The planning and control of capital expenditure is termed as “capital budgeting”. Capital budgeting is the art of finding assets that are worth more than they cost, to achieve a predetermined goal i.e. optimizing the wealth of a business enterprise. The investment proposals need to be related to the underlying corporate objectives and strategies.
Capital Investment process1. Search for Investment Opportunities2. Screening the Alternatives3. Analysis of Feasible Alternatives4. Analysis of Feasible Alternatives5. Evaluation of Alternatives6. Authorization7. Implementation and Control
Classification of Projects National and international projects Industrial and non industrial projects Project based on level of technology - High technology projects - Conventional technology projects - low technology projects Projects based on size - large Projects - Medium Projects - Small projects
Projects based on ownership - public sector projects - private sector projects - joint sector projects Projects according to purpose - Balancing Project - Modernization Projects - Replacement/renewal projects - Expansion Projects - Diversification projects - rehabilitation ( of sick units) projects - upgradation projects - maintenance projects - Mergers and acquisition - new project
Forward and BackwardIntegrationVertical integration Back Integration It is the creation of facilities for production of raw material and components required for current production. Forward integration It is the creation of facilities for manufacturing products for which the current products of the organization serve as inputs.
Rationale forgrowth and profitability To achieve consistent Diversification ( by transferring company’s strategic capability and providing superior value to customer). When companies objectives are no longer compatible within the scope of current portfolio (the condition occurs when there is decline in demand, high competitive pressures, quicker product line obsolescence)
To enhance the shareholder’s value The grass is greener on the other side or sheep mentality
Build, Own Operate (B.O.O) Build, Operate and Transfer (B.O.T) Lease,Rehabilitate,Operate and Transfer (L.R.O.T) Engineering Procurement and Construct Turnkey Contract
Project Management InformationSystem Managerial planning and control activities can be classified as Strategic planning Tactical planning Operational control
Level Cost Parameters PMIS Control Time Schedule Pyrz ParametersProject Manager Budgetary amid Mile Stone ControlManagers Work Package Cost and Cash Control Inflow ControlSupervisors Activity Control Resources Productivity Control
Use of Computers in ProjectManagement Reporting Resources management Cost analysis
Stages in setting up of a project Initial selection of project ideasa) Project must match with the promoters profile of qualifications,experience,interest,etc.b) Rough estimate of project cost and promoters capacity to mobilize the necessary resources to the proposed project.c) Clear idea about market size and growth potential.
d) The availability of inputs and proximity of market for final products.e) Costinvolvedinproduction,administration,and marketing.f) Availability of technology and plant and machinery.g) Risks involved with the project.
Selection of Project location Proximity Of Inputs Proximity Of Market Availability of Water Availability Of Transportation Availability Of Power Communication Facilities Government Policies Manpower Availability Weather and Climatic Condition Environmental Factors and Other Regulations General living Conditions
Selection of Project Site Availability of land Cost of site Cost of site preparation and development Soil and Topography
Selection of Technology Plant Capacity Principal Inputs Investment Outlay Way by other units Product Mix Latest Developments Ease of Absorption
SWOT Analysisa) Internal resourcesb) Availability of funds in capital marketc) Extent of support from banks and financial institutiond) existing and proposed level of investments and its impact on ROI,EPS and market value of firme) The business and financial risk attached to afirmf) Technology developed internally or possibility to obtain reliable technical know-how at cheaper costg) Brand loyalty of existing prouctsh) Source of raw material and other infrastructure facilitiesi) Market share,distribution net workj) Severity of competitionk) Cost of production and managerial competencel) Cost of capitalm) Governmental clearances and permissionsn) Macro and micro economic environment in which business operates
Zero date zero date project means a date is fixed up from which the implementation of the projects begins.The progress in implementation of the projects is monitored by taking zero date as a base for counting the time as well as cost of project. Financial closure The entrepreneur will prepare and submit a detailed project report called „techno-economic feasibility report‟ to the financial institution for obtaining term loans for project financing.on the basis of this report ,he will obtain the governmental clearances,statutory permissions.
Project visibility the project activities starts prior to the zero date. Much of the time spent on planning the project A project cannot be seen by the public most of its time
Work break down structure the total project work is broken down according to the various componenets and will establish the connection between various components is termed as „work breakdown structure‟. Brown field project A project implemented in the precints of a working plant/working facilityis known as „brown field project(BEP)‟
Resource levelling Resource levelling is usage of resources during the project durationwith minimum variation in resource requirements without extending the project completion time. Project execution plan Project execution plan (PEP) refers to that exercise of matching the project hardware and software with the executing agencies through a viable work system.
