PROJECT APPRAISAL PLANNING AND CONTROL

1. CHAPTER 1
OVER VIEW

2.  Capital investments: Importance and difficulties
 Types of capital investments
 Phases of capital budgeting
 Levels of decision making
 Facets of project analysis
 Feasibility study: A schematic diagram
 Key issues in major investment decisions
 Objectives of capital budgeting
 Common weaknesses in capital budgeting
OUTLINE

3. Capital Investments : Importance and Difficulties
Importance
 Long – term effects
 Irreversibility
 Substantial outlays
Difficulties
 Measurement problems
 Uncertainty
 Temporal spread

4. Types of Investments
 Mandatory Investments
 Replacement investments
 Expansion investments
 Diversification investments
 R & D investments
 Miscellaneous investments

5. Capital Budgeting Process
Financing
Implementation
Selection
Analysis
Review
Planning

6. Levels of Decision Making
Operating
decisions
Administrative
decisions
Strategic
decisions
 Where is the decision taken Lower level
management
Middle level
management
Top level
management
 How structured is the decision Routine Semi-structured Unstructured
 What is the level of resource
commitment
Minor resource
commitment
Moderate
resource
commitment
Major
resource
commitment
 What is the time horizon Short-term Medium-term Long-term

7. Key Issues in Project Analysis
Market Analysis
Technical Analysis
Potential Market
Market Share
Technical Viability
Sensible Choices
Financial Analysis
Risk
Return
Economic Analysis
Benefits and Costs in Shadow
Prices
Other Impacts
Ecological Analysis
Environmental Damage
Restoration Measures

8. Feasibility Study : A Schematic Diagram
Generation of Ideas
Initial Screening
Is the Idea Prima Facie Promising
Plan Feasibility Analysis
Conduct Market Analysis Conduct Technical Analysis
Conduct Financial Analysis
Conduct Economic and Ecological Analysis
Is the Project Worthwhile ?
Prepare Funding Proposal Terminate
Terminate
Yes No
NoYes
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9. Key Issues in Major Investment Decisions
• Investment story
• Risks
• DCF Value
• Financing
• Options

10. Objective of Capital Budgeting
Finance theory rests on the premise that managers should manage
their firm’s resources with the objective of enhancing the firm’s
market value. This goal has been eloquently defended by
distinguished finance scholars, economists, and practitioners. Wit
the following :
“ The quest for value drives scarce resources to their
most productive uses and their most efficient users. The
more effectively resources are deployed, the more robust
will be the economic growth and the rate of
improvement in our standard of living.”

11. Basic Considerations : Risk and Return
Investment
decisions
Financing
decisions
Return
Risk
Market value
of the firm

12. Common Weaknesses in Capital Budgeting
 Poor alignment between strategy and capital budgeting
 Deficiencies in analytical techniques
 Poor identification of base case
 Inadequate treatment of risk
 Improper evaluation of options
 Lack of uniformity in assumptions
 Neglect of side effects
 No linkage between compensation and financial measures
 Reverse financial engineering
 Weak integration between capital budgeting and expense budgeting
 Inadequate post - audits

13. SUMMING UP
 Essentially a capital project represents a scheme for investing resources that
can be analysed and appraised reasonably independently.
 The basic characteristic of a capital project is that it typically involves a
current outlay (or current and future outlays) of funds in the expectation of a
stream of benefits extending far into the future.
 Capital expenditure decisions often represent the most important decisions
taken by a firm. Their importance stems from three inter-related reasons:
long-term effects, irreversibility, and substantial outlays.
 While capital expenditure decisions are extremely important, they pose
difficulties which stem from three principal sources: measurement problems,
uncertainty, and temporal spread.
 Capital budgeting is a complex process which may be divided into six broad
phases: planning, analysis, selection, financing, implementation and review.

14.  One can look at capital budgeting decisions at three levels: operating,
administrative, and strategic.
 The important facets of project analysis are: market analysis, technical
analysis, financial analysis, economic analysis, and ecological analysis.
 Financial theory, in general, rests on the premise that the goal of financial
management should be to maximise the present wealth of the firm’s equity
shareholders. Business firms may pursue other goals. When these other goals
conflict with the goal of maximising the wealth of equity shareholders, the
trade-off has to be understood.
 The common weaknesses found in capital budgeting systems in practice are:
poor alignment between strategy and capital budgeting; deficiencies in
analytical techniques; no linkage between compensation and financial
measures; reverse financial engineering; weak integration between capital
budgeting and expense budgeting; inadequate post-audits.