PROJECT MANAGEMENT

PROJECT DEFINITION: “A temporary endeavor undertaken to create a unique product,

service or result”.
Project management: It is the application of processes, methods, skills, knowledge
and experience to achieve specific project objectives according to the project
acceptance criteria within agreed parameters. Project management has final
deliverables that are constrained to a finite timescale and budget.
CHARATCTERISTICS:
• Objectives:
Objectives are the key characteristics of the project where you will see the progress
of the project and time to time analysis will show you the result of how much you
have achieved.
• Single entity.
A project is one whole thing. This means that in a project although different
people contribute still is recognized as a single entity. The teams are often
specifically assembled for a single project.
• Life Span
No project can be ceaseless and indefinite. It must have one and beyond which it
cannot proceed. Every project is invariably time-bound.
• Require funds
Without adequate funds, no project can be successfully implemented. Cost
estimation is one of the essential factors for any organization. So, calculating in
advance the required funds for the project will be very impactful.
• Life Cycle
Each project has a life cycle with different stages like start, growth, maturity, and
decay. A project has to pass through different stages to get itself completed
• Team Spirit
Team spirit is required to get the project completed because the project constitutes
different members having different characteristics and from various disciplines. But
to achieve common goal harmony, missionary zeal, team spirit is necessary
• Risk and Uncertainty
The project is generally based on forecasting. So risk and uncertainty are always
associated with projects.
 • Directions
Project is always performed according to the directions given by the customers with
regard to time, quality and quantity, etc.
• Uniqueness
Each project is unique in itself, and it’s having own features. No two projects are
similar even if the type of organization is the same. The uniqueness of the project
can measure by considering the many factors like objectives, features of the project,
application of the project, etc.
• Flexibility
Change and project are synonymous. A project sees many changes throughout its life
span. These changes can make projects more dynamic and flexible.
• Sub-Contracting
Sub-contracting is a subset of every project and without which no project can be
completed unless it is a proprietary firm or tiny in nature. The more complexity of a
project the more will be the extent of contracting.
• Cost
If the quality of the project is to be changed there could be an impact on the cost of
the project. The cost could increase if more resources are required to complete the
project quicker.
IMPORTANCE OF PROJECT MANAGEMENT:
• Strategic Alignment:
Strategic Alignment is the process of linking the organization’s structure and resources
with its strategy and the ultimate objective.
Mark Langley, the president and CEO of PMI, has said, “If your organization is not good
at project management, you are putting too much at risk in terms of ultimately
delivering on strategy.”
• Clear Focus and Objectives:
Project Management is important as it comes up with a proper project plan for
achieving the strategic goals. Lack of clear goal was the most common reason for
project failure
Leadership:
A project manager is like a leader whose goal is to complete the project within the
time and budget and deliver what was promised or better.
Doing a Project without Project Management is like sailing a ship of pirates without
captain.
Project Planning:

Project Management ensures that proper information is available to the organization

and the clients of what can be achieved, what will be the budget, which resources
would be used and the duration to complete the project.

Reduced Costs and Quality Control:

Project management reduces project costs by optimized use of resources, improving

efficiency, and decreasing risks. Therefore, even with the added cost of a project
manager, you stand to gain much more.

PROGRAMMES, PROJECTS, TASKS:

PROGRAMMES: A programme is a wide ranging and long-term endeavour which

requires large volume of resources for achieving the objectives. Based on time, scope
and complexity involved, every programme may be divided into several projects.

PROJECTS: Project is a limiting case of a programme. It is an assignment which is

directed towards the attainment of short-term goals with limited resource base and a
fixed time frame.

TASK: A project consists of several packages. Each of these work packages consists of
certain activities which require immediate and spontaneous commitment and it is
performed by single or small group of people, it is called task.

CLASSIFICATION OF PROJECTS:

1-BASED ON INVESTMENT:

a) Large Scale Projects: Projects involving huge investment eg: ISRO Satellite
project
b) Medium Scale Projects: Involves medium level investment and are mainly
technology oriented. Eg: projects related to computer industry.
c) Small Scale Projects: It involves only lesser investment. Eg: Agricultural
projects.
2-BASED ON OUTPUT:

a) Quantifiable projects: in this, quantitative assessment of benefit can be made.

Eg: power generation.
b) Non-quantifiable projects: in which the benefits cannot be measured
quantitatively. Eg: projects under health, education.

3-BASED ON OWNERSHIP:

a) Public projects: Which are undertaken by government agencies. Eg:

construction of road and bridges.
b) Private projects: under taken by private enterprises.
c) Public-private partnership projects: undertaken by both government and
private enterprises together. Eg: garbage collection, generation of electricity by
windmill.

4-BASED ON SECTOR

a) Agricultural projects: these are the projects related to agricultural sector like
project of irrigation, well digging projects etc.
b) Industrial projects: these are the projects which are related to the industrial
manufacturing sectors like cement industry, steel industry.
c) Service projects: these are related to service sectors like education, tourism,
health ets

5-BASEDON TECHNO-ECONOMIC CHARACTERISTICS

a) Factor intensity-oriented classification: under this, projects are classified into

Capital intensive and Labour intensive. If large investment in plant and
machinery, the project will be called capital intensive. If large investment is
made in human resources, it will be called as labour intensive.
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
goods or services, the project is said to be demand-based projects. If a project
is started because of the availability of certain raw material, skills or other
inputs, the projects is said to be raw material based.
c) Magnitude oriented classification: here the size of investment is considered. It
may be classified as large scale, medium scale and small-scale projects.

6-BASED ON RESEARCH ACADEMIA

a) Major projects: These projects involve more than one year to 3 or five years
and minimum funding of 3 lakhs in case of social sciences and 5 lakhs in case of
sciences.
 b) Minor projects: these are the projects which will be completed within a year
and having a maximum funding of 1 lakh in case of social science and 3 lakh in
case of science.

7-FINANCIAL INSTITUTIONS CLASSIFICATION:

a) Profit oriented projects:

- New projects
- Expansion projects
- Modernisation projects
- Diversification projects

b) Service oriented projects:

- Welfare projects
- Service projects
- Research and development projects.

8-BASED ON URGENCY:

a) Normal projects: if normal time is allowed for the completion of the projects,
then such projects are called normal projects. Here capital costs are minimum
and quality will not be sacrificed.
b) Crash projects: Under this, additional capital costs are allowed to gain time.
Here, for time saving, maximum overlapping of various phases is encouraged.
c) Disaster projects: here time is the key factor and anything is allowed to gain
time

9-BASED ON OBJECTIVE:

a) Commercial projects: These are undertaken for commercial purpose and return
on investment is expected out of these projects. Eg: BOLT (Build own lease and
transfer), BOOT (Build own operate and transfer).
b) Social projects: These are the projects undertaken for social purpose and well-
being of the society. Eg: Polio Immunization Projects

10-CLASSIFICATION BASED ON NEEDS:

a) New projects
b) Balancing projects: balancing projects is one which has many production units
that are linked with one other. Here output of one product unit exactly matches
with the input requirement of the subsequent production unit.
c) Expansion projects: it is a projects that intends to enhance the current capacity
of the plant.
 d) Modernisation projects: it is one which is undertaken to incorporate latest
available technology.
e) Replacement projects: these are the projects which are undertaken for
maintaining the same level of efficiency by replacing an old machinery.
f) Diversification projects: these are undertaken with the intension of product
diversification.

