Management Studies: January 2012

Net Present Value (NPV)

It is a discounted cash flow technique. The cash flows of a project over its life are discounted at a specified rate. The difference of present value of cash inflow and present value of cash outflow is the net present value. If the present value of total benefits is higher than the present value of total costs, the project is acceptable. The NPV must be positive.

Formula, tables and computer programs are available to calculate net present value.
The formula for calculating net present value is:

where, PV = Present value, k = discount rate, n = number of years

Advantages of NPV

It considers time value of money.
It considers cash flow over the total life of the project.
The discount rate is specified.

Disadvantages of NPV

The discount rate may not be realistic.
Its calculation is not easy.

Internal Rate of Return (IRR)

Internal rate of return (IRR) is a discounted cash flow techniques. The discount rate is not specified. The trial and error method is used to find the discount rate which equates the present value of cash outflows and cash inflows to zero. IRR is the rate where net present value is zero. If the internal rate of return is greater than the required rate of return, the project is acceptable. The cost of capital generally servers as the indicator of the required rate of return.

Formula, annuity tables and computer programmes are available to calculate internal rate of return. Computer can do seconds where people take hours to calculate IRR.
The formula for calculating Internal Rate of Return is:

where R= Cash Flow, r = discount rate, n = number of years

Advantages of IRR

It considers time value of money.
It considers cash flow over the total life of the project.
Comparison of IRR with cost of capital considers the risk factor.

Disadvantages of IRR

It is complex and difficult to use.
The discount rate is not fixed.
It needs to be used carefully for evaluating exclusive projects.

Pay Back Period (PBP)

It measures the period of time required for the cost of a project to be recovered from the earnings of the project (annual cash flow). The main concern is the recovery of initial outlay.

Example:

Original project cost $500,000

Earning per year $100,000

Pay Back Period 5 years

The shorter the pay back period, the better the project.

Advantages of Pay Back Period (PBP)

It is easy to operate and simple to understand.
It considers earnings from the project for the payback period. The uncertainty is reduced.
Loss through obsolescence is reduced. Short pay back period reduces risk.
It serves as a standard to compare profitability of alternative projects.

Disadvantages of Pay Back Period (PBP)

It does not consider cash flow after the pay back period.
Time value of money is not considered.
It ignores uneven profits from various projects.

Return on Investment (ROI)

The return on capital employed is used as a criterion for making investment decisions. Net capital employed, consisting of total assets minus current liabilities, is used to calculate the return Net profit is used as return.

Satisfactory return is influenced by the nature of business, risks involved, comparative return from fixed deposit in Banks, and external economic conditions.
If the ROI is satisfactory, the project is accepted.

Advantages of ROI

It is simple to calculate, operate and understand.
It considers the cash flow throughout the life of the project.
It serves as a standard to compare profitability of alternative projects.

Disadvantages of ROI

It ignores time value of money.
It is difficult to define what is satisfactory rate of return.
It ignores varying profit from various projects.

Revisiting Feasibility Study

The feasibility study severs as the starting point for appraisal. Al the aspects of feasibility are carefully revisited

Technical Appraisal: Alternative technical solutions, processes, engineering and design requirements, technical specifications, technical risks and uncertainties, local resource availability, size, scale of operations, layout, location and geology are summarized and assessed.
Economic Appraisal: Economic assessment is in terms of worth of the project to the society. The costs and benefits of the project are assessed and summarized. The criteria used for assessment are:

Comparison of benefits and costs
Cost-benefit ratio
Internal Rate of Return (IRR)
Net Present Value (NPV)

Marketing Appraisal: Factors such as project capacity, market demand, market coverage, demand forecast, estimated revenue, marketing programme, competition and ability to satisfy customers are summarized and assessed.
Management Appraisal: Important features of project organization and management, institutional relationships, management capacities and limitations and impact of stakeholders on the project are summarized and assessed.
Environmental Appraisal: The positive and adverse environmental impacts of the project are summarized and assessed.
Financial Appraisal: Factors such as capital requirements, sources of funds, projected cash flow, profitability, and the project's capacity to meet financial obligations are summarized and assessed. Sensitivity analysis is done to test the effects of changes in variables such as cost, price and time on the project's ability to achieve objective. Ratio analysis is done to assess liquidity and profitability. The effect of inflation is assessed.

