Time value of Money

1
Time value of Money

• It may be noted that any project which is
  undertaken will involve the expenditure ie lot of
  Money.
• Money has time value. A rupee today is more
  valuable than a rupee a year hence.
• There are several reasons
• 1) Individuals in general prefer current
  consumption to future consumption
• 2) Capital can be employed productively to
• generate positive return. An
  investment of one rupee today would grow to
  (1r) a year later( r is rate of return on the
  investment)
• In an inflationary period a rupee today
  represents a greater real purchasing power
  than a rupee a year hence

2
Future value of a single amount

• To understand the future value of a single amount
  ,let us take an example.
• A bank is willing to give 10 interest
  compounded annually, for a period of 3 years,
• deposit will grow as follows
• First year principal amount -- 1000/-
• Interest for one year 100010/100 100/-
• Principal amount for second year 1100/-

3
contd

• Second year Interest would be 110 hence
  principal for third year Rs1210/ and interest
  would for third year Rs121/- thus value of money
  at the end of third year would become
  1210121Rs1331/-. The general formula we can
  apply to calculate would be
• n
• FVnPV(1r) where PV cash today
• FVn Future value
  n years later
• r
  interest rate per year
• n
  Numbers of year

4
Present value of money

• As we have discussed future value of money we
  should also understand Present value of money.
  Suppose some one promises to give Rs1000/- three
  year hence if we want to know what is the present
  value of this money at the interest rate of10
• Value three year hence 1000.00
• Value two year hence 1000( 1/ 1.10)
• Value one year hence 1000(1/1,10)(1/1.10)

5
Key steps in Market and Demand analysis
Collection of secondary information
Demand forecasting
Situational analysis specification Of objectives
Characterization of market
Market planning
Conduct of market survey
6
Commercial Appraisal of Project

• Commercial appraisal entails assessment of
  existing demand and projected demand and supply
  gap in the envisaged product-mix. Market is very
  important aspect of the project
• and it must be appraised very critically
  .Commercial aspect of the project can be
  assessed by focusing on following aspects
• 1- Scope of the market in terms of the
  demand of product

7
contd

• Assessment of quality price of the product which
  result in consumer preference for the product in
  relation to competitive products
• Prospects of entering into export market and
  likely extent of export sales
• Information on government control ,if any, on the
  sale price ,distribution ,import ,export in
  respect of product proposed to be manufactured

8
Commercial Appraisal

• Commercial appraisal entails assessment of
  existing and projected demand and supply gap in
  envisaged product-mix. Market is very important
  aspect of the project and must be appraised very
  carefully and critically , it can assessed by
  focusing on following aspects
• 1) scope of the market in terms of the demand
• of the product

9
continued

• Assessment of quality and price of the product
  which would result in consumer preference for the
  product in relation to competitive products
• Evaluation of the current and future demand and
  supply of the product mix proposed to be
  manufactured.
• Prospect of entering into export market and
  extent of export sales

10
Technical appraisal

• Technical appraisal is of great importance in
  project need assessment. The field covered by
  technical appraisal is wide, it basically
  includes investigation regarding location of
  unit, production process , selection of
  appropriate technology , technical tie-ups ,scale
  of production ,size of plant , selection of plant
  machinery, utilities required and schedule of
  implementation.

11
Location of a Project

• The basic consideration for project sites are
• 1) Size , suitability and cost of land
• 2) Availability of adequate water, power ,
  sanitary and sewerage services
• 3)Transportation facilities
• 4)Availability of skilled manpower
• 5) acceptability of project by local people

12
Raw Material

• Availability , adequacy and of reasonable price
  of raw material are important factor for long
  term success of the project. Raw materials if
  imported, one must consider the governmental
  rules and regulation and also indigenization plan
  for same so as to reduce cost and development of
  technology manufacturing capability for the
  same . in case
• cement , glass , aluminium projects leasing of
  mines is of utmost importance

13
Manpower and technical management

• The availability of appropriate personnel often
  decides the success or failure of project. The
  important aspect of technical appraisal is to
  determine the capability of technical people
  associated with the project and their capability
  to manage the project from conception through
  design , implementation and operation

14
Environmental Local aspects

• In project appraisal care should be taken for
  disposal of waste and effluent and it should
  conform to State pollution control boards.
  Project should have little detrimental impact on
  natural resources
• Collaboration and tie-ups
• Due consideration must be given for
  collaboration and tie-ups so that technology
• can be absorbed suitably

15
Financial Feasibility

• Financial feasibility is of critical value to the
  success or failure of project. Financial
  appraisal involves the evaluation of following
  aspects
• Financial analysis of past working results
• Preparation of cost estimates financial
  projections
• Means of financing
• Financial institutions lending the finance

16
Important aspects

• While estimating the cost of project following
  aspects must be considered
• 1) Land , site development and building
• 2)Technical know-how fees
• 3) Preliminary and capital issue expenses
• 4)Provision for contingencies
• 5) Margin money for working capital

