FM II _ Project Identification
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Transcript of FM II _ Project Identification
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Financial Management II
Investment (Project) Identification &
Feasibility Analysis
Lokesh Jain, CFPCM
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Project Identification
A project is defined as a non-routine-repetitive one-
off undertaking normally with discrete time, financial
and technical performance goals.
A project can be considered to be any series ofactivities and tasks that:
have a specific objective to be completed within certain
specifications;
have defined start and end dates;
have funding limits (if applicable); and
consume resources (i.e. money, time, equipment).
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Project Identification
A project is for setting up a plant and when the plant
becomes operational, the project is treated as
completed. A project is neither a physical objective
nor is it the end-result. It has something to do withthe activities that go on, which must be the same,
whether it is to build a nuclear power plant or
launching a new detergent
A project first emerges as a concept and follows
various stages, till it gets commissioned.
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Project Learning Component
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Types of Projects
a) New projects
b) Expansion projects
c) Modernization projects
d) Diversification projects
e) Other projects
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PROJECT LIFE CYCLE
a) Concept or initialization phase
b) Project definition phase
c) Growth or organization phase
d) Implementation phase
e) Project shutdown or cleanup phase
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Identification Of Project Opportunities
Product / service
Technology
Equipment
Scale of production
Market
Time phasing
Location
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PROJECT OBJECTIVES
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PROJECT CLASSIFICATION
Projects of different sectors
Industrial and Non-Industrial Projects
Projects belonging to core sector
Balancing
Integrating
Modernization
Expansion
Diversification
Rehabilitation/reconstruction
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FEASIBILITY STUDIES
To implement any project an entrepreneur needs tocarry out different types of feasibility studies. These
feasibility studies evaluate all the risks and returns
and try to balance them and help the entrepreneurto finalize his plans.
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TYPES OFFEASIBILITY STUDIES
Managerial Feasibility
Economic Feasibility
Commercial Feasibility
Financial Feasibility
Technical Feasibility
Social Feasibility
Market Feasibility
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FINANCIAL ANALYSIS
A wide range of criteria are available to judge theworthiness of investment projects. They fall into two
broad categories:
Discounting criteria
1. Net Present value
2. Benefit cost ratio
3.Internal rate of return Non-discounting criteria
1. Payback period
2. Accounting rate of return.
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NET PRESENT VALUE
The NPV of a project is the sum of the present values of all cashflows-positive as well as negative that are expected to occur
over the life of the project
NPV = CFt
t=0 (1+k) t
where,
CFt = cash flow at the end of the year t
n = life of the project
r = discount rate
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RULES FOR CONSIDERATION OF PROJECT
The proposal for investment will be acceptedif the NPV is positive, and rejected if the
NPV is negative.
If the NPV is zero then the project is in anindifferent position.
If a choice has to be made between two
projects, the project with higher NPV will be
accepted for investment.
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BENEFIT COST RATIO
BCR = PVB/I
Where PVB = Present value of benefits
I = Initial Investment
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RULES FOR CONSIDERATION OF PROJECT
If BCR =1, the decision will be indifferent If BCR > 1, The Investment decision can be
accepter
If BCR < 1, The Investment decision should berejected
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INTERNAL RATE OF RETURN (IRR)
IRR of a project is the discountrate whichmakes its NPV = 0.
In the NPV calculation we assume that the
discount rate is known and determine the
NPV.
In IRR Calculation we set the NPV= 0 and
determine the discount rate that satisfies
this condition
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RULES FOR CONSIDERATION OF PROJECT
If IRR > 1 accept the investment decision If IRR < 1, reject the investment decision
BENEFITS
IRR is closely related to NPV.
This method is easy to understand and
interpret.
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MODIFIED INTERNAL RATE OF RETURN
MIRRHere,
PV OF CASH OUTFLOW
= Terminal value of cash inflow
________________________
(1 + MIRR)
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PAY BACK METHOD
This method is the length of time required torecover the initial cash outlay on the project.
RULES FOR CONSIDERATION OF PROJECT
The shorter the pay back period, the project will
be more desirable for consideration
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ACCOUNTING RATE OF RETURN- (ARR)
ARR = PROFIT AFTER TAX
___________________
BOOK VALUE OF INVESTMENT
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SUITABILITY
For small sized projects, it is best to use Pay back andARR method and for larger projects, IRR method is
suitable.
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SENSETIVITY ANALYSIS
A means of identifying the project variables which,when varied, have the greatest effect on projectacceptability.
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Thank You