CAT AND RAT Schedulea) The various approaches for time scheduling are normally branded as CAT schedule and RAT schedule.b) CAT schedule stands for „activity target schedule. RAT schedule stands for „reserved activity target schedule‟.c) The CAT schedule is used for progressing of the executing agencies whereas the RAT schedule are those that are to be achieved. the project manager will try to maintain a distance between two schedules so that CAT schedule does not swallow the RAT schedule.d) A CAT schedule is detailed and developed in squared network form and RAT schedule is maintained in ‟s‟ curve form.e) The RAT schedule will contain only the key milestones whereas the CAT schedule will have all important activities.
f) The RAT schedule is based on some in built allowances for delays. This allowance is not to be disclosed to execution agencies. The RAT schedule is for taking care of all uncertainties in execution of projects.g) If the achievement of key milestones is delayed beyond the RAT schedule, then only slippage will be accepted for reporting to the financial institutions and the general public.h) The CAT and RAT schedule should be revised every time the cost estimates are revised to keep the gap of allowance.
Line of balance (LOB)o It is a device for planning and monitoring the progress of an order, project or program to be completed on target date.o Dates are predefined for various major activities like positioning of materials, specific contributory tasks to be accomplished, subassemblies and subprojects are to be completed.o It is useful control technique.o It is a more detailed management oriented charting technique for monitoring progress.
Value Engineering Review It is defined as a “a systematic analysis and evaluation of the technique and functions in the various sphere of an organization with a view to exploring channels of performance improvement so that the value in a particular product can bettered. In other words it is an analytical technique, designed to examine all the facets and cost of a product, in order to determine whether or not any item of cost can be reduced or eliminated, while retaining all functional, performance and quality requirements. Value engineering may be applied in the design and development stage and concentrates mainly on reduction of direct cost of production.
Risk Aware cultureo The project estimates are dependent on so many assumptions as to sales,profitability,costs,investments,technical estimates, work performance ,project implementation schedules.o Risk and uncertainty involvedo The risk awareness culture is to be developed at all project management team to fight against any adversaries occur in implementation of the project.
Project procedure manualo it is required to co-ordinate the various subsystems like contract management,configuaration management, time managemnt,cost,fund,materials,men and communications management.o It is prepared in such a way that interacting agencies are able to see their roles and mutual relationships as per the common goal.
Time and cost trade offo The project should be completed within its schedule of implementation and within the estimated cost.o The project manger should be conversant with the different time savings and the extra cost involved with project.o The following three option are available:1. Most efficient project2. Scheduled plan3. Shortest duration plan
Monitoring capital expenditure the accumulation, monitoring and control of capital expenditure of big project consists of the following steps1. Budget2. Allocation of job order No./Capex No3. Collection of cost against each Capex No4. Control of cost5. Proper reporting
Variance and performance analysis Variance analysis traditional analysis involves comparison of actual costs with budgeted costs to determine the variance. Performance analysis (BUGDETED – Actual) it a modern approach where analysis is done for the project as a whole projects on schedule,behind,and ahead of schedule. it indicates whether cost of a project as a whole project is as per budget
Network analysis (PERT and CPM) it is a technique is a technique used for administration of a project which consists of several activities having a definite interrelationship among them. Each activity identified by means of a starting event and a finishing event so that normal duration of the activity can be determined.o The project manager should decidea) Which tasks must be done first before others can be started?b) Which tasks could be done at the same time?c) Which tasks must be started as soon as possible and completed on schedule if the completion date for the entire project is to be achieved?
