PROJECT APPRAISAL PROJECT APPRAISAL Rushi Ahuja
PROJECT APPRAISALPROJECT APPRAISAL
Rushi Ahuja
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Generation of Ideas
Stimulating Flow of Ideas
SWOT Analysis
Clear Articulation of Objectives
Fostering a conducive culture
Tools for Idea Selection
Porter Model
Life Cycle Theory
Experience Curve
Following factors to be considered:
Reasonableness of cost
Consistency with Govt. regulations
Adequacy of Market
Availability of inputs
Compatibility with the personality of the Promoter
Risk acceptability level
Preliminary Screening of Ideas
Indentify factors
Assign weight to each factor
Rate the factors on a scale
Multiply factor weight and rating
Add the factor scores to arrive at overall rating index
Project Rating Index
Note - For details, refer Chapter 3 of book “Projects – Planning, Analysis Selection, Financing, Implementation and Review “ by Prasanna Chandra
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Market & Demand Analysis
Key Steps in Marketing &
Demand Analysis
Situational Analysis
Collection of Secondary
Information
Conduct of Market Survey
Characterization of market
Demand Forecasting
Market Planning
Fostering a conducive culture
Define the target population
Select the sampling scheme and sample size
Develop the questionnaire
Recruit and train the field investigators
Obtain information as per questionnaire from sample of respondents
Analyze and interpret the information
Steps in Market Survey
Effective demand in past and present
Breakdown of demand
Price
Methods of distribution and sales promotion
Consumers
Suppliers and competition
Government Policy
Characterization of Market
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Market & Demand Analysis
These methods rely on the judgment of experts to translate qualitative information into quantitative estimates. Since its based on the judgment, there is high likelihood that it may go wrong. Following are the important methods:
Jury of Executive Method
Delphi Method
Qualitative MethodsThese methods generate forecasts on the basis of analysis of historical time series.. Following are the important methods:
Trend Projection Method
Exponential Smoothing Method
Moving Averages Method
Time Series Projection Methods
These methods are more analytical than the above mentioned methods. These methods seek to develop forecast based on cause and effect relationship specified in an explicit, quantitative manner. Following are the important methods: Chain Ratio Method
Consumption Level Method
End Use Method
Casual Methods
Leading Indicator Method
Econometric Method
Demand Forecasting
Note - For details, refer Chapter 4 of book “Projects – Planning, Analysis Selection, Financing, Implementation and Review “ by Prasanna Chandra
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Technical Analysis
1. Choice of Technology : Choice of technology is influenced by the following factors: Plant Capacity Principal Inputs Investment Outlay and production costs Use by other units
2. Technical Arrangements : Satisfactory contractual arrangements should be made to obtain the technical know how needed for the proposed production process. Following should be worked out in detail: Price of the technology & mode of payment Process and Performance guarantees
3. Material and Inputs Raw Material Utilities
4. Product Mix: Choice of Product Mix is guided by the market requirements. While planning the production facilities some flexibility in product mix should be sought
5. Plant Capacity : Following factors have bearing on the plant capacity decision: Technological requirement Input constraints Investment costs
Product Mix Latest Developments Ease of absorption
Auxiliary Materials & Factory Supplies Processed Industrial Materials & Components
Period of collaboration & Assistance provided Continuing benefit of R&D work being done
Market conditions Resources of the firm Government Policy
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Technical Analysis
6. Location and Site : Choice of site location is influenced by following factors: Proximity to the source of raw materials Proximity to markets Availability of infrastructure
7. Machineries and Equipment : Requirement of machinery and equipment is dependent on the production technology and plant capacity
8. Structure and Civil Works: This may be divided into 3 categories: Site preparation and Development Buildings and Structure Outdoor Works
9. Environmental Aspects: Following key issues should be considered in respect of environment
What are the types of effluents and emissions generated What needs to be done for proper disposal of effluents and treatment of waste Will the project be able to secure all the environmental clearances
10. Charts and Layouts: Charts and layouts define the scope of the project and provide the basis of detailed engineering and estimation of investment and production costs
Labour Situation Government Policies Other factors like climatic & living conditions
Note - For details, refer Chapter 5 of book Projects – Planning, Analysis Selection, Financing, Implementation and Review by Prasanna Chandra
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Financial Analysis
1. Sources of Finance: Following can be sources of finance for a project: Equity Preference Debentures & Bonds Bank Loan
2. Cost of Capital : : Cost of Debt – Redeemable and Irredeemable Cost of Preference – Redeemable and Irredeemable Cost of Equity – Dividend growth model & CAPM Overall/weighted average cost of capital
3. Investment Evaluation CriteriaDiscounting Techniques Net Present Value Method Profitability Index Internal Rate of Return
4. Estimating Cash-flows: Estimating Cash flows of a normal project Estimating cash-flows of a replacement project
Personal Funds Loans from friends & Relatives Private Equity Venture Capital
Non Discounting Techniques Accounting rate of return Payback Period Method
Note - For detailed notes, refer to a separate handout – FM Section2 and Section3
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Risk Analysis
1. Risk Adjusted Discount Rate (RADR) : In this approach, discount rate of the Project is adjusted for Risk. Higher the risk, higher is the discount rate used for determining the NPV of the Project. Following are the calculation steps Calculate RADR which is = Risk Free Rate of Return + Risk Premium Calculate Present Value of Cash Flows using RADR as discount rate The Project which gives positive NPV, should be selected