Project Appraisal

Appraisal is the evaluation of the overall ability of the feasible project to succeed. It is done after the feasibility study of the project has been completed. The aim is to consider and compare the possible feasible projects and select the best that meets the objectives.

Appraisal is done systematically to provide an overall assessment of the project's likelihood for success. It answers the following questions:

Will be project as designed meet its objectives?
How does the project compare with other competing projects? This question applies if more than one project has been found feasible.

The primary function of appraisal is to evaluate a project's ability to achieve its objectives. For a private project, the objective is profitability. For a public project, the objective is socio-economic development in the country through economic growth, employment, poverty reduction etc.

Project Planning Process

Understand the Project Objectives: The very first step in a project planning is understanding the project objectives. Objectives are results to be achieved. They are the end result of project planning. They should be clearly understood and defined.
Identify Key Project Stages: A stage is the major sub division of the project. Normally, the key stages in a project are formulation, planning, implementation and termination.
Prepare Work Breakdown Structure: It identifies various activities to be performed in each stage of project. The Work Breakdown Structure (WBS) is used for breaking down the work into smaller elements. Generally a hierarchical Work Breakdown Structure is prepared. It is a detailed listing of steps required to complete a project.
Determine Logical Sequence of Activities: The logical sequence of activities are determined by the use of Network Analysis and other tools. The critical path for the project is determined.
Estimate Time and Resource Requirements: Accuracy in estimates of time, cost and other resources is important for project planning. Historical data, experience and experts can be helpful. Quantitative techniques and computer simulations can also help. The size of the activity and the efforts needed to complete it determine time and resource requirement.
Allocate Responsibilities for each Activity: Each activity of the project needs to be owned by an individual or department in the project. Responsibilities are carefully allocated for project activities. A record of the responsibilities allocated is kept.
Finalize Project Plan: The project schedule is optimized for the sequenced activities of all the stages of the project. The resources are allocated to each activity. The project plan is finalized.

Reasons for Project Planning

Control risks and uncertainty in the project environment.
Allocate resources in a coordinated manner.
Establish standards of performance for project monitoring and control against which:

Project progress can be measured
Resource usage and expenditure can be monitored
Project viability can be assessed.

Provide a structured basis for executing the project work and to sequence and schedule the work based on Work Breakdown Structure (WBS).
Establish procedures to make corrections in project work.
Achieve project results on time, to the budgeted cost and to the desired level of quality performance.
Improve efficiency of project operations by minimising waste.
The need for project planning increases with the increase in size and complexity of the project.

Bases for Effective Project Planning

Statement of Work (SOW): It is narrative description of the work to be accomplished by the project. It describes project parameters and constraints.
Project Specifications: They are documents stating the procedures and processes for technical contents, quality standards and organizational policies.
Milestone Schedule: It identifies major events in the project for formal reporting of progress including project start and end dates. It identifies logical relationships among tasks.
Work Breakdown Structure: It is grouping of activities in hierarchical order for each stage of the project. It breaks down the work into smaller elements which are measurable and integrable. It provides a basis for developing time, costs and schedules. Schedule is project time table.

Project Planning

Project planning is concerned with development of project for investment. Planning is very important for effective implementation and controlling the project. It identifies and addresses the tasks required for accomplishment of project objectives. It acts as a road map for managing the project. It determines how the project objectives will be accomplished. It involves detailed design,k budgeting, scheduling and allocation of resources.

Project planning is the detail scheme for proper arrangement of necessary action, steps and means. So that the objective of the proposed project's objectives can easily be achieved within stipulated time, cost and quality. Project planning is the process of setting project's goal and defining action to achieve those goals. It is mainly concerned with development of project investment. It identifies all key project task to be accomplished and milestone should be achieved. It prepares detail schedules and then the schedules are used for procuring equipments, materials, organizing the required resources, sequencing and measuring task performance.

