. Technical Analysis

3. Financial Analysis

4. Economic Analysis

5. Ecological Analysis

1.Market Analysis

Market analysis is concerned primarily with two questions:

1. What would be the aggregate demand of the proposed product/service in the future?

2. What would be the market share of the project under appraisal?

To answer the above questions, the following information required are:

• Consumption trends in the past and the present consumption level.

• Past and present supply position

• Production possibilities and constraints

• Imports and exports

• Structure of competition

• Cost Structure

• Elasticity of demand

• Distribution channels and marketing policies in use

• Consumer behaviour, intentions, motivations, attitudes, preferences and requirements

• Administrative, technical and legal constraints.


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2. Technical Analysis

Technical analysis seeks to determine whether the prerequisites for the successful

commissioning of the project have been considered and reasonably good choices have been

make with respect to location, size, process, etc. The important questions raised in technical

analysis are:

• Whether the preliminary tests and studies have been done or provided for?

• Whether the availability of raw materials, power, and other inputs has been established?

• Whether the selected scale of operation is optimal?

• Whether the auxiliary equipments and supplementary engineering works have been

provided for?

• Whether the proposed layout of the site, buildings and plant is sound?

• Whether work schedule have been realistically drawn up?

• Whether the technology proposed to be employed is appropriate from the social point of

view?

3. Financial Analysis

Financial analysis seeks to ascertain whether the proposed project will be financially

viable and weather the proposed project will satisfy the return expectations of those who provide

the capital. The following aspects have to be seen in financial analysis are:

• Investment outlay and cost of project

• Means of financing

• Cost of capital

• Projected profitability

• Break-even point

• Cash flows of the project

• Investment worthwhileness judged in terms of various criteria of merit

• Projected financial position

• Level of risk

4. Economic Analysis

Economic analysis, also referred to as social cost benefit analysis, is concerned

with judging a project from the larger social point of view. The questions sought to be answered

in social cost benefit analysis are:


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• What are the direct economic benefits and costs of the project measured in terms of

shadow(efficiency) prices and not in terms of market prices?

• What would be impact of the project on the distribution of income in the society?

• What would be the impact of the project on the level of savings and investment in the

society?

• What would be the contribution of the project towards the fulfillment of certain merit

wants like self-sufficiency, employment and social order?

5. Ecological Analysis

Ecological Analysis should be done particularly for major projects which have

significant ecological implications (like power plants and irrigation schemes) and environment-

polluting industries (like bulk drugs, chemicals, and leather processing). The key questions

raised in ecological analysis are:

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

• What is the cost of restoration measures required to ensure that the damage to the

environment is contained within acceptable limits?


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Module II (6 Hours)

Generation and screening of project ideas: Generation of ideas – monitoring the environment

– regulatory framework for projects – corporate appraisal – preliminary screening – project

rating index – sources of positive NPV – qualities of a successful entrepreneur – the porter model

for estimation of profit potential of industries.

Market and demand analysis: Situational analysis and specification of objectives – collection of

secondary information – conduct of market survey – characterization of the market – demand

forecasting – market planning.

Technical analysis: Study of material inputs and utilities – manufacturing process and technology

– product mixes – plant capacity – location and site – machinery and equipment – structures and

civil works – project charts and layouts – work schedule

Stimulating the flow of Ideas

1.SWOT Analysis

2.Clear Articulation of Objectives

3.Fostering a Conducive Climate

SWOT Analysis

Strengths

Weaknesses

Opportunities

Threats

An OPPORTUNITY is a chance for firm growth or progress due to a favorable juncture

of circumstances in the business environment.

Possible Opportunities:

Emerging customer needs

Quality Improvements


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Expanding global markets

Vertical Integration

A THREAT is a factor in your company’s external environment that poses a danger to its

well-being.

Possible Threats:

New entry by competitors

Changing demographics/shifting demand

Emergence of cheaper technologies

Regulatory requirements

By examining opportunities, you can discover untapped markets, and new

products or technologies, or identify potential avenues for diversification.

By examining threats, you can identify unfavorable market shifts or changes in

technology, and create a defensive posture aimed at preserving your competitive

position.

The purpose of SWOT Analysis

It is an easy-to-use tool for developing an overview of a company’s strategic situation. It

forms a basis for matching your company’s strategy to its situation.

It provides the “raw material” to do more extensive internal and external analysis and

identify opportunities that can be profitably exploited by it

Clear Articulation of Objectives

Cost reduction

Increase in capacity utilization

Improvement in contribution margin

Expansion into promising fields

Monitoring the environment

Economic sector

Government Sector

Technological Sector

Socio-Demographic Sector

Competition Sector


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Supplier Sector

Corporate Appraisal

Marketing & Distribution

Production & Operations

Research & Development

Corporate resources & personnel

Finance & Accounting

Preliminary Screening

1. Compatibility with the promoter

2. Consistency with governmental priorities

3. Availability of inputs

4. Adequacy of market

5. Reasonableness of cost

6. Acceptability of risk level

Project Rating Index

Steps in Project Rating Index

1. Identify factors relevant for project rating.

2. Assign weights to these factors according to importance

3. Rate the project proposal on various factors using a suitable rating scale.


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4. For each factor, multiply the factor rating with the factor weight to get the factor score.

5. Add all the factor scores to get the overall project rating index.

Sources of Positive Net Present Value

Entry barriers that result in positive NPV projects:

1. Economies of Scale

Economies of scale means that an increase in the scale of production, marketing or

distribution results in a decline in the cost per unit.

In order to exploit the economies of scale new entrants require a substantial investment in

plant & machinery, research & development and market development. The greater the capital

requirement, the higher the barrier to entry. Eg. Petroleum Refining, Mineral extraction, iron &

steel industry etc.

2. Product Differentiation

A firm can create an entry barrier by successfully differentiating its products from

those of its rivals. The basic differentiation is

Effective advertising and superior marketing

Exceptional service.

Innovative product features

High quality & dependability

3. Cost Advantage

If a firm can enjoy cost advantage vis-à-vis its competitors, it can be reasonable assured

of earning superior returns. E.g.. Low material cost, cheep labour , a favourable location etc.

4. Marketing Reach

A penetrating marketing reach is an important source of competitive advantage. E.g.. The

breadth and debth of Hindustan Lever’s distribution network is larger than its competitors.


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5. Technological Edge

Technological superiority enable a firm to enjoy excellent returns.

Eg. IBM, Xerox, Dr. Reddy’s Laboratory & Hero Honda etc.

6. Govt. Policy

Govt. policies that create entry barriers, partial or absolute, include the following:

Restrictive Licensing

Import restrictions

High tariff

Environmental Controls

Special tax relieves.

Qualities of a successful entrepreneur

A successful entrepreneur has the following qualities and traits:

1. Willingness to make sacrifices

2. Leadership

3. Decisiveness

4. Confidence in the project

5. Marketing orientation

6. Strong ego

Profit Potential of Industries – Porter Model

Micheal Porter has argued that the profit potential of an industry depends on the combined

strength of the following five basic competitive forces:


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The five forces are environmental forces that impact on a company’s ability to compete

in a given market.

The purpose of five-forces analysis is to diagnose the principal competitive pressures in a

market and assess how strong and important each one is.

Barriers to Entry

a. Economies of Scale

b. Product Differentiation

c. Capital Requirements

d. Switching Costs

e. Access to Distribution Channels

f. Cost Disadvantages Independent of Scale

g. Government Policy

h. Expected Retaliation

Bargaining Power of Suppliers

Suppliers are likely to be powerful if:

a. Supplier industry is dominated by a few firms

b. Suppliers’ products have few substitutes

c. Buyer is not an important customer to supplier


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d. Suppliers’ product is an important input to buyers’ product

e. Suppliers’ products are differentiated

f. Suppliers’ products have high switching costs

g. Supplier poses credible threat of forward integration

Bargaining Power of Buyers

a. Buyer groups are likely to be powerful if:

b. Buyers are concentrated or purchases are large relative to seller’s sales

c. Purchase accounts for a significant fraction of supplier’s sales

d. Products are undifferentiated

e. Buyers face few switching costs

f. Buyers’ industry earns low profits

g. Buyer presents a credible threat of backward integration

h. Product unimportant to quality

i. Buyer has full information

Threat of Substitute Products

Keys to evaluate substitute products:

Products with improving price/performance tradeoffs relative to present industry products

examples: Electronic security systems in place of security guards

Fax machines in place of overnight mail delivery

Rivalry Among Existing Competitors

a. Intense rivalry often plays out in the following ways:

b. Jockeying for strategic position

c. Using price competition

d. Staging advertising battles

e. Increasing consumer warranties or service

f. Making new product introductions

Occurs when a firm is pressured or sees an opportunity

a. Price competition often leaves the entire industry worse off

b. Advertising battles may increase total industry demand, but may be costly to smaller competitors


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c. Numerous or equally balanced competitors

d. Slow growth industry

e. High fixed costs

f. High storage costs

g. Lack of differentiation or switching costs

h. Capacity added in large increments

i. Diverse competitors

j. High strategic stakes

k. High exit barriers

Technical Analysis

Broad purpose of technical analysis is

(a) To ensure that the project is technically feasible in the sense that all the inputs required to

set up the project are available and

(b) To facilitate the most optimal formulation of the project in terms of technology, size,

location and so on.

