MFC 3rdSEMESTER Assignment Cycle6 (PPAC).doc

7/23/2019 MFC 3rdSEMESTER Assignment Cycle6 (PPAC).doc

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Amity Campus

Uttar Pradesh

India 201303

ASSIGNMENTSPROGRAM M!C

SEMESTER"III

Su#$e%t Name Pr&$e%t P'annin( Appraisa' and C&ntr

Study COUNTR) Sudan *CPermanent Enr&''ment Num#er +PEN, M!C001-.201/"201-01/

R&'' Num#er AM! 303 +T,

Student Name SOMAIA TAMA* )OUSI! E*MA

INSTRUCTIONS

a, Students are reuired t& su#mit a'' three assi(nment sets

ASSIGNMENT 4ETAI*S MARS

Assi(nment A !i5e Su#$e%ti5e 6uesti&ns 10Assi(nment Three Su#$e%ti5e 6uesti&ns 7 Case Study 10

Assi(nment C O#$e%ti5e &r &ne 'ine 6uesti&ns 10

#, T&ta' 8ei(hta(e (i5en t& these assi(nments is 309 OR 30 Mar:s

%, A'' assi(nments are t& #e %&mp'eted as typed in 8&rd;pd<

d, A'' uesti&ns are reuired t& #e attempted

e, A'' the three assi(nments are t& #e %&mp'eted #y due dates and need t& #e

su#mitted <&r e5a'uati&n #y Amity Uni5ersity

<, The students ha5e t& atta%hed a s%an si(nature in the <&rm

Si(nature

4ate =================================

+ , Ti%: mar: in <r&nt &< the assi(nments su#mitted



Assi(nment >A?

Assi(nment >?

Assi(nment >C?

Pr&$e%t P'annin( Appraisa' and C&ntr&'

Assi(nment "A

1 Pre%isi&n En(ineers *td Is %&nsiderin( a pr&p&sa' t&

rep'a%e &ne &< its ma%hines The <&''&8in( data is

a5ai'a#'e re(ardin( the samea. The machine was purchased 4 years ago for Rs.15 lacs and has been depreciatedat 25% p.a. as per the WD method. The machine has a remaining life of 5 years!after which its sal"age "alue is e#pected to be Rs.$.$ lacs. &ts present sal"age"alue is Rs.'.$ lacs.

b. The new machine costs Rs.22lacs! and would be depreciated at 4$% p.a. as perWD method. &ts e#pected life is years and after 5 years it is e#pected to fetchRs.' lacs. The installation of this machine will increase the annual re"enue by Rs.5lacs! apart from decreasing the operational costs by Rs.1.1$ lacs per annum.(ssume no change in the depreciation rate if old machine is continued to be used.&f the company uses a discounting factor of 1)% p.a. for calculating the present"alue of future cash flow! should it go for the replacement of e#isting machine withthe new machine* +arginal ta# rate of the company is 2$%.,how all your wor-ings.

@4B sa'5a(e 5a'ue pa(e 122Cash !'&8s Re'atin( t& Euity

The euity/related cash flow stream reflects the contributions made and benefits recei"able byeuity shareholders. &t is di"ided into 0 components Initia' In5estment uity funds committed to the pro3ect

Operatin( Cash !'&8s (T ref. Di"idend 6 Depn. 6 7ther 8on/9ash charges

Termina' Cash !'&8 8et ,al"age alue of :;( 6 9(<

/ Repayment of Term =oans /Redemption of ref. 9apital / Repayment of Wor-ing9apital =oans/ Retirement of Trade 9redits and 7ther dues! if any.2. Cash !'&8s Re'atin( t& *&n("Term !unds

Initia' In5estment =ong Term funds committed to thero3ect i.e. ;i#ed (ssets 6 Wor-ing 9apital +argin Operatin( Cash !'&8s (T 6 Depreciation.

6 7ther 8on/9ash charges 6 &nt. on Term =oons :1/TR< Termina' Cash !'&8 8et ,al"age alue of ;( 6 8et

Reco"ery of Wor-ing capital +arginN&te TR TaD Rate



0. Cash !'&8s Re'atin( t& T&ta' !unds

Initia' In5estment Total 7utlay of the ro3ect i.e. ;i#ed (ssets 6 9urrent (ssets

Operatin( Cash !'&8s (T 6 Depreciation. 6 7ther 8on/9ash charges

6 &nt. on =ong/Term =oans :1/TR< 6 &nt. on ,hort/term =oans :1/TR< Termina' Cash !'&8 8et ,al"age alue of ;( 6 8et ,al"age alue of 9urrent (ssets

Pa(e 131ExampleA Ltd is planning to replace its old belt manufacturing machinerywith new machinery, which costs Rs.10 crore and A Ltd expects todispose o its old machinery for Rs.2 crore. he new machinery isexpected to cut down manufacturing costs from Rs.!0 a belt atpresent to Rs."0 a belt. he #xed costs are Rs."0 la$hs per year. henew machinery will ha%e an economic life of 10 years anddepreciation will be by &traight Line method. At the end of theeconomic life, the new machinery can be sold o for 10' of itsac(uisition cost. he selling price of the belt is Rs.100 and the cost

of capital is 12'. A Ltd feels that its expected sales )no. of belts*and manufacturing cost per belt are li$ely to %ary, due to changes inbusiness en%ironment, as follows+articulars essimistic #pected 7ptimistic#pected sales :8o! of belts< 4!$$!$$$ 5!$$!$$$ )!$$!$$$+f. 9ost per belt :Rs. er belt< '$ 4$ 0$9onduct a sensiti"ity analysis ignoring ta#es.S&'uti&nThe relationship between 8 and its "ariables is gi"en byn >? :/</;/D@ >1/T@6D ,

8 A ////////// 6 / &tA1 :16-< t :16-< n

,ubstituting "alues for different "ariables! i.e. ARs.1$$B ARs.4$B ;ARs.4$!$$!$$$BDARs.C$!$$!$$$B TA$%B -A12%B &ARs.!$$!$$!$$$ :1$!$$!$$!$$$/2!$$!$$!$$$ <B,ARs.1!$$!$$!$$$ and n A 1$ years! we get!1$ >? :1$$/</4$!$$!$$$/C$!$$!$$$@ >1/$@6C$!$$!$$$ 8 A ////////////////////////////////////////tA1 :1.12< t

1!$$!$$!$$$6 //// / !$$!$$!$$$!:1.12< 1$

Which! on simplification! will be!1021$ >? :1$$/< 4$!$$!$$$ 8 A ////////// / )!')!$!$$$tA1 :1.12< t

(. ,ensiti"ity (nalysis by "arying ?uantity ,old:i< When sales are 4!$$!$$$ belts1$ >4!$$!$$$ :1$$/4$< 4$!$$!$$$



8 A //////////////////// / )!')!$!$$$tA1 :1.12< t

A2!$$!$$!$$$ &;( :12%!1$< / )!')!$!$$$A2!$$!$$!$$$ :5.'5$< / )!')!$!$$$ARs. 0.'22 crore

:ii< When sales are 5!$$!$$$ belts1$ >5!$$!$$$ :1$$/4$< 4$!$$!$$$ 8 A //////////////////// / )!')!$!$$$tA1 :1.12< t

A2!'$!$$!$$$ &;( :12%!1$< / )!')!$!$$$A2!'$!$$!$$$ :5.'5$< / )!')!$!$$$A Rs. ).$12 crore:iii< When sales are )!$$!$$$ belts1$ >)!$$!$$$ :1$$/4$< 4$!$$!$$$ 8 A //////////////////// / )!')!$!$$$tA1 :1.12< t

A0!$!$$!$$$ &;( :12%!1$< / )!')!$!$$$A0!$!$$!$$$ :5.'5$< / )!')!$!$$$A Rs. 10.)C2 crore 8 at different le"els of ,alesessimistic #pected 7ptimistic#pected sales :8o. of belts< 4!$$!$$$ 5!$$!$$$ )!$$!$$$

2 MatriD pharma *td is %&nsiderin( in5estin( in a ne8 'ine

&< pharma%euti%a's The C&mpany has a p'an that a<ter <i5eyears it 8i'' se'' the unit at a (&&d pr&<it t& a pharma%euti%a'

ma$&r The pr&$e%t &ut'ays are as <&''&8sParti%u'ars Rs In 'a%s

=and $uilding 1$$lant E machinery 5$$7ther fi#ed assets 1$$Technical -now/how fees 1'$

Fross wor-ing capital 45$The pro3ect to be financed is as follows Rs. &n lacsuity share capital 5$$12% reference share capital 25$1'% term loan 0$$1% an- loan for wor-ing capital 04$



The Gnit is e#pected to generate sales "alue of Rs.1$ crores in the first year! Rs.12crores in the second year and Rs.15 crores for the ne#t 0 years. The cost of

production e#cluding depreciation would be to the e#tent of )$% of the sales. Theapplicable rate of depreciation on building is 4% on straight line method and 00%written down "alue method on plant and machinery and other fi#ed assets. Thetechnical -now/how fees will be written/off o"er the period of fi"e years. Thesal"age "alue of plant and machinery after fi"e years would be 2$% of theacuisition cost! nil for other fi#ed assets and boo- "alue for land and building.The term loan for the pro3ect will be repaid after 5 years when the pro3ect would besold. The effecti"e ta# rate for the company is 0$%.Hou are reuired toa. Define the cash flows for the in"estment proposal from the long term funds pointof "iew.

b. 9alculate the net present "alue at a cost of capital of 2$%.

c. 9alculate the internal rate of return for the in"estment period.d. 9omment on the in"estment proposal of +atri# harma =td. Will yourrecommendation change! if an additional cash flow of Rs.5 crore arise by disposingoff the pro3ect* #plain.Parti%u'ars pa(e 120 pa(es 102

3 C&nser5ati5e Industries *td Is %&nsiderin( a pr&p&sa' <&r

the pur%hase &< a ne8 ma%hine reuirin( an &ut'ay &< Rs

1.00 'a%s its estimate &< the %ash <'&8 distri#uti&n <&r the

three years 'i<e &< the ma%hine is (i5en #e'&8

Rs In 'a%s Hear 1 Hear 2 Hear 0///////////////////////////////////////////////////////////////////////////////////////////////////////9ash flows probability cash flows probability cash flows probability$$ $.1 $$ $.1 12$$ $.2

'$$ $.2 )$$ $.0 C$$ $.54$$ $.4 '$$ $.4 '$$ $.22$$ $.0 5$$ $.2 0$$ $.1The probability distribution is assumed to be independent. The ris-/free rate ofinterest is 5%.;rom the abo"e information! determine the followinga. The e#pected 8 of the pro3ect



b. The standard de"iation of the probability distribution of 8c. The probability that the 8 will be Iero or less.

Cash <'&8 distri#uti&n pa(e 120

/ !&''&8in( are the detai's re'ated t& M;S G*OA*SPICESB 8h& 8ants t& set up spi%es manu<a%turin( unit in

India 8hi%h is estimated t& %&st Rs2.00 %r&resa. stimated sales Rs.15$$ crores

b. stimated input costs Rs. in croresRaw material )$$9onsumables 15$7ther production o"erheads 1$$Repairs and maintenance 44(dministration o"erheads 11$,elling o"erheads '$c. &nternational prices for spices are about 25% greater than domestic prices on ana"erage.d. Raw materials and consumables if imported would cost about Rs.'$$ crores andRs.2$$ crores respecti"ely at current prices.e. 9urrent Re.JK e#change rate is Rs.45J/Hou are reuired to compute the ffecti"e rate of rotection :R<! if any! en3oyed

by the pro3ect as well as its Domestic Resource 9ost :DR9<. &nterpret the figures

computed by you clearly stating the assumptions you need to ma-e.R page 151

. A pr&$e%t is su#$e%ted t& a pre'iminary e5a'uati&n #e<&re a

detai'ed appraisa' is d&ne @hat is the %riteria that are

usua''y app'ied <&r su%h pre'iminary e5a'uati&n Gi5e #rie<

detai'sPr&$e%t S%reenin( This is for prima facie turning down those pro3ect ideas! which do not meetthe basic criteria of preliminary appraisals. The pro3ects are identified! primarily! on the basis ofthe -nowledge of the surroundings and the internal ,W7T analysis. &n other words! selection andformulation of pro3ect ideas must be matched with

• The promoters Lpersonality traits! resources! and returns

• rerogati"es of a nation :socio/economic motifs<



• alancing the raw material crunch

• ,tances of the present and future mar-et

• 9ost benefit analysis considering the economies of scale

• Ris-/return "etting

(bo"e all! a surge for the pro3ects does not end up merely with information procurementB instead

the thin- tan- has to shuffle the ideas through formal and informal ,W7T analysis! which outsources a formidable strategy for new "entures.

