PROJECT MANAGEMENT • Directions Leadership: 2-BASED ON OUTPUT:

PROJECT DEFINITION: “A temporary endeavor undertaken to create a unique product, Project is always performed according to the directions given by the customers with A project manager is like a leader whose goal is to complete the project within the a) Quantifiable projects: in this, quantitative assessment of benefit can be made.
service or result”. regard to time, quality and quantity, etc. time and budget and deliver what was promised or better. Eg: power generation.
b) Non-quantifiable projects: in which the benefits cannot be measured
Project management: It is the application of processes, methods, skills, knowledge • Uniqueness Doing a Project without Project Management is like sailing a ship of pirates without
quantitatively. Eg: projects under health, education.
and experience to achieve specific project objectives according to the project captain.
Each project is unique in itself, and it’s having own features. No two projects are
acceptance criteria within agreed parameters. Project management has final 3-BASED ON OWNERSHIP:
similar even if the type of organization is the same. The uniqueness of the project Project Planning:
deliverables that are constrained to a finite timescale and budget.
can measure by considering the many factors like objectives, features of the project,
Project Management ensures that proper information is available to the organization a) Public projects: Which are undertaken by government agencies. Eg:
CHARATCTERISTICS: application of the project, etc.
and the clients of what can be achieved, what will be the budget, which resources construction of road and bridges.
• Objectives: • Flexibility would be used and the duration to complete the project. b) Private projects: under taken by private enterprises.
c) Public-private partnership projects: undertaken by both government and
Objectives are the key characteristics of the project where you will see the progress Change and project are synonymous. A project sees many changes throughout its life Reduced Costs and Quality Control: private enterprises together. Eg: garbage collection, generation of electricity by
of the project and time to time analysis will show you the result of how much you span. These changes can make projects more dynamic and flexible. windmill.
have achieved. Project management reduces project costs by optimized use of resources, improving
• Sub-Contracting
efficiency, and decreasing risks. Therefore, even with the added cost of a project 4-BASED ON SECTOR
• Single entity.
Sub-contracting is a subset of every project and without which no project can be manager, you stand to gain much more.
A project is one whole thing. This means that in a project although different a) Agricultural projects: these are the projects related to agricultural sector like
completed unless it is a proprietary firm or tiny in nature. The more complexity of a
people contribute still is recognized as a single entity. The teams are often PROGRAMMES, PROJECTS, TASKS: project of irrigation, well digging projects etc.
project the more will be the extent of contracting.
specifically assembled for a single project. b) Industrial projects: these are the projects which are related to the industrial
• Life Span • Cost PROGRAMMES: A programme is a wide ranging and long-term endeavour which manufacturing sectors like cement industry, steel industry.
requires large volume of resources for achieving the objectives. Based on time, scope c) Service projects: these are related to service sectors like education, tourism,
No project can be ceaseless and indefinite. It must have one and beyond which it If the quality of the project is to be changed there could be an impact on the cost of and complexity involved, every programme may be divided into several projects. health ets
cannot proceed. Every project is invariably time-bound. the project. The cost could increase if more resources are required to complete the
project quicker. PROJECTS: Project is a limiting case of a programme. It is an assignment which is 5-BASEDON TECHNO-ECONOMIC CHARACTERISTICS
• Require funds
directed towards the attainment of short-term goals with limited resource base and a
IMPORTANCE OF PROJECT MANAGEMENT:
Without adequate funds, no project can be successfully implemented. Cost fixed time frame. a) Factor intensity-oriented classification: under this, projects are classified into
estimation is one of the essential factors for any organization. So, calculating in • Strategic Alignment: Capital intensive and Labour intensive. If large investment in plant and
advance the required funds for the project will be very impactful. TASK: A project consists of several packages. Each of these work packages consists of machinery, the project will be called capital intensive. If large investment is
Strategic Alignment is the process of linking the organization’s structure and resources certain activities which require immediate and spontaneous commitment and it is made in human resources, it will be called as labour intensive.
• Life Cycle with its strategy and the ultimate objective. performed by single or small group of people, it is called task. b) Causation oriented classification: projects are classified to demand based and
raw material based. If a project is started due to non-availability of certain
Each project has a life cycle with different stages like start, growth, maturity, and Mark Langley, the president and CEO of PMI, has said, “If your organization is not good CLASSIFICATION OF PROJECTS: goods or services, the project is said to be demand-based projects. If a project
decay. A project has to pass through different stages to get itself completed at project management, you are putting too much at risk in terms of ultimately
is started because of the availability of certain raw material, skills or other
delivering on strategy.” 1-BASED ON INVESTMENT:
• Team Spirit inputs, the projects is said to be raw material based.
• Clear Focus and Objectives: c) Magnitude oriented classification: here the size of investment is considered. It
Team spirit is required to get the project completed because the project constitutes a) Large Scale Projects: Projects involving huge investment eg: ISRO Satellite
may be classified as large scale, medium scale and small-scale projects.
different members having different characteristics and from various disciplines. But Project Management is important as it comes up with a proper project plan for project
to achieve common goal harmony, missionary zeal, team spirit is necessary achieving the strategic goals. Lack of clear goal was the most common reason for b) Medium Scale Projects: Involves medium level investment and are mainly 6-BASED ON RESEARCH ACADEMIA
technology oriented. Eg: projects related to computer industry.
project failure
• Risk and Uncertainty c) Small Scale Projects: It involves only lesser investment. Eg: Agricultural a) Major projects: These projects involve more than one year to 3 or five years
projects. and minimum funding of 3 lakhs in case of social sciences and 5 lakhs in case of
The project is generally based on forecasting. So risk and uncertainty are always
sciences.
associated with projects.

b) Minor projects: these are the projects which will be completed within a year d) Modernisation projects: it is one which is undertaken to incorporate latest Industrial Projects Developmental Project 5- Directing and controlling: Directing deals with guiding the subordinates for
and having a maximum funding of 1 lakh in case of social science and 3 lakh in available technology. - Scope of the project is limited - Very large scope timely achievement of the objective. Controlling refers to check the actual
case of science. e) Replacement projects: these are the projects which are undertaken for - Entrepreneurs & corporates are the - Govt, public sectors, NGOs are the performance with the planned performance.
maintaining the same level of efficiency by replacing an old machinery. promoters promoters 6- Termination phase: the process of termination of a project consists of:
7-FINANCIAL INSTITUTIONS CLASSIFICATION: f) Diversification projects: these are undertaken with the intension of product - National stock market and domestic - International organisation like world a) Ensuring the project gives the planned output.
diversification. financial institutions are the sources of bank, IMF, ADB are the important b) Settlement of amount due to the contractors
a) Profit oriented projects: fund sources of fund.
11- BASED ON TIME REQUIRED FOR COMPLETION: c) Inform the stake holders about the closure of the project
- It operates on stringent debt-equity - It operates on higher debt-equity norms
- New projects d) Reallocate the human and non-human resources.
norms
- Expansion projects a) Long-term projects: very long time to complete - Interest rate is equal to market rate - Interest rate is very low for borrowed
- Modernisation projects b) Medium-term: 3-5 years
fund Project management:
- Diversification projects c) Short-term: within a year - Repayment period 7 to 10 years - Repayment period extend to 25 years
d) Very short-term projects: Very short period ie, a day or more Project management is the process of planning, organising, monitoring and controlling
b) Service oriented projects: of all aspects of a project. It also includes motivating all involved to achieve project
- Profitability is measured by using IRR - Profitability is measured by using
12- BASED ON RISK objectives within a specified time.
- Welfare projects method Economic Rate of Return (ERR) method.
- Service projects a) High risk projects: Eg: Nuclear projects Project life cycle: It refers to logical sequence of activities to accomplish the objective Project Management Body of Knowledge (PMBOK), Project management as “the
- Research and development projects. b) Low risk projects: of the project. It includes the phases from inception to the final termination of the application of knowledge, tools and techniques to project activities in order to meet
project. stakeholder’s needs and expectation from the project”
8-BASED ON URGENCY: 13- BASED ON FUNCTION
Stages of Project life cycle: Need for project management:
a) Normal projects: if normal time is allowed for the completion of the projects, a) Marketing Projects: these are undertaken in the area of marketing a product 1- Conception phase (initial stage): It includes the following stages
then such projects are called normal projects. Here capital costs are minimum or service. - Complexity of the project
a) Generation of project ideas - Achievement of objective
and quality will not be sacrificed. b) Financial projects: these projects are undertaken to raise finance or restructure
b) Development of project ideas - Planning and implementation of projects
b) Crash projects: Under this, additional capital costs are allowed to gain time. the capital structure.