Objectives of network analysisI. To ascertain the normal duration for completion of all the activities comprised in the projectII. To minimize the cost of the project by proper marshalling of the resourcesIII. To obtain the ‘cost time trade off’ t
Feasibility study report (pre-investment study report) Before a project investment is finalizes, the entrepreneur will conduct a feasibility study to confirm about the techno-commercial strength of project and prepares a report called feasibility report. It contains the followingsa) Study of the configuration of the project idea in all aspectsb) Identifying the type and size of the project with justificationc) Study of location
j) Lack of reliable technologyk) Lack of flexibilityl) Financial soundness of participating investorsm) Unforeseen competition
d) Study of demand of products/servicese) Survey of material requirementf) Project scheduleg) Project cost and sources of financeh) Profitability and cash flow analysisI ) Cost benefit analysisj) Identifying and quantifying risk elementk) Social costs and benefitsl) Study of economic, political and legal environment
Market surveyo Before understanding any new project it is customary to undertake a market survey.o Market survey is the other name of market research.The effectiveness of market survey depends on-i. Potential buyersii. Buyers intentioniii. Cost effectiveness a) cost of identifying buyers b) buyers willingness to disclose intention c) buyers propensity to carry out their intention
Invisible walls in projectestimationa) Delays in governmental clearancesb) Delays in obtaining sanction of loan from financial institutionsc) Reliability of contractorsd) Hurdles from the local people near the project sitee) Political disturbancef) Foreign exchange rate variationg) Unable to quantify the risk properlyh) Location disadvantagei) Uncertainty of markets and change in consumer preferences
J) Lack of reliable technologyk) Lack of flexibilityl) Financial soundness of participating investorsm) Unforeseen competition
Reasons for project failure thea) Substantial overrun of the project which makes project not feasible to implement furtherb) Changes in technology during the implementation of the projectc) Wrongful estimation of cost of project and its profitabilityd) Lack of experienced management teame) Lack of delegation of authority and responsibilityf) Lack of proper project monitoring systemg) Failure to obtain government clearances and permissionsh) Unfaithfulness of the promoteri) Lack of sufficient knowledge about the project to promoter.
Techniques for project controla) Watch and measure the achievement at short intervalsb) Ascertain current variances and predict future variancesc) Ascertain root cause of variancesd) Take actions to offset the ill-effects of past variancese) Prevent future potential variancesf) Track and measure the quantitative output and cost inputs
g) Evaluate targets, output and input in financial termsh) Special monitoring of essential tasks by using techniques like red lists, hotline reports to draw top management’s attention.i) Introduction of incentives for good performancej) Doing away with red-tapism and bureaucratic proceduresk)Periodic review meetings and taking appropriate actions
Incentives in oriented unitsplanning Incentive for export projecta) Liberal import facilities are allowed depending on actual import content of product and F.O.B value of productb) Customs and central excise duties paid on raw material used for manufacture of export products are reimbursablec) Raw materials are supplied at controlled prices for specified export productsd) Priority is accorded by railways for transport of goods meant for export
e) Export credit guarantee corporation (ECGC) offers special assistance by way of protecting from credit riskf)Insurance against loss in export of goods and services.ECGC also provides guarantee to banks and financial institutions to enable exporters to obtain better facilities from themg)Financial facilities at special concessional rates of interest are given by commercial banksh)100% foreign equity participation is allowed but the company should be an Indian company.i) Imports of capital goods/components and raw materials are exempted from import dutyj) Single point clearance with simplified proceduresk)Relaxations are allowed in respect of sales tax, property tax,octroil)Tax holiday is available for 100% export oriented units
Incentives for units in industriallybackward areaa) Central outright grant or subsidy schemeb) Concessional finance schemec) Transport subsidy scheme
Incentives for small scaleindustries units need not obtain a) Small scale industrial licenses for certain category of items manufacturedb) Number of products and services have been exclusively reserved for small scale units.c) Government provides comprehensive assistance to small entrepreneurs through various organizations like industries development organization.d) Priority and assistance is provided in allotment of lande) State finance corporations provides loan
Tax consideration in project planning since corporate tax is a very vital element, the magnitude and timing of the tax burden associated with projects should be carefully assessed. The tax incentives and benefits and tax implications have a major role to play in project investment decision.
Impact of liberalization andglobalization on project planning Under the post liberalization economic scenario, India is facing: global challenges of advanced technology Problems concerning energy conservation Rapid automation Need to have high productivity and low prices Issues arising out of efficiency oriented privatization Challenges of speed and customer orientation
To survive in the globalization situation, the Indian projects will have to: be cost effective and inexpensive Have low capital base Use advanced technology suitable for Indian conditions Be safe from pollution and nuclear radiation Be energy efficient Increase speed of delivery Ensure good customer relationship management
All future projects should incorporate adequate provisions for: using non-conventional energy, natural gas and coal where possible Partial replacement keeping pace with advanced technology Utmost safety in operation Conservation of resources Good quality control Ensuring excellence of end product Strategies for staying close to the customer Sticking to the expertise-core competence
Future projects should aim at: alleviating poverty Generating mass employment potential Raise standards of living and quality of life Making the country self sufficient in inexpensive essential goods and services Safe disposal of waste Adequate environmental protection
Strategic focus in project planninga) Economies of scale by consolidationb) Thrust on core business, in other words, expand the business globally where corporate has strength.c) Upgrading products and technologies to ensure customer satisfaction with quality and reliable products and services.d) Reduce product development time and cycle time to bring efficiency.e) Cost effective solution, cost reduction and increasing value to customers.
f) Clear understanding of customer’s requirement and ensuring customers loyalty on-going basis.g) Down-sizing,delayering and business process re- engineering to ensure efficiency in operations to service to customers.h) Deployment of techniques like total quality management, six sigma, activity based cost management etc.i) Strategic alliance with Indian and foreign companies, joint ventures with foreign companies, start new business or restore existing business.
