1. Module 1
This module gives an overview of project planning
and analysis, and capital budgeting. It is
divided into five sections, namely
 Capital expenditures: importance and
difficulties
 Phases of capital budgeting
 Generation and screening of project ideas
 Facets of project analysis
 Resource allocation framework

2. Capital expenditure are those
expenditure which are capital in nature
The following are the importance of
capital expenditure:
 They have long term effect
 Irreversible in nature
 Substantial outlays involved

3. The following are the difficulty involved
in capital expenditure decisions:
o Measurement problems
o Uncertainty
o Temporal spread

4. Capital budgeting is a complex process
which may be divided into five phases:
Planning
Analysis
Selection
Implementation
Review

5. Planning
 Articulation of firms broad investment
strategy
type of investment
identification of individual project opportunities
 Generation and screening of project
proposals
Prima facie worthwhile to justify feasibility study
what aspects of project are critical to study

6. Analysis
 A detailed analysis of the
marketing, technical, financial,
economical, and ecological aspects
 Focuses on gathering, preparing
and summarizing relevant
information
 The stream of cost and benefits can
be defined

7. Selection
 Is the project worthwhile?
 Wide range of appraisal criteria is
used to judge the worthiness of a
project
 Such criteria are divided into non-
discounting and discounting
technique

8. Implementation
 Refers to conversion of blue print into reality
 In case of industrial project, implementation involves
setting of manufacturing facilities
Project and engineering design
Negotiations and contracting
Construction
Training
Plant commissioning (starting up the plant)
 Translating an investment proposal into a concrete project
is a complex, time-consuming and risky task
 For expeditious implementation at a reasonable cost, the
following are helpful:
Adequate formulation of Project
Use of the principles of Responsibility Accounting
Use of Network Techniques

9. Review
 Performance review should be done periodically to
compare actual performance with the projected
performance
 Feedback device is useful in in several way:
how realistic were the assumptions
provides a documented log of experience that is
highly valuable in future decision making
suggests corrective action to be taken in the light
of actual performance
helps in uncovering judgemental biases
induces a desired caution among project sponsors

10. Generation and screening of
project ideas
 Generation of ideas
 Monitoring the environment
 Corporate appraisal
 Scouting for project ideas
 Preliminary screening

11. Generation of project ideas
 The search of promising ideas is the 1st step
towards establishing a successful venture
 The key success of any venture is getting the
right idea at right time
 Identification of such opportunities requires
imagination, sensitivity to environmental
changes, and realistic assessment of what the
firm can do
 significant technological breakthroughs,
combining existing fields of technology or offering
variants of present products or services, periodic
SOWT analysis, fostering conductive
organizational climate to tap the creativity of
employee facilitates the generation of ideas

12. Monitoring the Environment
 Promising investment idea enables a
firm/entrepreneur to exploit opportunities in the
environment
 For the purpose of monitoring, business
environment may be divided into:
1. Economic sector
2. Governmental sector
3. Technological sector
4. Socio-demographic sector
5. Competition
6. Supplier sector

13. Economic sector
 State of the economy
 Overall rate of growth
 Cyclical fluctuations
 Inflation rate
 Linkage with the world economy
 Trade surplus/deficits
 Balance of payment situation

14. Governmental sector
 Industrial policy
 Government programmes and projects
 Tax framework
 Subsidies, incentives and concessions
 Import and export policies
 Financing norms
 Lending conditions of financial institutions
and commercial banks

15. Technological sector
 Emergence of new technologies
 Access to technical know-how,
foreign as well as indigenous
 Receptiveness on the part of
industry

16. Socio-demographic sector
 Population trends
 Age shifts in population
 Income distribution
 Educational profile
 Employment of women
 Attitude towards consumption and
investment

17. Competition
 Number of firms in the industry and
their market share (of the top five
or four)
 Degree of homogeneity and
differentiation among products
 Entry barriers
 Comparison with substitutes
 Marketing policies and practices

18. Supplier sector
 Availability and costs of raw-
materials and sub-assemblies
 Availability and costs energy
 Availability and costs of money

19. Corporate appraisal
 A realistic appraisal of corporate strengths
and weakness is essential for
identification of investment opportunities
which can be profitably exploited
 The broad areas of corporate appraisals
are:
1. Marketing and Distribution
2. Production and Operations
3. Research and Development
4. Corporate Resources and Personnel
5. Finance and Accounting