11- BASED ON TIME REQUIRED FOR COMPLETION:

a) Long-term projects: very long time to complete

b) Medium-term: 3-5 years
c) Short-term: within a year
d) Very short-term projects: Very short period ie, a day

12- BASED ON RISK

a) High risk projects: Eg: Nuclear projects

b) Low risk projects:

13- BASED ON FUNCTION

a) Marketing Projects: these are undertaken in the area of marketing a product

or service.
b) Financial projects: these projects are undertaken to raise finance or restructure
the capital structure.
c) Human resource projects:
d) IT and Technology projects: these are undertaken in the area of IT related
requirement of an organisation.
e) Production projects:
f) Strategic products: these projects are undertaken to execute a strategy. Eg:
merger and acquisition.
 Industrial Projects Developmental Project
- Scope of the project is limited - Very large scope
- Entrepreneurs & corporates are the - Govt, public sectors, NGOs are the
promoters promoters
- National stock market and domestic - International organisation like world
financial institutions are the sources of bank, IMF, ADB are the important
fund sources of fund.
- It operates on stringent debt-equity - It operates on higher debt-equity norms
norms
- Interest rate is equal to market rate - Interest rate is very low for borrowed
fund
- Repayment period 7 to 10 years - Repayment period extend to 25 years
or more
- Profitability is measured by using IRR - Profitability is measured by using
method Economic Rate of Return (ERR) method.
Project life cycle: It refers to logical sequence of activities to accomplish the objective
of the project. It includes the phases from inception to the final termination of the
project.
Stages of Project life cycle:
1- Conception phase (initial stage): It includes the following stages
a) Generation of project ideas
b) Development of project ideas
c) Formulation of project proposal
d) Appraisal of the project proposal
e) Authorisation to commence the project.
2- Planning phase: It deals with deciding in advance about the future course of
action to be taken. It includes
a) Defining the scope
b) Estimate the human and non-human resources
c) Divide the project into number of manageable activities
d) Develop organisational structure
e) Determine the time of completion
f) Estimate the cost
g) Examine the possibilities for adverse occurrences.
3- Organising phase: it involves assigning task, grouping task into departments,
delegating authority and responsibility, and allocating resources across the
organisation to accomplish the objectives.
4- Executing phase: it indicates the actual implementation of the project.
 5- Directing and controlling: Directing deals with guiding the subordinates for
timely achievement of the objective. Controlling refers to check the actual
performance with the planned performance.
6- Termination phase: the process of termination of a project consists of:
a) Ensuring the project gives the planned output.
b) Settlement of amount due to the contractors
c) Inform the stake holders about the closure of the project
d) Reallocate the human and non-human resources.

Project management:
Project management is the process of planning, organising, monitoring and controlling
of all aspects of a project. It also includes motivating all involved to achieve project
objectives within a specified time.
Project Management Body of Knowledge (PMBOK), Project management as “the
application of knowledge, tools and techniques to project activities in order to meet
stakeholder’s needs and expectation from the project”
Need for project management:
- Complexity of the project
- Achievement of objective
- Planning and implementation of projects
- Environmental challenges: success of the project depends upon how the project
is able to cope with changing environment.
- Competition:
- Constrains:
- Risk and uncertainty
- Time overrun and cost overrun
- Project control and evaluation
Phases of Project Management:
1- Project identification: it refers to identification of business investment
opportunities.
2- Project formulation: it is the translation of project idea into a complete project
and also includes the feasibility reports.
3- Project appraisal:
4- Project selection
5- Project implementation
6- Project follow-up and evaluationevaluatio
 Chapter 2
IDENTIFICATION AND FORMULATION OF A PROJECT
Meaning of project identification:
- It refers to identification of business/investment opportunities.
- It is the process of collection, compilation and analysis of economic data for the
purpose of finding out possible opportunities for investment based on
opportunities in the market.
- Generation of project idea is a part of project identification.
Sources of Project Ideas:
o Our own needs:
o Market survey: It is the careful observation of market and it helps to
understand the demand and supply positions as well as the gap between
demand and supply.
o Success stories of friends and relatives:
o Project profiles: Government and private agencies publish periodic profiles of
projects and industries. A careful scrutiny of such profiles is helpful in choosing
the line of business.
o Import and export statistics:
o Trades fares and exhibitions
o Trade and professional journals
o Prospective customers
o Developments in other nations
o Government organizations
o Research organizations
o Items reserved for small scale units
o Study of government policies
o Utilization of waste materials
o Availability of raw materials
o Availability of skilled labor
o Brainstorming
o Hobbies
Screening of Project Ideas: It is a process of evaluating the project ideas with a view
to select the best and promising idea after eliminating the unprofitable ideas.
Criteria for screening the project ideas:
o Compatibility with the entrepreneur: the idea must suit with the interest,
personality and resources of the entrepreneur.
o Consistency with government regulations and priorities.
 o Availability of inputs: it is necessary to consider the availability of the inputs. If
the raw material are scares, there will be interruption in the production. If the
raw materials are imported, the entrepreneur has to ensure that there is no
problem in this regard.
o Marketing facilities: existing and potential demand in the domestic and export
market, nature of competition, sales and distribution system, consumption
trends, availability of substitute etc. should be assessed and evaluated before
the final decision.
o Profitability
o Cost of the product: A good study of the cost structure will give a good idea
regarding the different type of costs.
o Level of risk: Level of risk involves change in demand, technological
development, emergence of substitute, competition, cyclical fluctuation etc.
o Other factors: it includes the payback period, expected life, environmental
impact etc.
Importance of Project Identification:
- It may be the corner stone of the economic development
- It initiates the process of development in economy.
- It initiates the development of infrastructure facilities
- It may accelerate the socio-cultural development.
- It involves substantial financial outlays.
- It brings necessary change in the society.
Environmental Scanning: It is concerned with analyzing the external and internal
environment and collect information about the possible opportunities, threats from
the external environment and strengths, weakness from the internal environment.
Environmental scanning is done with the help of formal sources and informal sources.
Formal source includes banks, business councilors, magazines, journal books etc.
Informal sources include family, customers, friends etc.
SWOT Analysis:
- SWOT analysis is a very useful management technique.
- It is an analysis of analyzing the strength, weakness, opportunities and threats.
- It helps to identify the strength so that the same can be enhanced and analyzing
the weakness so that the same can be removed or minimized.
- It helps to find better opportunities to exploit maximum benefits and visualizing
the threats so that likely damages can be minimized.
Project formulation:
- It refers to a series of steps to be taken to convert an idea in to a feasible plan
of action.
- It is the process of examining technical, economic, financial, and commercial
aspects of the project.
- This is done to achieve the project objective with the minimum expenditure and
adequate resources.
- The project formulation means feasibility and viability study of the project and
it is undertaken to find out whether the proposed project would be feasible or
not.
Need for Project Formulation:
o Selection of appropriate technology
o Absence of external economies
o Non-availability of technically qualified personnel
o Resource mobilization
o Knowledge about government regulations.
Stages of project formulation:
1- Pre-feasibility study
2- Support studies
3- Feasibility study
4- Detailed project analysis and preparation of DPR
1- Pre-feasibility Study: It is a preliminary examination about the major
parameters of the project like location of the project, production capacity, raw
material and other inputs. A rough estimate of project cost, production cost,
means of financing, sales revenue, profitability, social benefits etc. can also be
understood.
2- Support studies: If pre-feasibility study demands a detailed study of certain
areas, such studies are called support studies. Example: market study, input
study, plant location study etc.
3- Feasibility study (viability study): It is a detailed study undertaken to get a
concrete justification of the selected project based on technical, economical,
commercial and financial aspects of the project. After conducting feasibility
study, a report is prepared, called feasibility study.
- Technical feasibility study: This is taken up to get a concrete justification about
the technical feasibility of the project.
- Economic feasibility study: It is done to examine whether the investment made
on the project will offer a satisfactory return.
 - Commercial feasibility study (Market Feasibility Study):This study is
undertaken to assess, accurately, the scope for the successful marketing of the
product or service. It is inevitable when the proposed product or service are
new to the industry.
- Financial Feasibility Study: It is undertaken to examine whether the expected
financial benefits are in excess of the financial costs associated with the
proposed project. It also studies the raising funds for investment opportunities.
4- Detailed Project Analysis (DPR) and Preparation of DPR: The DPR contains the
same information as in a feasibility study and it will be presented in a detailed
format. The main intention of DPR is to communicate formally, the promoter’s
decision to start a new project. It is an important document for obtaining
financial assistance from banks for getting approval from various government
departments.

Difference between Pre-Feasibility Study & Feasibility Study

Pre-feasibility Study Feasibility Study
- The objective is to determine whether the - The objective is to determine the true profitability of
project idea needs further investigation or not. the project idea and to decide whether a DPR based
on detailed project analysis is required or not.
- An overview of the project proposal is - Maximum coverage of project proposal is attempted
attempted through pre-feasibility reports. through feasibility documents.