Manufacturing Process & Technology

For manufacturing a product or service, two or more alternative technologies are available.

For example,

Cement can be made either by the dry process or the wet process.

Soda can be made by the electrolysis method or the chemical method.

Soap can be manufactured by the semi-boiled process or the fully boiled process.

Choice of Technology

The choice of technology is influenced by a variety of considerations:

Plant Capacity

Availability of Principal inputs

Investment Outlay and Production Costs

Use by other units

Product mix

Latest Development

Ease of Absorption


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Appropriateness of Technology

Appropriate technology refers to those methods of production which are suitable to local

economic, social and cultural conditions.

Example:

Whether it utilizes local raw materials & local man power?

Whether it is harmonious with social & cultural conditions?

Material Inputs & Utilities

1. Raw materials

(i) Agricultural products (E.g:Sugar-cane for producing papers)

(ii) Mineral products

(iii) Livestock and Forest Products

(iv) Marine products (Eg. Coral, fish oil-ornaments, food, medicine etc.)

2. Processed Industrial Materials and Components

3. Auxiliary Materials and Factory Supplies

4. Utilities

Product Mix

Product mix is the collection of products. In the production of most of the items,

variations in size and quality are aimed at satisfying a broad range of customers.

For example, a garment manufacturer may have a wide range in terms of size and quality

to cater to different customers. The variation in quality can enable

Plant Capacity

Plant capacity (also referred to as production capacity) refers to the volume or no. of units that

can be manufactured during a given period.

Plant capacity can be defined in two ways: (I) feasible normal capacity(FNC) and

Nominal maximum capacity (NMC)

(I) The feasible normal capacity refers to the capacity attainable under normal working

conditions.


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(II) The nominal maximum capacity is the capacity which is technically attainable and is

installed capacity guaranteed by the supplier of the plant.

Plant Capacity Decision Factors

The following factors will decide the plant capacity:

Technological requirement

Input constraints

Investment cost

Market conditions

Resources of the firm

Govt. Policy

Location & Site

Location refers to a fairly broad area, like a city, industrial area or coastal area. Site refers to a

specific piece of land where the project would be set up.

The choice of location is influenced by a variety of factors. They are:

Proximity to Raw materials & Markets

Availability of infrastructure

Labour Situation

Governmental Policies

Other factors

Machineries & Equipment

It is dependent on production technology and plant capacity.

Type of project.

Procedure for determining kind of machineries & equipment

Estimate the likely levels of production overtime.

Define the various machining and other operations.

Calculate the machine hours required for each type of operation.

Select machineries and equipments required for each function


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Classification of Equipment required for project

Plant (process) equipments.

Mechanical equipments.

Electrical equipments.

Instruments.

Internal transportation system.

Constraints in Selecting Machineries & Equipment

Limited availability of power.

Difficulty in transporting a heavy equipments.

Workers may not be able to operate, at least in the initial stage.

Import policy of the Government.

Procurement of Plant & Machinery

Orders for different items of plant and machinery may be placed with different suppliers or a

turnkey contract may be given for the entire plant and machinery to a single supplier.

Factors in selecting the suppliers:

1. Desired quality of machinery.

2. Level of technology.

3. Reputation of various suppliers.

4. Expected delivery schedules.

5. Preferred payment terms.

6. Required performance guarantees.

Structures & Civil Works

1. Site Preparation and Development

2. Building & Structures

3. Outdoor works

Project Charts & Layouts

1. General Functional Layout


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2. Material Flow Diagram

3. Production line Diagrams

4. Transport Layout

5. Utility Consumption Layout

6. Communication Layout

7. Organizational Layout

8. Plant Layout

Work Schedule

It reflects the plan of work concerning installation as well as initial operation.

Purpose of Work Schedule:

To anticipate problems likely to arise during the installation phase and suggest possible

means for coping with them.

To establish the phasing of investments taking in to account the availability of finances.

To develop a plan of operations covering the initial period.


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Module III (12 Hours)

Financial Analysis: Estimation of cost of project and means of financing – estimates of sales

and production – cost of production – working capital requirement and its financing – estimates

of working results – breakeven points – projected cash flow statement – projected balance sheet.

Project cash flows: Basic principles of measurement of cash flows – components of the cash

flow streams – viewing a project from different points of view – definition of cash flows by

financial institutions and planning commission – biases in cash flow estimation.

Appraisal criteria: Net Present Value – benefit cost ratio – internal rate of returns urgency –

payback period – accounting rate of returns – investment appraisal in practice.

Cost of Project

The cost of project represents the total of all items of outlay (or expenses)

associated with a project which are supported by long-term funds. It is sum of the outlays on the

following:

1. Land & Site Development.

2. Buildings & Civil works.

3. Plant & Machinery.

4. Technical know-how and Engineering Fees

5. Expenses on Foreign Technicians and Training of Indian Technicians Abroad.

6. Miscellaneous Fixed Assets.

7. Preliminary & Capital issue expenses.

8. Pre-operative expenses.

9. Provision for contingencies.

10. Margin money for working capital.

11. Initial cash losses.

Means of Finance

1. Share capital.

2. Term loans.

3. Debenture capital.

4. Deferred credit.


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5. Incentive sources.

6. Miscellaneous sources.

Key business consideration in means of finance

1. Cost

2. Risk

3. Control

4. Flexibility

Estimates of Sales & Production

• It is not advisable to assume a high capacity utilization level in the first year of

operations.

• It is sensible to assume that capacity utilization would be somewhat low in the first year

and rise thereafter gradually to reach maximum capacity.

• It is not necessarily to make adjustments for stocks of finished goods. For practical

purposes, it may be assumed that production would be equal to sales.

• The selling price will vary according to variations in the cost of production.

Cost of Production

1. Material cost

2. Utilities cost

3. Labour cost

4. Factory O/H cost

Working Capital Requirements & Its Financing

1. Working capital requirements.

2. Sources of Working Capital Finance.

3. Limits to obtaining working capital advances

4. Raw materials and components.

5. Stock of goods-in-process.

6. Stocks of finished goods.

7. Debtors.

8. Operating expenses.


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Sources of Working Capital Finance

• Working capital advances provided by commercial banks.

• Trade-credit.

• Accruals and provisions.

Long term sources of financing

Limits to obtaining working capital advances

• The aggregate permissible bank finance is specified as per the norms of lending

prescribed by the Tandon Committee.

• Against each current asset a certain amount of margin money has to be provided by the

firm.

Estimates of working results (Or) Profitability Projections

A. Cost of Production.

B. Total Administrative expenses.

C. Total sales expenses.

D. Royalty and Know-how payable.

E. Total cost of production.

{A+B+C+D=E}

F. Expected sales.

G. Gross profit before interest. {F - E}

H. Total financial expenses.

I. Depreciation.

J. Operating Profit. {G – H - I}

K. Other income

L. Preliminary expenses written off.

M. Profit/ Loss before taxation.

{J + K - L}

N. Provision for Taxation.

O. Profit after tax {M - N}

Less: Dividend on

-- Preference capital.


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-- Equity capital.

P. Retained Profit.

Q. Net cash accrual. {P + I + L}

Break Even Point

• It refers to the level of operation at which the project neither makes profit nor

incurs loss is calculated.

• Cost has to be divided in two parts i.e. Fixed cost and variable cost.

• B.E.P. = Fixed Costs

Unit selling price -- Unit Variable cost

Cash Flow Statement

Cash flow statement shows the movement of cash into and out of the firm and its net impact

on the cash balance within the firm.

Projected Cash Flow Statements

Projected Balance Sheet

The balance sheet, showing the balance in various asset and liability accounts, reflects the

financial condition of the firm at a given point of time.


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Cash Flow

Whatever cash come within the firm and go out of the firm during the project period is called

project cash flow.

Elements of the Cash Flow Stream

The cash flow stream of a project comprises three basic components (I) initial

investment (ii) Operating cash inflows and (iii) terminal cash inflow.

Time Horizon for Analysis

1. Physical Life of the plant

2. Technological life of the plant

3. Product market life of the plant

4. Investment planning horizon of the firm

5. Separation Principle

6. Incremental Principle

7. Post tax Principle

8. Consistency Principle

Viewing a Project from Different Points of View

Financial Institutions

In evaluating project proposals submitted to them, financial institutions define project

cash flows as follows:

Initial Cash outflow:

Capital expenditure on the project + outlays on W.C

Operating inflow: Profit after tax +Depn. +Int. and lease rentals


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Terminal inflow: Recovery of working capital (at book value)

+ Residual value of capital assets (land at

100% and other capital assets at 5% on initial cost

For calculating IRR the cash flows are considered for a maximum project life of 12 years.

For certain industries, which are subject to a faster rate of technological obsolescence, a

shorter life is considered.

Definition of Cash Flow by Planning Commission

As per the Manual for Preparation of Feasibility Reports developed by the Planning

Commission, the following rules should be observed in defining costs and returns (cash

flows):

1. Interest during construction should not be allowed for in the year-wise capital

expenditure figures since it is implicitly taken into account by the discounting procedure.

2. Returns should be defined on a gross basis as operating revenues minus operating costs.

Depn.and financial charges on capital expenditures covered by the capital cost figures

should not be deducted in defining returns.

