Business Modeling & Planning

Project Planning Stage Module - I

Capital Budgeting - Need

Financial Objective: Profit
maximisation and wealth maximisation Three types of decisions : Investment, Financing and working capital / dividend; First decision is always Investment followed by Financing / W. Capital / Dividend

Capital Investment : Importance

Long Term Effects on the company; Irreversibility of the decisions and
expenditure: Correct decision would increase consistent profits & wealth Substantial Investments: Directly linked to corporate financial objectives Strategic in nature and policy effect

Issues in Capital Investment

Measurement Issues Uncertainty Temporal Spread: Cost Benefit

analysis over a long period of time

Project Classification
Mandatory Investments- Statutory
Requirements (Post 3G For Security ) Replacement Projects Expansion Projects Diversification Projects R & Development Projects Social Projects

Capital Budgeting Process

Planning stage: Based on broad
strategy Analysis: Various Feasibility studies Selection: Capital budgeting techniques Financing: Capital Structure Implementation: Designing projects, Contracts, construction, training, Use of PERT / CPM Review: Feedback mechanism

Phases of Project Analysis

Market Analysis Technical Analysis Financial Analysis Economic Analysis Ecological Analysis

Basic Considerations
Risk & Return Relationship
Establishing the relationship between Investment, Financing decisions with risk and return and to observe its effect on Market value of the firm. Time Value of Money

Strategy & Projects

Formulation of strategy is a main
task of the top management Use of SWOT analysis External Environmental study Customers, competitor, Regulation etc; Internal Study: Technical, logistics availability etc.

Strategy & Projects

Whether a new project undertaken is
in line with companies growth strategy and can company create synergy? The effect of new project on companies overall risk ( This is discussed separately)

Environment Analysis
Economic Sector GDP, BOP position
etc Governmental Sector Industrial policy; Technological Sector Newer technology; Socio-Demographic Sector; Competition

Identifying Investment Opportunities

Porter Model - 5 competitive forces; Threat of new entrants; Rivalry among existing firms; Pressure from substitute products; Bargaining power of buyers; Bargaining power of sellers.

Growth & Stability Strategy

Growth Strategy includes
Concentration ( increasing the capacity of products if market share is increasing); Vertical Integration: Backward & forward integration; Diversification: In same line or conglomerate

About New Ideas

Study of performance of existing
industries; Study of Input, Process & Output of various industries; Import / Export policies and effect; Government plans & regulations; Government priorities;

About New Ideas

Analyse Economic & Social Trends; Newer Technological changes; Reviving Sick units; Mergers & Acquisitions;

Preliminary Screening
Compatibility with promoters; Consistency with Governmental
priorities; Availability of Inputs; Adequacy of market; Cost Analysis; Risk Analysis.

Portfolio Strategy
Instead of concentrating on one
business, capital resources are spread across multiple businesses to reduce risk and maximise returns; Use of BCG matrix, McKinsey Matrix

Sources of Positive NPVs

Economies of Scale Product differentiation Cost Advantage Marketing Reach Technological Edge Government Policy.