- Require efforts of short duration, ranging from 3 - Require efforts of long duration ranging from one to
to 6 months, depending on the type and size of two years.
the project.
- Lesser costs - Higher costs
- The information is accurate to the extent of 60% - Accurate to the extend of 85% to 95%.
to 70%.
 CHAPTER:3

PROJECT APPRAISAL
Meaning: Project appraisal is a process of detailed examination of several aspects of a
given project before recommending the same. The important aspects of project
appraisal are:
a) Technical appraisal
b) Commercial appraisal (market appraisal)
c) Economic appraisal
d) Financial appraisal
e) Management appraisal
f) Social Cost Benefit Analysis (SCBA)
g) Project risk analysis
Technical Appraisal: Technical appraisal is done to assess the technical or operational
ability of the proposed project. Most of the technical features of project are
irreversible in nature. Technical appraisal mainly involves the following aspects.
1- Manufacturing process or technology
2- Scale of operations
3- Raw materials
4- Technical know-how
5- Foreign collaboration
6- Product mix
7- Procurement of plant and machinery
8- Plant layout
9- Location of the project
10- Selection of site
1-Manufacturing process or Technology: Technology simply refers to the manner in
which a company’s inputs are transformed into output. Factors influencing the choice
of technology are:
- Plant capacity
- Inputs
- Investment outlay
- Use by other units
- Product mix
- Latest development
- Ease of absorption
- Cost
2-Scale of operation: Scale of operation denotes the plant capacity of the project.
Plant capacity refers to the volume of units that can be manufactured during a given
period. It is also called production capacity. Following factors should be considered
- Technological requirement
- Input constraints
- Investment cost
- Market conditions
- Resources of the firm
- Government policy
3-Raw materials: Raw material to be used should be chosen with great care after
analysing several factors such as cost of different raw materials available, the
transportation cost, the continuous availability of raw material. Type of machinery and
the amount to be invested in machinery are examined while selecting raw material for
the proposed project.
4- Technical Know-how: It means a body of accumulated knowledge and experience
in any technical field for doing or executing a particular activity. The project promoter
must ensure that the consultant has requisite knowledge and experience. He should
enquire whether he has already executed similar projects successfully.
5- Foreign collaboration:
- Terms and conditions with foreign collaborate should be understood
thoroughly.
- Competence and reputation should be enquired
- Approval of government of India should be ensured
- Collaboration agreement should not restrict the export of goods.
6- Product Mix: Product mix is the total number of products in all product lines.
Product line is the number of brands or related products in each product type. Factors
affecting the choice of product mix are:
- Profits and sales growth potential
- Stability in sales
- Better customer service
- Utilisation of available know-how
- Cost reduction
- Better capacity utilisation
7- Procurement of Plant & Machinery: The quality of output depends not only on
quality raw materials, but also on the quality of machinery used. It has a significant
role in ensuring uninterrupted production.
8- Plant Layout (Factory layout): J.L Zundy – “plant layout ideally involves the
allocation of space and the arrangement of equipment in such a manner that over all
operating costs are minimised.”
It refers to the arrangements of machines, equipment and other physical facilities with
in the factory premises. A proper plant layout reduce manufacturing cost by saving
time and money.
Types of layouts:
- Product layout (line layout): here machines and equipment are arranged in the
sequence in which they are used in the manufacture of a given product. There
is a continuous flow of materials towards the finished products.
- Process layout (functional layout): here similar machines are placed in one
place according to the operations or functions they perform.
- Combined layout: it is combination of both product layout and process layout.
It is not desirable to arrange the plant in absolute line form or process form.
- Stationary layout: under this, the men and equipment are moved to the
material which remain in one place. The product is completed at that place
where material lies.
Factors influencing the Plant Layout:
- Nature of the industry
- Volume of production
- Type of product
- Location
- Material handling
- Type of equipment
- Factory building
- Service facilities
- Lighting and ventilation
9- Location of the Project: It refers to a fairly broad area where the enterprise is to be
established like city, industrial zone or coastal area. A wrong selection of location may
cause difficulties in input requirements, non-availability of competent technical
personnel and the like.
Factors determining the plant location:
- Proximity to raw materials
- Nearness to market
- Availability of infrastructural facilities
- Transport and communication facilities
- Effluent disposal
 - Labour
- Government policies
- Climatic conditions
- Environmental considerations
- Other factors: cost of living, housing situation, facilities for education etc.
10 Selection of site: The location and Site are different. Location refers to a fairly broad
area like a city, an industrial zone or a coastal area. But site refers to a specific piece
of land where the project would be setup.

b- Commercial Appraisal (Market Appraisal): It is related with demand for the product or services.
The survival and success of projects depends upon, whether the product or service offered by the
project is commercially successful. Following are the important aspects to be analyzed in the
commercial aspects

- Past and current demand trend

- Past and current supply position
- Elasticity of demand
- Production possibilities and constraints
- Imports and exports
- Nature of competition
- Pricing of the project
- Distribution channel
- Government policies

Demand: it refers to the number of units to a particular product or service that consumers are will to
purchase during a specified period under a given set of condition.

Demand furcating techniques: It refers to the estimation of demand for a product during a specified
future period. Following are the methods:

1- Survey Approach (statistical methods): Under this method, demand forecasting is done by
obtaining information about the intention of customers.
a) Jury of expert’s opinion method:
b) Delphi Technique: Under this, a group of individual experts are asked to give their views
separately. Then all the views are pooled together and arrive at a consensus. Is there any
differences in views, the individual experts are informed about the views of others , and
they are asked to further analyze the problem and to revise their views in the light of the
views of others. This process goes until arrive at a consensus. There is no face-to-face
interaction.
c) Consumer’s survey method: In this method, the customers are directly approached and
asked to express their views about the product.
d) Sales forecast composite: under this method, forecasting is done on the basis of the
judgement of the sales personnel and are asked to forecast the sales in their respective
geographical area. The forecast of sales are pool together and gives appropriate weights,
then combined them to arrive composite forecast.
2- Statistical approach: two methods : trend analysis and Regression technique.
 a) Trend Analysis:
i) Curve fitting: under this, there is a graph is drawn. X axis denotes the time and Y axis
represents sales data. After plotting all the sales figures, a straight line is drawn in
such a manner that it is closest to all the points, it is called line of best fit.
ii) Moving average: under this, the sale forecast for the next year is computed by taking
the average of the actual data for the a few immediately preceding years.
iii) Weighted moving average method: under this, weightage may be assigned to each
of the previous years under consideration. It follows the assumption that the recent
data might have a better indication of the trend than the past data.
iv) Exponential smoothing method: under this method, the forecasts are modified in the
light of past observed errors. More recent observation given larger weights by
exponential smoothing methods, and the weights decrease exponentially as the
observations become more distant.
b) Regression technique: a regression model is an equation relating a dependent variable to
many independent variables. Here, dependent variable may be expressed as a function of
independent variable.

C- Economical Appraisal: It deals with the effect of the project on the entire economy. The resources
committed to larger projects of corporate entities as well as smaller projects of individual
entrepreneurs, must be deployed for maximizing the growth of the entire economy. The government,
through its policies and regulation, should generate the deployment of scarce resources and thereby
economic upliftment of the country.

D- Financial appraisal: it refers to the detailed analysis of investment decision from the perspective
of the organization which makes the investment. The promotor has to select the most profitable
project, by considering the expected risk and returns.

E- Management Appraisal: in management appraisal human resources are being evaluated. In the
case of sole proprietary business, the management appraisal is to be done on the sole proprietor. In
case of partnership firm, management appraisal is to be done on the mutual trust of partners.

Capacity to repay the loan together with interest can be evaluated by technical, fundamental and
commercial appraisal of the project. But the willingness to repay the loan is assessed by way of
management appraisal.

Important parameters studied in management appraisal:

- Integrity
- Interpersonal relationship
- Leadership qualities
- Foresightedness
- Technical and financial skill
- Commitment.

F- Social cost benefit analysis (SCBA): SCBA is undertaken to ascertain the impact of the project on
the society as a whole. In this analysis, greater emphasis is laid on social objectives with lesser motive
on profit. Here, both direct and indirect costs and benefits are taken into consideration.

Objective of social cost benefit analysis:

- Contribution of the project to the Gross Domestic Product of the society.