Pr&$e%t Identi<i%ati&nThe -ey feature of this acti"ity is recogniIing that identifying candidate pro3ects is somethingthat an organiIation should do on a regular basis! not 3ust once each year. ;urther! whene#amining pro3ects for appro"al! it is "ital to also e#amine the resource capacities andcapabilities a"ailable for assignment. &t is futile to assign a ma3or new pro3ect reuiring e#tensi"edisco"ery of business reuirements if no business analysts are a"ailable.ro3ect &dentification precedes ro3ect &nitiation.Pr&%ess 4es%ripti&n

ro3ect &dentification is a repeatable process for documenting! "alidating! ran-ing and appro"ing

candidate pro3ects within an organiIation

Pr&%ess Purp&se

Due to the changing financial conditions within the total organiIation! it is necessary to establisha stable process for appro"ing pro3ects for initiation. This process will

• alidate the business reason for each candidate pro3ect.

• ro"ide the base information for more informed financial commitments to pro3ects.

• stablish a more ob3ecti"e ran-ing of candidate pro3ects.

• (llow a more effecti"e matching of s-illed resources to the right pro3ect.

• ("oid o"er/allocating limited s-illed resources.

• (nticipate future human resource uantities and s-ills.

• ro"ide a "alid basis for staff training.• +a-e ro3ect &nitiation faster and more efficient.

ecause priorities! finances and resources may change at any time! it is critical that this process be well/defined and easy to follow. &t is also important that its "alue is understood and supported by corporate leaders and the business organiIation.Use Criteria

This process is intended for proposed pro3ects that

• (re of significant siIe and will reuire a significant amount of time to complete.

• +ust be tightly coordinated with other acti"e pro3ects.

• Will use new or emerging technology.

•

Will reuire a new wor- process.• (re intended for a new customer or unpro"en mar-et.

• Will impact numerous departments or organiIations.

• (re highly critical to the success of the business.

• (re a -nown high ris-.

This process is not intended for operational reuests that may be handled directly by the &T MelpDes- or small initiati"es that are routed to &T +anagers for immediate scheduling and e#ecution.Pr&%ess !'&8



CERTI!) USINESS CASE

1. 4&%ument usiness Case "aluate all 9andidate ro3ect &nformation that has been pro"ided by the reuesting organiIation or that has been gathered by a technical analyst. &f additionalinformation is needed! issue an &nformation Reuest to the reuester. ;ormat this informationinto a usiness 9ase. (ssign the 9andidate ro3ect a new ro3ect 9ode.

2. Re5ie8 usiness Case The usiness 9ase will be e#amined by a screening body with thecorporate authority to accept or re3ect a 9andidate ro3ect. When a usiness 9ase is accepted!the 9andidate ro3ect is captured in a repository for ran-ing and selection. &f additionalinformation is reuired on a usiness 9ase! note it as Npending and issue an &nformation‖

Reuest to the reuester. &f a usiness 9ase is re3ected! send the information to the reuester withan e#planation for the re3ection. Remain this information in a repository.0. Update usiness Case when additional information is recei"ed on a 9andidate ro3ect! obtainthe pending usiness 9ase from the repository and re"ise the data. This usiness 9ase shouldnow be reconsidered by process.Ran: Candidate Pr&$e%ts When reuested! all 9andidate ro3ects that are in the repositoryshould be ob3ecti"ely ran-ed in order of significance. The ran-ing criteria should include

1. Target due dates2. &mpact on the total business0. &mpact on the technology architecture4. &mpact on other applications5. ro3ect siIe! cost and duration'. ro3ect ris- &t will be helpful to ran- pro3ects against each of these criteria separately and then compile asingle ran-ing that weights each of these criteria against each other. This ran-ing process istypically used to feed uarterly budget decisions but may be reuested at any time.E5a'uate Res&ur%es (n updated ,-ills &n"entory should be maintained for all corporate:usiness Gnit and &nformation Technology Department< resources that is a"ailable for ro3ectassignment. (dditionally! an in"entory of a"ailable contract resources should also be captured.The purpose of this ,-ills &n"entory is to understand the true capabilities and capacities of theseresources.4etermine Res&ur%e Needs y e"aluating the ,-ills &n"entory and the 9andidate ro3ectrepository! this process will identify anticipated reuirements for uantities and capabilities offuture resources. This information will pro"ideO1. The identification of critical training needs2. ( basis for employment opportunities0. 9riteria for contract personalThis process should be re"iewed on a regular basis by Resource +anagers within theorganiIation and can be used for staff career counseling.Appr&5e Pr&$e%t

1. Se'e%t Pr&$e%t based on the information pro"ided by the ran-ing process! the 9ore rocess7wners of the business will authoriIe a specific pro3ect for initiation. This pro3ect should now beremo"ed as a 9andidate ro3ect.2. Assi(n Res&ur%es "en though a pro3ect has been selected! it does not become an acti"e‖ pro3ect until resources are appro"ed and deployed against it. &t is critical to remember that whenresources are assigned from the ,-ills &n"entory! this deployment has a proportionate impact on



the resourceLs a"ailability. The organiIation must be "ery careful to not o"er/commit limitedresources in an attempt to Nloo- more producti"e.‖

Pr&$e%t Appraisa'The assessment of the "iability of a pro3ect in"ol"ing medium or long/term in"estments in terms

of shareholder wealth may be termed as pro3ect appraisal. &n our country the all/&ndia le"elfinancial institutions ha"e de"ised an in house policy of assessing the industrial pro3ects to grantfinancial assistance based on their commercial! technical! economic and financial "iability.The "arious aspects of ro3ect (ppraisal are1. asic ligibility for ;inancial (ssistance2. +ar-et (ppraisal0. Technical (ppraisal4. ;inancial (ppraisal5. conomic (ppraisal'. ntrepreneurJromoter (ppraisal). +anagementJ7rganiIation (ppraisal

1. asi% E'i(i#i'ity <&r !inan%ia' Assistan%eThe basic eligibility for financial assistance to any company is being considered on following parameters 9onstitution of ;irmJ9ompany

riorityJFo"ernment olicy

&nstitutional olicy Decisions

(cceptability of the romoters by the ;inancial &nstitutions

2. Mar:et Appraisa'

;or appraising the mar-et of product or ser"ices from pro3ect are being decided on the basis offollowing factors (ssessment of otential Demand :Demand/,upply Fap<

,tudy on Trends of roduction! ,upply! &mports! #ports! rice Trends! Distribution and

,ales romotion! Fo"ernment olicies! 9ompetition! 9onsumer rofile! etc

+ethods of Demand ;orecasting "iI. Trend ro3ection! nd Gse! conometric +ethods

roblems in Demand ;orecasting in 9ollection of Data! +ethods of ;orecasting and

n"ironmental 9hanges0. Te%hni%a' Appraisa'

(ny pro3ect reuires technical appraisal for its "iability and feasibility in the region where it is proposed to and on the basis of -ind of technology reuired for the pro3ect. We need to considerfollowing points =ocation ad ,ite

lant 9apacity and roduct/+i#

Technology and Technical Pnow/how

,election and rocurement of lant and +achinery

9i"il and ,tructural Wor-

9harts and =ay/7uts

Raw +aterials! 9onsumables and Gtilities

&mplementation ,chedule



4. !inan%ia' Appraisa'

Ma"ing estimated the profitability figures a financial analyst would be interested to find thefinancial "iability of a pro3ect. The financial appraisal of any pro3ect in"ol"es following step stimation of 9ost of ro3ect

+eans of ;inancing

rofitability ro3ections and (ssumptions thereof 9ash ;low and alance ,heet ro3ections

Ratio (nalysis

(nalysis of ast Wor-ing Results! ;inancial osition and ,ources and (pplication of ;unds

5. E%&n&mi% Appraisa'

conomic analysis of any pro3ect is "ery important as to deri"e the actual benefit from the pro3ects in terms of following factors 9ost/enefit (nalysis

Domestic Resource 9ost

ffecti"e Rate of rotection

mployment otential

roducti"ity and &n"estment per Wor-er

'. Entrepreneur;Pr&m&ter Appraisa'

9apabilities of promoters is also important in appraisal of any pro3ect as it is reuired tounderstand the moti"es of promoter. ac-ground! ?ualifications and #perience

;inancial Resourcefulness

+anagerial 9ompetence! ast Trac- Record and Dealings with &nstitutionsJan-s

). Mana(ement;Or(aniFati&n Appraisa'

+anagement ,et/Gp

7rganiIational ,et/Gp

Recruitment and ,election of #ecuti"es Training

Appraisa' Criteria +Capita' ud(etin( " IRR NP et%,( company before selecting to implement a pro3ect gets the feasibility study carried out if the pro3ect is "iable in financial terms. 7b"iously! the company must ha"e carried out the technicaland mar-et analysis. The prime ob3ecti"e of the capital budgeting is to see if the pro3ected cashflows of the company yield a return which is higher than the e#pected return. What is thee#pected return* &t is a sub3ecti"e uestion and the figure has to be arri"ed at by the promoter ofthe pro3ect J company. Me may ta-e "arious parameters into considerations li-eB what are thee#pectations of the in"estors in euity! what is the current lending rate of the ban-s! and thefinancial institutions and what is the a"erage lending rate of the ban-s! and the financial

institutions and what is the a"erage return on the capital employed in that -ind of industry* 7necan source the data from the "arious magaIines and 3ournals on economic and finance published by Fo"ernment of &ndia.Cash A%%rua's

"ery company sells the product and earns some income from it. Mowe"er! this income is ta#edafter allowing the "arious permissible deductions. +any deductions which are permitted are ofnon/cash flow items li-e depreciation and the preliminary e#pense. Thus! one should becon"ersant with the "arious pro"isions of the rele"ant sections of the &ncome Ta# (ct 1C'1.



There are certain deductions which are permissible under the said (ct! the main ob3ecti"e ofthese deductions to reduce the effecti"e rate of ta#ation of the company. Mowe"er! it should beclear that there is a difference between the net profit and the cash flows. The terms used forestimatingJe"aluating the cash flows are gross cash accruals and net cash accruals.Fross 9ash (ccruals A .(.T. 6 8on 9ash flow &tems

.(.T. A rofit after Ta# 8on 9ash flow &tems A Depreciation E reliminary e#penses wJoff 8et 9ash (ccruals A .(.T. Di"idend 6 8on 9ash flow &tems&n case! the company does not declare di"idend during a particular year the gross cash flows andthe net cash flows will be eual.Te%hniues and meth&ds used <&r e5a'uati&n &< pr&$e%ts

7nce the rele"ant information about the pro3ect is gathered the techniues of capital budgetingare employed to 3udge the attracti"eness of the proposals. The end result will tell whether toaccept or re3ect the proposals. The capital budgeting employs the following four -inds oftechniues(ccounting Rate of Return :(RR<

aybac- eriod :< 8et resent alue :8<&nternal Rate of Return :&RR<enefit 9ost Ratio :9R< or rofitability &nde# :&<(ccounting Rate of Return or ("erage Rate of Return :(RR<(RR is defined as the ratio of ("erage rofit after Ta# to the ("erage oo- alue of the&n"estment. The higher the (RR! the better is the pro3ect. ro3ect ha"ing less than a predetermined cut off rate of return! say! 15% or 2$%! are re3ected.Pay#a%: peri&d meth&d

The paybac- period is the method under which we find out the number of years reuired toreco"er the initial outlay. Thus lower the paybac- period! higher would be the attracti"eness ofthe pro3ect.The two widely used methods of discounted cash flow techniues are 8et resent alue :8<&nternal Rate of Return :&RR<enefit 9ost Ratio :9R< or rofitability &nde# :&<Net Present a'ue +NP, Meth&d

Gnder the 8 +ethod! the cash flows are discounted at the rate which we call as the e#pected Jreuired rate or cost of capital and the 8 is e"aluated with the help of the following euationn (t

8 A Q / &! tA 1! 2! 0! ////////////ntA1 :1 6r< t

Where! (t refers to cash flow at the end of year StL! r A Discount rate! n A =ife of the pro3ect innumber of years! and! & A &nitial &n"estment.The IRR Meth&d

The &nternal Rate of Return :&RR< can be defined as the rate of return at which the sum of futurecash inflows! when discounted! is eui"alent to the initial outlay or the net present "alue is Iero.This can be represented asn (t

& A Q ! tA 1! 2! 0! ////////////n! where r A &RR



tA1 :1 6r< t & A &nitial &n"estmentJ7utlayThis method has the following distinct ad"antages&t ta-es into account the uantum of the cash outflows&t ta-es into account the total amounts of the cash inflows and the timings.ene<it C&st Rati& +CR,; Pr&<ita#i'ity IndeD +PI,

&t is the ratio of the present "alue of the future cash flows and the initial outlay. &t is a relati"emethod and not an absolute method. &t is useful for comparing two or more pro3ects in terms oftheir acceptability or profitability. +athematically it is e#pressed asn (tQ tA1 :1 6-< t

9R A & A ! where! - A Discount Rate&n case the reuired rate of return e#ceeds &RR! the proposal would be re3ected under &RRmethod. =i-ewise! if the e#pected return e#ceeds the &RR! we would get negati"e 8B hencethe pro3ect will again be re3ected on the 8 basis. Mence under both the methods we would notaccept the pro3ect. Thus both the methods gi"e us similar results so far as the appraisal criterion

for the in"estment in a pro3ect is concerned! e#cept when the initial cash outlays are different andthe timings of the cash flows also differ.