17
Means of Financing

• Availability of financial resource is an integral
• part of managing project . The sources of
  financing are
• 1) Share capital and Debenture
• 2) long term rupee loans/ foreign currency loans
  from IDBI ,IFCI ,LIC
• Foreign financial institution like IMF, World
  Bank, ADB

18
Conitinued

• Deferred payment of Plant and Machineries both
  indigenous and imported
• Unsecured loan from promoters
• Banks like State ban of India, ICIC Bank
• Foreign collaborators.
• Sound debt-equity ratio is indispensible for
  successful operation of projects. This ratio
  depends on many factors like gestation period

19
Financial Institutions

• The financial institution have played very
  crucial role in development of various projects
• In India since Indias independence. They
  have played a very decisive role in strengthening
  the India economy. An integrated network of more
  than 60 institutions functioning at all India
  level as also at State level has been setup not
  only for financing but also to promote
  establishment of
• new projects

20
Some of the financial Institutions

• Industrial Finance corporation of India- The
  IFCI was set up in 1948 as public corporation was
  restructured in to a company in July 1993
  provides medium and long term loans to Industries
• Industrial developments bank of India ( IDBI)
• Established in 1964 ,The IDBI coordinates the
  activities of other financial institution,
  supplements their resources to plan promote

21
continued

• Medium and large industries.
• Small Industries Development Bank of
  India(SIDBI)- A wholly owned subsidiary of IDBI
  .This the main institution for developing and
  financing the small scale industries

22
Economic Appraisal

• Economic appraisal as also the evaluation of the
  project profitability constitute important
• criterion for the success or failure of the
  project. Three basic questions are raised
• 1) Whether the project would contribute
  significantly to the development of the sector
• and economy as a whole?
• 2)whether Project will contribute to the
  industrial development of the concerned region

23
continued

• Whether project would improve the socioeconomic
  status of the people in the region ? Would
  project result in overall foreign exchange
  saving/earning or not? Export potential of
  projects( namely Industries) are also kept in
  view. Following measures are adopted to assess
  the viability of the project
• 1) Economic rate of Return
• Investment to employment ratio
• Pay back period

24
Environmental Analysis

• Growing concerns of environmental resource
  depletion and pollution have forced the Planners
  , Policy-makers and project implementators to
  take care of environmental
• on the new and existing projects. Following are
  the environmental components
• 1) Air
• 2) water
• 3) Land

25
continued

• Fauna and Flora
• Monumental resources
• Socio-economics
• Human aspects
• Environmental Impact Assessment(EIA) is
  defined as An Activity designed to identify ,
  predict , interpret and communicate information
  about the impact of action on mans health and
  well being

26
Project Implementation

• Implementation stage covers the actual
  development or construction of the projects up to
  the point at which these become fully
  operational. It includes monitoring of all the
  aspects of work or activity as it proceeds and
  supervision by oversight agencies within the
  country or external lenders. Every project has
  start and ending dates, and what happens between
  these dates is nothing but Implementation. It is
  the heart of the project

27
Continued

• Implementation is what realizes plan , what
  generates project outputs and what utilises the
  scare resources Its role is to mobile the
  resources which were anticipated and
  operationalize the activities which were designed
  .This implies that project activities will
  achieve anticipated out comes in the sense of
  technical performance within given cost and time
  schedules. Implementation has the objective of
  anticipating deviations from planned performance
  and making proper adjustment

28
Task of the Manager

• An important task of the project manager is to
  keep track of the range of project activities ,
  their functional responsibility and their
  scheduling dependencies. He has to be an
  enlightened manager of Human resources. Project
  staff have not only to be motivated to accept
  the managers leadership and direction but also
  encouraged to take responsibility of project
  performance

29
Network Techniques (CPM PERT)

• For sound planning , scheduling and control of
  project control activities , Network techniques
  have been found useful .Two techniques , namely,
  CPM PERT have been found relevant for Project
  Management. Network techniques involve breaking
  up projects in terms of activities to be carried
  out ,studying their inter-relationship among them
  , bringing causality of each activity fixing
  time schedule for each, to complete project by
  due date. Top management may apply tecnique based
  on broad categories compared tolevel use of more
  detailed technique by lower

30
Critical Path Method

• CPM an acronym for critical path Method was
  developed in1956-67 by Du Pont company in USA to
  solve scheduling problems in industrial concern.
  CPM is basically a technique used for reducing
  the time required to implement the project , By
  breaking the project in terms of activities and
  functions and by fixing their time sequence, it
  is possible to isolate the most critical activity
  in project and to compute the critical Path
  schedule for their implementation. Main thrust of
  CPM analysis is time-cost relationship

31
Assumptions

• Assumption in CPM analysis are
• Activities and function of a project can be
  crashed for their implementation
• Crashing reduces time but leads to enhanced
  direct costs because of factor like overtime and
  wastages.
• It involves fixation of time schedule for each
  activity . cost are two type Direct indirect

