AN ASSIGNMENT ON PROJECT PLANNING AND CONTROL

Submitted By: Harshita Kakar Nupur Mishra Vipul Golechha Pratik Naik Khushbu Patel Enrollment no: 118050592001 118050592005 118050592009 118050592032 118050592057

Submitted To: Mr. Imran Sheikh

MBA (3rd Semester) (2nd Shift)

1. CAPITAL INVESTMENT PROCESS AND KINDS OF PROJECTS

1.1 Meaning of Capital Budgeting:
Capital Investment involves a cash outflow in the immediate future in anticipation of returns at a future date. The capital investment decisions assume vital significance in view of their marked bearing on corporate profitability needs no emphasis. The planning and control of capital expenditure is termed as Capital Budgeting.

 Search for Investment Opportunities Screening the Alternatives

Analysis of Feasible Alternatives

Evaluation of Alternatives Authorization

Implementation and Control

National and International Projects Industrial and Non Industrial Projects Project Based on Level of Technology High Technology Projects Conventional Technology Projects Low Technology Projects

Projects According to

Projects based on size Large Projects Medium Projects Small Projects Projects Based on Ownership Public Sector Projects Private Sector Projects Joint Sector Projects

Purpose Balancing Projects Modernization Projects Replacement Projects Expansion Projects Diversification Projects Rehabilitation (of sick units) Projects Up gradation Projects Maintenance Projects Merger and acquisition New Project (innovation or invention)

2.1 Project Organization Structure:

Matrix Organisation structure: Matrix organization is a formal

way of hierarchy and sharing authority between the project manager and his team of functional managers, who are answerable to the project manager as well as the functional heads. It seeks to achieve the twin objectives of efficient use of resources and effective realization of project objectives. drawing personnel from various functional departments & putting them under the project manager. The project manager commands loyalty from functional staff, as long as they are in the project management team.

Task Force Organization Structure: A task force is created by

3.1 Initial Selection of Project Ideas:

Project must match with the promoters profile of

qualifications,

experience, interest etc. Rough estimate of project cost and promoters capability to mobilize the necessary resources to the proposed project. Clear idea about market size and growth potential. The availability of inputs and proximity to market for final products. Costs involved in production, administration, and marketing.

3.2 Selection of Project Location

Proximity of Inputs Proximity of Market

Availability of Water, Power, Manpower & Transport

Government Policies Communication Facilities Weather and Climatic Conditions

 Availability of Land Cost of site Cost of Site preparation and development

3.4 Soil and Topography

The soil strength of the particular area where the project is to be located becomes an important factor for consideration if the project envisages heavy machinery which requires heavy foundation. Topography means formation of soil and its contour. If topography, is much undulating, it needs big quantity of cutting of earth and filling of earth and also dressing. If soil topography is not favourable, the project cost may go up and also may delay the project to make it set right.
3.5 Choice of Technology

Plant Capacity Product Mix Latest Developments Ease of Absorption Principal Inputs Investment Outlay and Production Costs

Some of the aspects considered in SWOT analysis are: Internal financial resources Availability of funds in the capital market Extent of support from banks and financial institutions The business and financial risks attached with the business Cost of capital

3.7 Zero Date

Zero date of a project means a date is fixed up from which the implementation of the projects begins. The progress in implementation of the project is monitored by taking zero date as a base for counting the time as well as cost of project.

3.8 Financial Closure

The entrepreneur will prepare and submit a detailed project report called techno-economic feasibility report to the financial institutions for obtaining term loans for project financing

The project activities start prior to the zero date. For an outsider, a project has got zero value during its implementation, and gets full value only on successful implementation of the project. A project which is abandoned in the middle of implementation has nil value.

3.10 Work Breakdown Structure

The total project is broken down according to the various components and will establish the connection between various components.

3.11 Brown Field Project

Project implemented in the precincts of a working plant/working facility.

3.12 Resource Levelling

It is usage of resources during the project duration with minimum variation in source requirements without extending the project completion time.

3.13 Project Execution Plan

Project execution plan refers to that exercise of matching the project hardware and software with the executing agencies through a viable work system.

The CAT schedule stands for committed activity target schedule. It is used for progressing of the executing agencies. The RAT schedule stands for reserved activity target schedule. They are those which are to be achieved.

3.15 Line of Balance

It is a device for planning and monitoring the progress of an order to be completed by a target date.

3.16 Value Engineering Review

It is a systematic analysis and evaluation of the techniques and functions in the various spheres of an organisation with a view to exploring channels of performance improvement so that the value in a particular product can be bettered.

 3.18 Project Procedure Manual

It is required to coordinate the various subsystems like contract management,

configuration management, time management, cost, fund, materials, men and communications management.