Here, for time saving, maximum overlapping of various phases is encouraged. c) Formulation of project proposal - Environmental challenges: success of the project depends upon how the project
c) Human resource projects:
c) Disaster projects: here time is the key factor and anything is allowed to gain d) Appraisal of the project proposal is able to cope with changing environment.
d) IT and Technology projects: these are undertaken in the area of IT related
time requirement of an organisation. e) Authorisation to commence the project. - Competition:
e) Production projects: 2- Planning phase: It deals with deciding in advance about the future course of - Constrains:
9-BASED ON OBJECTIVE: f) Strategic products: these projects are undertaken to execute a strategy. Eg: action to be taken. It includes - Risk and uncertainty
merger and acquisition. a) Defining the scope - Time overrun and cost overrun
a) Commercial projects: These are undertaken for commercial purpose and return b) Estimate the human and non-human resources
on investment is expected out of these projects. Eg: BOLT (Build own lease and - Project control and evaluation
c) Divide the project into number of manageable activities
transfer), BOOT (Build own operate and transfer). Phases of Project Management:
d) Develop organisational structure
b) Social projects: These are the projects undertaken for social purpose and well-
e) Determine the time of completion 1- Project identification: it refers to identification of business investment
being of the society. Eg: Polio Immunization Projects
f) Estimate the cost opportunities.
10-CLASSIFICATION BASED ON NEEDS: g) Examine the possibilities for adverse occurrences. 2- Project formulation: it is the translation of project idea into a complete project
3- Organising phase: it involves assigning task, grouping task into departments, and also includes the feasibility reports.
a) New projects delegating authority and responsibility, and allocating resources across the 3- Project appraisal:
b) Balancing projects: balancing projects is one which has many production units organisation to accomplish the objectives. 4- Project selection
that are linked with one other. Here output of one product unit exactly matches 4- Executing phase: it indicates the actual implementation of the project. 5- Project implementation
with the input requirement of the subsequent production unit.
c) Expansion projects: it is a projects that intends to enhance the current capacity 6- Project follow-up and evaluationevaluatio
of the plant.
 Chapter 2 o Availability of inputs: it is necessary to consider the availability of the inputs. If Project formulation: - Commercial feasibility study (Market Feasibility Study):This study is
the raw material are scares, there will be interruption in the production. If the undertaken to assess, accurately, the scope for the successful marketing of the
IDENTIFICATION AND FORMULATION OF A PROJECT - It refers to a series of steps to be taken to convert an idea in to a feasible plan
raw materials are imported, the entrepreneur has to ensure that there is no product or service. It is inevitable when the proposed product or service are
of action.
Meaning of project identification: problem in this regard. new to the industry.
- It is the process of examining technical, economic, financial, and commercial
o Marketing facilities: existing and potential demand in the domestic and export - Financial Feasibility Study: It is undertaken to examine whether the expected
- It refers to identification of business/investment opportunities. aspects of the project.
market, nature of competition, sales and distribution system, consumption financial benefits are in excess of the financial costs associated with the
- It is the process of collection, compilation and analysis of economic data for the - This is done to achieve the project objective with the minimum expenditure and
trends, availability of substitute etc. should be assessed and evaluated before proposed project. It also studies the raising funds for investment opportunities.
purpose of finding out possible opportunities for investment based on adequate resources.
the final decision. 4- Detailed Project Analysis (DPR) and Preparation of DPR: The DPR contains the
opportunities in the market. - The project formulation means feasibility and viability study of the project and
o Profitability same information as in a feasibility study and it will be presented in a detailed
- Generation of project idea is a part of project identification. it is undertaken to find out whether the proposed project would be feasible or
o Cost of the product: A good study of the cost structure will give a good idea format. The main intention of DPR is to communicate formally, the promoter’s
not.
Sources of Project Ideas: regarding the different type of costs. decision to start a new project. It is an important document for obtaining
o Level of risk: Level of risk involves change in demand, technological Need for Project Formulation: financial assistance from banks for getting approval from various government
o Our own needs:
o Market survey: It is the careful observation of market and it helps to development, emergence of substitute, competition, cyclical fluctuation etc. departments.
o Selection of appropriate technology
understand the demand and supply positions as well as the gap between o Other factors: it includes the payback period, expected life, environmental
o Absence of external economies
demand and supply. impact etc.
o Non-availability of technically qualified personnel Difference between Pre-Feasibility Study & Feasibility Study
o Success stories of friends and relatives: Importance of Project Identification: o Resource mobilization
Pre-feasibility Study Feasibility Study
o Project profiles: Government and private agencies publish periodic profiles of o Knowledge about government regulations.
- It may be the corner stone of the economic development - The objective is to determine whether the - The objective is to determine the true profitability of
projects and industries. A careful scrutiny of such profiles is helpful in choosing project idea needs further investigation or not. the project idea and to decide whether a DPR based
- It initiates the process of development in economy. Stages of project formulation:
the line of business. on detailed project analysis is required or not.
- It initiates the development of infrastructure facilities - An overview of the project proposal is - Maximum coverage of project proposal is attempted
o Import and export statistics: 1- Pre-feasibility study
- It may accelerate the socio-cultural development. attempted through pre-feasibility reports. through feasibility documents.
o Trades fares and exhibitions 2- Support studies
- It involves substantial financial outlays.
o Trade and professional journals 3- Feasibility study - Require efforts of short duration, ranging from 3 - Require efforts of long duration ranging from one to
- It brings necessary change in the society.
o Prospective customers 4- Detailed project analysis and preparation of DPR to 6 months, depending on the type and size of two years.
o Developments in other nations 1- Pre-feasibility Study: It is a preliminary examination about the major the project.
Environmental Scanning: It is concerned with analyzing the external and internal
- Lesser costs - Higher costs
o Government organizations environment and collect information about the possible opportunities, threats from parameters of the project like location of the project, production capacity, raw - The information is accurate to the extent of 60% - Accurate to the extend of 85% to 95%.
o Research organizations the external environment and strengths, weakness from the internal environment. material and other inputs. A rough estimate of project cost, production cost, to 70%.
o Items reserved for small scale units Environmental scanning is done with the help of formal sources and informal sources. means of financing, sales revenue, profitability, social benefits etc. can also be
o Study of government policies Formal source includes banks, business councilors, magazines, journal books etc. understood.
o Utilization of waste materials Informal sources include family, customers, friends etc. 2- Support studies: If pre-feasibility study demands a detailed study of certain
o Availability of raw materials areas, such studies are called support studies. Example: market study, input
SWOT Analysis:
o Availability of skilled labor study, plant location study etc.
o Brainstorming - SWOT analysis is a very useful management technique. 3- Feasibility study (viability study): It is a detailed study undertaken to get a
o Hobbies - It is an analysis of analyzing the strength, weakness, opportunities and threats. concrete justification of the selected project based on technical, economical,
- It helps to identify the strength so that the same can be enhanced and analyzing commercial and financial aspects of the project. After conducting feasibility
Screening of Project Ideas: It is a process of evaluating the project ideas with a view
the weakness so that the same can be removed or minimized. study, a report is prepared, called feasibility study.
to select the best and promising idea after eliminating the unprofitable ideas.
- It helps to find better opportunities to exploit maximum benefits and visualizing - Technical feasibility study: This is taken up to get a concrete justification about
Criteria for screening the project ideas: the threats so that likely damages can be minimized. the technical feasibility of the project.
- Economic feasibility study: It is done to examine whether the investment made
o Compatibility with the entrepreneur: the idea must suit with the interest,
on the project will offer a satisfactory return.
personality and resources of the entrepreneur.
o Consistency with government regulations and priorities.