32
Programme Evaluation Review Technique

• PERT was originally developed in 1958, to
  facilitate the planning and scheduling of the
  Polaris fleet Ballistic Missile project of the US
  government . Designed to handle risk and
  uncertainty , PERT is widely used in defense and
  space industry and in other projects involving
  new technology. In comparison to Deterministic
  approach in the CPM, PERT approach is
  Probabilistic

33
Formula for PERT computation of an activity

• Lewis has given at formula for PERT computation
  of activity. The estimate of average expected
  time to perform an activity is a4mb
• te _______
• 6
• te expected time m most likely time
• aoptimistic time b pessimistic time

34
PERT CPM comparison

• Both techniques have found widespread use in
  scheduling .they hold good potential for use
• developing countries
• Main thrust of CPM is on time-cost relationship ,
  the focus of PERT is on shortening and
  controlling project time
• The PERT analysis was developed for projects
  characterized by uncertainty whereas CPM was
  developed for relatively risk free projects

35
Financial estimates Projections

Balance sheet
Costofproject time phasing
Cash flow statement
Means of financing
depreciation
InterestLoan repayment
Cost of production
Estimate of working result
Interest on WCA
Working capital needs
Working capital advance
Tax Factor
36
Means Of Financing

• Following means of financing are available
• 1) Share capital
• 2) Term Loan
• 3) Debenture capital
• 4)Deferred Capital
• 5) incentive sources
• 6) Miscellaneous sources

37
Share capital

• Whenever new projects ( even Industrial
  organization i,e Factory) are considered and
  raising the money is very important aspect and
  for that promoters of the industry would put
  their money and buy the shares of the factory.
  The number of shares being held by the promoters
  , represent their ownership . Amount of capital
  that a company can issue as per its memorandum
  represents the authorized capital. Other form of
  capitals are

38
Forms of capital

• Issued capital and subscribed capital. The actual
  amount paid by investor is called paid-up
  capital.
• An important source of long term financing
  ,equity capital offers the following advantages
• There is no compulsion to pay dividend if firm
  has insufficient fund
• Equity capital has no maturity date
• Presently equity dividends are tax exempt in the
  hands of investors

39
disadvantages

• Sale of equity to outsider will dilute the
  control of existing owner.
• The cost of equity capital is high, usually
  highest
• Equity dividends are paid out of profit after
  Tax, whereas interest payments are Tax deductible
  expenses

40
Debenture

• Debentures are a viable alternative to term loans
  . Debentures are instruments for raising the debt
  finance. Debenture holders are the creditors of
  the company.
• Debentures are typically secure by
  mortgages/charges on the immovable property of
  the company .
• Corporate debts may be short-term, or long term.
  Debentures are normally redeemable in nature

41
Innovations in debentures

• A varieties of debentures have been formulated
• Deep- discount bonds a deep discount bond are
  issued at a deep discount over its face value.
• Convertible debentures convertible debentures
  as the name suggest can be converted partially or
  wholly into equity shares. The conversion premium
  and conversion timing are predetermined and
  stated in the prospectus.
• Any conversion partial or full be optional at
  hands of Investor

42
Indexed Bond

• The payoff of atypical indexed bond will have two
  parts .First part will be fixed amount and second
  part will be variable component whose value will
  depend on some index . An indexed bond will
  appeal to investors who are looking for assured
  return along with capital appreciation that is
  linked to some index

43
Advantages disadvantages of Debt Financing

• Term loans and debentures are two important ways
  of raising long term debts. The advantages are
• 1 )Interest on debt is a tax-deductible expense
  ,whereas equity and preference dividends are paid
  out of profit after taxes
• 2) Debt financing does not result in dilution
  of control

44
Project evaluation

• Project evaluation is concerned with what happens
  once a project has been put into operation. It is
  primarily an effort to determine the worth or
  utility of the project.
• During project implementation ,evaluation is
  done to ensure efficiency in resource
  utilization. Project evaluation is done for one
  or more of three purpose

45
Effectiveness

• The criterion of effectiveness is the most common
  method of project evaluation. How effective is
  the development project? By effectiveness is
  meant degree of objective achievement it refers
  to the measure of projects productivities in
  yielding the intended result.
• Efficiency
• By efficiency is meant an amount of effort
  required to produce a given level of
  effectiveness. If not qualified efficiency means
  technical efficiency

46
Impact

• Impact is a measure of a projects results which
  actually work to alleviate or reduce the
  development problems which originated the idea
  for project in the first instance. Relationship
  exists in all the three methods , but all the
  three of these purpose require different method
  of evaluation. The efficiency criteria is best
  made while the project is under
• way in contrast impact evaluation is done
  after the conclusion of the project

47
Types of Evaluation

• Performance appraisal Performance appraisal of
  the project usually requires that project manager
  or senior project staff prepare summary documents
  on all aspects of project performance. It may
  take place at any time during project cycle
• Audit An audit is an important part of
  evaluation technique for evaluating the quality
  of project managements handling of project
  finances. Audit may focus on evaluating the
  utilization of specialized equipments