Planning

Planning
y Overview y Resource Allocation Framework

y Generation and Screening of Project Ideas.

Overviews
y A mini-steel plant is considering building a new Arc
Furnace:

y An insurance company is planning to install a computer

system for information processing. link Ganges and Cavery rivers.

y Government of India is thinking of an ambitious plan to

y Gautam a graduate student is planning to buy a

moped

y Involves - A capital expenditure decision

y y y y y
Importance and difficulties. Phase of capital budgeting Levels of decision making Facets of project analysis Objectives of capital budgeting

Importance
Long term effects irreversibility Substantial outlays

Difficulties

Measurement Problem

Uncertainty

Temporal spread

Cost

Benefit

Phases of Capital Budgeting

Planning

Analysis

Selection Implementation Review

Analysis
y
Marketing

Technical

Financial

Economic

Ecological

Selection
Appraisal Criteria

Non Discounting

Discounting

Pay back period Accounting Rate of return

Net present value Internal rate of return Benefit Cost Ratio

Criteria PBP ARR NPV IRR BCR

Accept PBP < target period ARR > Target rate NPV > 0

Reject PBP > target period ARR <Target rate NPV < 0

IRR > Cost of capital IRR <Cost of capital BCR > 1 BCR < 1

Implementation

Stage Project and engineering designs Negotiations and Contracting

Concerned With Site probing and prospecting preparation of blue prints, and plant designs, plant engineering, selection of specific machineries and equipment Negotiable and drawing up of legal contracts with respect to project financing, acquistion of technology, construction of building and civil works, provision of utilities, supply of machinery and equipment, marketing arrangements etc Site preparation, construction of building & civil works, erection and installation of machinery & equipment Training of engineers, technicians and workers

Construction

Training

Plant Start up of the plant Commissioning

y Translation of an investment proposal in to a concrete

project is a complex, time consuming & risk fraught task. Delay in implementation can lead to substantial cost overruns. For expeditious implementation at a reasonable cost, the following are helpful-

Adequate formulation of project

Home-work in term of preliminary studies

Comprehensive and detailed formulation of project

Use of principles of Responsibility Accounting

Time Frame

Cost Limit

Use of Network Techniques

PERT

CPM

Network Techniques

Key issues in Project Analysis

y Market Analysis
y Potential market y Market Share

y Technical Analysis
y Technical viability y Sensible choices

y Financial Analysis
y Risk y Return

Key issues in Project Analysis

y Economic Analysis
y Benefit and costs in shadow prices y Other impact

y Economical Analysis
y Environment damage y Restoration measures

Feasibility Study: A Schematic Diagram

General of ideas Initial Screening Is the idea prima facie promising

Plan feasibility Analysis

Terminate

Plan feasibility Analysis

Conduct Market Analysis

Conduct Technical Analysis

Conduct financial Analysis Conduct Economic and Ecological Analysis Is the project is worthwhile

Prepare finding Proposal

Terminate

Resource Allocation Framework

y In an HBR article, Seymour Tilles wroke The most
tangible expression of a companys strategy is its allocation of funds. Few things determine the future of the company as directly as the way it spends its money. Those activities which are treated generously are presumably the real basis of the companys future.

Research Allocation Framework

y Key criteria y Elementary investment strategies y Portfolio planning tools y Strategic position and action evolution y Diversification debate

Key Criteria Profitability Unit of Measurement Risk Unit of measurement Range of possible outcomes Difference between highest and lowest outcomes i.e Range of return of equity Growth Unit of measurement

ROE = PAT Net worth

- Assets - Networth - Profits -Dividends - So on.

Elementary Investment Strategies

 Replacement and Modernization  Capacity expansion  Vertical integration  Concentric diversification  Conglomerate diversification  Disinvestments

Portfolio Planning Tools

y BCG Product Portfolio matrix y General Electrics Stoplight Matrix

BCG Product Portfolio matrix

Relative High Market Share

Industry Growth Rate

Low

High

Stars

Question marks Dogs

Low

Cash Cows

Stars

Question Marks Dogs on disinvestments (Funds released)

Cash cows (Funds generated)

Stars

Question marks

Cash cows Dogs

General Electrics Stoplight Matix

Business Strength Strong High Invest Average Weak Invest Hold Divest Hold Divest Divest

Medium Invest Low Hold

Functions of Planning
y It provides a basis for organizing work on the project
and allocating responsibilities to individuals. between all those involved in the project.

y It is a means of communication and coordination y It induces people to look a head. y It instills a sense of urgency and time consciousness y It establishes the basis for monitoring and control.

Areas of Planning
y Planning the project work

y Planning the manpower and organisation

y Planning the money

y Planning the information system.

The work break-down structure helps in

y Effective planning by dividing the work into manageable
elements which can be planned budgeted and controlled project personnel and outside agencies.

y Assignment of responsibilities for work element to y Development of control and information system

Life Cycle of a Project

y Project development and preliminary engineering. y Bidding and contract negotiation y Engineering design y Purchase and procurement y Construction y Commissioning

Tools of Planning
Bar charts/ Gantt Chart Network Technique

y Simple to understand y Used to show progress y Can be used manpower

planning Limitations

y Effectively handle
interrelationship

y Identify the activities which

are critical- on time large projects updated

y Can handle complex and y Easily computerized &

Limitations

y Cannot show interrelationship

among activities in complex projects

y Physical limit to the size y Frequent changes & updating

is not possible

y Not easily understood by

project personnel

y Operational schedule is not

defined. i.e. who does, what & when

y For a large project a hierarchy of plans, having varying

levels of details need to be prepared.