The planning and control of capital expenditure is

termed as “capital budgeting”.

Capital budgeting is the art of finding assets that are

worth more than they cost, to achieve a

predetermined goal i.e. optimizing the wealth of a

business enterprise.

The investment proposals need to be related to the

underlying corporate objectives and strategies.

Capital Investment Decision Process

Capital Investment process1. Search for Investment Opportunities

2. Screening the Alternatives

3. Analysis of Feasible Alternatives

4. Analysis of Feasible Alternatives

5. Evaluation of Alternatives

6. Authorization

7. Implementation and Control

Kinds of Projects Balancing Projects

Modernization Projects

Replacement Projects

Expansion Projects

Diversification Projects

Classification of Projects National and international projects

Industrial and non industrial projects

Project based on level of technology

- High technology projects

- Conventional technology projects

- low technology projects

Projects based on size

- large Projects

- Medium Projects

- Small projects

Projects based on ownership

- public sector projects

- private sector projects

- joint sector projects

Projects according to purpose - Balancing Project

- Modernization Projects

- Replacement/renewal projects

- Expansion Projects

- Diversification projects

- rehabilitation ( of sick units) projects

- upgradation projects

- maintenance projects

- Mergers and acquisition

- new project

Forward and Backward

IntegrationVertical integration

Back Integration

It is the creation of facilities for production of raw

material and components required for current

production.

Forward integration

It is the creation of facilities for manufacturing

products for which the current products of the

organization serve as inputs.

Rationale for Diversification To achieve consistent growth and profitability

( by transferring company’s strategic capabilityand providing superior value to customer).

When companies objectives are no longer compatiblewithin the scope of current portfolio (the conditionoccurs when there is decline in demand, highcompetitive pressures, quicker product lineobsolescence)

To enhance the shareholder’s value

The grass is greener on the other side or sheepmentality

Build, Own Operate (B.O.O)

Build, Operate and Transfer (B.O.T)

Lease,Rehabilitate,Operate and Transfer (L.R.O.T)

Engineering Procurement and Construct

Turnkey Contract

Projects Organization structure and management systems Project Organization Structure

Matrix organization structure

Task force organization structure

Benefits of Project Management

Project Management Information System

Managerial planning and control activities can beclassified as

Strategic planning

Tactical planning

Operational control

Level

Project Manager

Managers

Supervisors

Cost Parameters

Budgetary Control

Cost and Cash Inflow Control

Resources Productivity Control

PMIS Control Pyrzamid

Time Schedule ParametersMile Stone

Work Package Control

Activity Control

Use of Computers in Project Management Reporting

Resources management

Cost analysis

Stages in setting up of a project Initial selection of project ideas

a) Project must match with the promoters profile ofqualifications,experience,interest,etc.

b) Rough estimate of project cost and promoterscapacity to mobilize the necessary resources to theproposed project.

c) Clear idea about market size and growth potential.

d) The availability of inputs and proximity of market for final products.

e) Costinvolvedinproduction,administration,and marketing.

f) Availability of technology and plant and machinery.

g) Risks involved with the project.

Selection of Project location Proximity Of Inputs

Proximity Of Market

Availability of Water

Availability Of Transportation

Availability Of Power

Communication Facilities

Government Policies

Manpower Availability

Weather and Climatic Condition

Environmental Factors and Other Regulations

General living Conditions

Selection of Project Site Availability of land

Cost of site

Cost of site preparation and development

Soil and Topography

Selection of Technology Plant Capacity

Principal Inputs

Investment Outlay

Way by other units

Product Mix

Latest Developments

Ease of Absorption

SWOT Analysisa) Internal resourcesb) Availability of funds in capital marketc) Extent of support from banks and financial institutiond) existing and proposed level of investments and its impact on ROI,EPS and

market value of firme) The business and financial risk attached to afirmf) Technology developed internally or possibility to obtain reliable technical

know-how at cheaper costg) Brand loyalty of existing prouctsh) Source of raw material and other infrastructure facilitiesi) Market share,distribution net workj) Severity of competitionk) Cost of production and managerial competencel) Cost of capitalm) Governmental clearances and permissionsn) Macro and micro economic environment in which business operates

Zero date

zero date project means a date is fixed up fromwhich the implementation of the projectsbegins.The progress in implementation of theprojects is monitored by taking zero date as abase for counting the time as well as cost ofproject.

