MBA – IV SEMESTER

FM-3: PROJECT FINANCE
UNIT I: – PROJECT FINANCE:

AN OVER VIEW
LESSON 1.1

implementing. financing.Project : Meaning A Project involves a group of interrelated activities that are planned and then executed in a certain sequence to create a unique product or service within a specific timeframe. controlling and coordinating unique activities or task to produce desirable outputs in accordance with predetermined objectives within the constraints of time and cost. . Project Management Project Management is an organised venture for managing projects. in order to achieve outcomes / benefits. monitoring. It involves scientific applications of modern tools and techniques in planning .

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

Project Process Planning Analysis Selection Financing Implementation Review .

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 .

Key Issues in Major Investment Decisions • Investment story • Risks • DCF Value • Financing • Options .

the more robust will be the economic growth and the rate of improvement in our standard of living. Wit the following : “ The quest for value drives scarce resources to their most productive uses and their most efficient users.Objective of Capital Budgeting/Project 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. The more effectively resources are deployed.” . and practitioners.

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

audits .Common Weaknesses in Capital Budgeting/Project process  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 .

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

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