20. Marketing and Distribution
 Market image
 Product line
 Market share
 Distribution network
 Customer loyalty
 Marketing and distribution costs

21. Production and Operations
 Condition and capacity of plant and
machinery
 Availability of raw materials, sub-
assemblies, and power
 Degree of vertical integration
 Locational advantage
 Cost structure

22. Research and Development
 Research facilities, laboratories and
equipment, modeling and testing facilities
 Capability of the firm to invest in R&D
 Presence of well known researchers and
scientists
 Track record of new product
developments
 Coordination between research and
operations

23. Corporate resources and
personnel
 Corporate image
 Clout with governmental and
regulatory agencies
 Dynamism of top management
 Competence and commitment of
employees
 State of industrial relations

24. Finance and Accounting
 Financial leverage and borrowing
capacity
 Cost of capital
 Tax situation
 Relations with shareholders and
creditors
 Accounting and control system
cash flows and liquidity

25. Scouting for project ideas
 Project managers perform numerous activities to generate
more and more project ideas
 Some suggestions are:
Analyze the performance of existing industries
Observe the inputs and outputs of various industries
Analysis of Exports and Imports
Study plan outlays and Government guidelines
look at the suggestions of Financial and Development
agencies
Study social and economic trends
Study new technological developments
Explore the possibility of reviving sick units
Identify unfulfilled psychological needs
Attend trade fairs

26. Preliminary Screening
 After a pool of ideas are generated the project manager starts to
screen them initially
 Some kind of preliminary screening is required to eliminate ideas
which prima facie are not promising
 Preliminary screening is a process of rejection rather than a
process of selection
 The following aspects may be looked into:
Compatibility with the promoter
Consistency with Government Priorities
Availability of inputs
Adequacy of market demand
Reasonableness of cost
Acceptable risk level

27. Compatibility with the Promoter
 Project idea must be compatible with the
interest, personality and resources of
entrepreneur
 According to Murphy, a real opportunity
has three characteristics:
1. It fits the personality of the
entrepreneur
3. It is accessible to him
2. It offers him the prospect of
rapid growth and high return on invested
capital

28. Consistency with Government
Priorities
 The project ideas must be feasible given the
national goals and government regulatory
framework
 The following question may raised in this context:
Is the project consistent with national goals and
priorities?
Are there any environmental effects contrary to
governmental regulations?
Can the foreign exchange requirements of the
project be easily accommodated?
Will there be any difficulty in obtaining the
license for the project?

29. Availability of Inputs
 The following questions are needed to be
answered:
Are the capital requirements of the project
within manageable limits?
Can the technical know-how required for the
project be obtained?
Are the raw materials required for the project
available domestically at a reasonable cost? If the
raw materials have to be imported, will there be
problems?
Is the power supply for the project reasonably
obtained from external sources and captive power
sources?

30. Acceptability of Risk level
 A project is critically dependent on the
risk characterizing it
 The assessment of risk is a difficult task,
and the following factors should be
considered:
Vulnerability to business cycle
Technological changes
Competition from substitutes
Competition from imports
Governmental control over price and
distribution

31. Project Rating Index
 Is an evaluation method that helps
management to carry out the process of
preliminary screening
 In this method, management identifies
factors for rating projects and assigns a
weight to each factor. The projects are
then measured against these factors and
assigned a score. If the project gets the
score below the desired value the project
is rejected.

32. Construction of Rating Index
Factors Factor Rating Factor
Weight Score
VG-5 G-4 A-3 P-2 VP-1
Technical know- 0.25 √ 0.75
how
Adequacy of market 0.15 √ 0.45
Input Availability 0.10 √ 0.40
Consistency with 0.20 √ 0.80
Govt. policies
Reasonableness of 0.30 √ 0.60
cost of raw
materials
Rating Index 3.00

33. Source of Positive Net Present
Value
 Project managers prefers to select project ideas that give
higher returns than the investment made
 The net present value is defined as the present value of the
future revenues minus future costs
 Sometimes sources of positive net present value acts as
entry barriers. Hence, an understanding of entry barriers is
helpful in identifying positive net present value
 There six main entry barriers that result in positive NPV
projects, namely:
1. Economies of scale
2. Product differentiation
3. Cost advantage
4. Marketing reach
5. Technological edge
6. Government policy