CHAPTER:3 2-Scale of operation: Scale of operation denotes the plant capacity of the project. 8- Plant Layout (Factory layout): J.L Zundy – “plant layout ideally involves the - Labour
PROJECT APPRAISAL Plant capacity refers to the volume of units that can be manufactured during a given allocation of space and the arrangement of equipment in such a manner that over all - Government policies
period. It is also called production capacity. Following factors should be considered operating costs are minimised.” - Climatic conditions
Meaning: Project appraisal is a process of detailed examination of several aspects of a - Environmental considerations
given project before recommending the same. The important aspects of project - Technological requirement It refers to the arrangements of machines, equipment and other physical facilities with
- Other factors: cost of living, housing situation, facilities for education etc.
appraisal are: - Input constraints in the factory premises. A proper plant layout reduce manufacturing cost by saving
- Investment cost time and money. 10 Selection of site: The location and Site are different. Location refers to a fairly broad
a) Technical appraisal - Market conditions area like a city, an industrial zone or a coastal area. But site refers to a specific piece
b) Commercial appraisal (market appraisal) Types of layouts:
- Resources of the firm of land where the project would be setup.
c) Economic appraisal - Government policy - Product layout (line layout): here machines and equipment are arranged in the
d) Financial appraisal sequence in which they are used in the manufacture of a given product. There
e) Management appraisal 3-Raw materials: Raw material to be used should be chosen with great care after b- Commercial Appraisal (Market Appraisal): It is related with demand for the product or services.
is a continuous flow of materials towards the finished products.
f) Social Cost Benefit Analysis (SCBA) analysing several factors such as cost of different raw materials available, the The survival and success of projects depends upon, whether the product or service offered by the
- Process layout (functional layout): here similar machines are placed in one
g) Project risk analysis transportation cost, the continuous availability of raw material. Type of machinery and project is commercially successful. Following are the important aspects to be analyzed in the
place according to the operations or functions they perform.
the amount to be invested in machinery are examined while selecting raw material for commercial aspects
Technical Appraisal: Technical appraisal is done to assess the technical or operational - Combined layout: it is combination of both product layout and process layout.
the proposed project. - Past and current demand trend
ability of the proposed project. Most of the technical features of project are It is not desirable to arrange the plant in absolute line form or process form.
- Past and current supply position
irreversible in nature. Technical appraisal mainly involves the following aspects. 4- Technical Know-how: It means a body of accumulated knowledge and experience - Stationary layout: under this, the men and equipment are moved to the
- Elasticity of demand
in any technical field for doing or executing a particular activity. The project promoter material which remain in one place. The product is completed at that place - Production possibilities and constraints
1- Manufacturing process or technology must ensure that the consultant has requisite knowledge and experience. He should where material lies. - Imports and exports
2- Scale of operations enquire whether he has already executed similar projects successfully. - Nature of competition
3- Raw materials Factors influencing the Plant Layout:
- Pricing of the project
4- Technical know-how 5- Foreign collaboration: - Distribution channel
- Nature of the industry
5- Foreign collaboration - Government policies
- Terms and conditions with foreign collaborate should be understood - Volume of production
6- Product mix thoroughly. - Type of product Demand: it refers to the number of units to a particular product or service that consumers are will to
7- Procurement of plant and machinery - Competence and reputation should be enquired - Location purchase during a specified period under a given set of condition.
8- Plant layout - Approval of government of India should be ensured - Material handling Demand furcating techniques: It refers to the estimation of demand for a product during a specified
9- Location of the project - Collaboration agreement should not restrict the export of goods. - Type of equipment future period. Following are the methods:
10- Selection of site - Factory building
6- Product Mix: Product mix is the total number of products in all product lines. 1- Survey Approach (statistical methods): Under this method, demand forecasting is done by
1-Manufacturing process or Technology: Technology simply refers to the manner in - Service facilities obtaining information about the intention of customers.
Product line is the number of brands or related products in each product type. Factors
which a company’s inputs are transformed into output. Factors influencing the choice - Lighting and ventilation a) Jury of expert’s opinion method:
affecting the choice of product mix are: b) Delphi Technique: Under this, a group of individual experts are asked to give their views
of technology are: 9- Location of the Project: It refers to a fairly broad area where the enterprise is to be
- Profits and sales growth potential separately. Then all the views are pooled together and arrive at a consensus. Is there any
- Plant capacity established like city, industrial zone or coastal area. A wrong selection of location may differences in views, the individual experts are informed about the views of others , and
- Stability in sales
- Inputs cause difficulties in input requirements, non-availability of competent technical they are asked to further analyze the problem and to revise their views in the light of the
- Better customer service views of others. This process goes until arrive at a consensus. There is no face-to-face
- Investment outlay personnel and the like.
- Utilisation of available know-how interaction.
- Use by other units - Cost reduction Factors determining the plant location: c) Consumer’s survey method: In this method, the customers are directly approached and
- Product mix - Better capacity utilisation asked to express their views about the product.
- Latest development - Proximity to raw materials d) Sales forecast composite: under this method, forecasting is done on the basis of the
- Ease of absorption 7- Procurement of Plant & Machinery: The quality of output depends not only on - Nearness to market judgement of the sales personnel and are asked to forecast the sales in their respective
- Cost quality raw materials, but also on the quality of machinery used. It has a significant - Availability of infrastructural facilities geographical area. The forecast of sales are pool together and gives appropriate weights,
role in ensuring uninterrupted production. - Transport and communication facilities then combined them to arrive composite forecast.
- Effluent disposal 2- Statistical approach: two methods : trend analysis and Regression technique.
 a) Trend Analysis: - To reducing the imbalances in growth and development. UNIDO Approach L-M Approach - National importance
i) Curve fitting: under this, there is a graph is drawn. X axis denotes the time and Y axis - To protect and improve the environmental condition - It follows the numeraire ‘aggregate - Follows numeraire ‘uncommitted social
represents sales data. After plotting all the sales figures, a straight line is drawn in - Justification of the use of scarce resources by the project. consumption’ income’ Components of capital budgeting techniques:
such a manner that it is closest to all the points, it is called line of best fit. - It measures shadow price in terms of - It measures shadow price in terms of
ii) Moving average: under this, the sale forecast for the next year is computed by taking
Approaches to Social Cost Benefit Analysis: domestic price. international price. - Initial cash outflow: It is the initial investment for a project includes cost of new
the average of the actual data for the a few immediately preceding years. - It is a stage-by-stage analysis - It is integrated analysis assets, installation charge, fright, insurance etc.
1- UNIDO Approach
- Propounded by UNIDO (United Nations - Propounded by I.M.D Little and James - Net annual cash inflow: It refers to the annual cash inflows expected to be
iii) Weighted moving average method: under this, weightage may be assigned to each 2- Little-Mirrlees Approach
International Development [Link].
of the previous years under consideration. It follows the assumption that the recent generated by the project during its life.
1-UNIDO (United Nations International Development Organization) Approach: Organization)
data might have a better indication of the trend than the past data. - Terminal cash inflow: It refers to the salvage or scrap value expected to be
G- Project Risk Analysis: All the projects are done based on some assumptions. There may be
iv) Exponential smoothing method: under this method, the forecasts are modified in the - It is based on the concept, ‘aggregate consumption’. difference between the reality of the above factors and the assumption about them. The project realized at the end of the life of the project.
light of past observed errors. More recent observation given larger weights by - Aggregate consumption is very important parameter for measuring standard of living of the appraisals are to be made keeping these risk possibilities in mind. The areas of assumptions are: - Required rate of return (cut-off rate, hurdle rate): It is the expected rate of
exponential smoothing methods, and the weights decrease exponentially as the people and the rising of standard of living of the people is an important objective for social
observations become more distant. projects. - Periodic cash inflow return from the proposed project.
b) Regression technique: a regression model is an equation relating a dependent variable to - People consume number different commodities; computation of aggregate consumption - Periodic cash outflow - Other components: Economic life of the project, volume of fund available, risk
many independent variables. Here, dependent variable may be expressed as a function of involves converting a heterogeneous bundle of goods into a single homogeneous measure. - Life of machinery of obsolescence etc.