Need of project planning

To establish and obtain greater understanding of project objectives and constraints.
To arrange the available resources in a coordinated manner.
To determine standard of performance evaluation and control.
To avoid confusion and wastage.
To identify the require time and resources for each task and total project.
To determine the rules and responsibility of a project team members.
To ensure greater communication and co-ordination.
To reduce the risk and uncertainty.
To provide a basis for project implementation through work down structure, scheduling and sequencing.
To improve the efficiency of operation.

The tasks involved in project planning are:

Feasibility Study: It determines the implementability of the project.
Appraisal: It is evaluation of the project's ability to succeed. It is done after the feasibility study is done.
Design: It is concerned with the preparation of :

Detailed engineering design, including blueprints and specifications.
Detailed implementation plan including schedule, cost estimates and allocation of resources.

Project planning is concerned with looking ahead at the future work plan of a project. It is deciding in advance about:

What activities need to be done in the project?
How the activities will be done?
When the activities are to be done?
Who will do the activities?

Steps for Planning Process

Analyze Opportunities: This is the first step of planning process and based on SWOT (Strenths, Weaknesses, Opportunities and Threats). Environmental scanning is done to generate data.

Strengths and weaknesses are internal to organization. They come from technology, structure, people.
Opportunities and threats come from the external environment. They come from political, economic, technological, social, cultural forces.
Resources assessment is done to find out resource availability.
Issue Analysis: The main issues to be dealt with in the plan are pinpointed.

Set Goals: Goals are results to be achieved. They provide direction to the plan. They are set for entire organization and for divisions and units. Goals should be SMART (Specific, Measurable, Agreed upon, Realistic and Time bound).
Develop Premises: Premises are key assumptions about the future environment in which the plan is to be carried out. Forecasting is important for premises.

Premises can be about sales, products, price, costs, technology, tax rates, etc.
Premises are developed about all the critical aspects of plan.

Determine and Evaluate Alternatives

Alternative courses of action are determined for achieving objectives efficiently. Most attractive alternatives are identified for evaluation.
Alternatives are evaluated in terms of contribution to goals achievement. Quantitative tools are used for evaluation. Computer can be a great help.

Select a Course of Action: The best course of action is selected. Costs, profits and judgement are important selecting a course of action. Two or more alternatives can also be selected. The limiting factor determines selection. It can be time, cost, quality or resource availability.
Formulate Action Plans: Action plan for each activity is prepared. Such plan sets targets. The integrated action plans become programme. Action plans answers:

What will be done?
Who will do it?
When will it be done?
How will it be done?

Prepare Budget: Action plans are converted into financial plan. Budgets are prepared for each activity to find out how much will it cost. Budgets serve as standards for control.

Principles of The Process of Planning

The principles of the planning are:

Principle of the limiting factor: Accurate recognition of limiting factors to goal attainment leads to accurate selection of alternatives.
Principle of commitment: Planning time frame should be appropriate to fulfill the commitments through a series of actions.
Principle of flexibility: Flexibility in planning lessens the losses of unexpected events. Advantages of flexibility should justify costs.
Principle of navigational change: Planning events and expectations should be checked periodically. Plans should be re-drawn to maintain a course toward the desired goal. (Periodically reviewing and rewarding plans). The planner should be a navigator.

Planning principles of commitment, flexibility and navigational change provide contingency approach to planning.

Characteristics of Total Planning Process

Process: Planning is a process. Process is systematic way of doing things. It is a mental process. It involves creative thinking and imagination.
Future-oriented: Planning anticipates future opportunities and threats. It is based on forecasting and environment scanning. It decides in the present about what is to be done in future. It provides direction to the organization.
Pervasiveness: Planning concerns all levels of management. It is the function of every manager. Its nature and scope differ according to the level of managers. Top managers set mission and objectives. Lower managers execute the plans.
Goal-oriented: Planning is goal focused. It not only sets goals but also selects actions to achieve them. It entails commitment of resources to selected actions. It is not based on hunch or guesswork. Actions are selected from among alternatives.
Decision-oriented: Planning involves decisions at all levels of management. It involves interdependent set of decisions. It coordinates various activities through decisions.
Efficiency: Planning is directed towards efficiency at all levels of management. Efficiency means greater output at lower costs. Alternatives are evaluated on the basis of efficiency.

