Project Review and Administrative Aspects

PROJECT REVIEW AND PROJECT REVIEW AND ADMINISTRATIVE ADMINISTRATIVE

ASPECTSASPECTS

INTRODUTIONINTRODUTION

A Project is monitored during the A Project is monitored during the implementation Phase so that time & cost over implementation Phase so that time & cost over run are minimised.After a project is run are minimised.After a project is Commissioned its Performance Is Periodically Commissioned its Performance Is Periodically Reviewed to see whether its Performance has Reviewed to see whether its Performance has been in line with expectations. If things turn been in line with expectations. If things turn sour, The abandonment may also have to be sour, The abandonment may also have to be examined. examined.

Various facets of Project ReviewVarious facets of Project Review:-:-

Control of in progress projectsControl of in progress projects Post-completion auditsPost-completion audits Abandonment AnalysisAbandonment Analysis Administrative aspects of capital budgetingAdministrative aspects of capital budgeting Agency problemAgency problem How sound is the capital budgeting system How sound is the capital budgeting system

Control of in progress projectsControl of in progress projects

A lot of efforts is expended in selecting capital A lot of efforts is expended in selecting capital projects, things often wrong in implementation projects, things often wrong in implementation phase. This is evident from the frequent cost phase. This is evident from the frequent cost &time over-runs witnessed in practice.&time over-runs witnessed in practice.

There are two aspects of controlling in progress There are two aspects of controlling in progress capital projects:-capital projects:-

Establishment of internal control proceduresEstablishment of internal control procedures Use of regular progress reports Use of regular progress reports

Post-completion auditsPost-completion audits

An audit of a project after it has been An audit of a project after it has been commissioned is referred to as a post audit.commissioned is referred to as a post audit.

Regular post completion audits of capital Regular post completion audits of capital projects are:-projects are:-

Provide a documented log of experience that Provide a documented log of experience that may be valueable in improving future decision may be valueable in improving future decision makingmaking

Enable the firm in identifying individuals with Enable the firm in identifying individuals with superior abilities in planning and forecastingsuperior abilities in planning and forecasting

Help in discovering systematic biases in Help in discovering systematic biases in judgment judgment

Include healthy caution among project Include healthy caution among project sponsors sponsors

Serve as a useful training ground for Serve as a useful training ground for promising promising

executives who need broader business executives who need broader business experience and exposureexperience and exposure

ROI Defined asROI Defined as:-:-

NET INCOME/BOOK VALUE OF ASSETSNET INCOME/BOOK VALUE OF ASSETS

The book ROI has two serious flawsThe book ROI has two serious flaws:-:- Constant economic rate of return but book Constant economic rate of return but book

ROI displays wide variation across time.ROI displays wide variation across time. There is an upward bias in ROI book of There is an upward bias in ROI book of

business which has substantial investment in business which has substantial investment in intangible assets. intangible assets.

Constant economic rate of return but Constant economic rate of return but variable book ROIvariable book ROI

Economic rate of return for a given yearEconomic rate of return for a given year = =

Cash flow + change in present valueCash flow + change in present value

Present value at the beginning of the yearPresent value at the beginning of the yearBook return on investment For a given yearBook return on investment For a given year = =

Cash flow + change in book value Cash flow + change in book value

book value at beginning of the yearbook value at beginning of the year

Abandonment AnalysisAbandonment Analysis

Capital expenditure mgt is a dynamic process. Capital expenditure mgt is a dynamic process. Its cannot be regarding as a commitment till Its cannot be regarding as a commitment till the end of project life. As time rollon, changes the end of project life. As time rollon, changes occur which can alter the attractiveness of occur which can alter the attractiveness of projects or entire duvision.projects or entire duvision.

This technique used to analyse a new project This technique used to analyse a new project can also be used to analyse whether an existing can also be used to analyse whether an existing project should be continued or terminated.project should be continued or terminated.

Differences between Existing & New Differences between Existing & New ProjectProject

EXISTING PROJECT NEW PROJECT EXISTING PROJECT NEW PROJECT • Most of Investment Most of Investment is stillMost of Investment Most of Investment is still

Represent a sunk cost, to be made,hence it is relevant Represent a sunk cost, to be made,hence it is relevant

which is not relevant for cash outflow.which is not relevant for cash outflow.

project analysis. project analysis. • The estimates of its future The estimates of its cash flow The estimates of its future The estimates of its cash flow

cash flow are likely more are to be more Uncertain. cash flow are likely more are to be more Uncertain.

precise.precise.• The dis.rate used for The dis.rate used for The dis.rate used for The dis.rate used for

Reappraising is different. Reappraising of terminated Reappraising is different. Reappraising of terminated