3.19 Time and Cost Trade-off

The project should be completed within its schedule of implementation and within the estimated cost.

3.20 Monitoring of Capital Expenditure

Budget Allocation of job order number / capex number Collection of cost against each capex number

Control of costs
Proper reporting

3.21 Variance and Performance Analysis

Variance Analysis- The traditional analysis involves comparison of actual costs with budgeted costs to determine the variance. Performance Analysis- This is a modern approach where analysis is done for the project as a whole (and individual parts) projects on schedule, behind and ahead of schedule

3.22 Network Analysis (PERT AND CPM)

Network Analysis is a technique used for administration of a project which consists of several activities having a definite interrelationship among them.

3.23 Initial Selection of Project Idea

Project must match with the promoters profile of qualifications

Clear idea about market size and growth potential

Availability of technology and plant and machinery Risks involved with the project

3.24 Feasibility Study Report

Before a project investment is finalised, the entrepreneur will conduct a feasibility study to confirm about the techno-commercial strength of project and prepares a report called Feasibility Study Report.

3.25 Market Survey

Before undertaking a new project it is customary to undertake a market survey. Perhaps the best known form of market research is the market survey.

3.26 Invisible Walls in Project Estimating

Delays in governmental clearances Reliability of contractors Political disturbances Locational disadvantages

3.27 Reasons for Project Failure

Substantial overrun of projects which makes the project not feasible to

implement further. Lack of experienced management team Lack of proper project monitoring system Lack of delegation of authority and responsibility Unfaithfulness of the promoter

4.1 Incentives for export oriented units:

Government of India offers various incentives for setting a export oriented projects as a measure for export promotion and for improving a balance of payment promotion. Liberal import facilities are allowed depending on actual import contain of product and F.O.B. value of product. Customs and central excise duties paid on raw material used for manufacture of export products are repayable. Raw materials are supplied at controlled price for specified export products. Priority is accorded by railways for transport of goods meant for exports. Export credit Guarantee Corporation offers special assistance by way of protecting from credit risk. Insurance against loss in export of goods and services. In financial facilities at special concessional rates of interest are given by commercial banks.

4.2 Incentives for units in industrially backward area:

To promote balanced regional development, government of India announced incentives for industries established in selected backward areas. These incentives are in the form of Central outright grant or subsidy scheme. Concessional finance scheme. Transport subsidy scheme.

4.3 Incentives for small scale industries:

To promote the development of small scale industries in the country

several measures have been announced. Small scale units need not obtain industrial licensee for certain category of items manufactured. Numbers of product and service have been exclusively reserved for small scale units. Government provides comprehensive assistance to small entrepreneurs through various organizations like small industries development organizations.

4.4 Tax consideration in project planning:

Tax consideration is an important factor in project investment decision. Some projects are located primarily because of tax incentives and benefits associated with them. The tax incentives and benefits and implications have a major role to play in project investment decisions.

4.5 Impact of liberalization and globalization on project planning:

Under the post liberalization economic scenario, India is facing: Global challenges of advance technology. Problems concerning energy conservation.

Rapid automation.
Need to have high productivity and low price

To survive in the globalization situation, the Indian projects will have to: Be cost effective and inexpensive. Have low capital base. Used advance technology suitable for Indian condition. Be safe from pollution and nuclear radiation.

 All future projects should incorporate adequate provisions for: Using non-conventional energy natural gas and coal where possible. Partial replacement keeping pace with advance technology.

Utmost safety in operation. Conservation of resources. Future project should aim at: Alleviating poverty. Generating mass employment potential. Raise standards of living and quality of life. Making the country self sufficient in inexpensive essential goods and service.

4.6 Strategic focus in project planning:

Economic of scale by consolidation.

Thrust on core business, in others words expand the business globally where

corporate has strength. Upgrading products and technologies to ensure customer satisfaction with quality and reliable product and services.

4.7 Micro and Macro consideration:

Projects are under taken at three levels: At national level: Where the investment plans policies and priorities are formulated and establish from the overall economic point of view. Eg: by setting a project in macro economic frame work.
At sectorial level:

Where policies, planning and strategies focus on growth and development of a single sector like industrial or agree culture or social amenities etc.
At project level:

Where one single project is planned and studied from all the economic, technical, financial and environmental perspectives in a more microscopic manner.

CBA is defined as An analytical tool in decision making which enable a systematic comparison to be made between the estimated cost of undertaking of project and the estimated value and benefits which may arise from the operation of such a project.