Financial closure

The entrepreneur will prepare and submit adetailed project report called „techno-economicfeasibility report‟ to the financial institution forobtaining term loans for project financing.on thebasis of this report ,he will obtain thegovernmental clearances,statutory permissions.

Project visibility

the project activities starts prior to the zero date.

Much of the time spent on planning the project

A project cannot be seen by the public most of its time

Work break down structure

the total project work is broken down according to

the various componenets and will establish the

connection between various components is termed

as „work breakdown structure‟.

Brown field project

A project implemented in the precints of a working

plant/working facilityis known as „brown field

project(BEP)‟

Resource levelling

Resource levelling is usage of resources during the

project durationwith minimum variation in resource

requirements without extending the project

completion time.

Project execution plan

Project execution plan (PEP) refers to that exercise

of matching the project hardware and software with

the executing agencies through a viable work

system.

CAT AND RAT Schedulea) The various approaches for time scheduling are

normally branded as CAT schedule and RAT schedule.

b) CAT schedule stands for „activity target schedule'. RAT

schedule stands for „reserved activity target schedule‟.

c) The CAT schedule is used for progressing of the

executing agencies whereas the RAT schedule are

those that are to be achieved. the project manager will

try to maintain a distance between two schedules so

that CAT schedule does not swallow the RAT

schedule.

d) A CAT schedule is detailed and developed in squared

network form and RAT schedule is maintained in ‟s‟

curve form.

e) The RAT schedule will contain only the key milestones

whereas the CAT schedule will have all important

activities.

f) The RAT schedule is based on some in built

allowances for delays. This allowance is not to

be disclosed to execution agencies. The RAT

schedule is for taking care of all uncertainties in

execution of projects.

g) If the achievement of key milestones is delayed

beyond the RAT schedule, then only slippage will

be accepted for reporting to the financial

institutions and the general public.

h) The CAT and RAT schedule should be revised

every time the cost estimates are revised to keep

the gap of allowance.

Line of balance (LOB)

o It is a device for planning and monitoring the progress of an order, project or program to be completed on target date.

o Dates are predefined for various major activities like positioning of materials, specific contributory tasks to be accomplished, subassemblies and subprojects are to be completed.

o It is useful control technique.

o It is a more detailed management oriented charting technique for monitoring progress.

Value Engineering Review

It is defined as a “a systematic analysis and evaluationof the technique and functions in the various sphere ofan organization with a view to exploring channels ofperformance improvement so that the value in aparticular product can bettered.

In other words it is an analytical technique, designed to examine all the facets and cost of a product, in order to determine whether or not any item of cost can be reduced or eliminated, while retaining all functional, performance and quality requirements.

Value engineering may be applied in the design and development stage and concentrates mainly on reduction of direct cost of production.

Risk Aware culture

o The project estimates are dependent on so manyassumptions as tosales,profitability,costs,investments,technicalestimates, work performance ,projectimplementation schedules.

o Risk and uncertainty involved

o The risk awareness culture is to be developed at all project management team to fight against any adversaries occur in implementation of the project.

Project procedure manual

o it is required to co-ordinate the various subsystemslike contract management,configuarationmanagement, timemanagemnt,cost,fund,materials,men andcommunications management.

o It is prepared in such a way that interacting agencies are able to see their roles and mutual relationships as per the common goal.