- Contribution of the project for the upliftment of the poorer sections of the society.
 - To reducing the imbalances in growth and development.
- To protect and improve the environmental condition
- Justification of the use of scarce resources by the project.

Approaches to Social Cost Benefit Analysis:

1- UNIDO Approach
2- Little-Mirrlees Approach

1-UNIDO (United Nations International Development Organization) Approach:

- It is based on the concept, ‘aggregate consumption’.

- Aggregate consumption is very important parameter for measuring standard of living of the
people and the rising of standard of living of the people is an important objective for social
projects.
- People consume number different commodities; computation of aggregate consumption
involves converting a heterogeneous bundle of goods into a single homogeneous measure.
- It measures consumption level by, measuring 1) consumer’s surplus 2) consumer’s willingness
to pay.
- The numeraire used in UNIDO approach is domestic price.

Stages:

a) Compute the financial profitability of the project based on market price.

b) Compute the net benefits of the project at economic prices, using shadow prices for the
resources.
c) Adjust the net benefit for the project’s impact on saving and investment.
d) Adjust the net benefit for the project’s impact on income distribution.
e) Adjust the net benefit for the goods produced whose social values differ from their economic
values.

Numeraire: it is the unit of account which the values of inputs and outputs are expressed.

Shadow price: if the market prices of inputs and outputs of a project do not represent their ‘real’
prices, they are required to be corrected suitably. Such corrected prices inputs and outputs is known
as shadow price.

2-Little-Mirrlees Approach (L-M Approach):

- It is suggested by I.M.D Little and James A.Mirrlees

- This approach rejects the ‘aggregate consumption’ by UNIDO ap[roach by arguing that the
consumption of all groups is valuable.
- L-M approach uses the Numeraire ‘uncommitted social income’
- According to this approach all public incomes are not equally valuable.
- It also states that the public income may accrue in the form of domestic currency or foreign
currency or in the form that is freely convertible into foreign exchange.
- It measures cost and benefits in terms of international price
 UNIDO Approach L-M Approach
- It follows the numeraire ‘aggregate - Follows numeraire ‘uncommitted social
consumption’ income’
- It measures shadow price in terms of - It measures shadow price in terms of
domestic price. international price.
- It is a stage-by-stage analysis - It is integrated analysis
- Propounded by UNIDO (United Nations - Propounded by I.M.D Little and James
International Development A.Mirrlees.
Organization)
G- Project Risk Analysis: All the projects are done based on some assumptions. There may be
difference between the reality of the above factors and the assumption about them. The project
appraisals are to be made keeping these risk possibilities in mind. The areas of assumptions are:

- Periodic cash inflow

- Periodic cash outflow
- Life of machinery
- Scrape value of machinery

CHAPTER 4

FINANCIAL APPRAISAL OF A PROJECT

Financial appraisal: It is a detailed analysis of investment decision from the perspective
of the organization which makes the investment.
Important aspects of financial appraisal are:
- Project Evaluation Technique (capital budgeting technique)
- Estimation of capital costs of a project
- Estimating the operating costs of a project
- Estimating operating revenue and output of project
- Profitability projection (estimates of working results)
- Proforma of balance sheet (Projected Balance Sheet)
Investment Decision (Capital Budgeting):
- It is defined as the process of selecting an opportunity for long term allocation
of the resources of an organization with the objective of generating profits.
- Charles T Horngreen “capital budgeting is a long-term planning for making and
financing proposed capital outlays”
Importance of Investment Decision:
- Long term investment
- Heavy investment
- Irrevocable decision
- Risk and uncertainty
- Impact of competitiveness of the firm
 - National importance
Components of capital budgeting techniques:
- Initial cash outflow: It is the initial investment for a project includes cost of new
assets, installation charge, fright, insurance etc.
- Net annual cash inflow: It refers to the annual cash inflows expected to be
generated by the project during its life.
- Terminal cash inflow: It refers to the salvage or scrap value expected to be
realized at the end of the life of the project.
- Required rate of return (cut-off rate, hurdle rate): It is the expected rate of
return from the proposed project.
- Other components: Economic life of the project, volume of fund available, risk
of obsolescence etc.
-
Project appraisal technique (capital budgeting techniques):
Traditional Method (Non-discounting Technique) Modern methods (Discounting Technique)
1. Urgency method 1. Discounted pay-back method
2. Pay-back method 2. Net present value method
3. Modern pay-back period method 3. Benefit cost ratio method (profitability index)
4. Average rate of return method 4. Internal rate of return method
5. Net terminal value method
Traditional method;
1-Urgency method:
- Under this necessity or urgency is the only criteria which is used to evaluate the
project proposal.
- Here the project most important is selected.
- It is more suitable in short-term projects requiring lesser capital investment.
- There is no scientific analysis
2-Pay Back Method:
- Under this, length of payback period is the criteria for selecting the project
proposal.
- Payback period is the length of period to recover the initial investment of the
project, shorter payback period is selected.
- Payback period is also known as pay-out period, pay-off period or recoupment
period.
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑂𝑢𝑡𝑙𝑎𝑦
a) When annual cash inflows are equal: Payback period = 𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤
 b) When annual cash inflows are unequal : Payback period is computed by
cumulating cash inflow till the time when the cumulative cash inflows become
equal to initial investment.
- It is useful for short term projects which generate inflows during the initial
years.
- It doesn’t consider the time value of money.
3-Modern Payback Period: (It is developed to overcome the limitation of traditional
payback method)
a) Post payback period method:
- Under this, proposals are evaluated by considering the surplus life of the project
after payback period.
- Projects which give greater post payback period with significant cash inflows
are selected.
b) Payback reciprocal method:
- Projects are evaluated based on the payback reciprocal.
- It is used to estimate the internal rate of return generates by a project.
- Proposal with higher payback reciprocal may be accepted.
𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤
Payback Reciprocal =
𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
c) Post payback Profitability Method:
- Projects are evaluated based on the post payback profits
𝑃𝑜𝑠𝑡 𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑃𝑟𝑜𝑓𝑖𝑡𝑠
Payback Profitability Index = 𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝑥 100

4-Average Rate of Return Method (Accounting Rate of Return):

- The proposals are evaluated on the basis of accounting profits and not on cash
flows.
- Accounting profit means the net profit after depreciation and tax.
- Also known as Return on Investment Method, Unadjusted Rate of Return
method.
- Projects with higher ARR is selected
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑡𝑢𝑟𝑛
ARR = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝑇𝑜𝑡𝑎𝑙 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑜𝑓 𝑡ℎ𝑒 𝑃𝑟𝑜𝑗𝑒𝑐𝑡
Average Return =
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑓𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑃𝑟𝑜𝑗𝑒𝑐𝑡

𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 + 𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒

Average Investment = 2
or

𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 − 𝑆𝑐𝑟𝑎𝑝 𝑣𝑎𝑙𝑢𝑒

2
+ Scrap value
Modern Methods (Discounted Cash Flow Techniques or Time-adjusted Cash flow
technique):
- Under this, project proposals are evaluated by considering time value of money
- It is based on the principle that the evaluation of a project must be done by
comparing values of outflows and inflows at the same point of time.
- Here, present value of future cash inflows are computed through discounting
process.
1-Discounted Payback Period:
- Under this method, all the future cash inflows are converted into their present
value by applying discount factors.
- Then the period required to recover the investment outlay is computed.
- Project with least payback period is selected.
2-Net Present Value Method (investors method):
- Under this, present value of future cash inflows are found out first
- Then present value of cash outlay is deducted from the total present values of
all cash inflows, the balance is net present value.
- The project with highest positive NPV is selected and rejects the projects with
negative NPV.
- Following are the steps involved in calculation of NPV
a) Determine the cut-off rate: It is the minimum rate of return that an investor
expects from the company. It is usually the cost of capital
b) Find the present values of cash inflows and outflows: The present values
are computed by discounting cash inflows and outflows using the cut-off
rate.
PV = Cash inflow X Concerned discount factor
- It is not suitable for comparing the project proposals with different life span,
unequal capital outlay
3-Benefit Cost Ratio Method (Profitability Index, Present value index method):
- Under this method, projects are evaluated using benefit cost ratio.
- Benefit cost ratio is the ratio of present value of cash inflows to the present
value of cash outflows.
- It is very suitable for comparing the projects with unequal investment outlays
and different life span.
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤𝑠
Benefit Cost Ratio =
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐶𝑎ℎ𝑠 𝑂𝑢𝑡𝑓𝑙𝑜𝑤𝑠
- PVI >1 – denotes present value of cash inflows is more the present value of cash
outflows.
- PVI<1 – present value of cash inflow is less than present value of cash outflows
 - PVI=1 – present value of cash inflow is equal to present value of cash outflow.
Benefit cost ratio may be computed by taking Net Present Value also
𝑵𝒆𝒕 𝑷𝒓𝒆𝒔𝒆𝒏𝒕 𝑽𝒂𝒍𝒖𝒆
Benefit Cost Ratio = 𝑷𝒓𝒆𝒔𝒆𝒏𝒕 𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑪𝒂𝒔𝒉 𝑶𝒖𝒕𝒇𝒍𝒐𝒘𝒔