3. Capital cost estimates generally do not allow for funds required for working capital

purposes, which are assumed to be borrowed, but only for the margin on working capital.

In this case the operating cost estimates must include interest payments on funds

borrowed for working capital.

4. 4. In some cases involving the use of fixed-interest term loans for capital expenditure, an

internal rate of return on own funds (equity) may need to be presented. In such cases the

initial capital cost figures should cover only the expenditure out of equity capital.

5. 5. Costs and returns should be calculated over the entire life of the project or over 25

yrs.whichever is less. The return should allow for a salvage value of assets at the end of

the period.

Observations based on the above description are as follows:

1. A project may be viewed for the point of view of equity capital or long-term funds.

2. Cost and return stream have been defined consistently with the point of view adopted.

They are defined in pre-tax terms.

3. A fairly long planning horizon is envisaged. This perhaps reflects the fact that the

projects considered by the Planning Commission, in general, have a long economic life.


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Biases in Cash-flow Estimation

I. Overstatement of Profitability

In forecasting the outcomes of risky projects, executives often commit planning

fallacy, implying that they display over optimism.

• Native Optimism

• Attribution error

• Anchoring

• Competitor neglect

• Organisation pressure

• Stretch targets

II. Understatement of Profitability

• There can be an opposite kind of bias relating to the understatement of profitability which

may depress a project’s true profitability.

• Salvage Values are Under-estimated

• Intangible benefits are ignored

• The value of future options is overlooked

Types of Investment Decisions

• One classification is as follows:

– Expansion of existing business

– Expansion of new business

– Replacement and modernisation

• Yet another useful way to classify investments is as follows:

– Mutually exclusive investments

– Independent investments

– Contingent investments

Investment Evaluation Criteria

• Three steps are involved in the evaluation of an investment:

– Estimation of cash flows

– Estimation of the required rate of return (the opportunity cost of capital)


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– Application of a decision rule for making the choice

Evaluation Criteria

• 1. Discounted Cash Flow (DCF) Criteria

– Net Present Value (NPV)

– Internal Rate of Return (IRR)

– Profitability Index (PI)

• 2. Non-discounted Cash Flow Criteria

– Payback Period (PB)

– Discounted Payback Period (DPB)

– Accounting Rate of Return (ARR)


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Module IV (10 Hours)

Types and measure of risk – simple estimation of risk – sensitivity analysis – scenario analysis

– montecarlo simulation – decision tree analysis – selection of project – risk analysis in practice.

Special decision situations: Choice between mutually exclusive projects of unequal life – optimal

timing decision – determination of economic life – inter-relationships between investment and

financing aspects – inflation and capital budgeting.

Analysis of firm and market risk: Portfolio theory and capital budgeting – capital asset pricing

model – estimation of key factors – CAPM and Capital budgeting

Analysis of Risk

Risk analysis is one of the most complex and slippery aspects of capital budgeting.

Many different techniques have been suggested and no singe technique can be

deemed as best in all situations.

Types of Project Risk

• Stand alone Risk. {Isolation}

• Firm Risk. {Corporate risk}

• Systematic risk. {Market risk}

Sources of Risk

Project-specific risk: The earnings and cash flows of the project may be lower than

expected because of estimation error or due to some other factors specific to the project

like the quality of mgt.

Competitive risk: The earnings and cash flows of the project may be affected by

unanticipated actions of the competitors.

Industry specific risk: Unexpected technological developments and regulatory changes,

that are specific to the industry to which the project belongs, will have an impact on the

earnings and cash flows of the project as well.


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Market risk: Unanticipated changes in macroeconomic factors like the GDP growth rate,

interest rate, and inflation have an impact on all projects.

International risk: In the case of a foreign project, the earnings and cash flows may be

different than expected due to the exchange rate risk or political risk

Measures of Risk

• Range.

• Mean absolute deviation.

• Standard deviation.

• Coefficient of variation.

• Semi-variance.

Analytical Derivation or Simple estimation

• No correlation among cash flows.

• Perfect correlation among cash flows.

• Moderate correlation among cash flows.

Sensitivity Analysis

• Sometimes called ’What if’ analysis

• One one variable is varied at a time.

• Example:

“what will happen to NPV if sales are only 50,000 units rather than the expected 75,000

units?”

Procedure

• Setup the relationship between the basic underlying factors (quantity sold or unit selling

price) and NPV.

• Estimate the Range of variation and the most likely value of each of the basic underlying

factors.

• Study the effect on net present value of variations in the basic variables.


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Merits of Sensitivity analysis

• It forces mgt% to identify the underlying variables and their interrelationships.

• It shows how robust a project is to changes in the underlying variables.

• It indicates the need for further work.

Limitations:

• Avoiding risk characteristics.

• Having one factor variation and keeping balance factor to be constant is difficult task.

Scenario Analysis

In sensitivity analysis, typically one variable is varied at a time. If variable are inter-related

as they are most likely to be, it is helpful to look at some plausible scenarios, each scenario

representing a consistent combination of variables.

Projected may be evaluated under three different scenarios

• Normal Scenario. {Avg demand, Avg S.P.}

• Optimistic Scenario. {High DD, High S.P. but low V.C.}

• Pessimistic Scenario. {Low DD, Low S.P. but high V.C.}

For Example:

• The base case scenario where the demand and price are expected to be normal.

• The scenario where the demand is high but the price low.

The scenario where the demand is low but the price high.

MONTE CARLO SIMULATION

It will be used for developing the probability profile of a criterion of merit by randomly

combining values of variables which have a bearing on the chosen criterion.

Procedure

• Model of the project.

• Specify the values of parameters and the probability distributions of the exogenous

variables.


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• Select a value, at random, from the probability distributions of each of the exogenous

variables.

• Determine the NPV corresponding to the randomly generated values of exogenous

variables and pre specified parameter values.

• Repeat steps 3 and 4 a number of times to get a large number of simulated NPV.

Plot the frequency distribution of the NPV.

Decision Tree Analysis

Steps in Decision Tree Analysis:

• Identifying the problem and alternatives.

• Delineating the decision tree.

• Specifying probabilities and monetary outcomes.

• Evaluating various decision alternatives.

Selection of a Project

• Risk profile method.

• Certainty equivalent method.

• Risk adjusted discount rate method.

Risk Analysis in Practice

• Conservative estimation of revenues.

• Safety margin in cost figures.

• Flexible Investment Yardsticks.

• Acceptable overall certainty index.

• Judgement on three point estimates.

• Room for improvement.

Special decision situations:-

• Choice between mutually exclusive projects of unequal life.

• Optimal timing decision.

• Determination of economic life.


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• Interrelationship between investment and financing aspects.

• Inflation and capital budgeting.

Choice between mutually exclusive projects of unequal life

• Based on cost. {specifically to the operating cost.}

• Based on life of the asset.

• Based on replacement cost and period.

Optimal timing decision

• Certain conditions – easy to invest.

• Uncertainty conditions – minimise the possibility of an inverstor and risk will be higher

as a result return will also be high.

Determination of economic life

• The economic life of an asset refers to the number of years the asset should be used to

produce a certain output.

It has been influenced by:-

• Operating and maintenance cost.

• Capital cost.

Interrelationship between investment and financing aspects

• Adjusted NPV.

• Adjusted Cost of Capital. {Equity and Debt}

Inflation and capital budgeting

• Inflation has been a persistent feature of the Indian economy. Hence it should be properly

considered in capital investment appraisal.

• The adjustment for inflation in project appraisal should be made properly.

Analysis of Firm and Market Risk:-

• Portfolio theory and capital budgeting.

• Capital asset pricing model.

• Estimation of key factors.

• CAPM and Capital Budgeting.


Dept. of MBA

Module V (5 Hours)

Social Cost Benefit Analysis(SCBA): Rationale for SCBA – UNIDO approach to SCBA –

Little and Mirle approach to SCBA.

Social Cost Benefit Analysis (SCBA)

Rationale for SCBA

• Market Imperfections.

• Externalities.

• Taxes and subsidies.

• Concern for savings.

Concern for Redistribution.

UNIDO Approach to SCBA

UNIDO approach emerged in 1960s. This approach was initially articulated in the “Guidelines

for Project Evaluation” which provides a special framework for SCBA, especially in developed

countries.

UNIDO method of project appraisal involves five stages

Calculation of the financial profitability of the project measured at market prices.

Obtaining the net benefit of the project measured in terms if economic (efficiency) prices.

Adjustment for the impact of the project on savings and investment.

Adjustment for the impact of the project on income and distribution.

Adjustment for the impact of the project on merit goods and demerit goods whose social

values differ from their economic values.

Each of the above stages helps in feasibility of the project from different angles.

Stage 1- The measurement of financial profitability is similar to financial evaluation of the

company.

Stage 2- It is concerned with determination of net benefits of the project in terms of economic

(efficiency) prices. It is also called as shadow prices.


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Stage 3 & 4- These stages are concerned with measuring the value of a project in terms of its

contribution to savings and income redistribution. In order to make such assessment, the income

gained or lost by individual groups in the society is measured.

Stage 5 – A merit good is one for which social value exceeds economic value. And a demerit

good is one for which social value is less than economic value. The difference between social

value and economic value has to be adjusted in the right direction.