Micro and Macro ConsiderationsAt National levelAt Sectorial level At Project level Macro considerations at national levela) Overall growth of all sectorsb) Allocation of resources between sectorsc) Boost up private and public sectord) Allocate the scarce resourcese) Controlling fiscal, monetary frameworkf) Maintaining wage policy, exchange rate and inflationary pressureg) Motivating economic behavior
Micro considerations at sectorial levela) Ensuring the investment planb) Ensuring a balance in implementation of multiple projectsc) New projects should be kept waitingd) Rational decisions should be made on the basis of past experience.e) Cost benefit analysisf) The investment plan should able bifurcate expense in core and non core projects.
Cost and time over runs pre feasibility stagea) bureaucratic delaysb) Securing necessary approvalsc) Failure to plan on important resources Evaluation stagea) Better evaluationb) Find lackingsc) Wrong selection of projectd) Wrong economic studies
choice of technologya) Wrong selection of technologyb) Section of technology on the basis of credit availability by supplierc) Delay in completing engineeringd) Improper scrutiny Contracting and procurementa) Improper preparation of tender documentsb) Wrong selection of vendorsc) More time consumption on importing materiald) Absence of proper quality
e) Poor logistic planning construction stagea) Starting construction activities without proper planningb) Low productivity of contractors Commissioning and start –upa) Delays in making available manualsb) Failure of equipmentsc) Defects in installation
Methods to avoid cost and time overrun1. master schedule/milestone network/master budget2. Time and resources schedule3. Procurement time schedulea) calendar time construction work scheduleb) scheduling of contractingc) Crashing economic analysisd) Progress reporte) Fund flow analysis etc
Cost benefit analysis It is more sophisticated technique recently introduced in long term decision making in capital projects appraisal. It is defined as “an analytical tool in decision making which enables a systematic comparison to be made between the estimated cost of undertaking of project and the estimated value and benefits which may arise from the operation of such a project.”
CBA and investment decisions The concept of NPV may not be regarded as entirely appropriate. CBA is essentially discounted cash flow analysis for public sector institutions. For a business assessing a project such comparison with the other investment opportunities currently available. The only factor which will influence the decision will be those costs and benefit incurred and received privately by the firm From society point of view road building has effects in the community which confer both costs and benefits on society as a whole e.g. increased traffic may create pollution of air and at the same time create jobs in the area around road
CBA is used to determinea) Whether or not a specific operation should be undertakenb) Which of the possible alternative projects should be selectedc) Which time cycle would be most beneficial to the project.
CBA Procedure1. Determine problem to be considered2. Ascertain alternative solutions to problem3. Estimate and analyze costs and benefits4. Appraise estimated costs and benefits5. Decide on optimal solution Techniques of CBAa) Discounted cash flow techniques - Net present value(NPV) - Internal rate of return(IRR)b) Benefit/cost comparisonc) Benefit/cost ratio
Benefits of CBA1. Ensure value of money2. Social cost and benefits3. Protection from potential enemy4. Good health Limitations of CBA1. Inaccuracy in data input2. Difficult to forecast3. Difficult to quantify4. Difficulty in determining value of cost and benefits
Social cost benefit analysis ‘social cost is a sacrifice or detriment to society. ‘social benefit’ is a compensation made to the society in the form of increase in per capita income, employment opportunities,etc. Social cost benefit analysis (SCBA) is a systematic evaluation of an organizations social performance as distinguished from its economic performance. It is concerned with the possible influences on the social quality of life instead of economic quality of life.• It is used to determinea) Which alternative or choice is socially viableb) Which alternative is the optimal or the best solution.
Indicators of social desirability of a projecta) Employment potentialb) Foreign exchange earningsc) Social-cost benefit analysisd) Capital output ratioe) Value added per unit of capital
Economic Appraisal Technique of Project Growing importance of public investment,especially in developing countries govt on development projects, the social cost benefit analysis has received increasing emphasis. To eliminate the trade offs between growth and equity, investment projects are divided intoa) Capital intensive industrial projectb) Infrastructure investmentsc) Agriculture and rural development projects Economic Rate of Return Domestic Resource Cost Effective Rate of Protection