- A positive NPVI- Denotes the present value of cash inflow is more than the
present value of cash outflow
- A negative NPVI- denotes the present value of cash inflow is less than the
present value of cash out flow
- If NPVI = 0, it means the present value of cash inflows and present value of cash
outflow are the same.
4-Internal Rate of Return Method (IRR):
- IRR is the rate of return at which the present value of cash inflows are equal to
the present value of cash outflows.
a) Calculation of IRR when Cash inflows are equal:
- Step 1: determine the net cash inflow during the life span of the project.
𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕
- Step 2: P.V factor = 𝑨𝒏𝒏𝒖𝒂𝒍 𝑪𝒂𝒔𝒉 𝑰𝒏𝒇𝒍𝒐𝒘
- Step 3: find the present value factor or the value nearest to the PV factor in the
row, corresponding to the life of the project, of cumulative present value table.
- Step 4: if IRR is lie between two rates, IRR can be obtained by using
𝑃1 − 𝑄
IRR = 𝐿 + 𝑃1 − 𝑃2 𝑥(𝐻 − 𝐿)
L= Lower discount rate. H= Higher discount rate, P1= Present value at lower rate
P2= Present value at Higher rate, Q=Net cash outlay
b) When cash inflows are unequal
Step 1: calculate the average cash inflow and establish first trial rate:
𝐼𝑛𝑖𝑡𝑖𝑙𝑎 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
P.V factor =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤𝑠
Step 2: Find the present value factor or the nearest to the PV factor in the row,
corresponding to the life of the project, of cumulative present value table.
Step 3: Compute the present value of cash inflows of all the years
Step 4: compute the NPV
Step 5: If NPV is positive, try the higher rate
If NPV is negative, try the lower rate
Continue the process until the NPV becomes zero
Step 6: If we obtain the rage within which the IRR lies, using the following
formula
𝑃1 − 𝑄
IRR = L + 𝑥 (𝐻 − 𝐿)
𝑃1 − 𝑃2
- If IRR is grater than or equal to the desired minimum rate of return, the project
may be accepted.
5-Net terminal Value method:
- It based on the assumption that each annual cash inflow is received at the end
of the year and reinvested in another asset at a certain rate of return till at the
end of the project.
- Then total compounded sum is discounted at the discount factor of the last year
and the present value is found out.
- The present value is compared with cost of project or initial investment.
- The excess present value over the cost of the project is the Net Terminal Value
- Project with higher NTV is selected

Risk and Uncertainty in Investment Decision:

Risk is the possibility of deviation of actual income from the expected income, and it
is measurable.
Uncertainty is the lack of certainty about an event, it is not measurable.
Techniques for analyzing risk in investment Decision:
A- General or Traditional Techniques:
1) Risk adjusted Cut-off Rate method:
- Under this method, some adjustment are made in the discount rate depending
upon the degree of risk associated with the project.
- If the risk associated with the project is high, some risk premium is added to the
discount rate.
- Risk adjusted Discount rate = Risk free rate of return + Risk premium
- Risk free rate is the rate at which the future cash inflows are to be discounted
assuming that there is no risk in the project.
- Risk premium is the extra return expected by the investors over and above the
normal rate.
2) Certainty Equivalent method:
- Under this method, each annual cash inflow of the project is adjusted by a
numerical value equivalent to the certainty of cash inflow.
- The numerical value used in the adjustment in the cash inflow is called certainty
equivalent coefficient or risk adjustment factor.
- Certainty Equivalent Coefficient = Risk free cash flow / Risk cash flow
- Certainty Equivalent Coefficient converts the uncertain cash inflows into certain
cash inflow.
Statistical or Modern Techniques:
1) Sensitivity Technique: (what if analysis)
- Under this, more than one forecast of future cash inflows are may be made
under different circumstances.
- They are a) optimistic, b) most-likely d) pessimistic
- Optimistic cash inflows are estimated under the assumption that ideal
condition is prevail in future.
- Most likely cash inflows are estimated under normal conditions.
- Pessimistic cash inflows are estimated under adverse or negative condition of
the future.
- If the net present values under three circumstances differ widely, it implies
great risk in the project
2) Probability assignment technique:
- Under this, a numerical value equivalent to the occurrence, is assigned to each
of the future annual cash flows.
- Multiply the cash inflow with respective probability, and arrive at expected cash
inflow
- Expected cash inflow further discounted to find out the present values.
- Then find NPV by deducting initial investment from the total of present values,
project with higher NPV may be selected.
3) Standard deviation technique:
- It is used under the situation where the projects have the same amount of
investment outlay and same net present value.
- Here, S.D of the expected annual cash inflows of each project is computed.
- A project with higher S.D is considered as risky.
4) Decision tree technique:
- It is a tool for analyzing the risk associated with complex investment decision.
- A decision tree is the graphical representation of the relationship between a)
present decision and future events b) future decision and the consequences.
- The sequence of events are plotted in a format appears like branches of trees.
- Decision tree analysis involves in the following steps:
a) Identify the problem
b) Ascertain the alternatives
c) Exhibit the decision tree showing the decision points, possible events and
other relevant information.
d) Specify the probabilities and monetary value of cash inflows
e) Analyze the alternatives
Estimation of Total Capital of a Project:
• The total cost of a project refers to sum total of the expenditure which is
expected to be incurred till the date of starting the commercial production of
the project.
• A project cost estimate is required not only for assessing fund requirement but
also for ascertaining viability of the project.
• The main components of capital cost of projects are:
- Advance expenditure
- Land
- Building
- Plant and machinery
- Ancillary and miscellaneous assets
- Intangible expenses
- Miscellaneous expenses
- Provision for contingencies
- Margin money for working capital.
Estimation of project operating cost:
• Operating cost are those cost which have to be incurred once the project is
commences production.
• The operating cost cover material cost, utility cost, labor cost and overhead
cost.
• The main components of operating costs of a projects are:
- The material cost
- The labor cost
- The cost of power, fuel and other services
- Plant maintenance cost
- Supervision cost
- Administrative and management cost
- Depreciation charges and interest on borrowings
- Repair and maintenance
- Selling & administrative cost
- Payment to collaborators.
Estimation of operating revenues (sales) and output of the project:
In estimating sales revenue, the following considerations should be born in mind
- It is not advisable to assume higher level of capacity utilization in the first year
of operation
- It is not necessary to make adjustment for stocks of finished goods
 - The selling price may be the present selling price.
Important sources of Error in Estimating Costs:
- Estimates of investment expenditure is too low
- Failure to allow for working capital
- Over Failure to consider future trend of cost
- estimation of capacity utilization
Profitability projections:
- For assessing the profitability of the project, the estimation of operating cost
and revenues are matched.
- In order to calculate the profitability projection or estimates of working results,
a projected income statement is to be prepared.
Projected balance sheet:
- It reflects the financial condition of the firm at a given period of time.
- The balance sheet is prepared with the help of projected assets and liabilities.
TECHNIQUES OF FINANCIAL ANALYSIS:
- It is a continuous process used to analyze the past and future financial position
of a firm.
- It is used to interpret the past or projected financial data.
- Important techniques are:
a) Fund flow analysis
b) Cash flow analysis
c) Ratio analysis
Fund flow analysis:
- It is a statement which is prepared to show the changes in assets, liabilities and
net worth between two balance sheet date.
- It is prepared to ascertain how much fund have been generated and how these
funds were put to use.
- The term “fund” means working capital
- Fund flow means change in working capital ie, increase or decrease in working
capital.
Cash flow Analysis:
- It is prepared to ensure that the business unit will have necessary cash with it
and it will not face the liquidity problem.
- It shows the movement of cash into and out of the firm and its net effect on the
cash balance with the firm.
 - It shows the sources cash and their uses.
Ratio Analysis:
- Ratio is a mathematical relationship between two figures taken from financial
statements.
- It is used to have an in-depth examination of the strength and potential pitfalls
of the organization.
- It helps to compare current performance with the past and also in measuring
effectiveness and efficiency of the organization in the lights of norms of
performance.
Analysis of Operational Strategy: Following techniques are used
a) Break-Even analysis
b) Sensitivity analysis
c) Risk analysis
A-Break-Even Analysis:
- In narrow sense it is concerned with the calculation of break-even point.
- It is the point at which the project neither earns profit nor incur loss.
- At this point total cost is equal to the total sales
- In broad sense, it refers to a system of analysis that can be used to determine
the probable profit at any level of activity.
- It is a tool of financial analysis is where by the impact on profit position of the
changes in volume, price, costs and mix can be estimated definitely and
accurately.
- BEP(units) = Fixed cost/ cost of contribution per unit
- BEP (rupees) = (Fixed cost / Total contribution ) x sales
- Contribution = Sales – variable cost or Fixed cost + Profit
Break-even Chart:
- Graphical representation of break-even analysis.
- It shows the profitability of a firm at different level of production.
- The chart often used for studying cost-volume-profit relationship.
Profit Volume Ratio:
- This ratio establishes the relationship between contribution margin and total
sales.
- It also known as contribution margin ratio or marginal profit ratio.
- P/V Ratio = (Contribution/Sales)x100
Margin of Safety: it is the difference between the actual sales and break-even sales.
 Margin of safety = Total sales – Break-even sales or Profit/Profit Volume Ratio