5.1 CBA procedure:

Determine problem to be considered Ascertain alternative solution to problem

Estimate and analyze cost and benefits

Appraise estimated cost and benefit Decide on optimal solution

5.2 Techniques of CBA: Discounted cash flow techniques:

For a privet sector project the rate of discount is the marginal or weighted average cost of capita for the business. In the public sector the selected rate of discount must reflect the cost of investment funds to society as a whole, so it is generally refer to as social rate of discount.
Net present value:

This is a discounted cash flow technique and thus it attempts to consider the time value of money, i.e. rs.1 today is of more value than rs.1 tomorrow. It discounts future earnings to make them comparable with investment. NPV = B C (1+r)n Where, B = sum of the benefits of the project C = sum of the cost of the project r = social rate of discount n = expected project life

 Internal rate of return:

This is also discounted cash flow techniques and is sometimes refer to as the trial and error techniques. Unlike NPV technique, it does not have an expected discount or cut off rate but it calculates discounted rate at which the cash outflows are equated with the cash inflows. Thus if Rs 100 is to be earn in 1 year from the investment in a machine which will cost Rs 1000 now then the IRR is Rs.100 -------------Rs.1000 = 10 %

100

The project is acceptable under IRR if the rate of return after discounting
benefits and cost is greater than the cost of capital.

 Benefit/cost comparison:

The estimated benefit and the estimated cost which may arise from undertaking a project are compared and the project is under taken if benefits are consider to be greater than cost. The method is clearly unsatisfactory because it does not allow for time value of money, i.e. it does not consider that Rs. 1 today is better than Rs. 1 to be received next year. Another problem with this method is that it does not give much guidance to the decision makers because the figures are not relative.
Benefits/cost ratio:

This is a ratio which assessing estimated benefits as a ratio to estimated cost. If the resulting figure is greater than 1 it is positive and if less than 1 it is negative. It suffers from the same fault as (2) above regarding the lack of consideration of time value of money but it does produce relative figures enabling comparison between projects to be made.

5.3 Benefits of CBA:

CBA can be used simply to ensure that value for money is obtained from a

project which requires the investment of funds. CBA study to attempt to allow for social cost and benefits. The discipline of trying to apply a consisting method of measurement in public sector areas should help to produce better decision which takes important subjective factors into account. CBA have sometime attempted the impossible and the task of listing relevant cost and benefits if in itself a valuable discipline.

5.4 Limitations of CBA:

CBA study is limited by the accuracy of data input. Not only are estimated costs

and benefits difficult to forecast often they are even more difficult to quantify. CBA can be encountered both in deterring the value of cost and benefits and in fixing a social rate of discount; it is a method which must be used with great care.

6.1 Economic rate of return:

The ERR is a discounted rate at which the cash inflows and cash outflows of the projects are equated. The cash inflows and cash outflows are termed as economic benefit and economic cost respectively which will arise during the life of the project.

6.2 Domestic resource cost:

The DRC represent the resource cost of a manufacture indigenously without importing such product or cost of such product if it can be exported. DRC measures the resource cost of manufacturing a product as compared to importing/exporting cost to it. The comparative advantage that a country enjoys if its domestic resource cost of a product is lesser than the cost of its importing. This can save the foreign exchange outgo by manufacturing the product within the country. DRC = Value added at domestic prices ----------------------------------------Value added at world prices

Exchange rate

6.3 Effective rate of protection:

The ERP indicates the degree of protection of project receive from international competition. In a calculation of ERP the basic parameter is value added which is the difference of selling price of a product and the cost of material inputs. The value added is the different of selling price and the cost of its material inputs. Due to domestic protection given by the government to the project there will be a difference in value addition at domestic price as compared with international price. ERP =Value added at domestic prices - Value added at world prices ERP will be zero when value added at domestic prices is equal to value added at world prices. Higher the value of ERP higher the implied protection enjoyed by the project. The domestic selling price will not include tax and excise duty but it is inclusive of selling commission. The selling price at world price is the C.I.F. price for import and F.O.B. price for export. ERP is calculated as follows: ERP =Value added at domestic prices - Value added at world prices ---------------------------------------------------------------------------- 100 Value added at world prices

7.

PROBLEM AND SOLUTION:

A project which started on 1st April, 2009 was expected to be completed by 31st March, 2010. The project is being reviewed on 30th September, 2009 when the following information has been ascertained. (Rs. Lakhs) Budgeted cost of work scheduled 50 Budgeted cost of work done 45 Actual cost incurred 54 Calculate: (a) performance variance (b) Efficiency variance (c) Expenditure variance. Solution: performance variance = Budgeted cost of work done - Budgeted cost of work scheduled = 45 - 50 = -5 Efficiency variance = Budgeted cost of work done - Actual cost incurred = 45 54 = -9 Expenditure variance = Budgeted cost of work scheduled - Actual cost incurred = 50 54 = -4