Little-Mirrlees approach

I.M.D Little and J.A Mirrlees have developed an approach to social cost benefit analysiswhich

became popular as Little-mirrlees approach (L-M approach).

There is a considerable similarity between the UNIDO approach and L-M approach.

Both approaches call for:

• Calculating accounting (shadow) prices particularly for foreign exchange savings and

unskilled labour.

• Considering the factor of equity.

• Use of DCF analysis.

Despite of the above similarities, there are some differences which are as follows:

• UNIDO approach is limited to domestic boundaries (measures cost and benefits in terms of

domestic rupees) where as L-M approach considers international aspects also (measures cost and

benefit in terms of international/border prices).

• UNIDO approach measures cost and benefits in terms of consumption where as the L-M

approach measures cost and benefits in terms of uncommitted social income.

• The UNIDO approach focuses on efficiency, savings and redistribution aspects indifferent

stages. L-M approach tends to view these aspects together.


Dept. of MBA

Module VI (4 Hours)

Multiple projects and constraints: Constraints – methods of ranking – mathematical

programming approach – linear programming model – Qualitative Analysis: Qualitative factors

in capital budgeting – strategic aspects – strategic planning and financial analysis – informational

asymmetry and capital budgeting – organizational considerations. Environmental appraisal of

projects: types and dimensions of a project – meaning and scope of environment – Environment

– Environmental resources values – environmental impact assessment and environmental impact

statement.

Constraints

• Project Dependence

• Capital Rationing

• Project indivisibility

Project Dependence

• Kind of economic dependency

Mutually exclusive

Not Mutually exclusive

Positive economic dependency

Capital Rationing

• Capital Rationing exists when funds available for investment are inadequate to undertake

all projects which are otherwise acceptable

Project indivisibility

• A capital project has to be accepted or

rejected- it cannot be accepted partially

Approaches available

• Method Of Ranking

• Method Of Mathematical Programming


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Method of Ranking

2 Steps in Method of Ranking

1. Rank all projects

2. Accept project

• Problems

1. Conflict in Ranking

2. Project indivisibility

• Feasible Combinations Approach

Feasible Combinations Approach

• Define all combination of projects

• Choose the feasible combination that has the highest NPV

Mathematical Programming Approach

Help in determining the optimal solution without Explicitly evaluating all Possible

Combinations

2 Broad Categories

1. Objective Function

2. Constraint Equations

Linear Programming Model

Assumptions

1. Objective Function &Constraint Equations are Linear

2. All the Coefficients in the objective Function &Constraint Equations are defined with

certainty

3. Objective Function is Unidimensional

4. Decision Variables are Considered to be continuous

5. Resources are homogeneous


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Qualitative Factors and Judgment in Capital Budgeting

In theory, the use of sophisticated techniques is emphasized since they maximize value to

shareholders. In practice, however, companies, although tending to shift to the formal methods of

evaluation, give considerable importance to qualitative factors. Most companies in Asia guided

one time or other, by three qualitative factors:

Urgency

Strategy

Environment

All companies think that urgency is the most important consideration while a large number

thinks that strategy plays a significant role. Some companies also consider intuition, security and

social considerations as important qualitative factors. Companies in USA consider qualitative

factors like employees’ morals and safety, investor and customer image, or legal matters

important in investment analysis.

Due to the significance of qualitative factors, judgment seems to play an important role. Some

typical responses of companies about the role of judgment are:

Vision of judgment of the future plays an important role. Factors like market potential,

possibility of technology change, trend of government policies, which are judgmental, play

importance role.

The opportunities and constraints of selecting a project, its evaluation of qualitative and

quantitative factors, and the weight age on every bit of pros and cons, cost-benefit analysis, are

essential elements of judgment. Thus, it is inevitable for any management decision.

Judgment and intuition should definitely be used when a decision of choice has to be made

between two or more, closely beneficial projects, or when it involves changing the long-term

strategy of the company.


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It plays a very important role in determining the reliability of figures with the help of quantitative

methods as well as other known financial matters affecting the projects.

THE PROCESS OF STRATEGIC PLANNING & FIANANCIAL ANALYSIS

Strategic planning is to a business what a map is to a road rally driver. It is a tool that defines

the routes that when taken will lead to the most likely probability of getting from where the

business is to where the owners or stakeholders want it to go. And like a road rally, strategic

plans meet detours and obstacles that call for adapting and adjusting as the plan is

implemented.

Strategic planning is a process that brings to life the mission and vision of the enterprise.

A strategic plan, well-crafted and of value, is driven from the top down; considers the

internal and external environment around the business; is the work of the managers of the

business; and is communicated to all the business stakeholders, both inside and outside of the

company.

As a company grows and as the business environment becomes more complex the need for

strategic planning becomes greater. There is a need for all people in the corporation to

understand the direction and mission of the business. Companies consistently applying a

disciplined approach to strategic planning are better prepared to evolve as the market changes

and as different market segments require different needs for the products or services of the

company.

The benefit of the discipline that develops from the process of strategic planning, leads to

improved communication. It facilitates effective decision-making, better selection of tactical

options and leads to a higher probability of achieving the owners’ or stakeholders’ goals and

objectives.


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There is no one formula or process for strategic planning. There are however, principles and

required steps that optimize the value of strategic planning. The steps in the process

described in this series of articles on strategic planning are presented below:

Current Situation Analysis

Segmentation Analysis

Strength, Weakness, Opportunities, and Threat Analysis

Core Competencies Analysis

Key Success Factors

Business Unit Strategy / Business Plan

Balanced Score Card

Evaluation

The principles and steps of this process will be discussed in a series of articles following this

introduction to strategic planning. The choice, of the planning process that works best, should

be driven by the culture of the organization, and by the comfort level of the participants. The

strategic planning process must mirror the cultural values and goals of the company.

There are a number of important steps to remember in the process of strategic planning. They

include collecting a meaningful and broad data base, creatively thinking about

differentiation, defining gaps, assessing core competencies, and understanding the identifying

critical resources and skills.

An important distinction in the process is to recognize the difference between strategic

planning, or the work being done, and strategic thinking, or the creative, intuitive input. The

planning element involves the data collection, goal setting, expectation definition and

statement of direction. Strategic thinking includes the intuitive and creative elements. This

thinking process takes into account and helps to leverage the values of the internal culture of

the business and external characteristics of the market.

Strategic planning can be a challenging process, particularly the first time it is undertaken in

a company. With patience and perseverance as well as a strong team effort the strategic plan

can be the beginning of improved and predictable results for a company. At times when the

business gets off track a strategic plan can help direct the recovery process. When strategic


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planning is treated as an ongoing process it becomes a competitive advantage and an

offensive assurance of improved day to day execution of the business practices.

Environment:

Environment The environment of any organization is "the aggregate of all conditions, events

and influences that surround and affect it".

Characteristics of Environment:

Characteristics of Environment Environment is complex: - The environment consists of a

number of factors, events, conditions, and influences arising from different sources. All these do

not exist in isolation but interact with each other to create entirely new sets of influences

Environment is dynamic. The environment is constantly changing in nature. Due to the many and

varied influences operating, there is dynamism in the environment, causing it to change its shape

and character continuously

Environment is multi-faceted. What shape and character an environment will assume depends on

the perception of the observer. A particular change in the environment, or a new development,

may be viewed differently by different observers. This is seen frequently when the same

development is welcomed as an opportunity by one company while another company perceives it

as a threat.

Environment has after-reaching impact. The environment has a far-reaching impact on

organizations. The growth and profitability of an organization depends critically on the

environment in which it exists. Any environmental change has an impact on the organization in

several different ways

External & Internal Environment:

External & Internal Environment The external environment includes all the factors outside the

organization which provide opportunities or pose threats to the organization. The internal


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environment refers to all the factors within an organization which impart strengths or cause

weaknesses of a strategic nature

An opportunity is a favorable condition in the organization's environment which enables it to

consolidate and strengthen its position. An example of an opportunity is a growing demand for

the products or services that a company provides. A threat is an unfavorable condition in the

organization's environment which creates a risk for, or causes damage to, the organization. An

example of a threat is the emergence of strong new competitors who are likely to offer stiff

competition to the existing companies in an industry.

A strength is an inherent capacity which an organization can use to gain strategic advantage. An

example of a strength is superior research and development skills which can be used for new

product development so that the company can gain a strategic advantage. A weakness is an

inherent limitation or constraint which creates strategic disadvantages. An example of a

weakness is over dependence on a single product line, which is potentially risky for a company

in times of crisis

SWOT Analysis:

SWOT Analysis Business firms undertake SWOT analysis to understand their external and

internal environmental SWOT which is the acronym for strengths, weakness, opportunities and

threats, is also Known as WUTS-UP or TOWS analysis

ENVIRONMENTAL SECTORS:

ENVIRONMENTAL SECTORS Market Environment Customer or client factors , such as, the

needs, preferences, perceptions, attitudes, values, bargaining power, buying behavior and

satisfaction of customers Product factors , such as, the demand, image, features, utility, function,

design, life cycle, price, promotion, distribution, differentiation, and the availability of

substitutes of products or services.

Marketing intermediary factors , such as, levels and quality of customer service, middlemen,

distribution channels, logistics, costs, delivery systems, and financial intermediaries. Competitor-


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related factors , such, as the different types of competitors, entry and exit of major competitors,

nature of competition, and the relative strategic position of major competitors.

