Carrying Out TEV Study

7/27/2019 Carrying Out TEV Study

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EVALUATION OF PROJECTS-

TECHNICAL & FINANCIAL ASPECTS


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FEASIBILITY STUDIES

To implement any project an entrepreneur needs to carry out

different types of feasibility studies. These feasibility studies

evaluate all the risks and returns and try to balance them and

help the entrepreneur to finalize his plans.


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TYPES OF FEASIBILITY STUDIES

Managerial Feasibility

Economic Feasibility

Commercial Feasibility

Financial Feasibility Technical Feasibility

Social Feasibility

Market Feasibility

Technical and Financial aspects are discussed in detail in the

following slides.


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TECHNICAL FEASIBILTY

Under Technical appraisal the necessary facilities required for

production are analyzed viz.

Basic infrastructure - Land/Building/Utilities

Technology/Technical Process

Machinery/Raw Material/Labour

Licensing/Registration/Clearances


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An entrepreneur should have the requisite number of

technically capable people as well as technology required to

set up and run the plant. The technology should be such thatis can adapt to local conditions.

Technology transfer from overseas often fails in this

regard. The conditions in USA and America are quite

different from India. Most parts of India are hot and dusty.Sophisticated process controls have known to fail.

Therefore, knowledge and suitability to local conditions is

very important.


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Technical analysis thus is mainly concernedwith:

Material inputs and utilities

Manufacturing processes

Product mixes Plant capacities

Locations and sites

Machinery and equipments

Structures and civil work

Project charts

Lay outs & work schedules


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EVALUATION OF TECHNOLOGICALOPTIONS

The technology should be

Proven and tested; preference could be given to the

technology used by the market leader.

Up- to date; otherwise, the risk of obsolescence is high.

Cost effective and par excellence.


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CHOICE OF TECHNOLOGY

The choice of technology is influenced by many factors

such as:

Plant capacity

Principal Inputs

Investment outlay and production cost

Use by other units

Product mix

Latest Developments

Ease of Integration


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PROJECT MANAGEMENT TECHNIQUES

CPM (Critical Path Method) and PERT (Programme Evaluation

Review Technique) are project management techniques, which

have been created out of the need of Western industrial and

military establishments to plan, schedule and control complex

projects.


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CPM/PERT

CPM/PERT can answer the following important questions

How long will the entire project take to be completed? What are

the risks involved?

Which are the critical activities or tasks in the project, whichcould delay the entire project if they were not completed on

time?

Is the project on schedule, behind schedule or ahead of

schedule? If the project has to be finished earlier than planned, what is

the best way to do this at the least cost?


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FINANCIAL ANALYSIS

A wide range of criteria are available to judge the worthiness of

investment projects. They fall into two broad categories:

Discounting criteria

1. Net Present value

2. Benefit cost ratio

3.Internal rate of return

Non-discounting criteria

1. Payback period

2. Accounting rate of return.


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NET PRESENT VALUE

The NPV of a project is the sum of the present values of all cash

flows-positive as well as negative that are expected to occur

over the life of the project

NPV = CFt

t=0 (1+k) t

where,

CFt = cash flow at the end of the year tn = life of the project

r = discount rate


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RULES FOR CONSIDERATION OF PROJECT:

The proposal for investment will be accepted if the NPV is

positive, and rejected if the NPV is negative.

If the NPV is zero then the project is in an indifferent position.

If a choice has to be made between two projects, the projectwith higher NPV will be accepted for investment.


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BENEFITS:

It considers the total benefit of an investment proposal over itslifetime.

Changes in the discount rate are easily reflected in the

evaluation process.

The most significant benefit of NPV is that it considers thetime value of money in calculations

NPV allows easy comparisons of returns from differentprojects, which enables rational resource allocation decisions tobe made


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DRAWBACKS

NPV cannot differentiate between a project with higher cashflows and a project with lesser cash flows in the early years

It does not provide the same base for comparison between twoprojects, with different lives of cash outflow

It is an absolute measure, and does not consider initial cashoutlays. Hence, it may not provide dependable results.


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BENEFIT COST RATIO:

BCR = PVB/I

Where PVB = Present value of benefits

I = Initial Investment


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RULES FOR CONSIDERATION OF PROJECT

If BCR =1, the decision will be indifferent

If BCR > 1, The Investment decision can be accepted

If BCR < 1, The Investment decision should be rejected


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BENEFITS

As this measures NPV Per rupee of outlay, it can discriminate

large and small investments and hence is preferable to NPV

method.