B-Sensitivity analysis:
- It helps in studying the impact of crucial variable like raw-material, sales
volume, sales price, degree of capacity utilization etc. over the economic
viability of an enterprise.
- It is useful to identify critical variable which may have considerable influence
on the financial returns of a project.
C-Risk Analysis:
- It helps in identifying the sources of risk such as rise in price of raw materials,
taxes and duties, product price etc. which have great bearing in determining
the future returns of the project.
- It offers an opportunity to the investor to redesign his proposed project.

Project Financing
Chapter 5

Meaning of Project Financing:

• It may be defined as the “raising of funds required to finance economically
separable capital investment project in which the providers of the funds looks
primarily to the cash flows from the project as the source of funds to service
their loans and provides the return on the equity invested in the project.”
• It is used to describe the financing of a particular project.
Conventional Financing Project Financing
- Cash flows from different business & - Cash flows from the project related assets
assets are considered alone are considered
- Creditor asses the repayment capacity of - Asses the repayment capacity of project
the borrower from the all sources related sources only
- End use of borrowed fund is not strictly - Creditor ensure proper utilisation of funds
monitored by the lenders as per project proposal
- Creditors are not interested to monitor - Project financier monitor the performance
the performance of the borrower of the enterprise.
- Creditors do not appoint their nominee - Credit financier appoint their nominee in
in the board of directors the board of directors of the borrower
company
CLASSIFICATION OF CAPITAL
Fixed capital:
- Fixed capital is the portion of total capital outlay of a business invested in
physical assets such as factories, vehicles, and machinery that stay in the
business almost permanently, or, more technically, for more than one
accounting period.
Factors affecting fixed capital requirements:
• Nature of the project
• Size of the project
• Diversity of production lines
• Method of production
• Method of acquiring fixed assets
Working capital:
• It refers to the capital required for the day-to-day working or operation of a
project.
• Two concepts of working capital; Gross concept of Working capital and Net
concept of working capital
• Gross concept means the fund invested in the current assets
• Net concept means excess of current assets over current liability.
Types of Working Capital:
A) Permanent working capital:
• It is the minimum amount of working capital required to ensure effective
utilization of the fixed assets and support the normal operations of the
business.
• It is a part of capital which permanently blocked-in Current Assets.
• Divided as:
a) Initial working capital: It is the capital at which the project is started.
b) Regular working capital: It is the amount needed for the continuous operations
of the business. It is the minimum amount of liquid capital to keep up the
circulating capital from cash to inventories, to receivables and back again to
cash.
B) Variable working capital:
 • It is the capital which varies according to the volume of business.
• Further divided into two
a) Seasonal working capital: It is the working capital which is needed during a
particular season. It is the additional W-C required during the busy season.
b) Special working capital: It refers to the extra working capital to be maintained
to meet the unforeseen contingencies or to finance special operations.
Factors determining W-C
- Character of the business
- Size and volume of business
- Length of processing period
- Turnover
- Terms of purchase and sale
- Seasonal variation
- Importance of labour
- Cyclical fluctuation
- Stock & Cash flow
Sources of project finance:
1. Equity share
2. Preference share
3. Debenture
4. Bonds
5. Internal accruals or retained earnings
6. Term loans
7. Deferred credits
8. Public deposit
9. Unsecured loans
10. Lease financing
11. Bridge loans
12. Loan syndication
13. Consortium lending
14. Venture capital financing
15. Government subsidy
1-Equity share:
- These are the shares which do not carry any preferential right in respect of
distribution of dividend or repayment of capital at the time of winding-up of
the company.
- It is also called ordinary shares
- Equity shareholders are the owners of the company.
 - Equity shareholders have voting right.
Sweat equity shares:
• It is an equity share issued by the company to its employees and to directors at
a discount or for consideration other than cash for providing know-how or value
additions.
• It is always issued at discount
• It helps to increase the morale and productivity of employees.
2- Preference shares:
• These are the shares which holds some preferential rights over equity shares.
• Preferential rights relates to the payment of dividend and repayment of capital
at the time of winding up.
• The rate of dividend is fixed.
• No voting right.
• Face value of preference shares is comparatively more than that of equity
shares.
Types of Preference Shares:
• Cumulative preference shares: If there are any arrears of dividend, that will be
carry forward and paid out of profit of the subsequent years.
• Non-cumulative preference shares: Those preference shares in which arrears
of dividend, are not carried forward to the subsequent years.
• Redeemable preference shares: The preference shares which are repayable
after the expiry of fixed period or at the option of the company.
• Irredeemable Preference Shares: Which are not repayable during the life of the
company.
• Convertible preference shares: Here the holders have the right to convert the
shares into equity shares within a specified period of time.
• Non-convertible preference shares: These are the preference shares which
cannot be converted into equity shares.
• Cumulative convertible preference shares: These are convertible into equity
shares and the holders get arrears of dividend, if any, even after the conversion.
 • Participating preference shares: Here, the holders have the right to participate
in the surplus profit distribution, after paying reasonable rate of dividend on
equity shares.
• Non-participating Preference shares: These preference shareholders get fixed
rate of dividend with preference. They don’t have the right to participate in the
surplus profit distribution.
3- Debentures:
- It is an instrument issued by the company under its common seal and
acknowledging its debt to the holder.
- It is a debt security (creditorship security).
- Carries a fixed rate of dividend.
- Debenture holders are creditors of the company.
- No voting rights.
Classification of Debentures:
Classification based on Registration:
A. Registered debentures:
- If the name of the person, to whom the debenture is issued, is recorded in the
register of the company is called registered debentures.
- These debentures are repaid only to the registered person only.
- It can be transfer only by transfer deed.
B. Bearer debentures:
- Here, the name of the debenture holder is not recorded in the register of the
company.
- It can be transferred by mere delivery.
Classification based on security:
a) Secured debentures:
- These debentures are issued either on the security of a specific asset or the
security of all assets in general.
- Also called mortgage securities.
b) Non secured debentures:
- These are the naked securities
- These are issued not on the security of any asset
Classification based on the redemption:
a) Redeemable debentures:
- These are the debentures which are repayable after a fixed period of time.
- Redeemed either by lumpsum or by installments.
b) Irredeemable debentures:
- These are the debentures which are not redeemable during the life span of the
company.
Classification based on convertibility:
A. Convertible debentures: These are the debentures which can be converted into
shares after a specified period of time.
B. Non-convertible debentures: These are the debentures which cannot be
converted into shares during the life period of the company.
4- Bonds:
• A type of debt instrument similar to debentures issued by government
corporations.
• The bond holder gets fixed rate of interest periodically.
• It represents the borrowed capital of the organization.
• The bonds are redeemed after a certain period, as mentioned in the bond
certificate.
Types of Bonds:
Zero coupon bond:
- These are issued at discount and redeemed at par at the time of maturity.
- No interest is paid
- Also called deep discount bond.
Floating rate bond:
- These are the bonds, which interest rate varies in accordance with the
variance in treasury bill rate and inflation index.
- Also called variable rate bonds
Reverse bonds:
- These are variable rate bonds but their rate of interest and the price index or
treasury bill rate move on opposite direction.
Asset backed bonds:
- It is variable bond but their rate of interests are secured with the income of
the stated assets.
Catastrophe Bonds:
- These are the bonds which offer extremely high rate of interest in the event of
predetermined catastrophe like earthquakes, tsunami etc.
- Offer very low interest in the normal situations.