Factors Affecting Environmental Appraisal:

Factors Affecting Environmental Appraisal Strategist-related factors. There are many factors

related to the strategist, which affect the process of environmental appraisal. Since strategists

play a central role in the formulation of strategies, their characteristics such as age, education,

experience, motivation level, cognitive styles, ability to withstand time pressures and strain, and

so on, have an impact on the extent to which the) are able to appraise their organization's

environment, and how well they are able to do it.

Organization-related factors. Like those of the strategists, many characteristics of an organization

also have an impact on the environmental appraisal process. These characteristics are the nature

of business the organization is in, its age, size and complexity, the nature of its markets, and the

products or services that it provides.

Environment-related factors. The nature of the environment facing an organization determines

the way its appraisal could be done. The nature of the environment depends on its complexity,

volatility or turbulence, hostility, and diversity.

Structuring Environmental Appraisal :

Structuring Environmental Appraisal Environmental threat and opportunity profile (ETOP) for

an organization. The preparation of ETOP involves dividing the environment into different

sectors and then analyzing the impact of each sector on the organization. A comprehensive

ETOP requires subdividing each environmental sector into sub factors and then the impact of

each sub factor on the organization is described in the form of a statement

Environmental appraisal of projects

What is project appraisal?

A process of analyzing the technical feasibility and economic viability of a project proposal with

a view to financing their costs.


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Importance of project appraisal

It is a capital investment decision

It has long term effects

Decision once taken is irreversible

Expenditures are high

Difficulties in respect of project appraisal

Measurement of costs and potential benefits are difficult

High degree of uncertainty

Long term spread ±time value of money

Types of projects

Mandatory investment (to comply with statutory requirement)

Replacement investment

New projects

Expansion projects

Diversification projects

Research and Development projects

Public good /social welfare projects

Infrastructure projects

Environmental Appraisal of Projects

• Feasibility Approach

– Whether the proposed project will meet the minimum environmental standards (legal) of the

country?

• Going beyond minimum standard

– Whether it can go beyond minimum standards and achieve environmental certification such as

ISO 14,000 (general) and LEED certification (building/ construction)?

– Whether the project/company can demonstrate leadership in the field of environmental

protection/augmentation by making it part of its core business?(ecological entrepreneurship).


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Approach to Environmental Feasibility

• Reactive approach (majority)

– EIA carried out with sole purpose of getting environmental clearance.

• Proactive approach (small minority)

– EIA as a tool to improve planning process

– EIA as an opportunity to internalize externalities and gain long term benefits:

• Improved cost-effectiveness

• Earn carbon credits

• Recovery of resources from waste streams

• Better and safer work environment

• Less occupational hazards

• Better image as responsible citizen of the country

Environmental Feasibility:

Legal Requirements and Procedures

EIA Notifications

EIA Process

Legal Requirements

• 27th Jan 1994 Notification of MoEF, GoI under the Environmental (Protection) Act 1986 –

making environmental clearance mandatory for expansion/ modernisation of any activity or

setting up new projects listed under Schedule 1(29 industries)

• 12 minor Amendments between 1994 to 2006

• 14th Sept. 2006 Notification in supersession of earlier notification of 1994.

• 2007 – Notifications to constitute various state level Environment Impact Assessment

authorities.

EIA Notification (1994)

• 29 industries will need environmental clearance from MoF,GoI.

• For expansion or new ventures with investment > Rs. 50 crores

• MoEF to act as Impact Assessment Agency (IAA)

– can appoint an expert committee if needed


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– May organise public hearing if needed

• Assessment within 90 daysof receiving documents or public hearing

• Validity of clearance for 5 years

• Site clearance in case of a few industries like mining etc. needed before project preparation

Amendments to 1994 Notification

• Between 1994 to 2006 – 12 Amendments

• 10th April 1999 – Process of environmental public hearing by SPCB introduced; Public hearing

committee to ensure fair representation in hearinigs

• 4th Aug. 2003 – Location sensitivity: projects located in critically polluted areas; within 15

kms. Of ecologically sensitive areas like sanctuaries, bio-reserves etc. need clearance from

MoEF.

• 7th July 2004 – environmental clearance made mandatory for construction and industrial

estates.

EIA Notification (2006)

• Partial Decentralization

– Category A – clearance by MoEF

– Category B – clearance by State regulatory authority (SPCB)

• B 1- will require EIA

• B2 – will not require

– Above categories based on size, capacity, area rather than investment level

– Formation of Environmental Impact Assessment

Agency and Environmental Expert Committee at Central and State levels

• Introduction of Scoping process

– TOR to be determined by Expert Appraisal Committees

• Based on information provided by proponent

• May visit site if needed

• Within 60 days of application

• To be displayed on MoEF/ SPCB’s website

Public consultation


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– Necessary for Category A, B1 except for 6 activities

– SPCB to conduct public hearings for which procedure outlined

– To ascertain view of local people

– To gather written responses of interested parties like experts, NGOs etc.

– MoEF to display summary of EIA on website; full draft in public reference place

– Video-graphy of proceedings by SPCB

• Appraisal

– Of EIA to be done by Expert Committee at state or Central levels

– Within 60 days, with recommendation to regulatory authority

• Decision making

– Regulatory authority to give decision within 45 days i.e 105 days of receipt of final EIA/

application

– Failing which, - default clearance

• Post-clearance monitoring

– Bi-annual compliance reports to regulating authority

– Latest report to be displayed on website of regulating authority

EIA – Concepts/ stages

• Screening: determines whether the proposed project requires an EIA and if so, at what level of

assessment?

• Scoping: identifies the key issues and impacts that should be further investigated; defines the

boundaries and time limit of study

• Impact analysis: identifies and predicts likely environmental and social impacts and evaluates

their significance

• Mitigation: recommends the actions to reduce and avoid the potential adverse environmental

consequences of the project

• Reporting: presents the result of EIA in the form of a report to the decision making body and

other interested parties

• Review: examines the adequacy and effectiveness of the EIA report and provides information

necessary for decision-making.


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Module VII (5 Hours)

Project financing in India: Means of finance – norms and policies of financial institutions –

SEBI guidelines – Sample financing plans – structure of financial institutions in India – schemes

of assistance – term loans procedures – project appraisal by financial institutions.


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Means of Finance

1. Share capital.

2. Term loans.

3. Debenture capital.

4. Deferred credit.

Norms and policies of financial institutions by RBI:

On a review of the credit exposures of the term lending institutions in 1997, it was considered

advisable to prescribe credit exposure limits for them in respect of their lending to individual /

group borrowers. Accordingly, as a prudential measure, aimed at better risk management and

avoidance of concentration of credit risks, it was decided in June 1997 by Reserve Bank of India

to limit a term lending institution's exposures to an individual borrower and group borrowers and

credit exposure norms were prescribed for them. These norms are to be considered as a part of

prudent credit management system and not as a substitute for efficient credit appraisal,

monitoring and other safeguards. In respect of existing credit facilities to borrowers which were

in excess of the ceilings initially prescribed, term lending institutions were required to take

necessary steps to rectify the excess and comply with the stipulations, within a period of one year

from June 28, 1997, the date of the first circular, and to bring such cases to the notice of their

Board of Directors.

Scope and Applicability

The exposure norms are also applicable to the refinancing institutions (viz., NABARD, NHB and

SIDBI) but in view of the refinance operations being the core function of these institutions, their

refinance portfolio is not subject to these exposure norms. However, from the prudential

perspective, the refinancing institutions are well advised to evolve their own credit exposure

limits, with the approval of their Board of Directors, even in respect of their refinancing

portfolio. Such limits could, inter alia, be related to the capital funds / regulatory capital of the


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institution. Any relaxation / deviation from such limits, if permitted, should be only with the

prior approval of the Board.

While computing the extent of exposures to a borrower / borrower group for assessing

compliance vis-a-vis the single borrower limit / group borrower limit, exposures where principal

and interest are fully guaranteed by the Government of India may be excluded.

These norms deal with only the individual borrower and group borrower exposures but not with

the sector / industry exposures. The FIs may, therefore, consider fixing internal limits for

aggregate commitments to specific sectors e.g., textiles, chemicals, engineering, etc., so that the

exposures are evenly spread. These limits should be fixed having regard to the performance of

different sectors and the perceived risks. The limits so fixed should be reviewed periodically and

revised, if necessary.

For Group Borrowers

The credit exposure to the borrowers belonging to a group shall not exceed 40 per cent of capital

funds of the FI. However, the exposure may exceed by additional ten percentage points (i.e., up

to 50 per cent) provided the additional credit exposure is on account of infrastructure projects.

FIs may, in exceptional circumstances, with the approval of their Boards, consider enhancement

of the exposure to a borrower up to a further 5 per cent of capital funds (i.e. 55 percent of capital

funds for infrastructure projects and 45 percent for other projects).

[The exposure ceilings stipulated initially in 1997 were 25 per cent and 50 per cent of the capital

funds of the FIs for the individual and group borrowers, respectively. In September 1997, an

additional exposure of up to 10 percentage points for the group borrowers (i.e., up to 60 per cent)

was permitted provided the additional credit exposure was on account of infrastructure projects

(which at that time were narrowly defined as only power, telecommunication, roads and ports).