Time and cost trade off

o The project should be completed within its schedule ofimplementation and within the estimated cost.

o The project manger should be conversant with the different time savings and the extra cost involved with project.

o The following three option are available:

1. Most efficient project

2. Scheduled plan

3. Shortest duration plan

Monitoring capital expenditure

the accumulation, monitoring and control of capital expenditure of big project consists of the following steps

1. Budget

2. Allocation of job order No./Capex No

3. Collection of cost against each Capex No

4. Control of cost

5. Proper reporting

Variance and performance analysis

Variance analysis

traditional analysis involves comparison of actual costs with budgeted costs to determine the variance.

Performance analysis (BUGDETED – Actual)

it a modern approach where analysis is done for the project as a whole projects on schedule,behind,and ahead of schedule.

it indicates whether cost of a project as a whole project is as per budget

Network analysis (PERT and CPM)

it is a technique is a technique used for administrationof a project which consists of several activities having adefinite interrelationship among them. Each activityidentified by means of a starting event and a finishingevent so that normal duration of the activity can bedetermined.

o The project manager should decide

a) Which tasks must be done first before others can be started?

b) Which tasks could be done at the same time?

c) Which tasks must be started as soon as possible and completed on schedule if the completion date for the entire project is to be achieved?

Objectives of network analysis

I. To ascertain the normal duration for completion of all the activities comprised in the project

II. To minimize the cost of the project by propermarshalling of the resources

III. To obtain the ‘cost time trade off ’ t

Techniques of network analysis

o PERT

o CPM

Feasibility study report (pre-investment study report) Before a project investment is finalizes, the entrepreneur

will conduct a feasibility study to confirm about thetechno-commercial strength of project and prepares areport called feasibility report.

It contains the followingsa) Study of the configuration of the project idea in all

aspectsb) Identifying the type and size of the project with

justificationc) Study of location

j) Lack of reliable technology

k) Lack of flexibility

l) Financial soundness of participating investors

m) Unforeseen competition

d) Study of demand of products/services

e) Survey of material requirement

f) Project schedule

g) Project cost and sources of finance

h) Profitability and cash flow analysis

I ) Cost benefit analysis

j) Identifying and quantifying risk element

k) Social costs and benefits

l) Study of economic, political and legal environment

Market survey

o Before understanding any new project it is customary toundertake a market survey.

o Market survey is the other name of market research.

The effectiveness of market survey depends on-

i. Potential buyers

ii. Buyers intention

iii. Cost effectiveness

a) cost of identifying buyers

b) buyers willingness to disclose intention

c) buyers propensity to carry out their intention

Invisible walls in project estimationa) Delays in governmental clearances

b) Delays in obtaining sanction of loan from financialinstitutions

c) Reliability of contractors

d) Hurdles from the local people near the project site

e) Political disturbance

f) Foreign exchange rate variation

g) Unable to quantify the risk properly

h) Location disadvantage

i) Uncertainty of markets and change in consumer preferences

J) Lack of reliable technology

k) Lack of flexibility

l) Financial soundness of participating investors

m) Unforeseen competition

Reasons for project failurea) Substantial overrun of the project which makes the

project not feasible to implement further

b) Changes in technology during the implementation of the project

c) Wrongful estimation of cost of project and itsprofitability

d) Lack of experienced management team

e) Lack of delegation of authority and responsibility

f) Lack of proper project monitoring system

g) Failure to obtain government clearances andpermissions

h) Unfaithfulness of the promoter

i) Lack of sufficient knowledge about the project to promoter.