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DRAWBACKS

Under unconstrained conditions, this method will accept and

reject the same projects as NPV.

It provides no means for aggregating several projects into a

package that can be compared with a large project. When cash outflows occur beyond the current period, the

Benefit- Cost


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INTERNAL RATE OF RETURN (IRR)

IRR of a project is the discountrate which makes its NPV = 0.

In the NPV calculation we assume that the discount rate is known

and determine the NPV.

In IRR Calculation we set the NPV= 0 and determine the discountrate that satisfies this condition


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RULES FOR CONSIDERATION OF PROJECT

If IRR > 1 accept the investment decision

If IRR < 1, reject the investment decision

BENEFITS

IRR is closely related to NPV.

This method is easy to understand and interpret.


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DRAWBACKS

This method may lead to multiple rates of return

This method may result into incorrect decisions in comparing

mutually exclusive projects


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MODIFIED INTERNAL RATE OF RETURN

To overcome this limitation, MIRR (MODIFIED INTERNAL

RATE OF RETURN) METHOD CAN BE ADOPTED:

Here,

PV OF CASH OUTFLOW= Terminal value of cash inflow

________________________

(1 + MIRR)


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BENEFITS / DRAWBACKS

BENEFITS

MIRR assumes that project cash flows are reinvested at thecost of capital. Hence it reflects better the profitability of a

project The problem of multiple rates does not existDRAWBACKS

For choosing among mutually exclusive projects of different

size, NPV is a better alternative in measuring the contribution

of each project to the value of the firm.


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PAY BACK METHOD

This method is the length of time required to recover the initial

cash outlay on the project.

RULES FOR CONSIDERATION OF PROJECTThe shorter the pay back period, the project will be more

desirable for consideration


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BENEFITS/DRAWBACKS

BENEFITS

It is simple in concept and application

It is a rough and ready method for dealing with risk

DRAWBACKS

It does not consider the time value of money

It ignores cash flows beyond the payback period

It is a measure of capital recovery and not profitability


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To overcome this limitation, the discounted Payback period is

considered.

Here, the cash flows are first converted into their present

values (by applying suitable discounting factors) and then added

to ascertain the period of time required to recover the initial

outlay of the project.


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BENEFITS / DRAWBACKS

BENEFITS

It is simple to calculate

It is based on information that is easily available

It considers benefits over entire life of the project

DRAWBACKS

It is based on accounting profit and not cash flow

It does not take into account Time value of money.

It is internally inconsistent


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CONCLUSION

To conclude,

For small sized projects, it is best to use Pay back and ARR

method and for larger projects, IRR method is suitable.


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WHY DO SOME PROJECTS FAIL?

Most projects suffer from one or more of the followingproblems:

Customers are not satisfied with the deliverables.

Deadlines are missed.

Budgets are chronically overrun. Team members are disgruntled.

Many projects never end.

The team members are not committed to the project


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STEPS TO CREATING MORE SUCCESSFUL

PROJECTS

The three key steps to creating more successful projects

are:

Have a process template and keep improving upon it.

Adapt a team based and participative approach.

Use project management methods.


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STEP 1:

A project exists to produce a unique product, service, process,

or plan. Since each product is unique, each set of steps to create

the product should be unique. Hence, rather than starting from

the scratch on each project and making up a set of steps, mostprojects can work off a process template that serves as a

starting point for how to create the deliverable.


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For example, for a project such as software development, the

organisation probably has a software development process that

project teams use when creating a new or improved software

program. This process template defines a generic set of stepsto follow that will get one from concept to design to coding to

testing.


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STEP 2

Project success depends on the project team. The new project

management approach is team-based and participative. The

project leader acts as a facilitator to the team and as a guide

through the project management process. The team creates theproject plan, monitors and controls the project and assesses

what went well and what should be improved for the next

project.


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This new approach to project management means project

managers must learn new skills: conflict resolution, active

listening, team participation, and team decision making-skills.

The participative approach to managing a project is a critical

factor in creating better project results.


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STEP 3

Project results are improved when a project management methodology is

used. Project management methodology is a set of tools and techniques

that help project team to:

Produce deliverables that will satisfy the client.

Get the project done on time.

Prevent constantly changing project requirements.

Get the project done within budget.

Make sure the project doesnt drag on forever.

Ensure that all stakeholders have a voice in the process.

Make the project a more satisfying experience for team members.

Carrying Out TEV Study

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