EVALUATION OF PROJECTS-

TECHNICAL & FINANCIAL ASPECTS

FEASIBILITY STUDIES
To implement any project an entrepreneur needs to carry out different types of feasibility studies. These feasibility studies evaluate all the risks and returns and try to balance them and help the entrepreneur to finalize his plans.

TYPES OF FEASIBILITY STUDIES

Managerial Feasibility

Economic Feasibility
Commercial Feasibility Financial Feasibility Technical Feasibility Social Feasibility Market Feasibility Technical and Financial aspects are discussed in detail in the following slides.
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TECHNICAL FEASIBILTY

Under Technical appraisal the necessary facilities required for production are analyzed viz. Basic infrastructure - Land/Building/Utilities Technology/Technical Process

Machinery/Raw Material/Labour
Licensing/Registration/Clearances

 An entrepreneur should have the requisite number of technically capable people as well as technology required to set up and run the plant. The technology should be such that is can adapt to local conditions.
Technology transfer from overseas often fails in this regard. The conditions in USA and America are quite different from India. Most parts of India are hot and dusty. Sophisticated process controls have known to fail. Therefore, knowledge and suitability to local conditions is very important.

Technical analysis thus is mainly concerned with: Material inputs and utilities Manufacturing processes Product mixes Plant capacities Locations and sites Machinery and equipments Structures and civil work Project charts Lay outs & work schedules

EVALUATION OF TECHNOLOGICAL OPTIONS

The technology should be

Proven and tested; preference could be given to the technology used by the market leader.
Up- to date; otherwise, the risk of obsolescence is high. Cost effective and par excellence.

CHOICE OF TECHNOLOGY
The choice of technology is influenced by many factors such as: Plant capacity Principal Inputs Investment outlay and production cost Use by other units Product mix Latest Developments Ease of Integration

PROJECT MANAGEMENT TECHNIQUES

CPM (Critical Path Method) and PERT (Programme Evaluation Review Technique) are project management techniques, which have been created out of the need of Western industrial and military establishments to plan, schedule and control complex projects.

CPM/PERT
CPM/PERT can answer the following important questions

How long will the entire project take to be completed? What are the risks involved?
Which are the critical activities or tasks in the project, which could delay the entire project if they were not completed on time? Is the project on schedule, behind schedule or ahead of schedule?

If the project has to be finished earlier than planned, what is the best way to do this at the least cost?

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FINANCIAL ANALYSIS
A wide range of criteria are available to judge the worthiness of investment projects. They fall into two broad categories: Discounting criteria 1. Net Present value

2. Benefit cost ratio

3.Internal rate of return Non-discounting criteria

1.

Payback period

2. Accounting rate of return.

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NET PRESENT VALUE

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

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

over the life of the project NPV = where, CFt = cash flow at the end of the year t CFt

t=0 (1+k) t

n
r

= life of the project

= discount rate
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RULES FOR CONSIDERATION OF PROJECT:

The proposal for investment will be accepted if the NPV is

positive, and rejected if the NPV is negative.

If the NPV is zero then the project is in an indifferent position. If a choice has to be made between two projects, the project with higher NPV will be accepted for investment.

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BENEFITS:

It considers the total benefit of an investment proposal over its lifetime. Changes in the discount rate are easily reflected in the evaluation process. The most significant benefit of NPV is that it considers the time value of money in calculations NPV allows easy comparisons of returns from different
projects, which enables rational resource allocation decisions to be made
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DRAWBACKS

NPV cannot differentiate between a project with higher cash flows and a project with lesser cash flows in the early years It does not provide the same base for comparison between two projects, with different lives of cash outflow It is an absolute measure, and does not consider initial cash
outlays. Hence, it may not provide dependable results.

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BENEFIT COST RATIO:

BCR = PVB/I Where PVB = Present value of benefits I = Initial Investment

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RULES FOR CONSIDERATION OF PROJECT

If BCR =1, the decision will be indifferent

If BCR > 1, The Investment decision can be accepted

If BCR < 1, The Investment decision should be rejected

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BENEFITS
As this measures NPV Per rupee of outlay, it can discriminate large and small investments and hence is preferable to NPV method.

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DRAWBACKS
Under unconstrained conditions, this method will accept and

reject the same projects as NPV.

