Introduction to Project

Appraisal and Finance

(PA&F)
Semester III – Class of 2019-21
PGPM
By Prof. Pranav Gosalia

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Centre for Financial Management, Bangalore 2
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 What are the common elements? Give your opinion…!!!

1. Team of product developer are designing a new desktop with

inbuilt camera, speaker, sound and writing pad connected with it
within five months.
2. Manufacturing such thousands of desktop at using designing
blueprint at plant.

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 What is Project?
A project is a temporary endeavor undertaken to create a unique
product, service, or result. (PMI)
• Unique
• Temporary
• Start and end date
• Define scope and resources
What is Project Appraisal?
Project Appraisal is a consistent process of reviewing a
given project and evaluating its content to approve or
reject this project, through analyzing the problem or need
to be addressed by the project, generating solution
options (alternatives) for solving the problem, selecting
the most feasible option, conducting a feasibility analysis
of that option, creating the solution statement, and
identifying all people and organizations concerned with or
affected by the project and its expected outcomes. It is an
attempt to justify the project through analysis, which is a
way to determine project feasibility and cost-effectiveness.
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What is Project?
a collection of linked activities carried out in
an organized manner with a clearly defined
start point and finish point, to achieve some
specific results that satisfy the needs of an
organization as derived from the
organization’s current business plans.
What is a project…continue…
Project is a temporary endeavor, having a defined beginning
and end (usually constrained by date, but can be by funding
or deliverables), undertaken to meet unique goals and
objectives, usually to bring about beneficial change or
added value.
The temporary nature of projects stands in contrast to
business as usual or operations which are repetitive,
permanent or semi-permanent functional work to produce
products or services.
In practice, the management of these two systems is often
found to be quite different, and RISKY
Question is : What makes it risky?
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 Project Constrain with Iron Triangle / Triangle
Project Constrain
of Balance / Triple Constraint

Project Management Framework

What is Project Management?

Process Group, Knowledge Group and Tools & Techniques.

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 Project Management Stages

Initiation

Closing Control Planning

Execution

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 Project Management
Process Groups and
Knowledge Areas
Mapping
(From PMBOK)

Project Risks? Project Risks?

oProjects have unique risks: oProjects have unique risks:

oSymmetric risks: oBinary risks
oDemand, price. oTechnology failure.
oInput/supply. oDirect expropriation.
oCurrency, interest rate, inflation. oCounterparty failure
oReserve (stock) or throughput (flow). oForce majeure
oAsymmetric downside risks: oRegulatory risk
oEnvironmental.
oCreeping expropriation.

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 Types of Investments Capital Investments : Importance and Difficulties

Importance
 Physical, monetary and intangible assets
 Long – term effects
 Strategic investment and tactical investment
 Irreversibility
 Mandatory Investments
 Substantial outlays
 Replacement investments Difficulties
 Expansion investments  Measurement problems
 Diversification investments  Uncertainty
 R & D investments  Temporal spread
 Miscellaneous investments

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 Capital Budgeting Process
Capital Budgeting Planning

Analysis
Capital budgeting is the process in which a
business determines and evaluates potential
expenses or investments that are large in Selection
nature.
Financing

These expenditures and investments include

Implementation
projects such as building a new plant or
investing in a long-term venture.
Review
FRICT – Flexibility, Risk, Income, Control and Tax influence capital structure (Debt-Equity
Ratio) decision and choice of financing instrument

Levels of Decision Making Key Issues in Project Analysis

Potential Market
Operating Administrative Strategic Market Analysis
decisions decisions decisions
Market Share
 Where is the decision taken Lower level Middle level Top level Technical Viability
management management management Technical Analysis
Sensible Choices
 How structured is the decision Routine Semi-structured Unstructured Risk
Financial Analysis
Return
 What is the level of resource Minor resource Moderate Major
Benefits and Costs in Shadow
commitment commitment resource resource
commitment commitment Economic Analysis Prices
Other Impacts
Environmental Damage
 What is the time horizon Short-term Medium-term Long-term
Ecological Analysis
Restoration Measures

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 Feasibility Study : A Schematic Diagram
P
r
Key Issues in Major Investment Decisions
Generation of Ideas
e
l
i Initial Screening
m
i
• Investment story
Is the Idea Prima Facie Promising
n
a Yes No • Risks
r
Plan Feasibility Analysis
y
Terminate • DCF Value
W
o
Conduct Market Analysis Conduct Technical Analysis • Financing
r
k
Conduct Financial Analysis
• Impact on Short-term EPS
E
A v • Options
n a Conduct Economic and Ecological Analysis
a l
l u
Is the Project Worthwhile ?
y a

s t Yes No
i
i
o Prepare Funding Proposal Terminate
s
n

Objective of Capital Budgeting Common Weaknesses in Capital Budgeting

 Poor alignment between strategy and capital budgeting
Finance theory rests on the premise that managers should manage
their firm’s resources with the objective of enhancing the firm’s  Deficiencies in analytical techniques
market value. This goal has been eloquently defended by  Poor identification of base case
distinguished finance scholars, economists, and practitioners. Wit
 Inadequate treatment of risk
the following :
 Improper evaluation of options

“ The quest for value drives scarce resources to their  Lack of uniformity in assumptions
most productive uses and their most efficient users. The  Neglect of side effects
more effectively resources are deployed, the more robust  No linkage between compensation and financial measures
will be the economic growth and the rate of
improvement in our standard of living.”  Reverse financial engineering
 Weak integration between capital budgeting and expense budgeting
 Inadequate post - audits

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 Project finance is the long-term financing of infrastructure and industrial
projects based upon the projected cash flows of the project rather than
the balance sheets of its sponsors.

Usually, a project financing structure involves a number of equity

investors, known as 'sponsors', a 'syndicate' of banks or other lending
institutions that provide loans to the operation.

• Topic :- Basel III and Project Finance

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