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Project Appraisal and finance by Dr R Soundara Rajan

 Outline teaching schedule:    Overview of project and project Planning Capital investment importance and difficulties Facet of project analysis Key issues in major investment decisions 3.Lecture-1 1. Learning Objectives:  Understand the issues in project selection and basic requirement for planning the project 2.  Assessment criteria Explain the issues in capital investment and planning process of a project .

Success comes after hard work .

Impossible to predict what will happen in future • Temporal spread.integrated steel plant requires several thousand crores Difficulties • Measurement problems • Uncertainty.cost and benefit spread over 10-20 years .Capital Investments : Importance and Difficulties Importance • Importance • Long – term effects • Irreversibility • Substantial outlays.

new products R & D investmentsdevelop new products and process Miscellaneous investmentsinterior decoration. landscape gardens .replace worn out equipment Expansion investmentsincrease capacity Diversification investments. fire fighting Replacement investments.Types of Investments Mandatory Investments Statutory like pollution control.

technical. Analysis.Equity. Constructions. BCR Financing. Commissioning Review. viability etc. financial. feasibility. Contract. economic and ecological Selection Project worthwhile?. Training. IRR.Actual performance with projected performance .Apply Payback. NPV.Capital Budgeting Process Planning-Strategy.marketing. screening.Engineering design. ARR. debt Implementation.

Levels of Decision Making Operating decisions  Administrative decisions Middle level management Semi-structured Strategic decisions Top level management Unstructured Where is the decision taken Lower level management Routine  How structured is the decision  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 .

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

Feasibility Study : A Schematic Diagram P Generation of Ideas Initial Screening r e l i m i n a r y Is the Idea Prima Facie Promising Yes Plan Feasibility Analysis Terminate Conduct Market Analysis Conduct Technical Analysis No W o r k Conduct Financial Analysis E v a A n a Conduct Economic and Ecological Analysis Is the Project Worthwhile ? Yes Prepare Funding Proposal No Terminate l u a t i o n l y s i s .

Financing Mix .positive NPV • Risks.NPV.Key issues in major Investment Decisions • Investment story.Firms enjoys comparative advantage visa vis its competitors. IRR • Financing.Risk associated and ability to handle • DCF Value.

and practitioners.” . the more robust will be the economic growth and the rate of improvement in our standard of living. The more effectively resources are deployed.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. “ The quest for value drives scarce resources to their most productive uses and their most efficient users. economists. This goal has been eloquently defended by distinguished finance scholars.

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

audits .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 .

uncertainty. Essentially a capital project represents a scheme for investing resources that can be analyzed and appraised reasonably independently.  4. selection. Their importance stems from three inter-related reasons: long-term effects.  5.  2.  3. financing. Capital expenditure decisions often represent the most important decisions taken by a firm. and substantial outlays.SUMMING UP  1. analysis. and temporal spread. 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. they pose difficulties which stem from three principal sources: measurement problems. Capital budgeting is a complex process which may be divided into six broad phases: planning. . While capital expenditure decisions are extremely important. irreversibility. implementation and review.

The common weaknesses found in capital budgeting systems in practice are: I. and ecological analysis. technical analysis. and strategic.  9. poor alignment between strategy and capital budgeting. III.  7. One can look at capital budgeting decisions at three levels: operating. II. inadequate post-audits. VI. 6. IV. When these other goals conflict with the goal of maximizing the wealth of equity shareholders. administrative. . economic analysis. reverse financial engineering. weak integration between capital budgeting and expense budgeting. rests on the premise that the goal of financial management should be to maximize the present wealth of the firm’s equity shareholders. in general. Business firms may pursue other goals.  8. Financial theory. the trade-off has to be understood. deficiencies in analytical techniques. financial analysis. no linkage between compensation and financial measures. V. The important facets of project analysis are: market analysis.

Oh may divine protect us both. May we work together with great energy. May we not hate each other . May he nourish us both. May our study be vigourous and fruitful. the teacher and the disciple.

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