independent variable. - It measures consumption level by, measuring 1) consumer’s surplus 2) consumer’s willingness - Scrape value of machinery
-
C- Economical Appraisal: It deals with the effect of the project on the entire economy. The resources to pay.
committed to larger projects of corporate entities as well as smaller projects of individual - The numeraire used in UNIDO approach is domestic price. CHAPTER 4 Project appraisal technique (capital budgeting techniques):
entrepreneurs, must be deployed for maximizing the growth of the entire economy. The government, Stages: Traditional Method (Non-discounting Technique) Modern methods (Discounting Technique)
through its policies and regulation, should generate the deployment of scarce resources and thereby FINANCIAL APPRAISAL OF A PROJECT
1. Urgency method 1. Discounted pay-back method
economic upliftment of the country. a) Compute the financial profitability of the project based on market price. 2. Pay-back method 2. Net present value method
b) Compute the net benefits of the project at economic prices, using shadow prices for the Financial appraisal: It is a detailed analysis of investment decision from the perspective
3. Modern pay-back period method 3. Benefit cost ratio method (profitability index)
D- Financial appraisal: it refers to the detailed analysis of investment decision from the perspective resources. of the organization which makes the investment. 4. Average rate of return method 4. Internal rate of return method
of the organization which makes the investment. The promotor has to select the most profitable c) Adjust the net benefit for the project’s impact on saving and investment. 5. Net terminal value method
project, by considering the expected risk and returns. d) Adjust the net benefit for the project’s impact on income distribution.
Important aspects of financial appraisal are:
Traditional method;
E- Management Appraisal: in management appraisal human resources are being evaluated. In the e) Adjust the net benefit for the goods produced whose social values differ from their economic - Project Evaluation Technique (capital budgeting technique)
case of sole proprietary business, the management appraisal is to be done on the sole proprietor. In values. 1-Urgency method:
- Estimation of capital costs of a project
case of partnership firm, management appraisal is to be done on the mutual trust of partners. Numeraire: it is the unit of account which the values of inputs and outputs are expressed. - Estimating the operating costs of a project - Under this necessity or urgency is the only criteria which is used to evaluate the
Capacity to repay the loan together with interest can be evaluated by technical, fundamental and Shadow price: if the market prices of inputs and outputs of a project do not represent their ‘real’ - Estimating operating revenue and output of project project proposal.
commercial appraisal of the project. But the willingness to repay the loan is assessed by way of prices, they are required to be corrected suitably. Such corrected prices inputs and outputs is known - Profitability projection (estimates of working results) - Here the project most important is selected.
management appraisal. as shadow price. - Proforma of balance sheet (Projected Balance Sheet) - It is more suitable in short-term projects requiring lesser capital investment.
Important parameters studied in management appraisal: 2-Little-Mirrlees Approach (L-M Approach): - There is no scientific analysis
Investment Decision (Capital Budgeting):
- Integrity - It is suggested by I.M.D Little and James [Link] 2-Pay Back Method:
- It is defined as the process of selecting an opportunity for long term allocation
- Interpersonal relationship - This approach rejects the ‘aggregate consumption’ by UNIDO ap[roach by arguing that the
- Leadership qualities consumption of all groups is valuable. of the resources of an organization with the objective of generating profits. - Under this, length of payback period is the criteria for selecting the project
- Foresightedness - L-M approach uses the Numeraire ‘uncommitted social income’ - Charles T Horngreen “capital budgeting is a long-term planning for making and proposal.
- Technical and financial skill - According to this approach all public incomes are not equally valuable. financing proposed capital outlays” - Payback period is the length of period to recover the initial investment of the
- Commitment. - It also states that the public income may accrue in the form of domestic currency or foreign project, shorter payback period is selected.
currency or in the form that is freely convertible into foreign exchange. Importance of Investment Decision:
F- Social cost benefit analysis (SCBA): SCBA is undertaken to ascertain the impact of the project on - Payback period is also known as pay-out period, pay-off period or recoupment
the society as a whole. In this analysis, greater emphasis is laid on social objectives with lesser motive - It measures cost and benefits in terms of international price
- Long term investment period.
on profit. Here, both direct and indirect costs and benefits are taken into consideration. - Heavy investment 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑂𝑢𝑡𝑙𝑎𝑦
a) When annual cash inflows are equal: Payback period = 𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤
Objective of social cost benefit analysis: - Irrevocable decision
- Contribution of the project to the Gross Domestic Product of the society.
- Risk and uncertainty
- Contribution of the project for the upliftment of the poorer sections of the society. - Impact of competitiveness of the firm

b) When annual cash inflows are unequal : Payback period is computed by Modern Methods (Discounted Cash Flow Techniques or Time-adjusted Cash flow - PVI=1 – present value of cash inflow is equal to present value of cash outflow. 5-Net terminal Value method:
cumulating cash inflow till the time when the cumulative cash inflows become technique):
Benefit cost ratio may be computed by taking Net Present Value also - It based on the assumption that each annual cash inflow is received at the end
equal to initial investment.
- Under this, project proposals are evaluated by considering time value of money 𝑵𝒆𝒕 𝑷𝒓𝒆𝒔𝒆𝒏𝒕 𝑽𝒂𝒍𝒖𝒆 of the year and reinvested in another asset at a certain rate of return till at the
- It is useful for short term projects which generate inflows during the initial Benefit Cost Ratio = 𝑷𝒓𝒆𝒔𝒆𝒏𝒕 𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑪𝒂𝒔𝒉 𝑶𝒖𝒕𝒇𝒍𝒐𝒘𝒔
- It is based on the principle that the evaluation of a project must be done by end of the project.
years.
comparing values of outflows and inflows at the same point of time. - Then total compounded sum is discounted at the discount factor of the last year
- It doesn’t consider the time value of money. - A positive NPVI- Denotes the present value of cash inflow is more than the
- Here, present value of future cash inflows are computed through discounting and the present value is found out.
present value of cash outflow
3-Modern Payback Period: (It is developed to overcome the limitation of traditional process. - The present value is compared with cost of project or initial investment.
- A negative NPVI- denotes the present value of cash inflow is less than the
payback method) - The excess present value over the cost of the project is the Net Terminal Value
1-Discounted Payback Period: present value of cash out flow
- Project with higher NTV is selected
a) Post payback period method: - If NPVI = 0, it means the present value of cash inflows and present value of cash
- Under this method, all the future cash inflows are converted into their present
- Under this, proposals are evaluated by considering the surplus life of the project outflow are the same.
value by applying discount factors.
after payback period.
- Then the period required to recover the investment outlay is computed. 4-Internal Rate of Return Method (IRR): Risk and Uncertainty in Investment Decision:
- Projects which give greater post payback period with significant cash inflows
- Project with least payback period is selected.
are selected. - IRR is the rate of return at which the present value of cash inflows are equal to Risk is the possibility of deviation of actual income from the expected income, and it
b) Payback reciprocal method: 2-Net Present Value Method (investors method): the present value of cash outflows. is measurable.
- Projects are evaluated based on the payback reciprocal. a) Calculation of IRR when Cash inflows are equal:
- Under this, present value of future cash inflows are found out first Uncertainty is the lack of certainty about an event, it is not measurable.
- It is used to estimate the internal rate of return generates by a project. - Step 1: determine the net cash inflow during the life span of the project.
- Then present value of cash outlay is deducted from the total present values of 𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕
- Proposal with higher payback reciprocal may be accepted. - Step 2: P.V factor = 𝑨𝒏𝒏𝒖𝒂𝒍 𝑪𝒂𝒔𝒉 𝑰𝒏𝒇𝒍𝒐𝒘 Techniques for analyzing risk in investment Decision:
𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤
all cash inflows, the balance is net present value.
Payback Reciprocal = 𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 - The project with highest positive NPV is selected and rejects the projects with - Step 3: find the present value factor or the value nearest to the PV factor in the A- General or Traditional Techniques:
c) Post payback Profitability Method: negative NPV. row, corresponding to the life of the project, of cumulative present value table. 1) Risk adjusted Cut-off Rate method:
- Projects are evaluated based on the post payback profits - Following are the steps involved in calculation of NPV - Step 4: if IRR is lie between two rates, IRR can be obtained by using - Under this method, some adjustment are made in the discount rate depending
𝑃𝑜𝑠𝑡 𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 𝑃1 − 𝑄 upon the degree of risk associated with the project.