Pr&$e%t 'i<e %y%'e can be di"ided into phases. These phases correspond with changes in the le"elof acti"ity or effort put into the pro3ect and uncertainty regarding the final outcome of the pro3ect.hase & 9onception E ,electionhase && lanning E ,chedulinghase &&& &mplementation! +onitoring E 9ontrolhase & "aluation E Termination

Pr&$e%t Pr&%urement Mana(ement

Pr&$e%t Pr&%urement P'annin(

This document details the manner in which other procurement processes will be managed i.e.!starting from the solicitation planning till the contract closing. ro3ect procurement planning isthe process of disco"ering the needs of the pro3ect that can be satisfied by acuiring products andser"ices from firms e#ternal to the pro3ect organiIation. The reuest for the products has to gothrough a procurement process! starting from the solicitation planning to contract closure.The primary ob3ecti"e of a procurement planning process is to decide and plan for acuiring all products and ser"ices from "endors single or multiple "endors. ,ome of the inputs reuired to prepare the procurement plan are1. ,tatement of scope2. Description of product or ser"ices0. rocurement of resources4. +ar-et conditions5. +a-e or buy analysis'. #pert 3udgment Se'e%ti&n &< Appr&priate type &< %&ntra%t @&r: Statement



&t is detailed description of the product or ser"ices to be procured for the "endor to decide on his potential to ser"e the pro3ect organiIation with the product or ser"ices that matches theire#pectations S&'i%itati&n P'annin(

,olicitation planning is the process of de"eloping the documents that are needed to support

solicitation. &t in"ol"es preparation of the procurement management plan! the statement of wor-!standard forms and e#pert e"aluation that forms the procurement documents and criteria for 3udging the "endor. Pr&%urement 4&%ument That document & used to in"ite proposals from eligible "endors end&r Hud(ment This in"ol"es e"aluating "arious proposals recei"ed from different prospecti"e "endors! by ratingthem. S&'i%itati&n

&t is a process of obtaining uotations! bids! offers or proposals from all prospecti"e "endors.end&r Se'e%ti&n

C&ntra%t Administrati&n&t is the process of ma-ing sure that the "endorLs performance satisfies the pro3ect needsmentioned in the contract. end&r Payments C&ntra%t C'&sin( P'ant *&%ati&n and *ay&ut The need for selecting a suitable location arises because of three situations&. When starting a new organiIation! i.e.! location choice for the first time.&&. &n case of e#isting organiIation.&&&. &n case of Flobal =ocation.



Assi(nment"

1 !&''&8in( are the detai's re'ated t& Ten In5estment

pr&$e%tsRs in 'a%s

Pr&$e%t %ash &ut<'&8 in %ash &ut<'&8 in %ash &ut<'&8 in Net present

a'ue

)ear 1 )ear 2 )ear 3

1 2$ 4$ $ 122 25 05 $ 1C0 20 2 5 2$4 0$ 24 4 225 04 21 $ 1$

' 0 2' 1$ 02) 1C 45 ) 14 12 2$ 05 24C 1$ 00 1$ C1$ ' 44 C 15The budget constraints for years 1! 2 and 0 are Rs.15$ lacs Rs.2$$ lacs and Rs.$lacs respecti"ely.The following pro3ect interrelationships e#ista. 7f the set of pro3ects 0!4 and ! at most two can be accepted.

b. ro3ects 5 and C are mutually e#clusi"e! but one of the two must be accepted.c. ro3ect ' cannot be accepted unless both pro3ects 1 and 1$ are accepted.d. ro3ect 2 can be delayed by a year. Though the cash flows reuired will be thesame! the net present "alue will drop by 5$%.e. ro3ects 0 and ) are complimentary. &f the two are accepted together! the totalcash flows will be reduced by 1$% and net present "alue will be increased by 12%.Hou are reuired to de"elop &nteger =inear rogramme from the abo"einformation.=inear rogram page 142 14C+ultiple Regression +ethod page )'



2 @hy C&n<'i%ts arise #et8een t8& &r m&re mutua''y

eD%'usi5e pr&$e%ts Ana'yFe the situati&ns 8here

%&n<'i%ts may arise and su((est h&8 these %&n<'i%ts %an

#e res&'5edPa(e 1/1 C&n<'i%t pa(e 1-/B10B201B1B2/B/1Bene<its &< Pr&$e%t Mana(ement

+a3or enefits1. ro"ides techniues for trade/off between conflicting goals E enterprise priorities.2. etter control of pro3ect.0. etter co/ordination.4. Reduces de"elopmental time5. =owers cost6. High order results.

9ommon sources of ris- in community learning initiati"es include Technical ris-s such as unpro"en technology ro3ect management ris-s such as a poor allocation of time or resources 7rganiIational ris-s such as resource conflicts with other acti"ities• External risks – such as changing priorities in partner organizations

!i(ure 1 asic &ngredients in ro3ect +anagement,pecifically! pro3ect management in construction encompasses a set of ob3ecti"es which may beaccomplished by implementing a series of operations sub3ect to resource constraints. There are potential conflicts between the stated ob3ecti"es with regard to scope! cost! time and uality! andthe constraints imposed on human material and financial resources. These conflicts should beresol"ed at the onset of a pro3ect by ma-ing the necessary tradeoffs or creating new alternati"es.,ubseuently! the functions of pro3ect management for construction generally include thefollowing1. ,pecification of pro3ect ob3ecti"es and plans including delineation of scope! budgeting!

scheduling! setting performance reuirements! and selecting pro3ect participants.2. +a#imiIation of efficient resource utiliIation through procurement of labour! materials andeuipment according to the prescribed schedule and plan.0. &mplementation of "arious operations through proper coordination and control of planning!design! estimating! contracting and construction in the entire process.4. De"elopment of effecti"e communications and mechanisms for resol"ing conflicts among the"arious participants.



Mu'tip'e Pr&$e%ts and C&nstraints

This deals with1. 9onflicts in Ran-ing of ro3ects by Different 9riteria2. Resolution of conflicts in Ran-ing0. Techniues for selection of more than one pro3ects

a. 9onflicts in Ran-ing of ro3ects by Different 9riteria Reasons for 9onflictRein"estment assumption of 8! which assumes that the cash flows are rein"ested at cost ofcapital.Rein"estment assumption of &RR which assumes that the cash flows are rein"ested at &RR itself.Rein"estment assumption of 9R which assumes that the cash flows are rein"ested at the rateabo"e ;isherian Rate. b. Resolution of 9onflicts and ,election of ro3ects1. ,iIe Disparity between cash outflows 9hoose that pro3ect with higher 8 if the pro3ectsfulfill! if there is no pro3ect dependency! capital constraint! etc.2. Time Disparity between the cash flows Mere! calculate the +odified 8 and +odified &RRand choose those pro3ects which ha"e higher modified 8 or &RR "alues.

0. Gneual useful pro3ect li"es Mere! both time and siIe disparities are possible. To remo"e thisconflict! we should use the ui"alent (nnual 9harge :(9< method. (9 is the annualiIedfigure of net cash inflows found out by multiplying the discounted net cash flows by the capitalreco"ery factor :9R;<! which is the reciprocal of of annuity factor! at the gi"en discount rateand life of the pro3ect<. ased on the higher (9! the pro3ect should be chosen.9( of a pro3ect A 8 # 9R;4. 9apital budget constraints&n case of capital rationing! if the pro3ects are independent! we can select pro3ect we need tocompare the 8s or &RRs of all the pro3ects and ran- them in the descending order and acceptthose which fall within the outlay.(. ;easible 9ombinations (pproachGnder this! gi"en the capital budget restriction and pro3ect interdependence! all the feasiblecombinations are to be defied. The feasible combination with the highest 8 is to be chosen. Mathemati%a' Pr&(rammin( Appr&a%h

/ =inear programming roblem :=</ &nteger rogramming roblem :&</ Foal rogramming roblem :F<= n+a#imiIe Q Ua 8aa A 1n,ub3ect to Q 9;at Ua V Pt! : tA $!1!Om<a A 1and $ V Ua V 1Where! 8a A 8et present "alue of pro3ect SaL.Ua A (mount of pro3ect SaL accepted9;at A 9ash outflow reuired for pro3ect SaL in period tK t = Capital budget available in period t!Ua! a A 1!2!O.n are the Decision ariables.&



This is similar to = only! but it imposes one more reuirement that the "ariables can ta-e ononly integer "alues. &t considers problems which allow only integer numbers. &t is useful inrepresenting pro3ects under capital rationing! and other interdependencies li-e +utual#clusi"eness! 9ontingency and 9omplementariness.

The pro3ect manager in this structure reports to either the general manager or the "ice/president.Me handles all the conflicts within his di"ision! and also coordinates! in case of necessity! withother di"isions.Ad5anta(es

The pro3ect manager is complete authority and can be held accountable for performance.The line of command is clear as all the employees in the di"ision report to the pro3ect manageronly.9ommunication channels are strong. Therefore low reaction time.;le#ibility in planning the pro3ect as the di"ision need not share all its resources with otherdi"isions.

9oordination with other di"isions is easy as the possibility of conflict is low.Top le"el management gets more time for decision/ma-ing and strategy formulation.4isad5anta(es

9ost of maintaining this structure is "ery high due to duplication of euipment! s-ills! etc! ineach di"ision.ersonnel are retained in the di"ision e"en after their wor- is complete! adding to idle resources.(s there are no strong functional groups! technological de"elopment suffers.=ow morale of staff due to lac- of career opportunities.