Techniques for project controla) Watch and measure the achievement at short

intervals

b) Ascertain current variances and predict future

variances

c) Ascertain root cause of variances

d) Take actions to offset the ill-effects of past

variances

e) Prevent future potential variances

f) Track and measure the quantitative output and

cost inputs

g) Evaluate targets, output and input in financial terms

h) Special monitoring of essential tasks by using techniques like red lists, hotline reports to draw top management’s attention.

i) Introduction of incentives for good performance

j) Doing away with red-tapism and bureaucratic procedures

k)Periodic review meetings and taking appropriate actions

Incentives in project planning Incentive for export oriented units

a) Liberal import facilities are allowed depending on actual import content of product and F.O.B value of product

b) Customs and central excise duties paid on rawmaterial used for manufacture of export products arereimbursable

c) Raw materials are supplied at controlled prices for specified export products

d) Priority is accorded by railways for transport of goods meant for export

e) Export credit guarantee corporation (ECGC) offers special assistance by way of protecting from credit risk

f)Insurance against loss in export of goods and services.ECGC also provides guarantee to banks and financial institutions to enable exporters to obtain better facilities from them

g)Financial facilities at special concessional rates of interest are given by commercial banks

h)100% foreign equity participation is allowed but the companyshould be an Indian company.

i) Imports of capital goods/components and raw materials are exempted from import duty

j) Single point clearance with simplified procedures

k)Relaxations are allowed in respect of sales tax, property tax,octroi

l)Tax holiday is available for 100% export oriented units

Incentives for units in industrially backward areaa) Central outright grant or subsidy scheme

b) Concessional finance scheme

c) Transport subsidy scheme

Incentives for small scale industriesa) Small scale units need not obtain industrial

licenses for certain category of items manufactured

b) Number of products and services have been exclusively reserved for small scale units.

c) Government provides comprehensive assistance to small entrepreneurs through various organizations like industries development organization.

d) Priority and assistance is provided in allotment of land

e) State finance corporations provides loan

Tax consideration in project planning

since corporate tax is a very vital element, themagnitude and timing of the tax burden associated

with projects should be carefully assessed. The taxincentives and benefits and tax implications have amajor role to play in project investment decision.

Impact of liberalization and globalization on project planning Under the post liberalization economic scenario,

India is facing:

global challenges of advanced technology

Problems concerning energy conservation

Rapid automation

Need to have high productivity and low prices

Issues arising out of efficiency oriented privatization

Challenges of speed and customer orientation

To survive in the globalization situation, the Indian

projects will have to:

be cost effective and inexpensive

Have low capital base

Use advanced technology suitable for Indianconditions

Be safe from pollution and nuclear radiation

Be energy efficient

Increase speed of delivery

Ensure good customer relationship management

All future projects should incorporate adequate

provisions for:

using non-conventional energy, natural gas and coalwhere possible

Partial replacement keeping pace with advancedtechnology

Utmost safety in operation

Conservation of resources

Good quality control

Ensuring excellence of end product

Strategies for staying close to the customer

Sticking to the expertise-core competence

Future projects should aim at:

alleviating poverty

Generating mass employment potential

Raise standards of living and quality of life

Making the country self sufficient in inexpensive essential goods and services

Safe disposal of waste

Adequate environmental protection

Strategic focus in project planning

a) Economies of scale by consolidation

b) Thrust on core business, in other words, expand the business globally where corporate has strength.

c) Upgrading products and technologies to ensurecustomer satisfaction with quality and reliableproducts and services.

d) Reduce product development time and cycle time to bring efficiency.

e) Cost effective solution, cost reduction and increasing value to customers.

f) Clear understanding of customer’s requirement andensuring customers loyalty on-going basis.

g) Down-sizing,delayering and business process re-

engineering to ensure efficiency in operations toservice to customers.

h) Deployment of techniques like total qualitymanagement, six sigma, activity based costmanagement etc.

i) Strategic alliance with Indian and foreign companies,joint ventures with foreign companies, start newbusiness or restore existing business.

Micro and Macro Considerations

At National level

At Sectorial level

At Project level

Macro considerations at national level

a) Overall growth of all sectors

b) Allocation of resources between sectors

c) Boost up private and public sector

d) Allocate the scarce resources

e) Controlling fiscal, monetary framework

f) Maintaining wage policy, exchange rate and inflationary pressure

g) Motivating economic behavior

Micro considerations at sectorial level

a) Ensuring the investment plan

b) Ensuring a balance in implementation of multiple

projects

c) New projects should be kept waiting

d) Rational decisions should be made on the basis of

past experience.

e) Cost benefit analysis

f) The investment plan should able bifurcate expense

in core and non core projects.