In November 1999, with a view to moving closer to the international standard of 15 per cent

exposure ceiling, the individual borrower exposure ceiling was reduced, with effect from April 1,

2000, from 25 per cent to 20 percent of capital funds. The FIs which had, as on October 31,

1999, exposures in excess of the reduced limit of 20 per cent, were permitted to reduce their

exposures to the level of 20 per cent latest by October 31, 2001. In June 2001, the exposure


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ceilings for the individual and group borrowers were reduced from 20 percent and 50 per cent to

15 percent and 40 per cent, respectively, with effect from April1, 2002 , but the additional

exposure in respect of group borrowers, of up to 10 percentage points on account of

infrastructure projects was continued. In February 2003, an additional exposure of up to five

percentage points (i.e., up to 20 percent) on account of infrastructure projects was permitted in

respect of individual borrowers also].

For Bridge Loans / Interim Finance

With effect from January 23, 1998, the restriction on grant of bridge loans by the FIs against

expected equity flows / issues has been lifted. Accordingly, FIs may henceforth grant bridge loan

/ interim finance to companies other than NBFCs against public issue of equity whether in India

or abroad, for which appropriate guidelines should be laid down by the Board of the Financial

Institution, as prescribed by RBI. However, FIs should not grant any advance against Rights

issue irrespective of the source of repayment of such advance.

FIs may sanction bridge loans to companies for commencing work on projects pending

completion of formalities only against their own commitment and not against loan commitment

of any other FIs / Banks. However, FIs may consider sanction of bridge loan / interim finance

against commitment made by a financial institution and / or another bank only in cases where the

lending institution faces temporary liquidity constraint, subject to certain conditions prescribed

by RBI.

These restrictions are also applicable to the subsidiaries of FIs for which FIs are required to issue

suitable instructions to their subsidiaries.

Working Capital Finance

There is no objection to FIs extending working capital finance on a very selective basis to

borrowers enjoying credit limits with banks, whether under a consortium or under a multiple


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banking arrangement, when the banks are not in a position to meet the credit requirements of the

borrowers concerned on account of temporary liquidity constraints. The FIs should take into

account these guidelines while granting short term loans to borrowers enjoying credit limits with

banks on a consortium basis. In case of borrowers whose working capital is financed under a

multiple banking arrangement, the FI should obtain an auditor's certificate indicating the extent

of funds already borrowed, before considering the borrower for further working capital finance.

Investment in Debt Securities

The total investment in the unlisted debt securities should not exceed 10 per cent of the FIs' total

investment in debt securities as given in guidelines for investment in debt securities, as on March

31 (June 30 in case of NHB), of the previous year. However, the investment in the following

instruments will not be reckoned as 'unlisted debt securities' for monitoring compliance with the

above prudential limits :

i. Security Receipts (SRs) issued by Securitisation Companies / Reconstruction Companies

registered with RBI in terms of the provisions of the Securitisation and Reconstruction of

Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002; and

ii. Asset Backed Securities (ABS) and Mortgage Backed Securities (MBS) which are rated

at or above the minimum investment grade.

Investment in Venture Capital Funds (VCF)

FIs are advised to comply with the prudential requirements relating to financing of venture

capital funds (VCF) set out at

Cross Holding of Capital among Banks / Financial Institutions


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(i) FIs' investment in the following instruments, which are issued by other banks / FIs and are

eligible for capital status for the investee bank / FI, should not exceed 10 percent of the investing

FI's capital funds (Tier I plus Tier II) :

a. Equity shares;

b. Preference shares eligible for capital status;

c. Subordinated debt instruments;

d. Hybrid debt capital instruments; and

e. Any other instrument approved as in the nature of capital.

FIs should not acquire any fresh stake in a bank's / FI's equity shares, if by such acquisition, the

investing FI's holding exceeds 5 percent of the investee bank's / FI's equity capital.

(ii) FIs' investments in the equity capital of subsidiaries are at present deducted from their Tier I

capital for capital adequacy purposes. Investments in the instruments issued by banks / FIs which

are listed at paragraph 4.8(i) above, which are not deducted from Tier I capital of the investing

FI, will attract 100 percent risk weight for credit risk for capital adequacy purposes.

SECURITIES AND EXCHANGE BOARD OF INDIA & STRUCTURE OF FINANCIAL

INSTITUTIONS IN INDIA

Objective

This memorandum proposes to amend SEBI (Mutual Funds) Regulations, 1996 (MF

Regulations) to provide regulatory framework for setting up of Infrastructure Debt Funds (IDFs)

by inserting Chapter VI-B to the MF Regulations.

Rationale for Amendments

Finance Minister, in his Budget Speech for 2011-2012, announced setting up of Infrastructure

Debt Funds (IDFs) in order to accelerate and enhance the flow of long term debt in infrastructure

projects for funding Government‟s programme of nfrastructure development.


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In 2007 SEBI had set up a Committee to suggest the broad guidelines for launch and operations

of Dedicated Infrastructure Funds. In its report dated July 23, 2007, the report detailed the

rationale and modalities of setting up of Dedicated Infrastructure Funds under the MF

Regulations. The Committee recommended that the Infrastructure Funds will need to be

structured differently from the current Mutual Fund Schemes, as these will largely invest in

unlisted companies, with longer gestation periods.

Pursuant to the Budget Announcements, consultations were held with representatives of Ministry

of Finance, RBI, and industry participants on draft regulatory framework for IDFs under the

extant MF Regulations. Taking into consideration views from the Government, RBI,

Infrastructure Companies and potential investors as also the recommendations of the aforesaid

Committee Report, it was agreed that Infrastructure Debt Funds may be set up under the existing

Mutual Fund Regulations by providing for a separate Chapter for the same.

A letter dated (the date has been excised for reasons of confidentiality) has also been received

from Secretary, Ministry of Finance enclosing broad structure of IDFs as approved by the

Finance Minister. (Annexure B)

Accordingly, Draft Chapter VI-B to the MF Regulations has been prepared for providing a

regulatory framework for IDFs. (Annexure A)

Salient features of Regulatory Framework for IDF Scheme

The IDFs could be set up by any existing mutual fund. Applications from companies which have

been carrying on activities or business in infrastructure financing sector for a period of not less

than five years and fulfill the eligibility criteria provided in Regulation 7 of Mutual Fund

Regulations will also be considered for setting up Mutual Funds exclusively for the purpose of

launching IDF Scheme.

The IDF would invest 90 per cent of its assets in the debt securities of infrastructure companies

or SPVs across all infrastructure sectors. Minimum investment by IDF would be Rs 1 crore with

Rs 10 lakh as minimum size of the unit. The credit risks associated with underlying securities

will be borne by the investors.

An infrastructure debt fund scheme shall be launched either as close-ended scheme maturing

after more than five years or Interval scheme with lock-in of five years.

Units of infrastructure debt fund schemes shall be listed on a recognized stock exchange.


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An Infrastructure debt fund shall have minimum 5 investors and no single investor shall hold

more than 50% of net assets of the scheme

Proposal

The Board Memorandum proposes to amend SEBI (Mutual Funds) Regulations, 1996 by

inserting Chapter VI-B, on Infrastructure Debt Fund Schemes. The proposed draft Mutual

Fund Amendment Regulation 2011 is enclosed as Annexure A for consideration and

approval.

The Board is requested to consider and approve the above and authorize the Chairman to

make and notify such consequential and incidental changes and amendments to the SEBI

(Mutual Funds) Regulations, 1996 as may be necessary and appropriate to implement the

decision of the Board.

MUTUAL FUNDS AMENDMENT REGULATIONS, 2011

In exercise of the powers conferred by section 30 of the Securities and Exchange Board of

India Act, 1992 (15 of 1992), the Board hereby makes the following regulations to further

amend the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996,

namely :-

1. These regulations may be called the Securities and Exchange Board of India (Mutual

Funds) (Amendment) Regulations, 2011.

2. They shall come into force on the date of their publication in the Official Gazette.

3. In the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the

following chapter VI – B shall be inserted after VIA.

INFRASTRUCTURE DEBT FUND SCHEMES

(1) “Infrastructure debt fund scheme” means a mutual fund scheme that invests primarily

(minimum 90% of scheme assets) in the debt securities or securitized debt instrument of

infrastructure companies or infrastructure capital companies or infrastructure projects or

special purpose vehicles which are created for the purpose of facilitating or promoting


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investment in infrastructure, and other permissible assets in accordance with these

regulations or bank loans in respect of completed and revenue generating projects of

infrastructure companies or projects or special purpose vehicles.

(2) Infrastructure includes the sectors as specified by SEBI Guidelines or as notified by

Ministry of Finance from time to time

(3) „Strategic Investor‟ means;

(i) an Infrastructure Finance Company registered with RBI as NBFC.

(ii) a Scheduled Commercial Bank;

(iii) International Multilateral Financial Institution.

(1) The provisions of this Chapter shall apply to infrastructure debt fund schemes launched

by mutual funds.

(2) Unless the context otherwise requires, all other provisions of Mutual Fund Regulations

and the guidelines and circulars issued thereunder shall apply to infrastructure debt fund

schemes, and trustees and asset management companies in relation to such schemes, unless

repugnant to the provisions of this Chapter.