Total Planning Process

We know that planning is the process of determining future course of actions. It is the process of setting goals and choosing the actions to achieve those goals. It is looking ahead. It attempts to define the future path of organization.

Planning selects future courses of action from among the alternatives. It serves as a guide for allocating resources in a coordinated manner. It specifies ways and means of implementing actions. It is the prime instrument for directing efforts. It provides targets which serve as standards for controlling performance.

Planning is a way of organizational life. Managers must plan. All other management functions are based on planning. Planning has primacy in management functions. Project planning is a part of total planning process in organizations.

You may also like this:

Problems of Railway Transport

Poor Maintenance: The technology used in railways is old and outdated. Spare parts are not available. The maintenance has been very poor. Safety is poor. Railway lines need rehabilitation.
Disruptions: Frequent breakdowns and natural calamities from floods and landslides disrupt railway services. This has made the service unreliable.
High Cost: Compared to road transport, railways costs are high in Nepal.
Poor Sustainability: Lack of alternative road transport is responsible for sustainability of railways. Future sustainability is questionable. Financial performance of railways is also poor.

Nepal and India negotiations are going on for the development of a railway network in Nepal. China has plans to connect its Tibet region with Nepal through railways.

Position of Railway Transport in Nepal

Railways are an important mode of transport for passengers and goods for projects. Nepal's network of railway transport consisted of:

Raxaul - Amlekhgunj Line (non operational)
Janakpur - Jayanagar Line
Raxaul - Birgunj Dryport Line

The Raxaul - Amlekhganj line became non operational after the opening up of Tribhuvan Highway which linked Kathmandu to India. At present Janakpur - Jayanagar line, which is 51 kilometers in length, is operational. Raxaul - Birgunj Dryport line has recently become operational with Indian Aid for import and export purposes.

Contents of Project Proposal (Financial Part)

This part outlines the implementation plan for the project.
It contains estimates of time required, the cost, and the materials used. Each major activity of the project is listed along with its cost estimates.
The costs of all activities are aggregated. Equipment costs and overhead costs are added to calculate total project cost.
An executive summary of the proposal should be provided at the beginning.
After submission to the customer, a proposal becomes a bid.
Diagrams, pictures, bar charts, graphics make proposals attractive.

You may also like this:

Contents of Project Proposal (Technical Part)

Problems: It should begin with a description of the problems to be addressed. The approach to tackle the problems should be presented in sufficient detail. The methods of resolving critical problems should be outlined. Customer requirements should guide this section.
Special Requirements: Ways of handling special requirements of the customer and variation orders should be listed.
Test and Inspection: All test and inspection procedures to assure performance, quality, reliability and compliance with specifications should be noted.
Logistics: Plan for logistic support should be outlined. It can be facilities, equipment, skills and administrative aspects of the project.
Reporting: Nature and timing of progress reports and evaluations should be noted.
Bio-data: Bio-data of key members of project team and responsibilities assigned to them should be provided.
Capability Statement: It is of the organization presenting the proposal. Past experience should be provided.

You may also like this:

Considerations For Project Proposal

Project Problem: The project problem for which the proposal is to be prepared should be carefully considered. It should deal with the terms of reference provided. The organization should have the capability to tackle problems of the project.
Organization and Staffing for Implementation: The composition of project team for implementation of project should be multidisciplinary. Professional people should handle the job. Implementation plan should be specified. So should the logistic support for the project.
Costing Estimates: The customer's ability to pay and cost estimates should be the prime considerations in costing of the proposal. There should be a bidding strategy. Competitor's bidding strategy should be considered to set the bid price.
Cost of Proposal: The development of a project proposal involves cost. How much should be spent on preparing the proposal should be an important consideration. The guidelines can be:

If the proposal is a full part of the competitive bidding, it is worth investing time and money to prepare it in detail and formally.
If the proposal is the first examination of the possibilities of a project, an overview brief proposal should be submitted.

You may also like this:

Pages