2. Certainty Equivalent Quotient (CEQ): In this approach, Cash flows of the project are adjusted for risk instead of the discount rate. Discount rate used is the risk free rate of return instead of weighted average cost of capital. Following are the calculation steps Multiply the Cash Flows with CEQ to find out risk adjusted cash flows Use Risk free rate of return as discounting factor for determining the NPV of the Project The Project which gives positive NPV, should be selected
3. Probability Theory : Since determination of cash flows of a project is based on certain assumptions about future, which is uncertain, therefore this approach assigns a probability or likely hood of occurrence of the cash flows. . Following are the calculation steps Multiply the Cash flows with their respective probability Add the results to calculate total Expected Value (EV) The Project which gives highest EV, should be selected
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Risk Analysis
4. Optimistic, Most Likely and Pessimistic Estimates: In this approach, cash flows under Optimistic, Most Likely and Pessimistic scenarios are analysed. Following are the steps: If it’s a optimistic scenario, then review the maximum cash flows of each project and select the
one which has the highest cash flow. (follow MaxiMax rule) If it’s a pessimistic scenario, then review the minimum cash flows of each project and select the
one which has the highest cash flow. (follow MaxiMin rule)
5. Standard Deviation: In this approach, risk of each project is measured using coefficient of variation. Higher the coefficient of variation(CV), higher is the risk. Following are the calculation steps Calculate Standard Deviation of each project using the following formula
SD = ∑ (X-X)2p Calculate coefficient of variation of each project using the following formula
CV = SD/EV The Project which gives lowest CV hence lower risk should be selected
6. Sensitivity Analysis: Under this approach, sensitivity of NPV of cash flows is examined under various scenarios like increase in costs, decrease in selling price etc. It is then determined as to which factor NPV is most sensitive to.
7. Decision Tree: it’s a diagrammatic presentation of various possible decisions. Each decision is followed by an outcome and for each outcome Expected Value (EV)is calculated . The decision which gives highest EV is selected.
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Project SchedulingProject Scheduling is the process of organising the activities to be under taken in a project , in a logical sequence. Schedule activities can be logically sequenced with proper precedence relationships, as well as leads and lags to support later development of a realistic and achievable project schedule. Project sequencing can be performed using Network diagrams or Gnatt Charts.Network DiagramsNetwork diagrams are schematic displays of the project’s schedule activities and the logical relationships among them, also referred to as dependencies. An example is shown below
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Project Scheduling
Time EstimationThe process of estimating schedule activity durations uses information on schedule activity scope of work, required resource types, estimated resource quantities, and resource calendars with resource availabilities. The inputs for the estimates of schedule activity duration originate from the person or group on the project team who is most familiar with the nature of the work content in the specific scheduleactivity. Generally 3 estimates are obtained for each activity; Optimistic time (to); Most Likely Time (tm);Pessimistic Time (tp)Once the 3 time estimates are obtained, average time is estimated using the following formula:
te = (to + 4tm + tp)/6
Determination of critical pathOnce the network diagram is ready and average time is determined next step is to determine the Earliest Occurrence Time (EOT) and Latest Occurrence Time (LOT) of each activity, and floats. Float is the extra time available to complete an activity. Critical path is the longest path. Critical path is marked by the events which have zero slack
Determination of FloatTotal Float = LOT of succeeding event - EOT of preceding Event - Duration of the activityFree Float = EOT of succeeding event - EOT of preceding Event - Duration of the activityIndependent Float = EOT of succeeding event - LOT of preceding Event - Duration of the activity
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Project SchedulingTools for evaluating SchedulesProgram Evaluation & Review Technique (PERT) – This technique is used for determining variability of Project duration. Variability is measured using standard deviation. Following steps are involved:
Determine standard deviation of duration of each activity on the critical path using the following formula:
SD of activity = (tp - to)/6Determine standard deviation of total duration of critical path on the basis of information obtained in the above step
(Sum of SD of activities on critical path)2
Critical path Method (CPM): The critical path method is a schedule network analysis technique that is performed using the schedule model. While PERT is used for projects characterised by uncertainty, CPM is used for relatively risk free projects. PERT is more probabilistic in nature whereas PERT is more deterministic. Principal focus of CPM is on variations in activity times as a result of changes in resource assignments. The main thrust of CPM analysis is on time cost relationships and it seeks to determine the project schedule which minimises total cost.
Schedule Compression: Schedule compression shortens the project schedule without changing the project scope, to meet schedule constraints, imposed dates, or other schedule objectives. Schedule compression techniques include:
Crashing: Schedule compression technique in which cost and schedule tradeoffs are analyzed to determine how to obtain the greatest amount of compression for the least incremental cost. Crashing does not always produce a viable alternative and can result in increased cost.
Fast tracking: A schedule compression technique in which phases or activities that normally would be done in sequence are performed in parallel. An example would be to construct the foundation for a building before all the architectural drawings are complete. Fast tracking can result in rework and increased risk. This approach can require work to be performed without completed detailed information, such as engineering drawings. It results in trading cost for time, and increases the risk of achieving the shortened project schedule.