PROJECT PLANNING AND
EVALUATION
Introduction: INVESTMENT DECISIONS
OUTLINE
Capital investments: Importance and difficulties
Types of capital investments
Phases of capital budgeting
Levels of decision making
Facets of project analysis
Feasibility study: A schematic diagram
Objectives of capital budgeting
Common weaknesses in capital budgeting
CAPITAL INVESTMENTS :
IMPORTANCE AND DIFFICULTIES
Importance
Long – term effects
Irreversibility
· Substantial outlays
Difficulties
Measurement problems
Uncertainty
Temporal spread
TYPES OF INVESTMENTS
•Mandatory Investments
•Replacement investments
•Expansion investments
•Diversification investments
•R & D investments
•Miscellaneous investments
CAPITAL BUDGETING PROCESS
Planning
Analysis
Selection
Financing
Implementation
Review
LEVELS OF DECISION
MAKING
Operating Administrative Strategic
decisions decisions decisions
Where is the decision taken Lower level Middle level Top level
management management management
How structured is the decision Routine Semi – structured Unstructured
What is the level of resource Minor resource Moderate resource Major resource
commitment commitment commitment commitment
What is the time horizon Short – term Medium – term Long – term
KEY ISSUES IN PROJECT ANALYSIS
Potential Market
Market Analysis
Market Share
Technical Viability
Technical Analysis
Sensible Choices
Risk
Financial Analysis
Return
Benefits and Costs in Shadow
Economic Analysis Prices
Other Impacts
Environmental Damage
Ecological Analysis
Restoration Measures
FEASIBILITY STUDY : A SCHEMATIC DIAGRAM
P Generation of Ideas
r
e
l
i Initial Screening
m
i
n
a
r Is the Idea Prima Facie Promising
y
Yes No
W
o
r Plan Feasibility Analysis
k
Terminate
A
n
a Conduct Market Analysis Conduct Technical Analysis
l
y
s
i
s Conduct Financial Analysis
E
v
a
l Conduct Economic and Ecological Analysis
u
a
t
i Is the Project Worthwhile ?
o
n
Yes No
Prepare Funding Proposal Terminate
OBJECTIVE OF CAPITAL BUDGETING
Finance theory rests on the premise that managers should
manage their firm’s resources with the objective of enhancing the
firm’s market value. This goal has been eloquently defended by
distinguished finance scholars, economists, and practitioners. Wit
the following :
“The quest for value drives scarce resources to their most productive
uses and their most efficient users. The more effectively resources
are deployed, the more robust will be economic growth and the rate
of improvement in our standard of living.”
BASIC CONSIDERATIONS: RISK AND RETURN
Investment
Return
decisions
Market value
of the firm
Financing
Risk
decisions
COMMON WEAKNESSES IN CAPITAL BUDGETING
·Poor alignment between strategy and capital budgeting
· Deficiencies in analytical techniques
· Poor identification of base case
· Inadequate treatment of risk
· Improper evaluation of options
· Lack of uniformity in assumptions
· Neglect of side effects
· No linkage between compensation and financial measures
· Reverse financial engineering
· Weak integration between capital budgeting and expense
budgeting
· Inadequate post - audits
Summing Up
· Essentially a capital project represents a scheme for investing resources that can
be analysed and appraised reasonably independently
The basic characteristic of a capital project is that it typically involves a
current outlay (or current and future outlays ) of funds in the expectation of a
stream of benefits extending far into the future
Capital expenditure decisions often represent the most important decisions
taken by a firm. Their importance stems from three inter-related reasons:
long-term effects, irreversibility, and substantial outlays
While capital expenditure decisions are extremely important, they pose
difficulties which stem from three principal sources: measurement
problems, uncertainty, and temporal spread
Capital budgeting is a complex process which may be divided into six
broad phases: planning, analysis, selection, financing, implementation and
review
One can look at capital budgeting decisions at three levels: operating,
administrative, and strategic
The important facets of project analysis are : market analysis, technical analysis,
financial analysis, economic analysis, and ecological analysis
Financial theory, in general, rests on the premise that the goal of financial
management should be to maximise the present wealth of the firm’s equity
shareholders. Business firms may pursue other goals. When these other goals
conflict with the goal of maximising the wealth of equity shareholders, the trade –
off has to be understood
The common weaknesses found in capital budgeting systems in practice are:
poor alignment between strategy and capital budgeting ; deficiencies in analytical
techniques; no linkage between compensation and financial measures; reverse
financial engineering; weak integration between capital budgeting and expense
budgeting ; inadequate post-audits.