S:i''s Reuirements &< Pr&$e%t Mana(er

3 Juman Re'ati&ns s:i''s

9ommunication s-ills +oti"ation s-ills 8egotiation and bargaining s-ills 9onflict management s-illsResp&nsi#i'ities &< Pr&$e%t Mana(er

Responsibility is the obligation to perform duties and carry out tas-s. &t flows from authority. &tcannot be delegated. The specific responsibilities consist ofi. Defining and maintaining pro3ect integrityii. ,electing the pro3ect teamiii. &dentifying and managing sta-eholdersi". lanning the pro3ect implementation

". ro3ect organiIation"i. ro3ect implementation"ii. ro3ect control and progress trac-ing"iii. ;inancial managementi#. 9hange and conflict management

Impa%t Ana'ysis Che%:'ist <&r Reuirements Chan(es

Imp'i%ati&ns &< the Pr&p&sed Chan(e



&dentify any e#isting reuirements in the baseline that conflict with the proposed change.&dentify any other pending reuirement changes that conflict with the proposed change.What are the conseuences of not ma-ing the change*What are possible ad"erse side effects or other ris-s of ma-ing the proposed change*Will the proposed change ad"ersely affect performance reuirements or other uality attributes*

Will the change affect any system component that affects critical properties such as safety andsecurity! or in"ol"e a product change that triggers recertification of any -ind*&s the proposed change feasible within -nown technical constraints and current staff s-ills*Will the proposed change place unacceptable demands on any computer resources reuired forthe de"elopment! test! or operating en"ironments*+ust any tools be acuired to implement and test the change*Mow will the proposed change affect the seuence! dependencies! effort! or duration of any tas-scurrently in the pro3ect plan*Will prototyping or other user input be reuired to "erify the proposed change*Mow much effort that has already been in"ested in the pro3ect will be lost if this change isaccepted*

Will the proposed change cause an increase in product unit cost! such as by increasing third party product licensing fees*Will the change affect any mar-eting! manufacturing! training! or customer support plans*

C&mp'eD In5estment 4e%isi&n under In<'ati&n&nflation is the complicated problem in in"estment decision/ma-ing process. &nflation is to beconsistently being considered in cash flows and discount rate.Migher inflation is a fact and common feature in de"eloping countries. (s the cash flows of anin"estment pro3ect occur o"er a long period of time! a firm should usually be concerned aboutthe impact of inflation on the pro3ect profitability. The capital budgeting results will be biased if the impact of inflation is not correctly factored in the analysis. Though decision ma-er recogniIe

inflation but they actually do not consider in the analysis of capital in"estment. Fenerally cashflows are being assumed at unit costs and selling price pre"ailing in year Iero to remainunchanged. (rgument is that as if inflation is there prices can be increased to co"er increasingcosts hence the impact on the pro3ectLs profitability would be the same if they assume rate ofinflation Iero.The problems with abo"e argument are:a< inflation rate is e#pressed in nominal terms while it is inappropriate and inconsistent to use anominal rate to discount cash flows which are not ad3usted for the impact of inflation :b< selling prices and costs show different degrees of responsi"eness to inflation.We should be consistent in treating inflation! since the discount rate is mar-et determined! and itis therefore stated in a nominal termsB then the cash flows should also be e#pressed in nominal

terms. &n other words! cash flows should reflect effect of inflation! when they are discounted bythe inflation affected discount rate.+a, Capita' Rati&nin(

&t helps in representing if a pro3ect SaL is completely accepted :Ua A 1< or re3ected :Ua A $<. 7r Ua

A :$!1<.:b< +utually #clusi"eness&t is represented byQ Ua V 1! where ( is the set of mutually e#clusi"e pro3ects



a ( &t implies that 1 is upper limit of pro3ects:9< Delay in ro3ects&f one of the pro3ects! say! U1 or U2 is delayed! the same is indicated as U and the constraint ise#pressed asU 6 U1 6 U2 V 1

"d# Contingenc$%&f the acceptance of one pro3ect is dependent on the acceptance of the other pro3ect:s<! then one pro3ect is contingent on the other. ;or e#ample!U VUD Mere! ro3ect Ls acceptance is based on ro3ect DLs acceptance.

2U= V U+ 6 U 8 := can be accepted only when + and 8 are accepted<:e< 9omplementariness&f the acceptance of two pro3ects has fa"orable influence on the cash flows of another pro3ect!then the two pro3ects are -nown to be complementary pro3ects. ;or instance! consider two pro3ects ( and . ither of them can be accepted independentlyB howe"er! if both are acceptedtogether! there may be o"erall reduction costs and increase in re"ues if a composite pro3ect ( isselected. ,ince (! as well as ( can not be accepted simultaneously! because the latter is acomposite one consisting of ( and ! the following constraint is incorporated o represent theabo"e which is as follows/U( 6 U 6 U( V 1ach of the techniues presented abo"e is "ersatile in its own way and should be applied whenthe constraints which it can best resol"e are obtained.

3 @rite a n&te &n 'endin( n&rms and p&'i%ies &< the

instituti&ns

11 pa(ePr&$e%t Appraisa'The assessment of the "iability of a pro3ect in"ol"ing medium or long/term in"estments in termsof shareholder wealth may be termed as pro3ect appraisal. &n our country the all/&ndia le"elfinancial institutions ha"e de"ised an in house policy of assessing the industrial pro3ects to grantfinancial assistance based on their commercial! technical! economic and financial "iability. The"arious aspects of ro3ect (ppraisal are1. asic ligibility for ;inancial (ssistance2. +ar-et (ppraisal0. Technical (ppraisal4. ;inancial (ppraisal5. conomic (ppraisal'. ntrepreneurJromoter (ppraisal). +anagementJ7rganiIation (ppraisal1. asi% E'i(i#i'ity <&r !inan%ia' Assistan%e

The basic eligibility for financial assistance to any company is being considered on following parameters



9onstitution of ;irmJ9ompany

riorityJFo"ernment olicy

&nstitutional olicy Decisions

(cceptability of the romoters by the ;inancial &nstitutions.

2. Mar:et Appraisa'

;or appraising the mar-et of product or ser"ices from pro3ect are being decided on the basis of following factors (ssessment of otential Demand :Demand/,upply Fap<.

,tudy on Trends of roduction! ,upply! &mports! #ports! rice Trends! Distribution and

,ales romotion! Fo"ernment olicies! 9ompetition! 9onsumer rofile! etc.

Pa(e 1/3

&ro'ect (inancingThe assessment of the "iability of a pro3ect in"ol"ing medium or long/term in"estments in terms

of shareholder wealth may be termed as pro3ect appraisal. &n our country the all &ndia le"elfinancial institutions ha"e de"ised an in house policy of assessing the industrial pro3ects to grantfinancial assistance based on their commercial! technical! economic and financial "iability.The %&n%ept &< the 'ead instituti&n

Till recently! the financial institutions used to select one of them as the lead institution! whichwas responsible for carrying out the appraisal of the pro3ect and subseuent legal documentationand the disbursements. Thus! the applicant company was reuired to interact with this leadinstitution only! although! it should -eep the other institutions abreast of the latest de"elopmentsabout the appraisal stages. The company was reuired to submit the application as per thereuirements. Mowe"er after the recent increase in the number of nonperforming assets :8(s<the concept of the lead institution has been dropped by the all &ndia financial institutions and

each institution is going ahead with its separate appraisal. 7f late! the financial institutions ha"eslowed down their lending acti"ities pertaining to pro3ect finance and ban-s ha"e beenincreasingly participating in term loans."ery business reuires a legal set up to run its business. This is the reuirement of the law.There can be many -inds of business organiIations li-e sole proprietorship concern! partnershipfirm! pri"ate limited company! public limited company and Fo"ernment 9ompany.The 9ompanies (ct is a massi"e piece of legislation that go"erns the formation! managementand all other aspects of the companiesLadministration. There is no aspect of the company! whichis left untouched by this piece of legislation. The 9ompanies (ct is broadly di"ided into thefollowing parts for its proper appreciation. &t would always be ad"isable for the pro3ect managersto get acuainted with the "arious aspects of the companies (ct 1C5'. The "arious parts of the

act are as below1441. (RT & deals with the preliminaries2. (RT &( deals with the oard for 9ompany =aw (dministration0. (RT && deals with the incorporation of a company and matters identical thereto.4 (RT &&& deals with the prospectus! and other matters! relating to issue of shares or debentures.5. (RT & deals with share capital and debentures.'. (RT deals with registration of charges.



). (RT & deals with the management and administration.. (RT && deals with the winding up of a company.C. (RT &&& deals with application of the (ct to companies formed or registered under pre"ious9ompanies =aw1$. (RT &U deals with companies authoriIed to get registered under this (ct

11. (RT U deals with winding up of unregistered company.12. (RT U& deals with companies incorporated outside &ndia.11. (RT U&& deals with registration offices! officers and fees.11. (RT U&&& deals with general aspects.,ubdi"ision of the (ct7n the basis of the abo"e! the (ct can further be subdi"ided into the following categories &ncorporation of the company

(llotment of shares and the share capital

+embership in the company

orrowing powers and registration of the charges

+anagement and administration of the company

Winding up of the company +iscellaneous aspects

In%&rp&rati&n &< the %&mpany

This part of the (ct deals with the following aspects related to the company 8ature and -inds of the companies

;ormation of the company

+emorandum of association of the company.

(rticles of association of the company

A''&tment &< shares and the share %apita'

This part deals with the following aspects related to the companies/ rospectus of a company :not applicable to pri"ate limited companies<.

,hares of a company

,hare capital

Mem#ership in the %&mpany

This part deals with the acuisition and termination of membership of the company. This aspectis also applicable to the public limited companies.&rr&8in( p&8ers and re(istrati&n &< %har(es

This deals with the borrowing powers and registration of charges which are to be created o"er the fi#ed assets of the company! which is reuired to create charges o"er its mo"eable andimmo"eable assets! if it a"ails term loans andJor wor-ing capital loans from financial institutionsJ ban-s.

Mana(ement and Administrati&n &< the %&mpanyThis deals with the following aspects related to the management of the company Directors of the company

+anagerial and other personnel

+eetings and resolutions

Di"idend! accounts! audit and in"estigations

re"ention of operation and mismanagement

9ompromiIation! arrangement! reconstruction and amalgamation etc.



@indin( up &< the %&mpany

This may be sub di"ided into Winding up procedures

9onduct of company during winding up

The companies (ct 1C5' is a consolidated document and contains laws! rules and the guiding

principles as laid down by "arious course in &ndia and abroad. The (ct has significantcomponent of nglish law.C&n%'usi&n

The business has to be implemented through any one of the four forms of the organiIationnamely "iI. sole proprietorship concern! partnership firm! limited company or Fo"ernment9ompany. &t is ad"isable to run the pro3ect! unless it is in the tiny sector through the companyform of the organiIation! which has many! ad"antageous li-e legal entity! perpetual successionand limited liability of the members. Mowe"er! e"ery company has to ha"e the capital clause!ob3ect clause! registered office clause and the limited liability clause. The other ma3or pro"isionsare that this form of the setup wor-s under the o"erall super"ision of the oard of directors. Theoard may appoint the +anaging Director for the day to day running of the business. Thus! there

may be a specific line of hierarchy within the business. There may be a case of delegation of power on account of this hierarchy. The organiIation structure of the company can be wellstructured as compared to the partnership and the sole proprietorship -inds of the setup.!inan%in( Pr&$e%ts

This part deals with/1. =oan ,yndication2. &slamic ;inance0. =e"eraged =eases4. uator rinciples5. ,ecuritiIation of ro3ect =oans'. &nno"ati"e Debt &nstruments

*&an Syndi%ati&n=oan ,yndication is the process of in"ol"ing numerous different lenders in pro"iding "arious portions of a loan. &t is mainly used in e#tremely large loan situations. ,yndication allows anyone lender to pro"ide a large loan while maintaining a more prudent and manageable credite#posure because they arenXt the only creditor.&t also means a group of ban-s that acts 3ointly! on a temporary basis! to loan money in a ban-credit :syndicated credit< or to underwrite a new issue of bonds.( combination of in"estment ban-ing firms that bid on a new security issue and then sells it ifthe bid is successful. The syndicate disbands when the security offering has been completed.,yndicates are needed to spread the ris- and obtain greater financial and mar-eting resources forlarge issues.

