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Mansoor Ali Seelro │ MBA (RE) 2Y │ mansoor.seelro@gmail.com │ std_18419@iobm.edu.pk │ June, 2016

Managing Projects

A project is (or involves) a capital expenditure (= capital investment/project). The basic characteristic

of a capital expenditure / investment is that it typically involves a current outlay of funds in the

expectation of a stream of benefits extending far into the future.

The following six (6) Phases of Capital Budgeting Process can be used to manage projects.

1. Planning

Idea generation / project concept

Preliminary screening of project proposals

Is the idea / project prima facie worthwhile / promising to justify a feasibility study?

2. Analysis

If the project is prima facie worthwhile, go for the following facets of project analysis in detail:

Market / marketing analysis (potential market, consumption trends, consumer behavior,

elasticity of demand, preferences, etc.)

Technical analysis (prerequisites for successful commissioning (=startup) of plant: machines,

raw materials, site, buildings, other inputs, etc.)

Financial analysis (ICO, means of financing, WACC, est. CFs, BE, projected profitability and

financial position, risk level, etc.)

Economic analysis (social cost-benefit analysis, income distribution in society, savings &

investment in society, impact on employment, etc.)

Ecological analysis (damage caused by project to the environment and restoration measures

in order to mitigate those damages)

Planning

Analysis

Selection

Financing

Implementation

Review

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Mansoor Ali Seelro │ MBA (RE) 2Y │ mansoor.seelro@gmail.com │ std_18419@iobm.edu.pk │ June, 2016

3. Selection (evaluation / appraisal)

Various project selection / evaluation / appraisal criteria or tools are as follows:

Criterion / tool Accept Reject

Non-discounting tools

1. Payback Period (PBP) PBP < target period PBP > target period

2. Accounting Rate of Return (ARR) ARR > target/req return ARR < target/req return

Discounting tools

1. Discounted PBP D.PBP < target period D.PBP > target period

2. Net Present Value (NPV) NPV > 0 (i.e. NPV is +ve) NPV < 0 (i.e. NPV is –ve)

3. Internal Rate of Return (IRR) IRR > WACC/req return* IRR < WACC/req return

4. Benefit-Cost Ratio (BCR) / PI BCR/PI > 1 BCR/PI < 1

* required (or expected) rate of return must at least equal (weighted average) cost of capital; hence used

interchangeably.

4. Financing

Decide on capital structure (i.e. D/E ratio)

FRICT (Flexibility, Risk, Income, Control, and Taxes) are key business considerations that

influence the capital structure.

5. Implementation

This is the phase where “Project Management” comes into play. For an industrial project,

implementation refers to the setup of manufacturing facilities – following are the stages:

Project & engineering designs (site probing/prospecting, plant designs, selection of

equipment, etc.)

Negotiations & contracting (legal contracts, technology acquisition, financial negotiations,

etc.)

Construction (site prep, buildings & civil works, erection & installation of plant/equip, etc.)

Training (training of engineers, technicians & workers)

Plant commissioning (startup of the plant)

6. Review

Periodic performance review & feedback system.

Note: Phases 1 – 4 above relate to the pre-feasibility and feasibility studies for a project. Phase 1

(planning) is concerned mainly with prefeasibility. Phases 2, 3 & 4 (analysis, selection & financing)

deal with the feasibility of a project. If the prefeasibility study reveals that the idea is viable and

worthwhile we go for feasibility study, otherwise we terminate before feasibility study. Next, if the

feasibility study is favorable we go for implementing the project, else we terminate without

implementing.