The following decision rulesThe following decision rules:-:-

IF ACTIONIF ACTION

PVCF<SV<DV DIVESTPVCF<SV<DV DIVEST

PVCF<DV<SV TERMINATEPVCF<DV<SV TERMINATE

SV<PVCF<DV CONTINUESV<PVCF<DV CONTINUE

SV<DV<PVCF DIVESTSV<DV<PVCF DIVEST

DV<SV<PVCF CONTINUE DV<SV<PVCF CONTINUE

DV<PVCF<SV TERMINATE DV<PVCF<SV TERMINATE

Behavioral issue in project Behavioral issue in project AbandonmentAbandonment

The investment decision should be guided by The investment decision should be guided by the net present value the net present value

Applied to a project `continuation Vs Applied to a project `continuation Vs abandonment` decision abandonment` decision

The rule says:-The rule says:- If the present value associated with If the present value associated with

abandonment is > Net present value associated abandonment is > Net present value associated with continuation.with continuation.

If the present value associated with If the present value associated with continuation is > Net present value associated continuation is > Net present value associated with abandonment.with abandonment.

OVERCOMING RESISTANCEOVERCOMING RESISTANCE

For this following measure may be used:- For this following measure may be used:- o Follow certain rulesFollow certain ruleso Develop proper rewards & penaltiesDevelop proper rewards & penaltieso Institute relatively independent reviewsInstitute relatively independent reviews

Managing divestmentsManaging divestments

Divestment are becoming commonplace, Divestment are becoming commonplace, corporate should approach them systematically corporate should approach them systematically & rationally. & rationally.

Guidelines for managing divestment:-Guidelines for managing divestment:- Regard divestment as a normal part of business Regard divestment as a normal part of business

lineline Consider as one of the many responses to a Consider as one of the many responses to a

situation situation

Administrative aspects of capital Administrative aspects of capital BudgetingBudgeting

Identification of promising investment Identification of promising investment opportunitiesopportunities

Classification of investment Classification of investment Submission of proposalsSubmission of proposals Decision makingDecision making Preparation of capital budget & appropriationPreparation of capital budget & appropriation Implementation Implementation Performance reviewPerformance review

Agency ProblemAgency Problem

Manager enjoy substantial autonomy and have Manager enjoy substantial autonomy and have

a natural inclination to pursue their own goals. a natural inclination to pursue their own goals.

this is the agency problem.this is the agency problem.

To Prevent from being dislodged from their To Prevent from being dislodged from their position, managers may try to achieve some position, managers may try to achieve some acceptable level of performance as far as acceptable level of performance as far as shareholder welfare is concerned.shareholder welfare is concerned.

They seek to following:-They seek to following:- Preside over a big empire that give them Preside over a big empire that give them

power, stature, and high compensation.power, stature, and high compensation. Pursue pet project that draw on their specail Pursue pet project that draw on their specail

skills and competencies so that their position skills and competencies so that their position in the organisation is entrenched.in the organisation is entrenched.

Enjoy generous compensation & lavish Enjoy generous compensation & lavish perquisites.perquisites.

Shirk efforts because identifying & Shirk efforts because identifying & implementing high NPV projects is very implementing high NPV projects is very demanding proposition. demanding proposition.

Avoid risks because acceptance of high firm-Avoid risks because acceptance of high firm-specific risks, although quite acceptable to specific risks, although quite acceptable to diversified shareholders, can threaten the diversified shareholders, can threaten the security of their job and the growth prospects security of their job and the growth prospects with the firm. with the firm.

Agency cost can be mitigated by monitoring Agency cost can be mitigated by monitoring the action and behaviour of managers & by the action and behaviour of managers & by offering them right incentives that motivate offering them right incentives that motivate them to maximise value.them to maximise value.

By monitoringBy monitoring:- :-

Its helps in checking more Its helps in checking more visible agency problems like empire building, visible agency problems like empire building, excessive perquisites, managerial absenteeism, excessive perquisites, managerial absenteeism, aand frauds. aand frauds.

By incentive compensationBy incentive compensation:-:-

A well conceived A well conceived incentive compensation plan goes a long way incentive compensation plan goes a long way in aligning the interest of managers and in aligning the interest of managers and shareholders.shareholders.

Following guidelines in compensation planFollowing guidelines in compensation plan:- :- Integrated the incentive plan into total Integrated the incentive plan into total

compensation architecturecompensation architecture Select the right set of performance measureSelect the right set of performance measure Use objective criteria Use objective criteria

Reward relative performanceReward relative performance Lengthen the decision making horizon of the Lengthen the decision making horizon of the

executivesexecutives

Evaluating the capital budgeting Evaluating the capital budgeting System of an org…System of an org…

Its may be evaluated in following criteriaIts may be evaluated in following criteria:- :- ResultsResults TechniquesTechniques CommunicationCommunication DecentralisationDecentralisation IntelligibilityIntelligibility FlexibilityFlexibility Control Control ReviewReview