Payback Profitability Index = 𝑥 100 a) Determine the cut-off rate: It is the minimum rate of return that an investor IRR = 𝐿 + 𝑃1 − 𝑃2 𝑥(𝐻 − 𝐿)
𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
expects from the company. It is usually the cost of capital - If the risk associated with the project is high, some risk premium is added to the
L= Lower discount rate. H= Higher discount rate, P1= Present value at lower rate
4-Average Rate of Return Method (Accounting Rate of Return): b) Find the present values of cash inflows and outflows: The present values discount rate.
P2= Present value at Higher rate, Q=Net cash outlay
- The proposals are evaluated on the basis of accounting profits and not on cash are computed by discounting cash inflows and outflows using the cut-off - Risk adjusted Discount rate = Risk free rate of return + Risk premium
b) When cash inflows are unequal
flows. rate. - Risk free rate is the rate at which the future cash inflows are to be discounted
Step 1: calculate the average cash inflow and establish first trial rate:
- Accounting profit means the net profit after depreciation and tax. PV = Cash inflow X Concerned discount factor 𝐼𝑛𝑖𝑡𝑖𝑙𝑎 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 assuming that there is no risk in the project.
P.V factor =
- Also known as Return on Investment Method, Unadjusted Rate of Return - It is not suitable for comparing the project proposals with different life span, 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤𝑠 - Risk premium is the extra return expected by the investors over and above the
unequal capital outlay Step 2: Find the present value factor or the nearest to the PV factor in the row, normal rate.
method.
corresponding to the life of the project, of cumulative present value table. 2) Certainty Equivalent method:
- Projects with higher ARR is selected 3-Benefit Cost Ratio Method (Profitability Index, Present value index method):
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑡𝑢𝑟𝑛 Step 3: Compute the present value of cash inflows of all the years - Under this method, each annual cash inflow of the project is adjusted by a
ARR = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 Step 4: compute the NPV
- Under this method, projects are evaluated using benefit cost ratio. numerical value equivalent to the certainty of cash inflow.
𝑇𝑜𝑡𝑎𝑙 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑜𝑓 𝑡ℎ𝑒 𝑃𝑟𝑜𝑗𝑒𝑐𝑡
Average Return = - Benefit cost ratio is the ratio of present value of cash inflows to the present Step 5: If NPV is positive, try the higher rate - The numerical value used in the adjustment in the cash inflow is called certainty
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑓𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑃𝑟𝑜𝑗𝑒𝑐𝑡
value of cash outflows. If NPV is negative, try the lower rate equivalent coefficient or risk adjustment factor.
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 + 𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒
Average Investment = or - It is very suitable for comparing the projects with unequal investment outlays Continue the process until the NPV becomes zero - Certainty Equivalent Coefficient = Risk free cash flow / Risk cash flow
2
and different life span. Step 6: If we obtain the rage within which the IRR lies, using the following - Certainty Equivalent Coefficient converts the uncertain cash inflows into certain
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤𝑠 formula cash inflow.
Benefit Cost Ratio = 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐶𝑎ℎ𝑠 𝑂𝑢𝑡𝑓𝑙𝑜𝑤𝑠
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 − 𝑆𝑐𝑟𝑎𝑝 𝑣𝑎𝑙𝑢𝑒 𝑃1 − 𝑄
+ Scrap value IRR = L + 𝑥 (𝐻 − 𝐿)
2 - PVI >1 – denotes present value of cash inflows is more the present value of cash 𝑃1 − 𝑃2

outflows. - If IRR is grater than or equal to the desired minimum rate of return, the project
- PVI<1 – present value of cash inflow is less than present value of cash outflows may be accepted.
 Statistical or Modern Techniques: Estimation of Total Capital of a Project: - The selling price may be the present selling price. - It shows the sources cash and their uses.
1) Sensitivity Technique: (what if analysis) • The total cost of a project refers to sum total of the expenditure which is Important sources of Error in Estimating Costs: Ratio Analysis:
- Under this, more than one forecast of future cash inflows are may be made expected to be incurred till the date of starting the commercial production of
- Estimates of investment expenditure is too low - Ratio is a mathematical relationship between two figures taken from financial
under different circumstances. the project.
- Failure to allow for working capital statements.
- They are a) optimistic, b) most-likely d) pessimistic • A project cost estimate is required not only for assessing fund requirement but
- Over Failure to consider future trend of cost - It is used to have an in-depth examination of the strength and potential pitfalls
- Optimistic cash inflows are estimated under the assumption that ideal also for ascertaining viability of the project.
- estimation of capacity utilization of the organization.
condition is prevail in future. • The main components of capital cost of projects are: - It helps to compare current performance with the past and also in measuring
- Most likely cash inflows are estimated under normal conditions. - Advance expenditure Profitability projections:
effectiveness and efficiency of the organization in the lights of norms of
- Pessimistic cash inflows are estimated under adverse or negative condition of - Land - For assessing the profitability of the project, the estimation of operating cost performance.
the future. - Building and revenues are matched.
- If the net present values under three circumstances differ widely, it implies - Plant and machinery Analysis of Operational Strategy: Following techniques are used
- In order to calculate the profitability projection or estimates of working results,
great risk in the project - Ancillary and miscellaneous assets a projected income statement is to be prepared. a) Break-Even analysis
2) Probability assignment technique: - Intangible expenses b) Sensitivity analysis
- Under this, a numerical value equivalent to the occurrence, is assigned to each - Miscellaneous expenses Projected balance sheet:
c) Risk analysis
of the future annual cash flows. - Provision for contingencies - It reflects the financial condition of the firm at a given period of time.
- Multiply the cash inflow with respective probability, and arrive at expected cash - Margin money for working capital. A-Break-Even Analysis:
- The balance sheet is prepared with the help of projected assets and liabilities.
inflow - In narrow sense it is concerned with the calculation of break-even point.
Estimation of project operating cost: TECHNIQUES OF FINANCIAL ANALYSIS:
- Expected cash inflow further discounted to find out the present values. - It is the point at which the project neither earns profit nor incur loss.
- Then find NPV by deducting initial investment from the total of present values, • Operating cost are those cost which have to be incurred once the project is - It is a continuous process used to analyze the past and future financial position - At this point total cost is equal to the total sales
project with higher NPV may be selected. commences production. of a firm. - In broad sense, it refers to a system of analysis that can be used to determine
3) Standard deviation technique: • The operating cost cover material cost, utility cost, labor cost and overhead - It is used to interpret the past or projected financial data. the probable profit at any level of activity.
- It is used under the situation where the projects have the same amount of cost. - Important techniques are: - It is a tool of financial analysis is where by the impact on profit position of the
investment outlay and same net present value. • The main components of operating costs of a projects are: a) Fund flow analysis changes in volume, price, costs and mix can be estimated definitely and
- Here, S.D of the expected annual cash inflows of each project is computed. - The material cost b) Cash flow analysis accurately.
- A project with higher S.D is considered as risky. - The labor cost c) Ratio analysis - BEP(units) = Fixed cost/ cost of contribution per unit
4) Decision tree technique: - The cost of power, fuel and other services - BEP (rupees) = (Fixed cost / Total contribution ) x sales
- It is a tool for analyzing the risk associated with complex investment decision. Fund flow analysis:
- Plant maintenance cost - Contribution = Sales – variable cost or Fixed cost + Profit
- A decision tree is the graphical representation of the relationship between a) - Supervision cost - It is a statement which is prepared to show the changes in assets, liabilities and
present decision and future events b) future decision and the consequences. - Administrative and management cost Break-even Chart:
net worth between two balance sheet date.
- The sequence of events are plotted in a format appears like branches of trees. - Depreciation charges and interest on borrowings - It is prepared to ascertain how much fund have been generated and how these - Graphical representation of break-even analysis.