5- Internal accruals or Retained earnings:

- The portion of profit which is not distributed to shareholders as dividend is
known as retained earnings.
- These funds are utilized for future development of the business.
- Therefore, it is an important source of long-term finance.
- It makes the company in a self-dependent position.
- It guarantees minimum rate of dividend to shareholders.
6- Term loans:
- The term loan is granted on the basis of formal agreement between the
borrower and the lending institution
- The main features of term loan are fixed rate of interest, scheduled for
repayment of principal, security and other conditions of the Lender.
7-Deferred credits:
- It's an arrangement under which the supplier of an asset provide the facility of
deferred credit to customers on the basis of the bank guarantee offered by
the customers.
- Under this method a project promoter who wants to avail the deferred credit
facilities offered by a supplier of an asset should approach a bank for offering
guarantee for the repayment of the deferred installment to the asset supplier
- The bank examines the viability of the proposal and if satisfied, gives
guarantees to the project promoter.

8-Public deposits:
- These are deposits which are mobilized from public in general or from the
shareholders or directors at a specified rate of interest for a specified period
of time.
- Public deposits are received for a minimum period of 6 months and maximum
period of 36 months.
Advantages:
- Low floatation cost
- Low rate of interest
- Facilitates trading on equity
- No charge over assets
- Flexibility
Disadvantage:

- Not reliable
- Does not protect the Interests of depositors
- Harmful to the development of capital market
- Threats to banks
9-Unsecured loans:
- The funds are mobilized from the relatives, friends and other will wishes in the
form of loans are called unsecured loans
- The loans are raised without any charge on the assets of the enterprise they
considered as unsecured loans.
10-Lease financing:
- It's a contract between the owner of an asset and the user of the asset
whereby the owner of the asset gives it to the user for periodical payments.
- The owner of the asset is called lessor and the user of the asset is called lessee
- The periodical payment which the lessee to be paid to the lessor for using the
asset is called lease rental.
Types of lease financing:
• Financial lease
• Operating lease
• Sale and lease back lease
• Leverage lease
Financial lease:
- Here, the selection of the asset, selection of supplier, finalisation of price,
terms of sale etc are decided by the lessee.
- Then the lessee is entered into lease contract with lessor which purchase the
asset and gives it to the lessee for a specified period.
- The lessee is responsible for repairs, maintenance, taxes and insurance etc.
Operating leases:
- An operating lease is a contract that permits the use of an asset without
transferring the ownership rights of said asset.
- It is very popular in asset like office equipment, vehicles etc.
- Here, the lessor is responsible for the repairs, maintenance of the asset.
- After the expiry, the lessee has the option to renew the lease agreement for
another period.
Sale lease back lease:
- Here, a firm sells an asset to another party at market value, and the seller
leases it back from the purchaser.
- The seller can get cash and can use the asset for lease rentals.
Leverage lease:
- Here the lessor borrows money from a bank or financial institution and buys
an asset.
 - Then the purchased property is leases to the lessee for a specified period of
time in return for a periodical payment of lease rentals.
- Lessor repays the loan using the lease rental received form the lessee.
11-Bridge loan:
- Sometime the project implementation is delayed due to delay in getting a
particular source of finance.
- In such situation, banks and financial institution may sanction loans to the
project promoters in order to help the speedy implementation of the project,
such loans are known as bridge financing
12-Loan syndication:
- It is an alliance between two or more financial institution or banks where they
agree to finance a particular project.
- The process of loan syndication is mainly happens, when the amount of loan is
very high and high risk.
Process of loan syndication:
Step 1: Pre-mandate stage: here borrower initiates the process of loan syndication
Step 2: Arranging banks prepares a document containing all details such as
- Investment, industry overview
- Executive summary, financial structure
- Terms and conditions etc.
Step 3: The lead bank sends invitation to other banks to participate in the
syndication.
Step 4: loan documentation is sends to the banks for their review and approval.
Step 5: loan amount is distributed
Escrow account:
- An escrow account is a third parties account where funds are kept before they
are transferred to the ultimate party.
- It provides security against scams and frauds especially with high asset value
and dispute-prone sectors like Real Estate.
13-Consortium lending:
- It is very similar to loan syndication.
 - It is an alliance between two or more financial institution or banks where they
agree to finance a particular project.
- Loan syndication work across borders and consortium lending typically occurs
within the boundaries of nation.
14-Venture capital:
- Venture capital (VC) is a form of private equity and a type of financing that
investors provide to startup companies and small businesses that are believed
to have long-term growth potential.
- Venture capital generally comes from well-off investors, investment banks,
and any other financial institutions.
15-Government subsidy:
- The government offers two types of subsidies
a) Area subsidy
b) Product subsidy
Area subsidy:
- Under area subsidy, government offers subsidy for the project set up in
notified backward areas.
- The projects which are set up in such notified backward area are eligible for
capital investment subsidy.
Product subsidy: Under product subsidy, subsidy is offered by the government to
projects that manufacture specified products.
Capital structure:
- The term capital structure denotes the relationship between the various long-
term forms of financing such as debentures, preference share capital and
equity share capital.
- In another words, it is the debt-equity composition of a firm.
Factors influencing capital structure:
- Trading on equity
- Cost of capital
- Nature and size of the firm
- Control
- Purpose of financing
- Period of finance
- Flexibility
 - Rate of corporate tax
- Requirements of investors
- Capital market condition
- Ability to generate cash flows
- Stability of sales
- Cost of floatation
- Asset structure

CHAPTER 6

PROJECT PLANNING AND SCHEDULING

Project planning:
- Project planning is a common thread which connects all the activities associated
with the project, right from the conception to handing over the clockwork to
the clients.
- It covers the activities such as work breakdown structure (WBS), statement of
work and accurate time estimates and schedules which help further in
anticipating difficulties in a project and overcome them.
Objectives of project planning:
- Analyzing
- Anticipating
- Scheduling
- Co-ordinating and controlling
- Information management
Project scheduling:
- It refers to the process of determining the time required for executing each
operation and the order in which they are to be carried out for better
accomplishment of the project objectives.
- Logical sequence of various activities of a project is given below:
1- Registration of the company
2- Obtaining industrial licenses and import licenses.
3- Appointment of consultant
4- Resource mobilization
5- Acquisition of land and development of site.
6- Preparing designs, plans and estimate of civil work
7- Entrusting the construction work to civil contractors
8- Preparing design specification, and placing order for plant and machinery
 9- Transportation of plant and machinery to the project site
10- Installation of machinery
11- Commissioning plant and trial run
12- Commencement of commercial production.
Project Scheduling Techniques:(which offers solution for the optimum utilization of project time)

a) Bar charts
b) Networks

Bar chart
- It is the pictorial representation of various tasks required to be performed for
accomplishment of the project objectives.
- These charts have formed the basis of development of many others such as
Gantt Chart and Milestone Chart etc.
Gantt Chart:
- Developed by Henry L Gantt- 1977
- It is a pictorial representation specifying the start and finish time for various
task to be performed in a project on a horizontal time-scale.
- Each project is broken down to physically identifiable and controllable units,
called task.
- These tasks are indicated by means of bar, equidistance from vertical axis and
time is plotted on X-axis.
Limitations:
- Very difficult to use the project with large number of tasks.
- Not suitable for complex projects
- It does not indicate the inter relationship between the tasks.
Milestone Chart:
- It is an improvement of Gantt Chart.
- The milestone, represents a circle over task in the bar chart indicates
completion of specific phase of the task.
- Eg: In land preparation (Task A), includes plugging and leveling (milestone)
Limitations:
- It does not reveal the interdependence among tasks
- Silent regarding the critical activities
- It does not consider the uncertainty in accomplishing the task
 - Very difficult to draw the mile stone for large projects.
Networks:
- The network technique is a logical extension of milestone chart, used to
illustrate the interrelationship between and among all the milestones in an
entire project.
- The most common techniques used in network analysis are Critical Path
Method (CPM) and Programme Evaluation and Review Technique (PERT).
- CPM was developed by E.I Du Pont de Nemours & Company as an application
to construction project.
- PERT was developed by US Navy for scheduling the research and development
activities.

