SIKKIM MANIPAL UNIVERSITY-DE Vernacular Programs Assignment format

Student Name: Registration Number: Subject Name: Project Financing & Budgeting

Course: LC Code: Subject Code:

Q1. A) Analyse the benefits one would get from project financing. Answer: BOT/BOO method is attractive from the perspective of government officials. This is because these contracts are efficient mechanisms for rapidly organising private capital and management. They are done in order to provide a set of priority services, without affecting the overall utility system's organization and employees. This kind of methodology offers a predetermined cash flow which means that, there is an implementation risk and also an absence of market risk. The financial institutions that provide financing should be aware that organizing a BOT project consumes significant time and involves higher costs. Any BOT or BOO projects require close cooperation among the government agency, financial providers, and the private sponsor, to make them successful. There are some procedures through which these projects go through. They are: Build A private company (or consortium) agrees with the government to invest in a public infrastructure project. The company then secures their own financing to construct the project. Operate The private operator maintains the ownership and manages the project for the specific period as per the agreement and tries to get back the money through tolls and other charges. Own- A private company owns the project. Transfer Once the concession period is complete, the company assigns ownership and operation of the facility to the government or to the relevant state authority. B) Explain the different evaluation methods of project funding. Answer: There are three methods: 1. Net present value of cash flow: Perhaps the mostly widely used technique for analysing a potential investment opportunity or project is the net present value of cash flow or NPV approach. With the NPV of cash flow technique, we can discount all cash flows in our business case at the opportunity cost of capital. In most of the cases, this is the weighted average cost of capital for a company. In this analysis, the rule of business which is implemented is to accept the projects and assets when the NPV of cash flow is more than zero.
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SIKKIM MANIPAL UNIVERSITY-DE Vernacular Programs Assignment format

2. Internal Rate of Return/ IRR: The Internal Rate of Return (IRR) or discounted cash flow rate of return, offer the analysts a way to quantify the rate of return provided by the investment. The rule of capital budgeting or evaluation of the project is to accept all investments where, the IRR is greater than the opportunity cost of capital. In many conditions, the cost of capital is equal to the weighed average cost of capital (WACC). 3. Profitability Index: The profitability index, also known as the benefit-cost ratio, is another measure that uses a simple rule to evaluate cash flow results for a given project. In this case, the profitability index rule tells managers and executives to accept all projects that have an index value equal to or greater than 1. Q2. Explain Quantitative and Qualitative techniques in project financing. Answer: Quantitative Techniques: Quantitative Technique is a powerful tool and it is an analytical process that offers optimum solutions. In capital budgeting, it is important to make good financial decisions when choices are obtainable on how to spend your money. Quantitative technique has wide scope in engineering and management studies. The financial modelling skills help to analyse the cash inflow and outflow throughout the life cycle of the product. The cash inflow rises from one of the three activities namely Financing, Operations, and Investing. The cash outflow results from expenses and investment. Analysts use the financial modelling to estimate the sum of cash inflows and outflows during the life cycle of the project. In general, cash flows are reduced during the development of the project and rises as a result of the amount got from marketing, support, and finally the product costs obtained by selling the product. Immediately after the customer accepts the project, cash inflows begin through revenues. Hence, with the sum of four negative cash outflows and one positive cash flow, all occurring at different times is commonly determined by the Net Present Value (NPV) techniques. Qualitative Analysis: Once a project passes through the quantitative analysis test, it has to be further estimated by considering the qualitative factors. Qualitative analysis looks at a variety of factors to determine whether it is worth making an investment. The impact of qualitative analysis on the project is virtually impossible to evaluate accurately in financial terms. Qualitative analysis is used by analysts in credit and security to: Determine industry trends Analyse the effectiveness of management Examine new products or services in the market before adopting Determine how the behaviour of overall economy affects the financial performance of the firm. Examine the impact of an increase or decrease in employee number on the society.
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SIKKIM MANIPAL UNIVERSITY-DE Vernacular Programs Assignment format

Determine the environmental impact of the project Managers often miss the best investing opportunities while considering the quantitative measures like NPV. They must also decide if the investment in a project acts as a platform for future innovation and growth. It is necessary for the managers to consider how the project fits into the competitive environment and the strategic position of the company. Q3. How will you identify the right technology for a project? Answer: One of the fastest ways to determine the technological information needed is to analyse a company that already exists and produce the same or similar product that you plan. Once an idea about the technical skills and technology required for the project is obtained, the next duty is to determine the means to acquire these inputs. In some cases if a project requires machinery it can be leased else has to be purchased if the project is an overseas project. A good source of information on the suppliers for new and used equipment can be obtained from industry associations. The industry association provides information on specific companies that sell the required technologies. They also provide useful information on the trade shows which takes place world wide where you can attend and obtain the appropriate technology along with optimal after sales services. You can contact such bilateral or multilateral associations that help to identify and sometimes finance technical consultants or firms for manufacturing projects. A project manager must successfully manage the resources allocated to the project. For example, a construction project comprises of labour hours of the designers, the builders, the testers and the inspectors of the project team. It also includes managing any labour subcontracts. However, managing project resources often involves more than people management. The project manager must also handle the equipment used for the project and the material required by the people and equipment assigned to the project. The equipment required for a project depends on the nature of the project. For example, for a project to construct a frozen food warehouse you would need earth moving equipment, cranes, and cement trucks. For a project to release a new version of a computer game, the required equipments would include computers, test equipment, and duplication and packaging machinery. The project management key for equipment is much like for people resources. You need to ensure that you have the right equipment in the right place at the right time and that it has the supplies it needs, to operate properly.