- Decision tree analysis involves in the following steps: - Repair and maintenance funds were put to use. - It shows the profitability of a firm at different level of production.
a) Identify the problem - Selling & administrative cost - The term “fund” means working capital - The chart often used for studying cost-volume-profit relationship.
b) Ascertain the alternatives - Payment to collaborators. - Fund flow means change in working capital ie, increase or decrease in working
c) Exhibit the decision tree showing the decision points, possible events and Profit Volume Ratio:
capital.
other relevant information. Estimation of operating revenues (sales) and output of the project:
- This ratio establishes the relationship between contribution margin and total
d) Specify the probabilities and monetary value of cash inflows Cash flow Analysis:
In estimating sales revenue, the following considerations should be born in mind sales.
e) Analyze the alternatives - It is prepared to ensure that the business unit will have necessary cash with it - It also known as contribution margin ratio or marginal profit ratio.
- It is not advisable to assume higher level of capacity utilization in the first year
and it will not face the liquidity problem. - P/V Ratio = (Contribution/Sales)x100
of operation
- It shows the movement of cash into and out of the firm and its net effect on the
- It is not necessary to make adjustment for stocks of finished goods Margin of Safety: it is the difference between the actual sales and break-even sales.
cash balance with the firm.

Margin of safety = Total sales – Break-even sales or Profit/Profit Volume Ratio • It is the capital which varies according to the volume of business. - Equity shareholders have voting right.
CLASSIFICATION OF CAPITAL • Further divided into two
Sweat equity shares:
a) Seasonal working capital: It is the working capital which is needed during a
Fixed capital:
particular season. It is the additional W-C required during the busy season. • It is an equity share issued by the company to its employees and to directors at
- Fixed capital is the portion of total capital outlay of a business invested in b) Special working capital: It refers to the extra working capital to be maintained a discount or for consideration other than cash for providing know-how or value
B-Sensitivity analysis:
physical assets such as factories, vehicles, and machinery that stay in the to meet the unforeseen contingencies or to finance special operations. additions.
- It helps in studying the impact of crucial variable like raw-material, sales business almost permanently, or, more technically, for more than one
Factors determining W-C • It is always issued at discount
volume, sales price, degree of capacity utilization etc. over the economic accounting period.
viability of an enterprise. - Character of the business • It helps to increase the morale and productivity of employees.
Factors affecting fixed capital requirements:
- It is useful to identify critical variable which may have considerable influence - Size and volume of business
2- Preference shares:
on the financial returns of a project. • Nature of the project - Length of processing period
- Turnover • These are the shares which holds some preferential rights over equity shares.
C-Risk Analysis: • Size of the project
- Terms of purchase and sale • Preferential rights relates to the payment of dividend and repayment of capital
- It helps in identifying the sources of risk such as rise in price of raw materials, • Diversity of production lines - Seasonal variation at the time of winding up.
taxes and duties, product price etc. which have great bearing in determining Importance of labour
• Method of production -
the future returns of the project. - Cyclical fluctuation • The rate of dividend is fixed.
- It offers an opportunity to the investor to redesign his proposed project. • Method of acquiring fixed assets Stock & Cash flow
- • No voting right.
Working capital: Sources of project finance: • Face value of preference shares is comparatively more than that of equity
Project Financing • It refers to the capital required for the day-to-day working or operation of a 1. Equity share shares.
project. 2. Preference share
Chapter 5
Types of Preference Shares:
3. Debenture
• Two concepts of working capital; Gross concept of Working capital and Net
Meaning of Project Financing: 4. Bonds • Cumulative preference shares: If there are any arrears of dividend, that will be
concept of working capital
5. Internal accruals or retained earnings carry forward and paid out of profit of the subsequent years.
• It may be defined as the “raising of funds required to finance economically • Gross concept means the fund invested in the current assets 6. Term loans
separable capital investment project in which the providers of the funds looks 7. Deferred credits • Non-cumulative preference shares: Those preference shares in which arrears
primarily to the cash flows from the project as the source of funds to service • Net concept means excess of current assets over current liability. 8. Public deposit of dividend, are not carried forward to the subsequent years.
their loans and provides the return on the equity invested in the project.” Types of Working Capital: 9. Unsecured loans • Redeemable preference shares: The preference shares which are repayable
10. Lease financing after the expiry of fixed period or at the option of the company.
• It is used to describe the financing of a particular project. A) Permanent working capital: 11. Bridge loans
Conventional Financing Project Financing • It is the minimum amount of working capital required to ensure effective 12. Loan syndication • Irredeemable Preference Shares: Which are not repayable during the life of the
- Cash flows from different business & - Cash flows from the project related assets utilization of the fixed assets and support the normal operations of the 13. Consortium lending company.
assets are considered alone are considered business. 14. Venture capital financing
• Convertible preference shares: Here the holders have the right to convert the
- Creditor asses the repayment capacity of - Asses the repayment capacity of project • It is a part of capital which permanently blocked-in Current Assets. 15. Government subsidy
shares into equity shares within a specified period of time.
the borrower from the all sources related sources only • Divided as: 1-Equity share:
- End use of borrowed fund is not strictly - Creditor ensure proper utilisation of funds a) Initial working capital: It is the capital at which the project is started. - These are the shares which do not carry any preferential right in respect of • Non-convertible preference shares: These are the preference shares which
monitored by the lenders as per project proposal b) Regular working capital: It is the amount needed for the continuous operations distribution of dividend or repayment of capital at the time of winding-up of cannot be converted into equity shares.
- Creditors are not interested to monitor - Project financier monitor the performance of the business. It is the minimum amount of liquid capital to keep up the the company.
the performance of the borrower of the enterprise. • Cumulative convertible preference shares: These are convertible into equity
circulating capital from cash to inventories, to receivables and back again to - It is also called ordinary shares
- Creditors do not appoint their nominee - Credit financier appoint their nominee in shares and the holders get arrears of dividend, if any, even after the conversion.
cash.
in the board of directors the board of directors of the borrower - Equity shareholders are the owners of the company.
B) Variable working capital:
company
 • Participating preference shares: Here, the holders have the right to participate Classification based on the redemption: Asset backed bonds: Disadvantage:
in the surplus profit distribution, after paying reasonable rate of dividend on - It is variable bond but their rate of interests are secured with the income of
a) Redeemable debentures: the stated assets. - Not reliable
equity shares.
- These are the debentures which are repayable after a fixed period of time. Catastrophe Bonds: - Does not protect the Interests of depositors
• Non-participating Preference shares: These preference shareholders get fixed - These are the bonds which offer extremely high rate of interest in the event of - Harmful to the development of capital market
rate of dividend with preference. They don’t have the right to participate in the - Redeemed either by lumpsum or by installments. predetermined catastrophe like earthquakes, tsunami etc. - Threats to banks
surplus profit distribution. - Offer very low interest in the normal situations. 9-Unsecured loans:
b) Irredeemable debentures:
- The funds are mobilized from the relatives, friends and other will wishes in the
3- Debentures:
- These are the debentures which are not redeemable during the life span of the 5- Internal accruals or Retained earnings: form of loans are called unsecured loans
- It is an instrument issued by the company under its common seal and company. - The portion of profit which is not distributed to shareholders as dividend is - The loans are raised without any charge on the assets of the enterprise they
acknowledging its debt to the holder. known as retained earnings. considered as unsecured loans.
Classification based on convertibility: - These funds are utilized for future development of the business. 10-Lease financing:
- It is a debt security (creditorship security).
- Carries a fixed rate of dividend. A. Convertible debentures: These are the debentures which can be converted into - Therefore, it is an important source of long-term finance. - It's a contract between the owner of an asset and the user of the asset
- Debenture holders are creditors of the company. shares after a specified period of time. - It makes the company in a self-dependent position. whereby the owner of the asset gives it to the user for periodical payments.
- No voting rights. - It guarantees minimum rate of dividend to shareholders. - The owner of the asset is called lessor and the user of the asset is called lessee
Classification of Debentures: B. Non-convertible debentures: These are the debentures which cannot be 6- Term loans: - The periodical payment which the lessee to be paid to the lessor for using the
converted into shares during the life period of the company. - The term loan is granted on the basis of formal agreement between the asset is called lease rental.
