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Managing Projects
A project is (or involves) a capital expenditure (= capital investment/project). The basic characteristic
of a capital expenditure / investment is that it typically involves a current outlay of funds in the
expectation of a stream of benefits extending far into the future.
The following six (6) Phases of Capital Budgeting Process can be used to manage projects.

Planning
Analysis
Selection
Financing
Implementation
Review
1. Planning

Idea generation / project concept

Preliminary screening of project proposals
Is the idea / project prima facie worthwhile / promising to justify a feasibility study?

2. Analysis
If the project is prima facie worthwhile, go for the following facets of project analysis in detail:

Market / marketing analysis (potential market, consumption trends, consumer behavior,

elasticity of demand, preferences, etc.)
Technical analysis (prerequisites for successful commissioning (=startup) of plant: machines,
raw materials, site, buildings, other inputs, etc.)
Financial analysis (ICO, means of financing, WACC, est. CFs, BE, projected profitability and
financial position, risk level, etc.)
Economic analysis (social cost-benefit analysis, income distribution in society, savings &
investment in society, impact on employment, etc.)
Ecological analysis (damage caused by project to the environment and restoration measures
in order to mitigate those damages)

Mansoor Ali Seelro MBA (RE) 2Y mansoor.seelro@gmail.com std_18419@iobm.edu.pk June, 2016

3. Selection (evaluation / appraisal)

Various project selection / evaluation / appraisal criteria or tools are as follows:

Criterion / tool
Non-discounting tools
1. Payback Period (PBP)
2. Accounting Rate of Return (ARR)
Discounting tools
1. Discounted PBP
2. Net Present Value (NPV)
3. Internal Rate of Return (IRR)
4. Benefit-Cost Ratio (BCR) / PI

Accept

Reject

PBP < target period

ARR > target/req return

PBP > target period

ARR < target/req return

D.PBP < target period

NPV > 0 (i.e. NPV is +ve)
IRR > WACC/req return*
BCR/PI > 1

D.PBP > target period

NPV < 0 (i.e. NPV is ve)
IRR < WACC/req return
BCR/PI < 1

* required (or expected) rate of return must at least equal (weighted average) cost of capital; hence used
interchangeably.

4. Financing

Decide on capital structure (i.e. D/E ratio)

FRICT (Flexibility, Risk, Income, Control, and Taxes) are key business considerations that
influence the capital structure.

5. Implementation
This is the phase where Project Management comes into play. For an industrial project,
implementation refers to the setup of manufacturing facilities following are the stages:

Project & engineering designs (site probing/prospecting, plant designs, selection of

equipment, etc.)
Negotiations & contracting (legal contracts, technology acquisition, financial negotiations,
etc.)
Construction (site prep, buildings & civil works, erection & installation of plant/equip, etc.)
Training (training of engineers, technicians & workers)
Plant commissioning (startup of the plant)

6. Review

Periodic performance review & feedback system.

Note: Phases 1 4 above relate to the pre-feasibility and feasibility studies for a project. Phase 1
(planning) is concerned mainly with prefeasibility. Phases 2, 3 & 4 (analysis, selection & financing)
deal with the feasibility of a project. If the prefeasibility study reveals that the idea is viable and
worthwhile we go for feasibility study, otherwise we terminate before feasibility study. Next, if the
feasibility study is favorable we go for implementing the project, else we terminate without
implementing.

Mansoor Ali Seelro MBA (RE) 2Y mansoor.seelro@gmail.com std_18419@iobm.edu.pk June, 2016