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Mba - Iv Semester Fm-3: Project Finance Unit I: - Project Finance: An Over View Lesson 1.1

Capital projects involve investing resources to create unique products or services over a set timeframe. Project management scientifically plans, finances, implements, monitors, controls, and coordinates these activities. Capital expenditures are important but difficult due to measurement problems, uncertainty, and temporal effects. The project process involves planning, analysis, selection, financing, implementation, and review. Decisions can be made at operating, administrative, or strategic levels, with strategic decisions having major long-term resource commitments. Key issues in project analysis include market, technical, financial, economic, and ecological considerations. Common weaknesses in the capital budgeting process include poor strategy alignment, analytical deficiencies, inadequate risk treatment, and lack of post-audits.

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30 views

Mba - Iv Semester Fm-3: Project Finance Unit I: - Project Finance: An Over View Lesson 1.1

Capital projects involve investing resources to create unique products or services over a set timeframe. Project management scientifically plans, finances, implements, monitors, controls, and coordinates these activities. Capital expenditures are important but difficult due to measurement problems, uncertainty, and temporal effects. The project process involves planning, analysis, selection, financing, implementation, and review. Decisions can be made at operating, administrative, or strategic levels, with strategic decisions having major long-term resource commitments. Key issues in project analysis include market, technical, financial, economic, and ecological considerations. Common weaknesses in the capital budgeting process include poor strategy alignment, analytical deficiencies, inadequate risk treatment, and lack of post-audits.

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deepakadhana
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MBA IV SEMESTER

FM-3: PROJECT FINANCE


UNIT I: PROJECT FINANCE:

AN OVER VIEW
LESSON 1.1

Project : Meaning
A Project involves a group of interrelated activities that are planned and then executed in a certain sequence to create a unique product or service within a specific timeframe, in order to achieve outcomes / benefits. Project Management Project Management is an organised venture for managing projects. It involves scientific applications of modern tools and techniques in planning , financing, implementing, monitoring, controlling and coordinating unique activities or task to produce desirable outputs in accordance with predetermined objectives within the constraints of time and cost.

Capital Investments : Importance and Difficulties


Importance
Long term effects

Irreversibility
Substantial outlays

Difficulties
Measurement problems Uncertainty

Temporal spread

Project Process
Planning Analysis Selection

Financing Implementation
Review

Levels of Decision Making


Operating decisions

Administrative decisions
Middle level management Semi-structured

Strategic decisions
Top level management Unstructured

Where is the decision taken

Lower level management Routine

How structured is the decision

What is the level of resource commitment

Minor resource commitment

Moderate resource commitment

Major resource 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 Economic Analysis Ecological Analysis


Restoration Measures Return Benefits and Costs in Shadow Prices Other Impacts Environmental Damage

Feasibility Study : A Schematic Diagram


P

Generation of Ideas Initial Screening

r
e l i m i n a r y

Is the Idea Prima Facie Promising Yes Plan Feasibility Analysis Terminate Conduct Market Analysis Conduct Technical Analysis No

W o r k

Conduct Financial Analysis


E v a

A n a

Conduct Economic and Ecological Analysis Is the Project Worthwhile ? Yes Prepare Funding Proposal No Terminate

l
u a t i o n

l
y s i s

Key Issues in Major Investment Decisions


Investment story Risks

DCF Value
Financing Options

Objective of Capital Budgeting/Project


Finance theory rests on the premise that managers should manage their firms resources with the objective of enhancing the firms 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 the economic growth and the rate of improvement in our standard of living.

Basic Considerations : Risk and Return

Investment decisions

Return Market value of the firm

Financing decisions

Risk

Common Weaknesses in Capital Budgeting/Project process


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 firms 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.

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