Notations used in the network diagram:

Activity-on-Arrow = The arrow represents the work to be done, the circle represents
an event.
Land preparation Procurement of input
+
Activity-on-Node = A box(node) is used to show the task itself, the arrow the sequence
in which work is done.

Land preparation Procurement of Input

n n

Basic Concepts Related to Network Analysis:

- Network: It refers to the inter-connection of the various related activities of a
project.
- Network Diagram: It is a graphical representation of activities and events of a
project using sequentially and logically connected arrows and nodes.
- Activity: It refers to a physically identifiable portion of work related to the
project. It is work required to be done to materialize a specific event.
- Event: An event or node represents the start or end of an activity. An event
cannot be completed until all activities preceding to it are completed.
- Predecessor Activity: It is an activity which must be completed before starting
the other activities.
- Successor Activity: It is an activity which cannot be started before the
completion of other activity.
- Start activity: It is the first activity in a network diagram.
- End activity: It is the last activity in a network diagram
- Concurrent activity: the activities which are to accomplished simultaneously (at
the same time).
 - Dummy Activity: it is an imaginary activity which does not consume any
resources. It is used to represent a situation where one event cannot be taken
place until a previous event has taken place.
- Merge Event: It represents a joint completion of two or more activities are
called merge event.
- Burst event: It is the beginning of two or more activities is called burst event.
Guidelines for Construction of Network Diagram:
1- Each activity is represented only by one arrow.
2- The head of an activity indicates the direction of the progress of a project.
3- Every activity should have a tail event and a head event.
4- All the preceding activity should be completed before starting an activity.
5- The length of arrows has no significant
6- Flow from the left to right
7- Arrows should not be crossed.
8- Arrows should be straight
9- Event in the diagram must be numbered logically and systematically.
10- Looping or cycling should be avoided.

Network Techniques: Critical Path Method or Program Evaluation and Review

Technique
Critical Path Method (CPM):
- Developed by Morgan R Walker and James Kelly in the year 1956.
- The objective is to estimate the duration of a project more accurately by
identifying critical path in the network diagram.

Basic Terms Used in CPM:

- Path: It refers to unbroken chain of activities from start event to end event in a
network diagram.
- Critical path: It is the longest path in the network diagram. It is denoted by
double line or thick lines.
- Critical Activities: These activities which are lying on the critical path of a
network diagram. These are the zero float activities.
- Non-critical Activities: These are the activities where a delay in their start will
not cause further delay in the completion of the entire project. These are the
activities whose total float is not zero.
- Earliest Event Time (TE): It is the earliest occurrence time of an event.
TE = Earliest time of proceeding event + Duration of the preceding activity (it
is known as forward pass method)
If there are more than one E value – take the maximum value
- Latest Event Time (TL): It is the latest time occurrence of an event.
TL= Latest time of successor event – duration of the successor activity.
If there are more than L value – take the minimum value
 - Earliest Start Time of an Activity (EST): Earliest start time of an activity is the
earliest time which it can commence.
EST of an activity = Earliest start time of the tail event of the activity.
- Earliest Finish Time of an Activity (EFT): It is the earliest time by which it can
be finished.
EFT of an Activity = EST of the activity + Activity duration.
- Latest Finish Time (LFT) of an Activity: It is the latest time by which it can be
finished.
LFT = Latest time of head event of the activity.
- Latest start Time (LST) of an activity: It is the latest time by which it can
commence.
LST = Latest Finish Time of an Activity – Activity duration.
- Slack: float of an event is known as slack
Slack of an event = Latest Time of an Event – Earliest Time of that Event.

- Float: It denotes the variability range with which an activity can be completed
without affecting the total project duration.
It denotes the spare time available to the non-critical activity.
a) Total Float = LFT - EFT or Float = LST – EST
It refers to the duration by which an activity can be delayed without delaying
the total project duration.
b) Free float = It refers to that portion of the total float within which an activity
can be manipulated without affecting the float of successor activities.
Free float = EST of the successor activity – EFT of the present activity
Free float = E value of Head Event – E value of the tail event – duration of
the activity
c) Independent Float: It refers to that portion of the total float within which
an activity can be delayed to begin without affecting the floats of the
proceeding activities.
Independent Float = EST of the successor Activity – LFT of the predecessor
Activity – Duration.
Independent float = E value of head event – L value of tail event – Duration
Independent float = Free Float – Tail Event Slack
Independent float < Free Float < Total Float

Steps in Critical Path Method (CPM):

- Construct the network diagram of the project.
- Find the Earliest time of each event.
- Find the latest time of each event.
- Show the earliest time and latest time of each activity.
- Calculate EST, EFT, LST, LFT of each activity.
- Determine the total float
- Identify the Critical activity: Activities with zero float
 - Mark the Critical path by using double line.
- Calculate the total project duration (sum of durations of critical activities).
Advantages of CPM
- CPM depicts the project activities and their outcomes as a network diagram.
- CPM demonstrate the inter-dependents of project activities and thereby helps
in scheduling.
- It facilitates optimization of project duration
- Helps in determining the slack time
- Helps to identify the activities which can run parallel to each other
- Helps to identify the most critical element of the project.
Disadvantages:
- It assumes that each time of activity are known in advance is not always true.
- It does not handle scheduling of time.
- Critical path is not always precise.
- Complicated when projects are complex
- Useful only to repetitive projects.

PROJECT EVALUATION AND REVIEW TECHNIQUE (PERT)

- It is a tool for network analysis.
- It was originally developed for using in defense, where the strategies will be
changed frequently.
- It is useful to estimate the time required for completing each activity and
thereby the duration of the entire project.
- It is mainly used in the situation where there is uncertainty regard the time
required for completing the project activities.
- There are three estimates are used
a) Optimistic Time Estimate (to): It denotes shortest possible time to complete
the project and it determine on the assumption that there is an optimistic
or ideal condition when the project is implemented.
b) Most Likely Time Estimate (tm): It is the time estimate based on the
assumption that normal condition will prevail while executing the project.
c) Pessimistic Time Estimate (tp): It refers to the maximum possible time that
would be required to complete the project activities and it is based on the
assumption that there is an adverse condition will prevail when the project
is implemented.

Steps in PERT Calculation:

- Obtain three time estimate for each of the project activities.
- Compute the expected time for completion of each activity
Expected time (te) = (to + 4tm +tp)/6
- Construct the network diagram
- Determine the Earliest time and Latest time by using expected time.
- Compute LST, LFT, EST and EFT
 - Compute total float
LST – EST or LFT – EFT
- Identify the Critical path
- Mark critical path with double line
- Determine the total project duration.
- Computation of variance
𝑡p − to 2
Variance of activity = ⌈ 6 ⌉
- Computation of variance of project duration = sum of the variance of critical
activities.
- Compute the standard deviation of project duration=
√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
 - Looping is one of the important features in GERT.
- The key objective is to evaluate the network logic and estimated duration of
each activity and based on which arrive at some inferences about the activities
which may not be performed.
- It is widely used in research and development projects.
Advantages:
- GERT is more accurate than PERT
- It helps to assign multiple resources
- It creates loops between tasks.
- More flexible
- It allows looping back or skipping an activity entirely
- There are number of computerized packages.