It provides no means for aggregating several projects into a package that can be compared with a large project. When cash outflows occur beyond the current period, the Benefit- Cost

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INTERNAL RATE OF RETURN (IRR)

IRR of a project is the discount rate which makes its NPV = 0. In the NPV calculation we assume that the discount rate is known and determine the NPV. In IRR Calculation we set the NPV= 0 and determine the discount rate that satisfies this condition

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RULES FOR CONSIDERATION OF PROJECT

If IRR > 1 accept the investment decision

If IRR < 1, reject the investment decision

BENEFITS
IRR is closely related to NPV. This method is easy to understand and interpret.

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DRAWBACKS
This method may lead to multiple rates of return

This method may result into incorrect decisions in comparing mutually exclusive projects

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MODIFIED INTERNAL RATE OF RETURN

To overcome this limitation, MIRR (MODIFIED INTERNAL RATE OF RETURN) METHOD CAN BE ADOPTED: Here, PV OF CASH OUTFLOW

= Terminal value of cash inflow ________________________

(1 + MIRR)

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BENEFITS / DRAWBACKS

BENEFITS
MIRR assumes that project cash flows are reinvested at the
cost of capital. Hence it reflects better the profitability of a project The problem of multiple rates does not exist For choosing among mutually exclusive projects of different size, NPV is a better alternative in measuring the contribution of each project to the value of the firm.

DRAWBACKS

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PAY BACK METHOD

This method is the length of time required to recover the initial cash outlay on the project.

RULES FOR CONSIDERATION OF PROJECT

The shorter the pay back period, the project will be more desirable for consideration

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BENEFITS /DRAWBACKS
BENEFITS
It is simple in concept and application
It is a rough and ready method for dealing with risk

DRAWBACKS
It does not consider the time value of money It ignores cash flows beyond the payback period It is a measure of capital recovery and not profitability
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To overcome this limitation, the discounted Payback period is considered. Here, the cash flows are first converted into their present values (by applying suitable discounting factors) and then added

to ascertain the period of time required to recover the initial

outlay of the project.

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ACCOUNTING RATE OF RETURN- (ARR)

ARR

PROFIT AFTER TAX ___________________ BOOK VALUE OF INVESTMENT

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BENEFITS / DRAWBACKS
BENEFITS
It is simple to calculate
It is based on information that is easily available It considers benefits over entire life of the project

DRAWBACKS
It is based on accounting profit and not cash flow It does not take into account Time value of money.

It is internally inconsistent

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CONCLUSION
To conclude,

For small sized projects, it is best to use Pay back and ARR method and for larger projects, IRR method is suitable.

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WHY DO SOME PROJECTS FAIL?

Most projects suffer from one or more of the following problems: Customers are not satisfied with the deliverables. Deadlines are missed. Budgets are chronically overrun. Team members are disgruntled. Many projects never end. The team members are not committed to the project

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STEPS TO CREATING MORE SUCCESSFUL PROJECTS

The three key steps to creating more successful projects are: Have a process template and keep improving upon it. Adapt a team based and participative approach.

Use project management methods.

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STEP 1:
A project exists to produce a unique product, service, process, or plan. Since each product is unique, each set of steps to create the product should be unique. Hence, rather than starting from the scratch on each project and making up a set of steps, most projects can work off a process template that serves as a starting point for how to create the deliverable.

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For example, for a project such as software development, the organisation probably has a software development process that project teams use when creating a new or improved software program. This process template defines a generic set of steps to follow that will get one from concept to design to coding to testing.

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STEP 2
Project success depends on the project team. The new project management approach is team-based and participative. The project leader acts as a facilitator to the team and as a guide through the project management process. The team creates the project plan, monitors and controls the project and assesses what went well and what should be improved for the next project.

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This new approach to project management means project

managers must learn new skills: conflict resolution, active listening, team participation, and team decision making-skills. The participative approach to managing a project is a critical factor in creating better project results.

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STEP 3
Project results are improved when a project management methodology is

used. Project management methodology is a set of tools and techniques that help project team to:
Produce deliverables that will satisfy the client. Get the project done on time.

Prevent constantly changing project requirements.

Get the project done within budget. Make sure the project doesnt drag on forever. Ensure that all stakeholders have a voice in the process. Make the project a more satisfying experience for team members.

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