Is'ami% !inan%eThe core and principles of &slamic ban-ing are deri"ed from ,hariYah rules and the larger "aluesystem embedded in &slam. This includes discouraging forbidden acti"ities such as gambling andalcohol. The most widely -nown rule is against usury or riba! the charging of interest. (ny formof concealment! fraud! or attempt at misrepresentation "iolates the principles of 3ustice andfairness. +ore significant is the specific mention of promotion of clarity and public interest. The basic guideline is captured in the ideal a"oidance of pre"entable ambiguity and uncertainty! andNdo not consume one anotherLs wealth un3ustly! and be aware that lawful gain should only be



through business/based on mutual consent among you! and do not destroy one another. ‖The first point of difference in an &slamic ban- is that the ob3ect of the contract should e#ist!specific and free of any ambiguity! and of course be permissible under ,hariah. ,o! in effect! the

ban- cannot lend but ma-e an in"estment. &t cannot be neutral about what the borrower does

with the money. &n this sense it is closer to a mutual fundB all the more so because the reward for the borrower too is gi"en in the same spirit! i.e. he is not a mere lender or depositor! but one who!as it were! partners the ban- in assuming possession of the asset and! therefore! gets a profit sharefrom it.This form of ban-ing is! howe"er! of more recent origin and practiced in "arying degrees e"en inthe e#plicitly &slamic societies. The most complete form of this is found in one of the leastde"eloped economies! ,udan.&slamic finance forms are still a relati"ely small niche within the world mar-et of financialser"ices! although there is already a wide "ariety amongst them institutions offering &slamicfinancial ser"ices! full/fledged &slamic ban-s! and those with so/called &slamic Windows. &slamiccapital mar-ets! and &slamic &n"estment ;unds! &slamic insurance :lifeJnon/life< and non/ban-

financial ser"ices such as leasingJfinance coB micro/finance ha"e also grown. +utual funds ha"eassets totaling K0$$ bn! and in"estment funds of about K25$ bn assets. &slamic Windows holdK2$$ bn! which is small compared to con"entional mar-et for funds.*e5era(ed *eases

( lease in which the lessor puts up some of the money reuired to purchase the asset and borrows the rest from a lender. The lender is gi"en a senior secured interest on the asset and anassignment of the lease and lease payments. The lessee ma-es payments to the lessor! whoma-es payments to the lender.(lso called lease agreement wherein the lessor! by borrowing funds from a lending institution!finances the purchase of the asset being leased.The lessor pays the lending institution bac- by way of the lease payments recei"ed from thelessee. Gnder the loan agreement! the lender has rights to the asset and the lease payments if thelessor defaults.&n this type of lease! =essor pro"ides an euity portion :2$% to 5$%< of the euipment cost andlenders pro"ide the balance on a nonrecourse debt basis. =essor recei"es ta# benefits of ownership.=ong/term lease in which =essor borrows most of the funds to acuire the asset financed from athird party! usually a ban- or insurance co. =essor ma-es an euity in"estment eual to! say! 2$%of euipment original cost! and borrows remaining $% by issuing non/recourse notes to lenders!and writes a non cancellable lease for the euipment.=essor ma-es an assignment of the lease and lease rental payments to the lender! who is entitledto repossess the asset if the lessee happens to default. ( le"eraged lease is a true lease for ta# purposes! because =essor! as owner of the asset! is entitled to all of the ta# benefits of ownership!including accelerated depreciation write/offs! deduction of &nterest payments on the ban- loan!and &n"estment 9redit if any! for purchase of the asset. an-s write le"eraged leases for their own customers through the leasing subsidiary of a ban- holding company.Euat&r Prin%ip'es

The uator rinciples :< are a set of en"ironmental and social benchmar-s for managingen"ironmental and social issues in de"elopment pro3ect finance globally. 7nce adopted by ban-sand other financial institutions! the uator rinciples commit the adoptees to refrain from



financing pro3ects that fail to follow the processes defined by the rinciples. The uator rinciples were de"eloped by pri"ate sector ban-s led by 9iti Froup! (8 (mro! arclays andWest= and were launched in Zune 2$$0. The ban-s chose to model the uator rinciples onthe en"ironmental standards of the World an- and the social policies of &nternational ;inance9orporation :&;9<.

,i#ty :'$< ;&s :(pril 2$$< ha"e adopted the uator rinciples! which ha"e become the de factostandard for ban-s and in"estors on how to assess ma3or de"elopment pro3ects around the world.The uator rinciples represent a significant industry/wide initiati"e. They were drafted by the ban-s in consultation with the &;9! pro3ect sponsors! pro3ect engineers! and 8F7s. While theyha"e generally been well recei"ed! some pro3ect sponsors ha"e said they go too far! while some 8F7s say they do not go far enough.(8[ has adopted the uator rinciples! a set of "oluntary standards designed to help ban-sidentify and manage social and en"ironmental ris-s associated with the direct financing of largeinfrastructure pro3ects such as dams! mining and pipelines.What are uator rinciples* The uator rinciples were first established in association with the World an-Xs

&nternational ;inance 9orporation :&;9< in 2$$0 and since then ha"e been adopted bynearly 5$ ban-s around the world! co"ering in e#cess of 5% of the global pro3ect financemar-et. The rinciples were updated in mid 2$$' to reflect the recent re"ision of the&;9Xs erformance ,tandards! on which the rinciples are based. The uator rinciples are designed to ha"e effect primarily in countries with de"eloping

legal framewor-s. They ha"e particular rele"ance to (8[ as we are a financier of pro3ects in emerging (sian economies. y adopting the uator rinciples! (8[ has "oluntarily committed to fund only new

pro3ects that can be de"eloped and operated according to sound social and en"ironmentalstandards. The rinciples are now considered global best practice for ensuring applicable pro3ect finance proposals meet these standards.

The uator rinciples state that the adopting ;&s will pro"ide loans directly to pro3ects onlyunder the following circumstances ,cope The rinciples :< apply to pro3ects o"er G,D 1$ mn.

/1 Re"iew and 9ategorisation of ris- of pro3ects

/2 ,ocial and n"ironmental (ssessment

/0(pplicable ,ocial E n"ironmental ,tandards

/4 (ction lan and +anagement ,ystem

/5 9onsultation and Disclosure

/' Frie"ance +echanism

/) &ndependent Re"iew

/ 9o"enants

/C &ndependent +onitoring and Reporting

/1$ uator rinciples adopting ;inancial &nstitution :;&< Reporting.

C&mp'eD In5estment 4e%isi&n under In<'ati&n&nflation is the complicated problem in in"estment decision/ma-ing process. &nflation is to beconsistently being considered in cash flows and discount rate.14CMigher inflation is a fact and common feature in de"eloping countries. (s the cash flows of an



in"estment pro3ect occur o"er a long period of time! a firm should usually be concerned aboutthe impact of inflation on the pro3ect profitability. The capital budgeting results will be biased if the impact of inflation is not correctly factored in the analysis.Though decision ma-er recogniIe inflation but they actually do not consider in the analysis of capital in"estment. Fenerally cash flows are being assumed at unit costs and selling price

pre"ailing in year Iero to remain unchanged. (rgument is that as if inflation is there prices can be increased to co"er increasing costs hence the impact on the pro3ectLs profitability would bethe same if they assume rate of inflation Iero.The problems with abo"e argument are :a< inflation rate is e#pressed in nominal terms while it isinappropriate and inconsistent to use a nominal rate to discount cash flows which are notad3usted for the impact of inflation :b< selling prices and costs show different degrees of responsi"eness to inflation.We should be consistent in treating inflation! since the discount rate is mar-et determined! and itis therefore stated in a nominal termsB then the cash flows should also be e#pressed in nominalterms. &n other words! cash flows should reflect effect of inflation! when they are discounted bythe inflation affected discount rate.

+a, Capita' Rati&nin(&t helps in representing if a pro3ect SaL is completely accepted :Ua A 1< or re3ected :Ua A $<. 7r Ua

A :$!1<.:b< +utually #clusi"eness&t is represented byQ Ua V 1! where ( is the set of mutually e#clusi"e pro3ectsa ( &t implies that 1 is upper limit of pro3ects:9< Delay in ro3ects&f one of the pro3ects! say! U1 or U2 is delayed! the same is indicated as U and the constraint ise#pressed asU 6 U1 6 U2 V 1:d< 9ontingency15$&f the acceptance of one pro3ect is dependent on the acceptance of the other pro3ect:s<! then one pro3ect is contingent on the other. ;or e#ample!U VUD Mere! ro3ect Ls acceptance is based on ro3ect DLs acceptance.

2U= V U+ 6 U 8 := can be accepted only when + and 8 are accepted<:e< 9omplementariness&f the acceptance of two pro3ects has fa"orable influence on the cash flows of another pro3ect!then the two pro3ects are -nown to be complementary pro3ects. ;or instance! consider two pro3ects ( and . ither of them can be accepted independentlyB howe"er! if both are acceptedtogether! there may be o"erall reduction costs and increase in re"ues if a composite pro3ect ( isselected. ,ince (! as well as ( can not be accepted simultaneously! because the latter is acomposite one consisting of ( and ! the following constraint is incorporated o represent theabo"e which is as follows/U( 6 U 6 U( V 1ach of the techniues presented abo"e is "ersatile in its own way and should be applied whenthe constraints which it can best resol"e are obtained.

S&%ia' C&st ene<it Ana'ysis +SCA,Meanin( &< SCA



,9( is the methodology de"eloped in economic analysis to e"aluate an in"estment from thesocial point of "iew. &n this! the main ob3ecti"e and outcome of a pro3ect has to be e#amined inthe light of national interest. The Gnited 8ations &ndustrial De"elopment 7rganiIation :G8&D7<has de"eloped an approach to calculate the ,ocial 9ost and enefit. This approach is -nown asG8&D7 approach. &n this! there are 5 steps to measure the social benefit. (nother measure was

de"eloped by =ittle +irrlees. G8&D7 measure approach measures costs and benefits in terms of consumption whereas =+ approach measures in terms of uncommitted social income. &ndian;inancial &nstitutions :;&s< ha"e different methods to measure social benefits of a pro3ect beforefinancing it. ,9( is more important in public sector pro3ects than in pri"ate sector pro3ects.,9( by ;&s,9( is carried out by the all/&ndia ;&s li-e &D&! &9&9& and &;9& based on their ownmethodology deri"ed from modifying both the G8&D7 and the =+ methods. &t is gi"en below/1. conomic Rate of Return :RR<2. ffecti"e Rate f rotection :R<0. Domestic Resource 9ost :DR9<1 E%&n&mi% Rate &< Return +ERR,

(ll non/labor inputs and outputs are "alued at international prices! as they reflect the trueeconomic "alues.&n the case of tradable items for which international prices are directly a"ailable!international prices are used.&nputs are "alued at c.i.f. prices and outputs are "alued at f.o.b. prices.;or tradable items whose international prices are not a"ailable! social con"ersion factorsare used. The rupee "alue of the tradable goods is multiplied by the social con"ersion factorsto obtain the social "alues. The rupee "alue of each good is di"ided into tradable! nontradableand residual components because the "alue of goods may contain some inputs thatwent into their production which are tradable. The social con"ersion factors are then appliedto the tradable! non/tradable and residual components of the rupee "alue of the good to getthe social "alue of the components. The sum of the social "alue of the components is ta-enas the social "alue of the good.2 E<<e%ti5e Rate &< Pr&te%ti&n +ERP,

Fo"ernments of "arious countries try through "arious means such as ta#es and tariffs! importand e#port restrictions! and subsidies! to protect the home industry. R gi"es an idea aboutthe protection en3oyed by a particular industry and shows the "ulnerability of the industry incompetition from o"erseas if the protection is withdrawn. &ts formula! based on "alue added:(< is as follows/( at Domestic prices / ( at World pricesR A /////////////////////////////////////////////////////////// # 1$$( at World pricesWhere! ( A ,elling rice net of ta#es and duties Traded E 8on/traded &nput costs.The traded inputs are "alued at both world prices and domestic prices while non/traded inputsare "alued only at domestic prices. The inputs are segregated into tradable and non/tradable onthe following lines.Raw +aterials These are treated as traded goods. The world prices are estimated at c.i.f. prices.ower! fuel! and water These are treated as non/traded goods e#cept when the cost of fuel is significant. &n such cases! it should be "alued at both domestic and world prices.



Repairs and maintenance Fenerally a non/traded item! but the "alue of spares consumedis considered! at both domestic and world prices.,elling #penses 8on/traded item.152(dministrati"e o"erheads They contain 2 components =abor costs and other e#penses.

