PROJECT EVALUATION AND

PLANNING
Submitted by: Aneket sewa

Enrollment no.,19001051

i) What do you understand by Capital Investment? Its

importance and difficulties.

Ans. Capital investment is the procurement of money by a company in order

to further its business goals and objectives. The term can also refer to a
company's acquisition of long-term assets such as real estate, manufacturing
plants and machinery.

IMPORTANCE
1. Effects in the long Run: the consequences of capital expenditure decisions
extend into the feature. The scope of current manufacture activities of a
company governed largely by capital expenditures in the past. Likewise,
current capital expenditure decisions provide the frame work for future
activities. Capital investment decisions have an enormous bearing on the
basic character of a company.
2. Irreversibility: The market for used capital equipment in general is ill-
organized. Further, for some types of capital equipment, custom-made to
meet specific requirement, the market virtually be non-existent. Once such
equipment is acquired, reversal of decision may mean scrapping the capital
equipment. Thus, a wrong capital investment decision cannot be reversed
without incurring a substantial loss.
3. Substantial outlays: Capital expenditures usually involve substantial outlays.
An integrated steel plant, for example, involves an outlay of several
thousand million. Capital costs tend to increase with advanced technology.

DIFFICULTIES
 1) Measurement problems: Identifying and measuring the costs and benefits of
a capital expenditure proposal tends to be difficult. This is more so when a
capital expenditure has a bearing of some other activities of the company
like cutting into sales of some existing product or has some intangible
consequences like improving the morale of workers.
2) Uncertainty: A capital expenditure decision involves costs and benefits that
extend for into future. It is impossible to predict exactly what will happen in
future. Hence, there is usually a great deal of uncertainty characterizing the
costs and benefits of a capital expenditure decision.

3) Temporal Spread: The costs and benefits associated with a capital

expenditure decision are spread out over a long period of time, usually 10-20
years for industrial projects and 20-50 years for infrastructural projects. Such
a temporal spread creates some problems in estimating discount rates and
establishing equivalence.

ii) Elaborate different phases of capital budgeting and

levels of decision making along with their key
characteristics.
Ans. Different phases of capital budgeting are-
1) Market Analysis:
A market Analysis studies the attractiveness and the dynamics of a special market
within a special industry. It is part of the industry analysis and thus in turn of the
global environmental analysis. It is concerned with two questions –
What would be the aggregate demand of the proposed product/service in the
future?
What would be the market share of the project under appraisal?
To answer the above questions, the market analyst requires a wide variety of
information and appropriate method.
1) Technical analysis:
The technical analysis of a project idea includes designing the various processes,
installing equipment, specifying material, and prototype testing, the project
manager has to be careful in finalizing the technical aspects of the project as the
decision is irreversible and the investments involved may be high. The Project
manager has to select the technology required in consultation with technical
experts and consultants.
 3. Financial analysis:
Financial analysis is the process of evaluating businesses, Projects, budgets and
other finance-related entities to determine their suitability for investment.
Typically, financial analysis is used to analyze whether an entity is stable, solvent,
liquid, or profitable enough to be invested in.
4. Economic analysis:
Economic analysis is a process for evaluating the merits of a particular project or
course of action in a systematic and rigorous way. Social cost-benefit analysis
refers to cases where the project has a broad impact on society and, as such, is
usually carried out by the government.
5. Ecological analysis:
Environmental concern has assumed a great deal of significance and rightly so. An
ecological analysis should be done particularly for major projects which have the
significant ecological implication.

CAPITAL BUDGET DECISION MAKING LEVEL

1) Operating Capital Budgeting- This may include routine minor expenditures,
such as expenditure on office equipment. The lower or the middle level
management can easily handle the operating capital budgeting decisions.
2) Administrative Capital Budgeting- This involves medium sized investments
such as expenditure on expansion of existing line of business. The decisions
are semi- structured in nature and so generally Senior manager is assigned
this type of decision making.
3) Strategy Capital budgeting- These types of decisions are significant
influence on the direction and influence to the business and so the top
management generally handles these types of decisions.

iii) What key issues are examined while making a

major investment decision?
Ans. A key consideration with investment is the rate or return that an
investment will make. This is vital because the owners of the business
look to management to maximize their return. If the business cannot earn
an acceptable return, then the owners would be better off taking their
cash out of the business and investing it elsewhere.
iv) Discuss the key business consideration relevant for a
project financing decision.
Ans. The key business consideration which is relevant for the project financing
decisions are -
1) Cost: In general, the cost of debt funds is lower than the cost of equity funds
because the interest payable on debt capital is a tax-deductible expense.
2) Risk: The main sources of risk for a firm are the Business risk and financial
risk. These are as follows -
Business risk: Business risk refers to the variability of earnings before
interest and taxes and arises mainly from fluctuations in demand and
variability of prices and costs.
Financial risk: Financial risk represents the risk arising from financial
leverage.
(3) Control: From the point of view of the promoters of the project, the issue of
control is important.
(4) Flexibility: This refers to the ability of a firm to raise further capital from any
source it wishes to tap to meet the future financing needs.

v) What are the items found in the cash flow

statement?
Ans.
a) Operating activities-
i) Cash inflows
1) Proceeds from sales of goods and services to customers.
2) Receipt from royalties, fees, commission and other revenues.
ii) Cash Outflows
1) Payment of employees benefit expenses
2) Purchase of inventory from suppliers
3) Pay operating expenses
4) Payment of taxes.
b) Investing activities
i) Cash Inflows
1) Sale of property, plant, equipment, long- term investments
 2) Receipt from Interests and Dividends
ii) Cash Outflows
1) Purchase of property, plant, equipment and non- current investments

c) Financing Activities
1) Cash Inflows
I ) Proceeds from issue of preference or equity shares
ii)Proceeds from issuance of debts /binds
iii)Procurement of Loans
2) Cash Outflows
I ) Redemption of preference shares, buy back of own equity shares
ii) Redemption of debentures and payment of long-term loans
iii) Payment of dividends and interests

Thank you