Classification based on Registration: borrower and the lending institution Types of lease financing:
4- Bonds:
A. Registered debentures: - The main features of term loan are fixed rate of interest, scheduled for • Financial lease
• A type of debt instrument similar to debentures issued by government repayment of principal, security and other conditions of the Lender. • Operating lease
- If the name of the person, to whom the debenture is issued, is recorded in the corporations. 7-Deferred credits: • Sale and lease back lease
register of the company is called registered debentures. - It's an arrangement under which the supplier of an asset provide the facility of • Leverage lease
• The bond holder gets fixed rate of interest periodically. deferred credit to customers on the basis of the bank guarantee offered by Financial lease:
- These debentures are repaid only to the registered person only.
• It represents the borrowed capital of the organization. the customers. - Here, the selection of the asset, selection of supplier, finalisation of price,
- It can be transfer only by transfer deed. - Under this method a project promoter who wants to avail the deferred credit terms of sale etc are decided by the lessee.
• The bonds are redeemed after a certain period, as mentioned in the bond facilities offered by a supplier of an asset should approach a bank for offering - Then the lessee is entered into lease contract with lessor which purchase the
B. Bearer debentures: certificate. guarantee for the repayment of the deferred installment to the asset supplier asset and gives it to the lessee for a specified period.
- Here, the name of the debenture holder is not recorded in the register of the - The bank examines the viability of the proposal and if satisfied, gives - The lessee is responsible for repairs, maintenance, taxes and insurance etc.
Types of Bonds:
company. guarantees to the project promoter. Operating leases:
Zero coupon bond: - An operating lease is a contract that permits the use of an asset without
- It can be transferred by mere delivery. 8-Public deposits: transferring the ownership rights of said asset.
- These are issued at discount and redeemed at par at the time of maturity. - These are deposits which are mobilized from public in general or from the - It is very popular in asset like office equipment, vehicles etc.
Classification based on security: - No interest is paid shareholders or directors at a specified rate of interest for a specified period - Here, the lessor is responsible for the repairs, maintenance of the asset.
a) Secured debentures: - Also called deep discount bond. of time. - After the expiry, the lessee has the option to renew the lease agreement for
- Public deposits are received for a minimum period of 6 months and maximum another period.
- These debentures are issued either on the security of a specific asset or the Floating rate bond:
period of 36 months. Sale lease back lease:
security of all assets in general. - These are the bonds, which interest rate varies in accordance with the Advantages: - Here, a firm sells an asset to another party at market value, and the seller
- Also called mortgage securities. variance in treasury bill rate and inflation index. - Low floatation cost leases it back from the purchaser.
- Also called variable rate bonds - Low rate of interest - The seller can get cash and can use the asset for lease rentals.
b) Non secured debentures: Reverse bonds: - Facilitates trading on equity
- These are variable rate bonds but their rate of interest and the price index or - No charge over assets Leverage lease:
- These are the naked securities
treasury bill rate move on opposite direction. - Flexibility - Here the lessor borrows money from a bank or financial institution and buys
- These are issued not on the security of any asset an asset.

- Then the purchased property is leases to the lessee for a specified period of - It is an alliance between two or more financial institution or banks where they - Rate of corporate tax 9- Transportation of plant and machinery to the project site
time in return for a periodical payment of lease rentals. agree to finance a particular project. - Requirements of investors 10- Installation of machinery
- Lessor repays the loan using the lease rental received form the lessee. - Capital market condition 11- Commissioning plant and trial run
- Loan syndication work across borders and consortium lending typically occurs - Ability to generate cash flows 12- Commencement of commercial production.
11-Bridge loan: within the boundaries of nation. - Stability of sales
- Cost of floatation Project Scheduling Techniques:(which offers solution for the optimum utilization of project time)
- Sometime the project implementation is delayed due to delay in getting a 14-Venture capital:
- Asset structure a) Bar charts
particular source of finance.
- Venture capital (VC) is a form of private equity and a type of financing that
- In such situation, banks and financial institution may sanction loans to the b) Networks
investors provide to startup companies and small businesses that are believed
project promoters in order to help the speedy implementation of the project,
to have long-term growth potential. CHAPTER 6
such loans are known as bridge financing
- Venture capital generally comes from well-off investors, investment banks,
PROJECT PLANNING AND SCHEDULING Bar chart
12-Loan syndication: and any other financial institutions.
- It is the pictorial representation of various tasks required to be performed for
- It is an alliance between two or more financial institution or banks where they 15-Government subsidy: Project planning:
accomplishment of the project objectives.
agree to finance a particular project. - Project planning is a common thread which connects all the activities associated
- The government offers two types of subsidies - These charts have formed the basis of development of many others such as
- The process of loan syndication is mainly happens, when the amount of loan is with the project, right from the conception to handing over the clockwork to Gantt Chart and Milestone Chart etc.
very high and high risk. a) Area subsidy the clients.
Gantt Chart:
Process of loan syndication: b) Product subsidy - It covers the activities such as work breakdown structure (WBS), statement of
work and accurate time estimates and schedules which help further in - Developed by Henry L Gantt- 1977
Step 1: Pre-mandate stage: here borrower initiates the process of loan syndication Area subsidy:
anticipating difficulties in a project and overcome them. - It is a pictorial representation specifying the start and finish time for various
Step 2: Arranging banks prepares a document containing all details such as
- Under area subsidy, government offers subsidy for the project set up in task to be performed in a project on a horizontal time-scale.
Objectives of project planning:
- Investment, industry overview notified backward areas. - Each project is broken down to physically identifiable and controllable units,
- Analyzing called task.
- Executive summary, financial structure - The projects which are set up in such notified backward area are eligible for
- Anticipating - These tasks are indicated by means of bar, equidistance from vertical axis and
capital investment subsidy.
- Terms and conditions etc. - Scheduling time is plotted on X-axis.
Product subsidy: Under product subsidy, subsidy is offered by the government to - Co-ordinating and controlling
Step 3: The lead bank sends invitation to other banks to participate in the Limitations:
projects that manufacture specified products. - Information management
syndication.
- Very difficult to use the project with large number of tasks.
Capital structure: Project scheduling:
Step 4: loan documentation is sends to the banks for their review and approval. - Not suitable for complex projects
- The term capital structure denotes the relationship between the various long- - It refers to the process of determining the time required for executing each - It does not indicate the inter relationship between the tasks.
Step 5: loan amount is distributed
term forms of financing such as debentures, preference share capital and operation and the order in which they are to be carried out for better
Milestone Chart:
Escrow account: equity share capital. accomplishment of the project objectives.
- In another words, it is the debt-equity composition of a firm. - Logical sequence of various activities of a project is given below: - It is an improvement of Gantt Chart.
- An escrow account is a third parties account where funds are kept before they
1- Registration of the company - The milestone, represents a circle over task in the bar chart indicates
are transferred to the ultimate party. Factors influencing capital structure:
2- Obtaining industrial licenses and import licenses. completion of specific phase of the task.
- It provides security against scams and frauds especially with high asset value
- Trading on equity 3- Appointment of consultant - Eg: In land preparation (Task A), includes plugging and leveling (milestone)
and dispute-prone sectors like Real Estate. - Cost of capital 4- Resource mobilization
- Nature and size of the firm Limitations:
13-Consortium lending: 5- Acquisition of land and development of site.
- Control 6- Preparing designs, plans and estimate of civil work - It does not reveal the interdependence among tasks
- It is very similar to loan syndication. - Purpose of financing 7- Entrusting the construction work to civil contractors - Silent regarding the critical activities
- Period of finance 8- Preparing design specification, and placing order for plant and machinery - It does not consider the uncertainty in accomplishing the task
- Flexibility
 - Very difficult to draw the mile stone for large projects. - Dummy Activity: it is an imaginary activity which does not consume any - Earliest Start Time of an Activity (EST): Earliest start time of an activity is the - Mark the Critical path by using double line.
resources. It is used to represent a situation where one event cannot be taken earliest time which it can commence. - Calculate the total project duration (sum of durations of critical activities).