Q4. What are the measures that are considered for assessing the profitability of a project?

SIKKIM MANIPAL UNIVERSITY-DE Vernacular Programs Assignment format

Answer: The project cycle is identified as the process of carrying out a project through the different stages of project programme, identification, formulation, appraisal, implementation, and post-project evaluation. Among these stages, the project appraisal is a key step to ensure the economic and financial viability of a project. The appraisal stage evaluates the adequacy of project returns as well as the capital structure and the financial viability of a project. The analysis of strength and weakness factors of the beneficiary, who looks for financing, will enable him to obtain the check points. This is done to improve the reliability and to attract the financiers for investing on a project. Viability of any project especially for infrastructure projects is judged through financial returns and profits over a specific period of time. The incorporation process of the project also adds value to the viability of the project. The financial feasibility of a project is determined through a strict pro forma financial statement analysis. There are three key financial statements such as income statement, balance sheet and cash flow statement. Projected financial statements are used to measure various financial ratios that are essential to evaluate the financial viability of a project. Q5. A) Analyse the entity risk control matrix. Answer: This categorisation of entity objectives helps to concentrate more on various elements of enterprise risk management. It provides distinction between different categories of objectives that focuses on separate aspects of enterprise risk management. They are generated from the way the management runs a firm or an entity. These elements are incorporated with the management process. These components include: 1. Internal Environment: This includes the tone of a firm and sets the core for seeing and addressing the possible risks. It includes risk management philosophy, risk appetite, integrity and ethical values, and the environment in which they operate. 2. Objective Setting: The objectives in the management can recognise the potential events that affect their achievement. Enterprise risk management ensures that the management has a process in place to set objectives. 3. Event Identification: One must identify the internal and external events that make an impact on the achievement of an entitys objectives. This is done by differentiating risks and opportunities. 4. Risk Assessment: Risks are analysed keeping likelihood and impact, as a basis for determining the way it should be managed. The assessment of the risks is done on an intrinsic manner.

SIKKIM MANIPAL UNIVERSITY-DE Vernacular Programs Assignment format

5. Risk Response: Management opts for risk responses thus avoiding, accepting, reducing, or sharing risk. They develop a set of actions to align risks with the entitys risk tolerances and risk appetite. 6. Control Activities: Policies and procedures are defined and implemented to ensure that the risk responses are effectively carried out. 7. Information and Communication: Relevant and adequate information and timeline is identified, captured, and communicated in a form that facilitates people to carry out their responsibilities. 8. Monitoring: The entire enterprise risk management is reviewed and modifications are made as necessary. This reviewing is done through ongoing management activities, separate evaluations, or both. B) What is the importance of project financing/budgeting? Answer: Project budgeting is a process that enables you to make an increase in the productivity of the business. If you are able to track the process of budgeting throughout the project, you can understand the result of budget disparity on profitability. You can also obtain the required details, in order to make the project a successful one. By calculating the exactness of the project and assessing the impact on the profitability, you can fine tune the process of bidding and make sure that there will be competitive bids in the future. If the budget surpasses the allocated amount, the project leader should work with the team and the sponsors so that, the spending limit and the project budget go line in line. The team must get the funds up front so that, they can speed up the project. If the team fails to obtain sufficient funds in time, they will not be able to increase the pace of the project. There are several elements which you can take into consideration, while budgeting a project. They include: Labor costs External/material costs Cash flow Aligning your budget and your spending limit Q6. Explain the principles followed in designing the financial plan. Answer: Preparing the financing plan is one of the prominent steps in the preparation of financing proposal. Having a written financing plan enables the members of the team to identify the goals of the project and examine various tasks during the course of the project. This also facilitates the team to communicate the plans and obtain inputs from all the major stakeholders. The financing plan should be simple as it decreases the confusion and promotes the support of the stakeholders. The financing plan should include goals and objectives of the project, description, timetable, total price, debit capacity, anticipated rate plans, details of other funding
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SIKKIM MANIPAL UNIVERSITY-DE Vernacular Programs Assignment format

sources, debt repayment plan, construction and funding contracts and other legal requirements. Designing the financing plan for a project generally involves meeting six principal objectives, they are: Ensuring the accessibility of adequate financial resources to complete the project. Obtaining sufficient funds at the lowest practicable cost. Reducing the project sponsors credit exposure to the project. Establishing a dividend policy that maximises the rate of return on the project sponsors equity. This is subject to the restrictions imposed by lenders and the cash flow generated by the project. Increasing the value of tax benefits of ownership to which the project will give rise. Achieving the most beneficial regulatory treatment.