The labor cost is included in the "alue added. Therefore! it is not considered. The other e#penses li-e rent! telephone and telegraph! etc. are treated as non/traded items.The "alue added is the difference between the "alue of the output and the "alue of the inputsmentioned abo"e. That is! it is the surplus a"ailable for the pro"iders of capital and labor.2 4&mesti% Res&ur%e C&st +4RC,

&t is the spending reuired in terms of the domestic currency to generate a sa"ing of one unit of a foreign currency! say! one G, dollar.( at domestic pricesDR9 A ///////////////////////////////// # #change Rate( at world pricesThe amount of ( for computation of DR9 is estimated as follows/

Domestic &nternational,elling rice=ess 7peration costsRaw materialsower! fuel! water Repairs and maintenance(dmin o"erheads,elling e#penses=ess 9apital costs9harge on capital employedDepreciationDepreciation on capital euipment is charged at '%. The "alue of capital euipment is bifurcated into imported and indigenous ta#es and duties are netted out before chargingdepreciation.The charge on capital employed is computed at 1$%. This is applied after brea-ing downthe "alue into imported and indigenous components and netting out ta#es and duties fromthe two components.1509apital employed is the sum of fi#ed assets and wor-ing capital.Re'ati&nship #et8een ERP and 4RC7ne of the two can be calculated from the other using the following relationship/DR9\ A :R 6 1< #change Rate:ro"ided there are no capital costs<

4etai'ed Pr&$e%t Rep&rt&t is the primary report for the formulation of the in"estment proposal. &n"estment decisions areta-en based on the details incorporated in the study. Thus feasibility is prepared only for theformulation and in"estment decision/ma-ing. The first step in feasibility study is the needsanalysis. The purpose is to define o"erall ob3ecti"es of the system proposed to be designed. Thesecond and perhaps the most important thing is system identification. This is referred to asacti"ity analysis.



!easi#i'ity study rep&rt %&ntains

( broad indication of demand and a"ailability of the productReuired sources for the de"elopment of the pro3ect,election of suitable process and technology;i#ation of capacity on the basis of the pro3ect

rocess description and layout plans for the pro3ect("ailable facilities154"aluation of a"ailable facilities9apital costrofitability analysisro3ect schedule and schedule controlDesign and flow diagrams(fter the preparation of feasibility study report has been prepared! it should be submitted to thee#perts the concerned departments of operation such as finance! commercial! pro3ect etc e#aminethis. &n case of any differences! the feasibility study report is discussed with the e#perts!

consultants and is modified according to it.Preparati&n &< 4etai'ed pr&$e%t rep&rt

reparation of detailed pro3ect report is further step in firming up the proposal. When anin"estment proposal has been appro"ed on the basis functional report and the proposal is a ma3or proposal! it would be necessary to detailed pro3ect report to firm up the proposal for the capitalcost as well as the "arious facilities. &t includes...#amination of technological parametersDescription of the technology to be usedroad technical specification"aluation of the e#isting resources,chedule planFeneral layoutolume of wor- Mence these reports are to be made before in"estment is made into pro3ect. Thus formulation of in"estment is based on the studies is made. These can be considered as pre/in"estment decision.Detailed pro3ect report is prepared only for the in"estment decision/ma-ing appro"al! but alsoe#ecution of the pro3ect and also preparation of the plan. Detailed pro3ect report additionallyincludes that is contents in addition to ;easibility study reports are.ro3ect descriptionlanning and implementation of the pro3ect,pecifications=ayouts and flow diagramsDetailed pro3ect report is a complete document for in"estment decision/ma-ing! appro"al! planning whereas feasibility study report is a base document for in"estment decision/ma-ing.Detailed pro3ect report is base document for planning the pro3ect and implementing the pro3ect.The Detailed ro3ect Report :DR< is the culmination of all the analysis mar-et and demand!technical and financialB presented in a systematic format! along with other related informationsuch as the bac-ground of the promoters! location of the company! etc. There is no set pattern in155which DR has to be presented. The DR is generally prepared for submission to the financial



institutions.;irst we study the model format for the DR. This is followed by the format of application formof the (ll &ndia ;inancial &nstitutions.C&ntents &< 4PR

1. Feneral information

a. 8ame b. 9onstitution and ,ector c. =ocationd. 8ature of industry and producte. romoters and their contributionf. 9ost of pro3ect and +eans of ;inance2. romotersL details0. +ar-eting and ,elling (rrangements4. articulars of the pro3ecta. roduct mi# and capacity b. =ocation and site

c. lant and +achineryd. Raw materialse. Gtilities5. Technical (rrangements'. roduction rocess). n"ironmental (spects. ,chedule of &mplementationC. 9ost of the pro3ect1$. +eans of ;inance11. rofitability estimatesa. (ssumptions b. ro3ected income statementc. ro3ected balance sheetd. ro3ected cash flow statement12. (ppraisal based on profitability estimates10. conomic 9onsiderations14. (ppendicesa. stimates of costs of production b. 9alculation of depreciationc. 9alculation of wor-ing capital and margin money for wor-ing capitald. Repayment J &nterest schedule of term loan and ban- financee. 9alculation of ta#f. 9o"erage ratiosg. 8! &RR! etc.h. ,ensiti"ity (nalysis.



Case StudyA ne8 %&mpany in%&rp&rated re%ent'y in Andhra Pradesh is in the

pr&%essin( &< settin( up a 10 mi''i&n t&nes per annum %apa%ity%ement pr&$e%t and has app&inted a ne8 pr&$e%t mana(er t&

study 5ari&us aspe%ts &< pr&$e%t appraisa' in respe%t &< the pr&p&sed

%ement pr&$e%t Put y&urse'< in the p'a%e &< the pr&$e%t mana(er and

present the appraisa' pr&%ess %&5erin( a'' the aspe%ts

Cement

Pr&$e%t mana(er

Analysis - &election of ro/ectsEnd Use Meth&d pa(e KThe demand for products in industries such as auto components! industrial chemicals! machinetools! etc. depends on the demand condition of the industries which use these products. &n suchcases! the demand will ha"e to be estimated basing on the demand conditions in the user industryand the mar-et share targeted. ;irst the production of each of the user industries should bedetermined. Then the no. of units of the products consumed per each unit produced by the userindustries can be estimated! which gi"es the total demand for the product. The proportion of thetotal demand e#pected to be captured gi"es the demand pro3ection for the firm.

E%&n&metri% Meth&d

The demand cement depends on the general economic acti"ity. To forecast thedemand in such industries! a model consisting of all the ma3or economic factorsshould be de"eloped. The impact of the "ariables can be found out using multipleregressions as already studied abo"e! which is gi"en belowH A $ 6 1U1 6 2U2 6 OO.nUn.HA Demand to be estimatedWhere! $ A H/&ntercept1!2! OOOO.n A arameters representing weight ages of different factor U1!U2! OOO.Un A &ndependent factors.C&nsumpti&n *e5e' Meth&d +ostly! the demand for the consumer goods!depend on the income le"els of the consumers and the change in prices. The impact

of these factors can be studied under two different methods as follows/+i, In%&me E'asti%ity &< 4emand +IE4, Meth&d

9hange in demand :?2 ?1<J>:?16?2<J2@&D A /////////////////////////// A ////////////////////////////////9hange in income :&2 &1<J>:&16&2<J2@Where! ?2 A Demand after change?1 A Demand before change



&2 A &ncome after change&1 A &ncome before change+ii, Pri%e E'asti%ity &< 4emand +PE4, Meth&d

9hange in demand :?2 ?1<J>:?16?2<J2@&D A /////////////////////////// A ////////////////////////////////9hange in rice :2 1<J>:162<J2@Where! ?2 A Demand after change?1 A Demand before change2 A rice after change1 A rice before change9. 6ua'itati5e M&de's

When uantitati"e estimation is not possible! ?ualitati"e +odels! which in"ol"e estimating thedemand sub3ecti"ely! are used. These methods are uic- and simple! but the element ofsub3ecti"ity! which is their principle defect! should be -ept in "iew while using them. Thefollowing three models are "ery popular among the ualitati"e methods/

+i, !ie'd Sa'es !&r%e Meth&d&n this method! the salesmen of the company are as-ed to estimate the potential sales in theirterritory of 3urisdiction. (ll the forecasts from "arious territories are pooled and combineddemand for the firm is obtained. This method is fast and accurate as the sales men -now betterabout the future sales prospects. The disad"antages may be o"er estimates or under estimates dueto more incenti"es+ii, 4e'phi Meth&d

&n this method! estimates are called from a group or a panel of e#perts in the field! but the groupis not allowed to meet! discuss! and debate each otherLs opinions. &ndi"idual e#perts are as-ed togi"e their estimates independently! to a"oid one group influencing the other. ( panel of co/coordinators carries out the 3ob of reconciling the "iews of all of them. ;irst the co/coordinator

solicits the opinion from all the e#perts. Then! those whose opinions are well off the a"erage areas-ed to e#plain the rationales of their position. ( second round of uestionnaire is sent to them.When a reasonable consensus is arri"ed at! the co/ordinates sums up the outcome of the e#erciseand calculates the demand.+iii, Hury &< EDe%uti5e Opini&n Meth&d

This is a "ariation from Delphi +ethod wherein a group of managers are ad"ised to sit togetherand arri"e at a forecast. This method is uic-! ta-es "iew points of all people! and is moreinteresting to managers rather than trend pro3ection method. &ts wea-nesses are that the managersmay be biased! and sometimes it is "ery difficult to arri"e at a consensus uic-ly.

Te%hni%a' Ana'ysis&n technical analysis we study the technical aspects of setting up pro3ect. ,election of technologyand how to mo"e on the acuisition of technology! purchasing the materials and euipments!selecting the site and layout of facilities on the site and finally consider about the pollution andeffluent disposal is part of technical analysis.

• Technological decisions are generally irre"ersible

• Reuires a big outlay of in"estment

• 9ompetiti"eness of company can also be get affected



Pr&$e%t Pr&%urement Mana(ement

Pr&$e%t Pr&%urement P'annin(

This document details the manner in which other procurement processes will be managed i. e.!starting from the solicitation planning till the contract closing. ro3ect procurement planning is

the process of disco"ering the needs of the pro3ect that can be satisfied by acuiring products andser"ices from firms e#ternal to the pro3ect organiIation. The reuest for the products has to gothrough a procurement process! starting from the solicitation planning to contract closure.The primary ob3ecti"e of a procurement planning process is to decide and plan for acuiring all products and ser"ices from "endors single or multiple "endors. ,ome of the inputs reuired to prepare the procurement plan are1. ,tatement of scope2. Description of product or ser"ices0. rocurement of resources4. +ar-et conditions5. +a-e or buy analysis

'. #pert 3udgmentPr&%urement &< res&ur%es

&t gi"es a description of resources needed to procure the products and ser"ices from the mar-et as per the specifications gi"en in the product or ser"ice description document.Mar:et C&nditi&ns

lanning for procuring goods and ser"ices from "endors! the pro3ect or purchase manager should be aware of the products or ser"ices a"ailable in the mar-et. +acro economic factors li-einflation rate and go"ernment regulations influence procurement plans. (long with these factors0there are certain other factors also which should be -eep in mind while planning procurementsuch as uality management! cash flow statement! ris- management! staffing! initial orderingcosts and the wor- brea-down structure.Ma:e &r uy Ana'yses

7nce we ha"e reuired information about the product and mar-et conditions then we need todecide whether to source these products from within the organiIation or from outside "endors. &f organiIation has free machine time and infrastructure that can satisfy the need of pro3ect in a costeffecti"e manner! then it is better to ma-e the product from within the organiIation than tosource from e#ternal "endors. ut if the costs! the infrastructure and other resources are notappropriate! then it is better to buy it from e#ternal "endor.EDpert Hud(ment

#pert 3udgment is used to analyIe and 3udge the inputs of the procurement process. &t is pro"ided by a single indi"idual or a group of indi"iduals who are e#perts in specific fields.Se'e%ti&n &< Appr&priate type &< %&ntra%t

There are following ma3or type of contracts/1. ;i#ed price contract2. 9ost/lus/;i#ed/;ee or 9ost/lus/ercentage/;ee contracts0. Fuaranteed +a#imum and ,hared ,a"ings contract4. ;i#ed/rice/&ncenti"e/;ee contracts5. 9ost/lus/&ncenti"e/;ee contracts@&r: Statement



&t is detailed description of the product or ser"ices to be procured for the "endor to decide on his potential to ser"e the pro3ect organiIation with the product or ser"ices that matches their e#pectations. The details "ary depending on the nature of the product or ser"ice to be procured!or the reuirements of the pro3ect organiIation and type of contract to be administered.S&'i%itati&n P'annin(

,olicitation planning is the process of de"eloping the documents that are needed to supportsolicitation. &t in"ol"es preparation of the procurement management plan! the statement of wor-!standard forms and e#pert e"aluation that forms the procurement documents and criteria for 3udging the "endor.Pr&%urement 4&%ument

4That document & used to in"ite proposals from eligible "endors. &deal procurement documentshould be a balanced by two factors i.e.! on the one hand! it should be rigid in see-ing responsesthat are corresponding and comparable but on the other hand! it should be fle#ible to encouragesuggestions from the "endor so as to enhance ways of satisfying the need.end&r Hud(ment