Cost and time over runs

pre feasibility stage

a) bureaucratic delays

b) Securing necessary approvals

c) Failure to plan on important resources

Evaluation stage

a) Better evaluation

b) Find lackings

c) Wrong selection of project

d) Wrong economic studies

choice of technology

a) Wrong selection of technology

b) Section of technology on the basis of credit availability by supplier

c) Delay in completing engineering

d) Improper scrutiny

Contracting and procurement

a) Improper preparation of tender documents

b) Wrong selection of vendors

c) More time consumption on importing material

d) Absence of proper quality

e) Poor logistic planning

construction stage

a) Starting construction activities without proper planning

b) Low productivity of contractors

Commissioning and start –up

a) Delays in making available manuals

b) Failure of equipments

c) Defects in installation

Methods to avoid cost and time overrun

1. master schedule/milestone network/master budget

2. Time and resources schedule

3. Procurement time schedule

a) calendar time construction work schedule

b) scheduling of contracting

c) Crashing economic analysis

d) Progress report

e) Fund flow analysis etc

Cost benefit analysis

It is more sophisticated technique recently introducedin long term decision making in capital projectsappraisal.

It is defined as “an analytical tool in decision makingwhich enables a systematic comparison to be madebetween the estimated cost of undertaking of projectand the estimated value and benefits which may arisefrom the operation of such a project.”

CBA and investment decisions

The concept of NPV may not be regarded as entirelyappropriate.

CBA is essentially discounted cash flow analysis for public sector institutions.

For a business assessing a project such comparison with the other investment opportunities currently available.

The only factor which will influence the decision will be those costs and benefit incurred and received privately by the firm

From society point of view road building has effects in the community which confer both costs and benefits on society as a whole e.g. increased traffic may create pollution of air and at the same time create jobs in the area around road

CBA is used to determine

a) Whether or not a specific operation should be undertaken

b) Which of the possible alternative projects should beselected

c) Which time cycle would be most beneficial to the project.

CBA Procedure

1. Determine problem to be considered

2. Ascertain alternative solutions to problem

3. Estimate and analyze costs and benefits

4. Appraise estimated costs and benefits

5. Decide on optimal solution

Techniques of CBA

a) Discounted cash flow techniques

- Net present value(NPV)

- Internal rate of return(IRR)

b) Benefit/cost comparison

c) Benefit/cost ratio

Benefits of CBA

1. Ensure value of money

2. Social cost and benefits

3. Protection from potential enemy

4. Good health

Limitations of CBA

1. Inaccuracy in data input

2. Difficult to forecast

3. Difficult to quantify

4. Difficulty in determining value of cost and benefits

Social cost benefit analysis

‘social cost' is a sacrifice or detriment to society.

‘social benefit’ is a compensation made to the societyin the form of increase in per capita income,employment opportunities,etc.

Social cost benefit analysis (SCBA) is a systematic evaluation of an organizations social performance as distinguished from its economic performance.

It is concerned with the possible influences on the social quality of life instead of economic quality of life.

• It is used to determine

a) Which alternative or choice is socially viable

b) Which alternative is the optimal or the best solution.

Indicators of social desirability of a project

a) Employment potential

b) Foreign exchange earnings

c) Social-cost benefit analysis

d) Capital output ratio

e) Value added per unit of capital

Economic Appraisal Technique of Project

Growing importance of public investment,especially in developing countries govt on development projects, the social cost benefit analysis has received increasing emphasis.

To eliminate the trade offs between growth and equity,investment projects are divided into

a) Capital intensive industrial project

b) Infrastructure investments

c) Agriculture and rural development projects

Economic Rate of Return

Domestic Resource Cost

Effective Rate of Protection