Networks: place until a previous event has taken place. EST of an activity = Earliest start time of the tail event of the activity. Advantages of CPM
- The network technique is a logical extension of milestone chart, used to - Merge Event: It represents a joint completion of two or more activities are - Earliest Finish Time of an Activity (EFT): It is the earliest time by which it can - CPM depicts the project activities and their outcomes as a network diagram.
illustrate the interrelationship between and among all the milestones in an called merge event. be finished. - CPM demonstrate the inter-dependents of project activities and thereby helps
entire project. - Burst event: It is the beginning of two or more activities is called burst event. EFT of an Activity = EST of the activity + Activity duration. in scheduling.
Guidelines for Construction of Network Diagram: - Latest Finish Time (LFT) of an Activity: It is the latest time by which it can be - It facilitates optimization of project duration
- The most common techniques used in network analysis are Critical Path
1- Each activity is represented only by one arrow. finished. - Helps in determining the slack time
Method (CPM) and Programme Evaluation and Review Technique (PERT).
2- The head of an activity indicates the direction of the progress of a project. LFT = Latest time of head event of the activity. - Helps to identify the activities which can run parallel to each other
- CPM was developed by E.I Du Pont de Nemours & Company as an application 3- Every activity should have a tail event and a head event. - Latest start Time (LST) of an activity: It is the latest time by which it can - Helps to identify the most critical element of the project.
to construction project. 4- All the preceding activity should be completed before starting an activity. commence. Disadvantages:
- PERT was developed by US Navy for scheduling the research and development 5- The length of arrows has no significant LST = Latest Finish Time of an Activity – Activity duration. - It assumes that each time of activity are known in advance is not always true.
activities. 6- Flow from the left to right - Slack: float of an event is known as slack - It does not handle scheduling of time.
7- Arrows should not be crossed. Slack of an event = Latest Time of an Event – Earliest Time of that Event. - Critical path is not always precise.
Notations used in the network diagram: 8- Arrows should be straight - Complicated when projects are complex
Activity-on-Arrow = The arrow represents the work to be done, the circle represents 9- Event in the diagram must be numbered logically and systematically. - Float: It denotes the variability range with which an activity can be completed - Useful only to repetitive projects.
an event. 10- Looping or cycling should be avoided. without affecting the total project duration.
It denotes the spare time available to the non-critical activity. PROJECT EVALUATION AND REVIEW TECHNIQUE (PERT)
+
Land preparation Procurement of input
Network Techniques: Critical Path Method or Program Evaluation and Review a) Total Float = LFT - EFT or Float = LST – EST - It is a tool for network analysis.
Activity-on-Node = A box(node) is used to show the task itself, the arrow the sequence Technique It refers to the duration by which an activity can be delayed without delaying - It was originally developed for using in defense, where the strategies will be
in which work is done. the total project duration. changed frequently.
Critical Path Method (CPM): b) Free float = It refers to that portion of the total float within which an activity - It is useful to estimate the time required for completing each activity and
Land preparation Procurement of Input - Developed by Morgan R Walker and James Kelly in the year 1956. can be manipulated without affecting the float of successor activities. thereby the duration of the entire project.
- The objective is to estimate the duration of a project more accurately by Free float = EST of the successor activity – EFT of the present activity - It is mainly used in the situation where there is uncertainty regard the time
identifying critical path in the network diagram. Free float = E value of Head Event – E value of the tail event – duration of required for completing the project activities.
Basic Concepts Related to Network Analysis: the activity - There are three estimates are used
Basic Terms Used in CPM: c) Independent Float: It refers to that portion of the total float within which a) Optimistic Time Estimate (to): It denotes shortest possible time to complete
- Network: It refers to the inter-connection of the various related activities of a
- Path: It refers to unbroken chain of activities from start event to end event in a an activity can be delayed to begin without affecting the floats of the the project and it determine on the assumption that there is an optimistic
project.
network diagram. proceeding activities. or ideal condition when the project is implemented.
- Network Diagram: It is a graphical representation of activities and events of a - Critical path: It is the longest path in the network diagram. It is denoted by Independent Float = EST of the successor Activity – LFT of the predecessor b) Most Likely Time Estimate (tm): It is the time estimate based on the
project using sequentially and logically connected arrows and nodes. double line or thick lines. Activity – Duration. assumption that normal condition will prevail while executing the project.
- Activity: It refers to a physically identifiable portion of work related to the - Critical Activities: These activities which are lying on the critical path of a Independent float = E value of head event – L value of tail event – Duration c) Pessimistic Time Estimate (tp): It refers to the maximum possible time that
project. It is work required to be done to materialize a specific event. network diagram. These are the zero float activities. Independent float = Free Float – Tail Event Slack would be required to complete the project activities and it is based on the
- Event: An event or node represents the start or end of an activity. An event - Non-critical Activities: These are the activities where a delay in their start will Independent float < Free Float < Total Float assumption that there is an adverse condition will prevail when the project
cannot be completed until all activities preceding to it are completed. not cause further delay in the completion of the entire project. These are the is implemented.
- Predecessor Activity: It is an activity which must be completed before starting activities whose total float is not zero. Steps in Critical Path Method (CPM):
the other activities. - Earliest Event Time (TE): It is the earliest occurrence time of an event. - Construct the network diagram of the project. Steps in PERT Calculation:
- Successor Activity: It is an activity which cannot be started before the TE = Earliest time of proceeding event + Duration of the preceding activity (it - Find the Earliest time of each event. - Obtain three time estimate for each of the project activities.
completion of other activity. is known as forward pass method) - Find the latest time of each event. - Compute the expected time for completion of each activity
- Start activity: It is the first activity in a network diagram. If there are more than one E value – take the maximum value - Show the earliest time and latest time of each activity. Expected time (te) = (to + 4tm +tp)/6
- End activity: It is the last activity in a network diagram - Latest Event Time (TL): It is the latest time occurrence of an event. - Calculate EST, EFT, LST, LFT of each activity. - Construct the network diagram
- Concurrent activity: the activities which are to accomplished simultaneously (at TL= Latest time of successor event – duration of the successor activity. - Determine the total float - Determine the Earliest time and Latest time by using expected time.
the same time). If there are more than L value – take the minimum value - Identify the Critical activity: Activities with zero float - Compute LST, LFT, EST and EFT

- Compute total float - Looping is one of the important features in GERT.

LST – EST or LFT – EFT - The key objective is to evaluate the network logic and estimated duration of
- Identify the Critical path each activity and based on which arrive at some inferences about the activities
- Mark critical path with double line which may not be performed.
- Determine the total project duration. - It is widely used in research and development projects.
- Computation of variance Advantages:
𝑡p − to 2 - GERT is more accurate than PERT
Variance of activity = ⌈ 6 ⌉ - It helps to assign multiple resources
- Computation of variance of project duration = sum of the variance of critical - It creates loops between tasks.
activities. - More flexible
- It allows looping back or skipping an activity entirely
- Compute the standard deviation of project duration=
- There are number of computerized packages.
√𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑜𝑓 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛
Advantages of PERT:
- Helps to minimize the production delays, interruptions and conflicting by
scheduling and budgeting resources in time.
- It is more suitable for project with non-repetitive nature.
- It ensures the completion of project on time.
- It provides up to date information
- More attention is made on critical activities.
Disadvantages:
- Construction of clear and logical diagram is difficult.
- It focuses only on time. No importance to cost
- Calculation of three- time estimates is difficult.
- Not suitable for project with repetitive nature.
CPM PERT
- Activity oriented - Event oriented
- Single time estimate - Triple time estimates
- Deterministic model - Probabilistic model
- Use when projects are repetitive nature - Use when projects are non-repetitive
nature
- Time estimated with high accuracy - Time estimate may not be accurate.
- Control both time and cost - Mainly for planning and controlling of
- time
- Uses in non-research process such as - Uses research and development projects
ship building and civil construction.
- Crashing is applicable - Crashing is not applicable
- Float is used for determining Critical - Critical path is determined by using slack.
path

Graphical Evaluation and Review Technique:

- It follows a probabilistic approach for both network logic and for estimating
duration of project activities.
- GERT is rarely used in complex systems.
- It is introduced to address the limitation of CPM and PERT