This in"ol"es e"aluating "arious proposals recei"ed from different prospecti"e "endors! by ratingthem. There are following factors to e"aluate "endors1. 8eed interpretation gi"en by "endor 2. 9ost of procurement0. 9ould that be at lowest cost4. Technical e#pertise5. +anagement practice in use to complete pro3ect in time'. ;inancial capability of "endor S&'i%itati&n

&t is a process of obtaining uotations! bids! offers or proposals from all prospecti"e "endors.end&r Se'e%ti&n

endor selection is a process of recei"ing uotations or proposals from prospecti"e "endors ande"aluating these proposals to choose the right "endor. The tools and techniues used for selecting a "endor are as follows1. 9ontract negotiation2. Weighing system0. ,creening ,ystem4. De"eloping independent estimatesC&ntra%t Administrati&n

&t is the process of ma-ing sure that the "endorLs performance satisfies the pro3ect needsmentioned in the contract. &f the pro3ect is so large that it reuires multiple "endors to satisfyneeds! then the ma3or area of concentration should be on handling the interfaces among themultiple "endors.end&r Payments

endor should ensure timely and periodic submission of bills to the contract administrator for payments for the completed wor- for as agreed in the contract. illing document should containall supporting statement as mentioned in the contract.5C&ntra%t C'&sin(

&t is a process in"ol"ing "erification of the product along with the updating all pro3ect documents



with the final results and storing all pro3ect information for future retrie"al.P'ant *&%ati&n And *ay&ut

lant location or the facilities location problem is an important strategic le"el decision ma-ingfor an organiIation. 7ne of the -ey features of a con"ersion process :manufacturing system< isthe efficiency with which the products :ser"ices< are transferred to the customers. This fact will

include the determination of where to place the plant or facility.The selection of location is a -ey/decision as large in"estment is made in building plant andmachinery. &t is not ad"isable or not possible to change the location "ery often. ,o an improper location of plant may lead to waste of all the in"estments made in building and machinery!euipment.efore a location for a plant is selected! long range forecasts should be made anticipating futureneeds of the company. The plant location should be based on the companyLs e#pansion plan and policy! di"ersification plan for the products! changing mar-et conditions! the changing sources of raw materials and many other factors that influence the choice of the location decision. The purpose of the location study is to find an optimum location one that will result in the greatestad"antage to the organiIation.

The need for selecting a suitable location arises because of three situations&. When starting a new organiIation! i.e.! location choice for the first time.&&. &n case of e#isting organiIation.&&&. &n case of Flobal =ocation.I In Case &< *&%ati&n Ch&i%e <&r the !irst Time &r Ne8 Or(aniFati&ns

9ost economies are always important while selecting a location for the first time! but should-eep in mind the cost of long/term businessJorganiIational ob3ecti"es. The following are thefactors to be considered while selecting the location for the new organiIations1. Identi<i%ati&n &< re(i&n The organiIational ob3ecti"es along with the "arious long/termconsiderations about mar-eting! technology! internal organiIational strengths and wea-nesses!region specific resources and business en"ironment! legal/go"ernmental en"ironment! socialen"ironment and geographical en"ironment suggest a suitable region for locating the operationsfacility.2. Ch&i%e &< a site 8ithin a re(i&n 7nce the suitable region is identified! the ne#t step ischoosing the best site from an a"ailable set. 9hoice of a site is less dependent on theorganiIationLs long/term strategies. "aluation of alternati"e sites for their tangible andintangible costs will resol"e facilities/location problem.The problem of location of a site within the region can be approached with the followingcostorientednon/interacti"e model! i.e.! dimensional analysis.0. 4imensi&na' ana'ysis &f all the costs were tangible and uantifiable! the comparison andselection of a site is easy. The location with the least cost is selected. &n most of the casesintangible costs which are e#pressed in relati"e terms than in absolute terms. Their relati"e'merits and demerits of sites can also be compared easily. ,ince both tangible and intangible costsneed to be considered for a selection of a site! dimensional analysis is used.When starting a new factory! plant location decisions are "ery important because they ha"e direct bearing on factors li-e! financial! employment and distribution patterns. &n the long run!relocation of plant may e"en benefit the organiIation. ut! the relocation of the plant in"ol"esstoppage of production! and also cost for shifting the facilities to a new location. &n addition to



these things! it will introduce some incon"enience in the normal functioning of the business.Mence! at the time of starting any industry! one should generate se"eral alternate sites for locating the plant. (fter a critical analysis! the best site is to be selected for commissioning the plant. =ocation of warehouses and other facilities are also ha"ing direct bearing on theoperational performance of organiIations. The e#isting firms will see- new locations in order to

e#pand the capacity or to place the e#isting facilities. When the demand for product increases! itwill gi"e rise to following decisions ] Whether to e#pand the e#isting capacity and facilities. ] Whether to loo- for new locations for additional facilities. ] Whether to close down e#isting facilities to ta-e ad"antage of some new locations.II In Case &< *&%ati&n Ch&i%e <&r EDistin( Or(aniFati&n

&n this case a manufacturing plant has to fit into a multi/plant operations strategy. That is!additional plant location in the same premises and elsewhere under following circumstances1. lant manufacturing distinct products.2. +anufacturing plant supplying to specific mar-et area.0. lant di"ided on the basis of the process or stages in manufacturing.

4. lants emphasiIing fle#ibility.The different operations strategies under the abo"e circumstances could be1. P'ants manu<a%turin( distin%t pr&du%ts ach plant ser"ices the entire mar-et area for theorganiIation. This strategy is necessary where the needs of technological and resource inputs arespecialiIed or distincti"ely different for the different product/lines.;or e#ample! a high uality precision product/line should not be located along with other product/line reuiring little emphasis on precision. &t may not be proper to ha"e too manycontradictions such as sophisticated and old euipment! highly s-illed and semi/s-illed personnel! delicates processes and those that could permit rough handlings! all under one roof and one set of managers. ,uch a setting leads to much confusion regarding the reuired emphasisand the management policies.roduct specialiIation may be necessary in a highly competiti"e mar-et. &t may be necessary toe#ploit the special resources of a particular geographical area. The more decentraliIed these pairsare in terms of the management and in terms of their physical location! the better would be the planning and control and the utiliIation of the resources.2. Manu<a%turin( p'ants supp'yin( t& a spe%i<i% mar:et area Mere! each plant manufacturesalmost all of the companyLs products. This type of strategy is useful where mar-et pro#imityconsideration dominates the resources and technology considerations. This strategy reuiresgreat deal of coordination from the corporate office. (n e#treme e#ample of this strategy is thatof soft drin-s bottling plants.0. P'ants di5ided &n the #asis &< the pr&%ess &r sta(es in manu<a%turin( ach production process or stage of manufacturing may reuire distincti"ely different euipment capabilities!labor s-ills! technologies! and managerial policies and emphasis. ,ince the products of one plantfeed into the other plant! this strategy reuires much centraliIed coordination of the)manufacturing acti"ities from the corporate office that are e#pected to understand the "arioustechnological aspects of all the plants.4. P'ants emphasiFin( <'eDi#i'ity This reuires much coordination between plants to meet thechanging needs and at the same time ensure efficient use of the facilities and resources.;reuent changes in the long/term strategy in order to impro"e be efficiently temporarily! are not



healthy for the organiIation. &n any facility location problem the central uestion is S&s this alocation at which the company can remain competiti"e for a long time*L;or an established organiIation in order to add on to the capacity! following are the ways:a< #pansion of the facilities at the e#isting site This is acceptable when it does not "iolate the basic business and managerial outlines! i.e.! philosophies! purposes! strategies and capabilities.

;or e#ample! e#pansion should not compromise uality! deli"ery! or customer ser"ice.:b< Relocation of the facilities :closing down the e#isting ones< This is a drastic step which can be called as SGprooting and TransplantingL. Gnless there are "ery compelling reasons! relocationis not done. The reasons will be either bringing radical changes in technology! resourcea"ailability or other destabiliIation.(ll these factors are applicable to ser"ice organiIations! whose ob3ecti"es! priorities andstrategies may differ from those of hardcore manufacturing organiIations.III In Case &< G'&#a' *&%ati&n

ecause of globaliIation! multinational corporations are setting up their organiIations in &ndiaand &ndian companies are e#tending their operations in other countries. &n case of globallocations there is scope for "irtual pro#imity and "irtual factory.

IRTUA* PROLIMIT)With the ad"ance in telecommunications technology! a firm can be in "irtual pro#imity to itscustomers. ;or a software ser"ices firm much of its logistics is through the informationJcommunication pathway. +any firms use the communications highway for conducting a large portion of their business transactions. =ogistics is certainly an important factor in deciding on alocation^whether in the home country or abroad. +ar-ets ha"e to be reached. 9ustomers ha"eto be contacted. Mence! a mar-et presence in the country of the customers is uite necessary.IRTUA* !ACTOR)

+any firms based in G,( and GP in the ser"ice sector and in the manufacturing sector often outsources part of their business processes to foreign locations such as &ndia. Thus! instead of oneLsown operations! a firm could use its business associatesL operations facilities. The &ndian 7firm is a foreign/based companyLs S"irtual ser"ice factoryL. ,o a location could be oneLs own or oneLs business associates. The location decision need not always necessarily pertain to ownoperations.!ACTORS IN!*UENCING P*ANT *OCATION;!ACI*IT) *OCATION

;acility location is the process of determining a geographic site for a firmLs operations.+anagers of both ser"ice and manufacturing organiIations must weigh many factors whenassessing the desirability of a particular site! including pro#imity to customers and suppliers!labor costs! and transportation costs.=ocation conditions are comple# and each comprises a different 9haracteristic of a tangible :i.e.;reight rates! production costs< and non/tangible :i.e. reliability! ;reuency security! uality<nature.=ocation conditions are hard to measure. Tangible cost based factors such as wages and productscosts can be uantified precisely into what ma-es locations better to compare. 7n the other handnon/tangible features! which refer to such characteristics as reliability! a"ailability and security!can only be measured along an ordinal or e"en nominal scale. 7ther non/tangible features li-ethe percentage of employees that are unioniIed can be measured as well. To sum this upnontangiblefeatures are "ery important for business location decisions. &t is appropriate to di"ide the



factors! which influence the plant location or facility location on the basis of the nature of theorganiIation as1 Genera' '&%ati&na' <a%t&rs! which include controllable and uncontrollable factors for all typeof organiIations.2 Spe%i<i% '&%ati&na' <a%t&rs specifically reuired for manufacturing and ser"ice organiIations.

=ocation factors can be further di"ided into two categoriesDominant factors are those deri"ed from competiti"e priorities :cost! uality! time! andfle#ibility< and ha"e a particularly strong impact on sales or costs. ,econdary factors also areimportant! but management may downplay or e"en ignore some of them if other factors are moreimportant.Genera' *&%ati&na' !a%t&rs

;ollowing are the general factors reuired for location of plant in case of all types of organisations.CONTRO**A*E !ACTORS

1. ro#imity to mar-ets2. ,upply of materials

0. Transportation facilities4. &nfrastructure a"ailability5. =abor and wages'. #ternal economies). 9apitalUNCONTRO**A*E !ACTORS

. Fo"ernment policyC. 9limate conditions1$. ,upporting industries and ser"ices11. 9ommunity and labour attitudes12. 9ommunity &nfrastructureCONTRO**A*E !ACTORS

1 Pr&Dimity t& mar:ets "ery company is e#pected to ser"e its customers by pro"iding goodsand ser"ices at the time needed and at reasonable price organiIations may choose to locatefacilities close to the mar-et or away from the mar-et depending upon the product. When the buyers for the product are concentrated! it is ad"isable to locate the facilities close to the mar-et.=ocating nearer to the mar-et is preferred if C The products are delicate and susceptible to spoilage. (fter sales ser"ices are promptly reuired "ery often. Transportation cost is high and increase the cost significantly. ,helf life of the product is low. 8earness to the mar-et ensures a consistent supply of goods to customers and reduces the cost of transportation.2 Supp'y &< ra8 materia' &t is essential for the organiIation to get raw material in rightualities and time in order to ha"e an uninterrupted production. This factor becomes "eryimportant if the materials are perishable and cost of transportation is "ery high.Feneral guidelines regarding effects of raw materials on plant location are When a single raw material is used without loss of weight! locate the plant at the raw materialsource! at the mar-et or at any point in between.