Eligibility criteria for launching IDFS

(1) An existing mutual fund may launch an infrastructure debt fund schemes if it has an

adequate number of key personnel having adequate experience in infrastructure sector.

(2) A certificate of registration may be granted under regulation 9 to an applicant proposing

to launch only Infrastructure Debt Fund Schemes if the sponsor or the parent company of the

sponsor;

(a) has been carrying on activities or business in infrastructure financing sector for a period

of not less than five years;

(b) fulfills eligibility criteria provided in Regulation 7.

Explanation- For the purpose of this clause, „parent company of the sponsor‟ shall mean a

company which holds at least 75% of paid up equity share capital of the sponsor.


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Conditions for infrastructure debt fund schemes

(1) An infrastructure debt fund scheme shall be launched either as close-ended scheme

maturing after more than five years or Interval scheme with lock-in of five years and interval

period not longer than 1 month as may be specified in the scheme information document.

(2) Units of infrastructure debt fund schemes shall be listed on a recognized stock exchange,

provided that such units shall be listed only after being fully paid up.

(3) Mutual Funds may disclose indicative portfolio of infrastructure debt fund scheme to its

potential investors disclosing the type of assets the mutual fund will be investing.

(4) An Infrastructure debt fund shall have minimum 5 investors and no single investor shall

hold more than 50% of net assets of the scheme.

(5) No infrastructure debt fund schemes shall accept any investment, from any investor

which is less than Rupees one crore.

(6) The minimum size of the unit shall be Rupees 10 lakhs.

(7) Each scheme launched as infrastructure debt fund scheme shall have firm commitment

from the strategic investors for contribution of an amount of at least Rupees twenty five

crores before the allotment of units of the scheme are marketed to other potential investors.

(8) Mutual Funds launching Infrastructure debt fund scheme may issue partly paid units to

the investors. In case partly paid units are issued:

(a) AMCs shall call for the unpaid portions depending upon the deployment opportunities

(b) The offer document of the scheme shall disclose the interest or penalty which may be

deducted in case of non payment of call money by the investors within stipulated time. The

amount of interest or penalty shall be retained in the scheme.

Permissible investments

(1) Every Infrastructure debt fund scheme shall invest at least ninety percent of the net assets

of the scheme in the debt securities or securitized debt instruments of infrastructure

companies or projects or special purpose vehicles which are created for the purpose of

facilitating or promoting investment in infrastructure or bank loans in respect of completed

and revenue generating projects of infrastructure companies or special purpose vehicle.


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(2) Subject to sub-regulation (1), every Infrastructure Debt Fund scheme may invest the

balance amount in Equity shares, convertibles including mezzanine financing instruments of

companies engaged in infrastructure, infrastructure development projects, whether listed on a

recognized stock exchange in India or not; or money market instruments and bank deposits.

(3) The investment restrictions shall be applicable on the life-cycle of the Infrastructure Debt

Fund Scheme and shall be reckoned with reference to the total amount raised by the

Infrastructure Debt Fund Scheme.

(4) No mutual fund shall, under all its Infrastructure Debt Fund schemes, invest more than

thirty per cent of its net assets in the debt securities or assets of any single infrastructure

company or project or special purpose vehicles which are created for the purpose of

facilitating or promoting investment in infrastructure or bank loans in respect of completed

and revenue generating projects of any single infrastructure company or project or special

purpose vehicle.

(5) An Infrastructure debt scheme shall not invest more than 30% of the net assets of the

scheme in debt instruments or assets of any single infrastructure company or project or

special purpose vehicles which are created for the purpose of facilitating or promoting

investment in infrastructure or bank loans in respect of completed and revenue generating

projects of any single infrastructure company or project or special purpose vehicle, which are

rated below investment grade or unrated. Such Investment limit may be extended upto 50%

of the net assets of the scheme with the prior approval of the Board of Trustees and AMC

Board.

(6) No Infrastructure Debt Fund schemes shall invest in –

(i) Any unlisted security of the sponsor or its associate or group company;

(ii) Any listed security issued by way of preferential allotment by the sponsor or its associate

or group company;

(iii) Any listed security of the sponsor or its associate or group company or bank loan in

respect of completed and revenue generating projects of infrastructure companies or SPVs, in

excess of twenty five per cent of the net assets of the scheme, subject to approval of trustees

and full disclosures to investors for investments made within the aforesaid limits.


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(iv) Any asset or securities owned by the sponsor or Asset Management Company or its

associates in excess of 20% of the net assets of the scheme not below investment grade,

subject to approval of trustees and full disclosures to investors for investments made within

the aforesaid limits.

Valuation of assets and declaration of net asset value

(1) The assets held by an Infrastructure Debt Fund scheme shall be valued “in good faith” by

the AMC on the basis of appropriate valuation methods based on principles approved by the

Trustees. Such valuation shall be documented and the supporting data in respect of each

security so valued shall be preserved at least for a period of five years after the expiry of the

scheme. The methods used to arrive at values „in good faith‟ shall be periodically reviewed

by the Trustees and by the statutory auditor of the Mutual Fund.

(2) The valuation policy approved by the board of AMC shall be disclosed in the scheme

information document.

(3) The net asset value of every Infrastructure Debt Fund scheme shall be calculated and

declared atleast once in each quarter.

Duties of Asset Management Company

(1) The asset management company shall lay down an adequate system of internal controls

and risk management.

(2) The asset management company shall exercise due diligence in maintenance of the assets

of an Infrastructure Debt Fund scheme and shall ensure that there is no avoidable

deterioration in their value.

(3) The asset management company shall record in writing, the details of its decision making

process in buying or selling infrastructure companies‟ assets together with the justifications

for such decisions and forward the same periodically to trustees.

(4) The asset management company shall ensure that investment of funds of the

Infrastructure Debt Fund schemes is not made contrary to provisions of this chapter and the

trust deed.


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(5) The asset management company shall obtain, wherever required under these regulations,

prior in-principle approval from the recognized stock exchange(s) where units are proposed

to be listed.

(6) The AMC shall institute such mechanisms as to ensure that proper care is taken for

collection, monitoring and supervision of the debt assets by appointing a service provider

having extensive experience thereof, if required.

Disclosures in offer document and other disclosures

(1) The offer documents of Infrastructure Debt Fund schemes shall contain disclosures which

are adequate for investors to make informed investment decisions and such further

disclosures as may be specified by the Board.

(2) The portfolio disclosures and financial results in respect of an Infrastructure Debt Fund

schemes shall contain such further disclosures as are specified by the Board.

(3) Advertisements in respect of Infrastructure Debt Fund schemes shall conform to such

guidelines as may be specified by the Board.

49T. Transactions by employees etc.

(1) All transactions done by the trustees or the employees or directors of the asset

management company or the trustee company in the investee companies shall be disclosed

by them to the compliance officer within one month of the transaction.

(2) The compliance officer shall make a report thereon from the view point of possible

conflict of interest and shall submit it to the trustees with his recommendations, if any.

(3) The persons covered in sub-regulation (1) may obtain the views of the trustees before

entering into the transaction in investee companies, by making a suitable request to them.


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Module VIII (10 Hours)

Project Management: Forms of project organization – project planning – project control –

human aspects of project management – prerequisites for successful project implementation.

Network techniques for project management – development of project network – time estimation

– determination of critical path – scheduling when resources are limit – PERT and CPM models

– Network cost system (Only problems on resources allocation and resources leveling)

Project review and administrative aspects: Initial review – performance evaluation –

abandonment analysis – administrative aspects of capital budgeting – evaluating the capital

budgeting system of an organization.

Project Management is the process of achieving project objectives (schedule, budget and

performance) through a set of activities that start and end at certain points in time and produce

quantifiable and qualifiable deliverables.

Successful project management is the art of bringing together the tasks, resources and people

necessary to accomplish the business goals and objectives within the specified time constraints

and within the monetary allowance. Projects and Programs are linked directly to the strategic

goals and initiatives of the organization supported.

Project Execution and Control Phase

Purpose

It is said that Project Management is 20% planning and 80% tracking and control. The project

manager is like a lifeguard looking for someone to save. The project manager must monitor the

project team at all times, because even the best team member can drown. Executing, monitoring

and controlling project progress is important to detecting issues, problems and solutions early

enough to quickly get the project back on schedule so the objectives are still met. While it is

impossible to foresee and plan for every issue, project managers can regulate work as the project

progresses, and still deliver a finished product that meets the objectives and requirements laid out

in the initiation and planning phases.

The emphasis of the Execution and Control Phase is to ensure that each deliverable achieves the

desired results, in the designated period, within the designated cost, and using the specified


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allocated resources. To ensure the accomplishment of that goal, continuous supervision of the

project is required. The project manager must ensure that all the plans leading up to this phase

are in place, current and can be implemented as soon as the situation warrants.

Project Manager Role

The project manager is responsible for controlling the project. He or she implements tracking

and reporting processes, tracks the plan as it progresses and reschedules when needed to keep the

project on track. During this phase the project manager is responsible for scope management.

They will implement the change control process and manage the change control log. It is during

this phase that customer deliverables are produced and the project manager is responsible for

quality assurance and deliverable signoff. In addition the project manager is also responsible for

executing the risk management plan and ensuring that risks have little or no unexpected impact

on the project.

Inputs

Project Team

Project WBS

Communication Plan

Risk Management Plan

Organization Chart

Responsibility Matrix

Project Notebook

Issues/Action Item Log

Status Reports

Project Schedule

Outputs

Current and Updated Project Schedule

Change Management

Quality Management

Phase Sign Off


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Step-By-Step planning Process

Tracking

Immediately after management approval, a project baseline should be established. This baseline

is the standard by which progress will be measured. Variances to the baseline may trigger

implementation of contingency plans developed during the planning phase to keep the project on

track. Once the project has begun, the project manager must have a way to effectively monitor

the progress against the baseline. Many activities may be occurring simultaneously and may be

difficult to control. In order to stay involved with all phases of the project, the project manager

will establish a routine project review strategy and communication plan to ensure current,

accurate and consistent progress feedback. The frequency of each project tracking/review is

normally a function of the project’s remaining duration. As the project draws to a close, the

frequency should increase. Other variables such as project phase, complexity, management

visibility, overall cost, current performance, and proximity to major milestones are also

considerations.

Status Meeting

Project status meetings should be held by the project manager, as needed, to review schedule and

budget variances, focus on short term milestones, address any issues and assign action items, and

gain support for required scope or strategy changes. The frequency of the status meetings is

dependent on the expectations of the project owner and the progress of the project. Each meeting

should be documented and meeting minutes distributed within 48 hours of the meeting.

Change Management

Issues arise throughout the project that could cause change in scope to occur. Once a change has

been requested, the project manager or the change originator will complete the Scope Change

Request Form (Appendix B). The project manager will keep the Scope Change Request Log

(Appendix B) in the project notebook.


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Evaluate Scope Change Requests

An assessment of the impact of the scope change will be performed to examine the tasks,

schedule, cost, and quality that may be affected by the change. A solution will be recommended

based on the impacts assessed. Project managers should use the following process steps to

control changes in scope:

Change in scope due to requirement change requests - Requests for changes will be formally

documented and approval is required prior to re-baselining of the project plan

Assess Scope Change Impact

The project manager must ensure that the scope control process established during the initial

scope definition is enforced. The project manager and core team members should scrutinize each

Scope Change Request Form for its benefit and schedule/cost impact and the results should be

communicated to the project sponsor for final approval. Each member of the core team should

make a careful review of the impact of changes in scope before the change is approved.

Taking Corrective Action

Revisit the Planning Process - The success of a project is often determined by the strategy and

recovery techniques the project manager uses when problems arise or changes in scope are made.

The methods used to put a problem project back on a successful course are the same as those

used to develop the original project execution plan. The ultimate goal is continuous schedule,

resource and budget optimization.

Minimize Float Usage - During the entire execution phase, the team should adopt a proactive

philosophy and think ASAP by establishing goals to out-perform the target project. A healthy

amount of pressure should be maintained by the project manager to keep float usage at a

minimum.

Crash the Schedule - If the schedule does slip, the first place to look for improvement is the

critical path activities. Every activity in the critical path represents an opportunity to recover lost

time. If a scope change is causing the end date of the project to be extended, the project manager


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should evaluate all tasks along the critical path to see if adding resources or re-evaluating the

duration estimate could shorten durations. Expand Work Breakdown - Breaking large activities

down into smaller pieces is a good way to enhance control. “Divide and Conquer” is an

appropriate strategy, especially when more information is available than when initial planning

was performed.

Trend Analysis - If Earned Value Analysis is used and the resulting reports indicate a negative

trend, the problem could be several individuals, or a combination of factors. Out of Target

Projects, numerous scope changes, inaccurate planning estimates and progress reporting, are the

most common occurrences the project manager should investigate and resolve.

Review Status with Owner

Once the scope change impact has been assessed, the project manager will schedule a meeting to

review with the project owner. The project manager must have available the completed Scope

Change Request Form and a recommendation for the project owner. Based on the impacts

associated with the change and input from the project manager, the project owner will decide

whether to approve or reject the request. After the project manager and project owner have

discussed the scope change request and associated impact, the project owner must sign the Scope

Change Request Form and designate either the approval or rejection. For major scope changes,

upper management approval is required. The project manager will keep the owner signed Scope

Change Request Form in the project files for future reference.

Update Project Plans and Schedule

Typically scope changes require changes to the project plans and the project schedule. In order

for any project plan or schedule to change, the project owner must have acknowledged his

approval of such changes by signing the Scope Change Request Form. Usually not all project

plans will require changes. The project manager must determine which project plans will be

affected and update them accordingly. For example, the communication plan may require

additional reports to be generated or the human resource plan may be altered to increase

resources on the project. It is the project manager’s responsibility to ensure that all project plans

are updated and adhered to.


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When schedule changes are made, the project manager must ensure all project stakeholders,

especially project team members, are aware of the revisions.

Maintaining Quality

Quality Plans should not be seen as separate documents, but rather as a set of quality review

activities that must be included in the project’s detailed project plan. The project team members

and subject matter expert’s (SME’s) will provide the project manager with reports noting

compliance or noncompliance to the quality plan or quality expectations, specifications, and

procedures. As needed, the project manager will intervene when quality is not acceptable. The

determination of acceptability is within the owner and other stakeholders. The project manager is

responsible for obtaining feedback from the owners and/or other stakeholders to determine if the

requirements have been met. The primary method of obtaining quality feedback is to conduct

regular quality reviews

Project Documentation

Throughout the project, the project manager will generate reports relating to quality issues and

conformance. This will include the project status report and weekly status reports. A quality

audit will be performed periodically to ensure accuracy of the information.

Throughout the project, the project manager will develop lessons learned to be placed in the

repository. The lessons learned will address any issues or problems encountered in the quality of

the project and the associated resolutions. Use the Team Member Evaluation Form (Appendix B)

to gather and analyze lessons learned.

Produce and Distribute Documentation

The project manager must produce and distribute all the project documentation necessary to

reflect any changes to the project plans and/or schedule. The Communication Matrix developed

in the Planning Phase will detail the recipients, communication methods, and number of copies

required.


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Produce Project Reports

During the project, the project manager is required to produce project reports. These reports are

provided in Microsoft Project and include:

Project Status Reports

Deliverable, Task or Milestone Reports

Executive Review Meeting Facilitation

The executive review meeting/presentation may need to be conducted every month depending on

the visibility of the project. It is one of the most informative ways senior management of the

company can review the overall progress and status of the programs/projects being worked on in

the company. Because this meeting will be for higher executives in the company, additional

items will need to be considered. Some of these include:

Appropriate facilities - Reserve the best meeting facility possible within the company. Reserve

them well in advance. Make sure the climate settings are comfortable. If presentation equipment

and props are to be used, make sure they are usable in the room. The meeting room should have

speaker phone equipment in it. There should be extra seats available.

Invitation to meeting - Because executive managers have more demand on their time, send out

invitations to the meeting well in advance. A meeting agenda should also go with the invitation.

Try to schedule meeting in the mid morning when the attention span is usually the best.

Materials - Because executive managers have little time to spare, have all materials and extras

ready well before the meeting. Spare meeting equipment (overhead bulbs, markers, easels etc.) is

also desirable. Spare packets of the presentation material should also be made.

Monitor and Control Project Risk

Risk control is the process of continually sensing the condition of a program and developing

options and fallback positions to permit alternative lower-risk solutions. Continuously updating

the risk management plan is an important step in risk avoidance and risk control. At a minimum,

risk plans, and additional risks should be reviewed weekly by the project manager and monthly


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by the entire project team. Plans must be updated and new plans developed as risks change

throughout the life cycle of the project. This component of risk management forms part of the

day-to-day management of the project.

It contains the following steps:

Implement risk avoidance actions in accordance with the risk management plan. Implement risk

contingency actions in accordance with the risk management plan, if risk avoidance does not

occur. Report on each risk issue during progress reporting (internal to the project and at

management (e.g., Steering Committee level). Develop corrective actions to project costs,

schedule, quality, technical and/or performance as needed.

Monitor and analyze the effectiveness of each risk control action. Modify or replace any actions

that are ineffective.

Periodically update the list of managed risks by “dropping” risk issues that have been avoided or

no longer pose a real threat to the project. Add new risk issues as they surface during the project.

Periodically, review the risk probability and impact information to ensure that this information

remains current and accurate. Reassess the priority list to ensure the appropriate risks are being

managed. This list will change as the project progresses and what was a low priority risk may

become one of the top priority risks. If needed, develop a Risk Management Plan for any new

risks in the top priority list.

Programme Evaluation Review Technique (PERT)

PERT is used to measure the effectiveness of the project. A project management tool that

provides a graphical representation of a project's timeline. PERT, or Program Evaluation Review

Technique, was developed by the United States Navy for the Polaris submarine missile program

in the 1950s. PERT charts allow the tasks in a particular project to be analyzed, with particular

attention to the time required to complete each task, and the minimum time required to finish the

entire project.


Dept. of MBA

CPM (Critical Path Method)

The critical path method is an algorithm for scheduling a set of project activities. It is an

important tool for effective project management.

mba-iv-project, appraisal, planning & control [12mbafm425]-notes

Documents

project appraisal

hours financial analysis

demand analysis

capital budgeting module

situational analysis

analysis overview

analysis of firm

technical analysis