When weight loosing raw material is demanded! locate the plant at the raw material source. When raw material is uni"ersally a"ailable! locate close to the mar-et area. &f the raw materials are processed from "ariety of locations! the plant may be situated so as tominimiIe total transportation costs. 8earness to raw material is important in case of industries such as sugar! cement! 3ute and cotton

te#tiles.3 Transp&rtati&n <a%i'ities ,peedy transport facilities ensure timely supply of raw materials tothe company and finished goods to the customers. The transport facility is a prereuisite for thelocation of the plant. There are fi"e basic modes of physical transportation! air! road! rail! water and pipeline. Foods that are mainly intended for e#ports demand a location near to the port or large airport. The choice of transport method and hence the location will depend on relati"ecosts! con"enience! and suitability. Thus transportation cost to "alue added is one of the criteriafor plant location./ In<rastru%ture a5ai'a#i'ity The basic infrastructure facilities li-e power! water and wastedisposal! etc.! become the prominent factors in deciding the location. 9ertain types of industriesare power hungry e.g.! aluminum and steel and they should be located close to the power station

or location where uninterrupted power supply is assured throughout the year. The nona"ailabilityof power may become a sur"i"al problem for such industries. rocess industries li-e paper! chemical! cement! etc.! reuire continuous. ,upply of water in large amount and gooduality! and mineral content of water becomes an important factor. ( waste disposal facility for process industries is an important factor! which influences the plant location.. *a#&ur and 8a(es The problem of securing adeuate number of labour and with s-illsspecific is a factor to be considered both at territorial as well as at community le"el during plantlocation. &mporting labour is usually costly and in"ol"e administrati"e problem. The history of labour relations in a prospecti"e community is to be studied. rospecti"e community is to bestudied. roducti"ity of labour is also an important factor to be considered. re"ailing wage pattern! cost of li"ing and industrial relation and bargaining power of the unionsL forms inimportant considerations.- EDterna' e%&n&mies &< s%a'e #ternal economies of scale can be described as urbaniIationand locational economies of scale. &t refers to ad"antages of a company by setting up operationsin a large city while the second one refers to the Nsettling down among other companies of ‖

related &ndustries. &n the case of urbaniIation economies! firms deri"e from locating in larger cities rather than in smaller ones in a search of ha"ing access to a large pool of labour! transportfacilities!



Assi(nment"C1.

The importance of capital e#penditure decisions stems from inter/related reason:s< li-e

a. =ong/term effects

b. ,ubstantial 7utlaysc. +easurement problems

d. oth :a< and :b< abo"e

e. oth :b< and :c< abo"e

2. Which of the following isJare correct*

a. (ccept when enefit 9ost Ratio is greater than one

b. Re3ect when aybac- eriod is greater than target period.

c. Re3ect when (ccounting Rate of Return is less than target rate

d. oth :a< and :c< abo"e

e. (ll of :a<! :b< and :c< abo"e

0. Which of the following is false*

a. ( capital pro3ect in"ol"es a current outlay of funds which gi"e a stream of benefitse#tending far into future.

b. ( capital pro3ect represents a scheme for in"esting resources that can be analyIed andappraised reasonably independently.

c. 9apital udgeting is a simple process which may be di"ided into fi"e broad phases of planning! analysis! selection! implementation and re"iew.

d. 9apital e#penditure decisions pose difficulties such as uncertainty and temporal spread.

e. oth :b< and :d< abo"e

4. Which of the following is not an in"estment strategy*

a. 9apacity e#pansion

b. ertical integration

c. +oderniIation

d. 9onglomerate Di"ersification

e. +erger

5. Which of the following isJare not the method:s< of measuring indi"idual creati"ity*

a. (ttribute listing

b. rainstorming



c. 8ominal Froup Techniue

d. lac- o#


'. Which of the following is not an entry barrier! which results in positi"e 8*a. conomies of scale

b. roduct differentiation

c. Technological edge

d. =ow tariffs

e. +ar-eting reach

). Which of the following is not a causal method*

a. 9hain Ratio +ethod

b. +o"ing ("erage +ethod

c. =eading &ndicator +ethod

d. conometric +ethod

e. nd Gse +ethod

. When the income le"el was Rs.1$$$! the uantity demanded was 5$ last year. &n this year! thedemand went up to Rs.55! when the income rose to Rs.1$2$. What is the income elasticity of demand this year*

a. 4.1.

b. 1.122

c. $.25

d. 4.1$

e. 4.$$

C. The choice of technology is influenced by a "ariety of considerations. Which of them isJarenot such consideration:s<*

a. lant capacity

b. &n"estment outlay

c. roduction costs

d. roduct prices

e. ase of absorption

1$. re/operati"e e#penses do not include

a. 9ompany flotation e#penses

b. &nterest during construction period

c. ro-erage and commission on capital





11. To meet the cost of pro3ect! which of the following is not a means of finance*

a. Deferred 9redit

b. Debenture 9apital

c. +argin money for wor-ing capital.



12. The brea-/e"en point in percentage terms! for the data :7ptimum 9apacity C$%! ,ales at1$$% 9apacity Rs.1!$!$$$! ariable 9ost '$% of ,ales! and ;i#ed 9osts Rs.0'!$$$<would be

a. 55.5'%

b. 5$.$$%

c. 45.$$%

d. 00.00%

e. 0$.$$%

10. Which of the following statements isJare true*

a. (ccept when 9R is greater than 1 and 89R is greater than $.

b. &ndifferent when 9R is eual to 1 and 89R is eual to $.

c. (ccept when 9R is less than 1 and 89R is less than $.


e. (ll of :a<! :b< and :c< abo"e.

14. Which of the following isJare correct*

a. ,cenario analysis loo-s at some plausible scenarios and e#amines how the 8 beha"es.

b. +onte 9arlo ,imulation is a fle#ible and "ersatile tool for generating probabilities of 8s.

c. Decision Tree (nalysis analyses ris- free situations in decision ma-ing


e. (ll :a<! :b< and :c< abo"e

15. Which of the following isJare true in respect of Ldoubling the period by using the more

accurate Rule of Thumb_*a. (t 1$% interest rate! the doubling period is ).25 years

b. (t 15% interest rate! the doubling period is 4.C5 years

c. (t 1$% interest rate! the doubling period is ).2$ years





1'. 9apital reco"ery factor is the

a. &n"erse of future "alue interest factor for annuity

b. &n"erse of future "alue interest factor

% In5erse &< present 5a'ue interest <a%t&r <&r annuity

d. &n"erse of present "alue interest factor

e. ,ame as present "alue interest factor for annuity

1). During the current year! (9 =td paid a di"idend of Rs.2$! which is e#pected to grow at arate of 5% indefinitely. &f the current mar-et price of (9 =td is Rs.4! the cost of euitywill be

a. Rs.20.%

b. Rs.25%

c. Rs.0$%

d. Rs.2.%

e. 1'.%

1. The in"estment reuired for creating a capacity of 5!$$$ units for a product is Rs.C crore.What is the in"estment reuired for creating a capacity of 2$!$$$ units! if the capacity costfactor is $.5*

a. Rs. 0' crore

b. Rs. 1 crore

c. Rs. 4.5 crore

d. Rs. 10.5 crore

e. Rs. 22.5 crore

1C. Which of the following is not a step in Decision Tree (nalysis*

a. &dentifying the problem and alternati"es

b. "aluating "arious decision alternati"es

c. Delineating the decision tree

d. Frouping of probabilities

e. ,pecifying probabilities and monetary outcomes.

2$. Which of the following isJare false*

a. 9apital pro3ects li-e securities are usually di"isible b. 9apital pro3ects are assessed in terms of 8s whereas financial securities are assessed

in terms of rate of return.

c. (ll the points lying on a gi"en ris-/return indifference cur"e offer the same le"el of satisfaction.





21. ,ocial 9ost enefit (nalysis :,9(< focuses on social costs and benefits! but these oftentend to differ from the monetary costs and benefits of the pro3ects. The principalsources of discrepancy are

a. Ta#es

b. +ar-et imperfections

c. &nternalities


e. oth :a< and :b< abo"e

22. Which of the following isJare false*

a. The e#tent of which a pro3ect is sheltered is measured by Domestic Resource 9ost.

b. The difference between the selling price and input costs is the "alue added.

c. conomic Rate of Return is simply the &nternal Rate of Return of the stream of social

costs and benefits.d. &f the "alue of Domestic Resource 9ost is more than the e#change rate! it is fa"orable.

e. oth :a< and :d< abo"e

20. Which of the following isJare false*

a. ecause of constraints li-e pro3ect dependence! capital rationing! and pro3ectindi"isibility! in"estment pro3ects can be "iewed in isolation.

b. 9apital pro3ects are generally indi"isible! which means that pro3ects can be accepted partially.

c. 9apital rationing e#ists when funds a"ailable for in"estment are inadeuate.


e. oth :b< and :c abo"e

24. &f a pro3ect has ffecti"e Rate of rotection :R< of 0% and if the #change Rate is Rs.4$to a Dollar! then the Domestic Resource 9ost :DR9< of the pro3ect is

a. Rs. 55.$$

b. Rs. ').$$

c. Rs. 55.2$

d. Rs. 50.2$e. Rs. 15.2$

25. &n respect of a pro3ect (! you are gi"en that the &nitial &n"estment is Rs.1!0$!$$$! the terminal"alue is Rs.2!14!)2$! the annual cash inflow is Rs.4$!$$$ and the pro3ect life is 4 years! therein"estment rate assumed for the abo"e pro3ect is

a. 2$%

b. 5.0)%



c. 4%

d. 1.04%n

e. ).5%

2'. Domestic Resource 9ost is associated witha. The cost of raising resources within the country

b. The opportunity cost of depleting the domestic resources

c. The cost of en"ironmental benefit

d. The usage of domestic resources "is/ /̀"is sa"ingJearning of one unit of foreign e#change

e. Rate of rotection offered to domestic industries

2). Which of the following isJare false*

a. Detailed ro3ect Report :DR< is generally prepared for submission to the ;inancial&nstitutions :;&s<

b. The format of DR and the application form for the (ll/&ndia ;&s are one and the same.

c. There is a set pattern in which the DR has to be presented.

d. There is no set pattern in which the DR has to be presented.


2. Which of the following isJare not ma3or reason:s< for the failure of a pro3ect*

a. &nefficiency of staff managers b. oor pro3ect planning

c. Wrong choice of technology

d. oth :b< and :c< abo"e


2C. Which of the following isJare true in respect of a pro3ect*

a. ( pro3ect is a comple# of routine acti"ities

b. ( pro3ect has specific starting and ending points

c. ( pro3ect is a permanent endea"or to create a uniue product


e. (ll of :a<! :b< and :c< abo"e.

0$. Delphi +ethod is a

a. Techniue in which the e#ecuti"es are as-ed to forecast demand sub3ecti"ely.

b. Techniue in which salesmen of different territories are as-ed to collect informationregarding buying plans of users.



c. Techniue in which estimates are called from a group of e#perts in the field. ut thegroup is not allowed to debate each other_s opinion independently.

d. Techniue in which a group discussion is conducted to pool up creati"e ideas.

e. (ll of :a<! :b< and :d< abo"e.

01. Which of the following is a time series model of demand forecasting*

a. #ponential smoothing method

b. =eading indicator method

c. 9onsumption le"el method

d. 9hain ratio method

e. nd use method

02. Which of the following is not a characteristic of a pro3ect*

a. ,pecific goals

b. Gniue acti"itiesc. ,pecified time

d. ,euence of acti"ities

e. Gnspecified acti"ities

00. Which of the following methods isJare ualitati"e for demand forecasting*

a. ;ield sales force method

b. Zury of e#ecuti"e opinion method

c. Delphi method



04. Feneration of pro3ect ideas based on indi"idual creati"ity does not include

a. (ttribute listing

b. lac- bo#

c. Directed dreaming

d. rain storming

e. 9hec-list

05. Which of the following hasJha"e impact on the plant location*

a. Fo"ernment policiesJregulations.

b. Raw material a"ailability and their pro#imity

c. ("ailability of infrastructure

MFC 3rdSEMESTER Assignment Cycle6 (PPAC).doc

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