Transcript Document

z Money doesn't
create man but
it is the man
who created
money.
-Warren Buffet
WELCOME To ALL OF YOU –
Project Finance
RAHUL JAIN
(Striving for excellence)
BCOM (H), MBA, FCS
Aim of the Module
z To develop a comprehensive
understanding of evaluation techniques to
gauge the viability of a project, and
variables affecting the viability.
Learning outcomes
z
z
z
z
Identify the various cost components involved
in setting up an apparel factory
Evaluate the viability of the project based on
the most appropriate Capital Budgeting
technique
Estimate the working capital requirements for
running the apparel plant
Estimate the break-even volume and value of
sales for a given investment level
Our Strategy for achieving
these Objectives?
z Concepts, Cases and Class Discussion
z Punctuality, Participation and Preparation
(Its compulsory to bring your own calculators, Pen,
Stationary, Registers, Prescribed Book, Printouts
of the Intranet documents- Otherwise
disciplinary action will be taken)
z
z
z
z
Judgment challenge
Learning to communicate ideas
Learning from each other
Learning through discovery
What is “Good”
Participation?
z Quality, not quantity.
z Analyzing and discussing course
material.
z Questioning the analysis of others.
z Seeking clarification.
z Summarizing / synthesizing.
z Adherence to guidelines for
professional conduct.
Project - Meaning
Project is an activity which is unique and
temporary and helps in implementing the
strategy of the organization.
Project
Projects are used today as a way of achieving a variety of outcomesin local or international locations for new constructions, new
product development product improvement, process design,
process improvement, utility installation, theory and technology
development, and many more. Bringing a project to a successful
conclusion requires the integration of numerous management
functions like controlling, directing, team building, communication
and others.
Examples :
z Developing a new product or service
z Constructing a building
z Implementing a new business procedure
Project Management
z Project management is the art and
science of directing and leading a team of
people to accomplish a discrete goal.
Converting Idea into
Success
z
Being Different
z
Having Fun
z
Vision creates Opportunities, Execution
Creates Magic
Being Different
z Can We change the status quo ?
z Can We take the Initiative ?
z Can We leverage on our strengths ?
Some Examples
Having Fun
z Can We be creative ?
z Can We do the same thing in better
manner ?
z Can We enjoy the process ?
Project Finance
1. A Project usually defined as a major
productive capital investment.
2. One has to do following:
•
•
•
Raising Money
Allocating Money
Preparing the budgets and financial
statements
Project Finance
Process
1. Strategic/commercial evaluation
2. Systematic identification and exploration
of risks
3. Forecasting of Cash flows
4. Design of risk bearing/sharing package
5. Appropriate funding package
6. Impact of financing package on net cash
flows and sensitivity analysis
16
Financial Goals of Project
z Profit maximization (profit after tax)
z Shareholder’s Wealth Maximization
Profit Maximization
z Maximizing the Rupee Income of Firm
y Resources are efficiently utilized
y Appropriate measure of firm performance
y Serves interest of society also
Objections to Profit
Maximization
z
z
z
z
z
It is Vague
It Ignores the Timing of Returns
It Ignores Risk
Assumes Perfect Competition
In new business environment profit
maximization is regarded as
y
y
y
y
Unrealistic
Difficult
Inappropriate
Immoral.
Shareholders’ Wealth
Maximization
z Maximizes the net present value of a
course of action to shareholders.
z Accounts for the timing and risk of the
expected benefits.
z Benefits are measured in terms of cash
flows.
z Fundamental objective—maximize the
market value of the firm’s shares.
Key terms
z Tangible costs or benefits are those costs or benefits
that an organization can easily measure in dollars.
z Intangible costs or benefits are costs or benefits that
are difficult to measure in monetary terms.
z Direct costs are costs that can be directly related to
producing the products and services of the project.
z Indirect costs are costs that are not directly related to
the products or services of the project, but are
indirectly related to performing the project.
z Sunk cost is money that has been spent in the past;
when deciding what projects to invest in or continue,
you should not include sunk costs.
Key terms
z Opportunity cost
What you give up for certain in exchange for a chance at
something better.
z Total risk
The overall variability of returns on an project.
z Interest
The cost of borrowed money
Key terms
z Time value of money
The fundamental finance principal that one
dollar received today is worth more than
one dollar received tomorrow.
Equity / Stock/Share
Evidence of an ownership interest in a
corporation
Costs
z Fixed (Indirect/Overheads) – are not influenced
by the amount produced but can change in the long run e.g.,
insurance costs, administration, rent, some types of labour costs
(salaries), some types of energy costs, equipment and
machinery, buildings, advertising
and promotion costs
z Variable (Direct) – vary directly with the amount produced,
e.g., raw material costs, some direct labour costs, some direct
energy costs
z Semi-fixed – where costs not directly attributable to either of
the above, for example, some types of energy and labour costs
Comparison of
Variable and Fixed Costs
A variable cost is a cost that changes in direct
proportion to changes in the cost driver.
A fixed cost is not immediately affected
by changes in the cost driver.
Expenditure
z Revenue Expenditure
z Capital Expenditure
Apparel Products Value Chain
By Lyn Fernando
Buyer (Retailer) 100%
-Lack
of
Direct
contacts/
Access to
Retailer.
-Long lead time
Selling & Distribution
(Agents)
Outbound logistics
Manufacturing (cut, sew &
finishing)FOB 10-25% of
Retail
Raw materials /Accessories
–40-70% of FOB
Sourcing
Product Development
Design
Need to develop
strong networks &
lobby groups. Free
Trade Agreements,
concessionary tariffs
- Cost of Agents
Proximity to market,
regular sailings -sea &
Air. Electronic Data
Interchange for
documentation
Lack of Advanced
Manufacturing
Technology
Dependency on
imported raw material,
long lead times,delays
at customs,
documentation, EDI
• High Cost Structure
(
Labour,
Utility)
Wastage
use
of
CAD/CAM
• Labor Laws, Invest
in Human Resources
• Lack
of
Management
Skilled
•Low productivity,
• Proximity
Suppliers
to
•High energy cost
Lack of Specialty
fabrics & Accessories
Non availability of advanced
product development facilities
Lack of design capabilities
Financials/Costing Of Project
Terminal
Cash flow
Initial
outlay
0
1
2
3
4
5
6
Annual Cash Flows
...
n
Annual Cash Flow
Sales
COGS
Other expenses
Depreciation.
Total. Op. costs
EBIT
Non Op. Expense
EBT
Taxes (40%)
Net income
Add Depreciation
Cash Flow After Taxes
Year1
7,035,600
5,800,000
612,960
120,000
6,532,960
502,640
80,000
422,640
169,056
253,584
120000
373584
Project Costing Processes
z Resource planning: determining what resources
and quantities of them should be used
z Cost estimating: developing an estimate of the
costs and resources needed to complete a project
z Cost budgeting: allocating the overall cost
estimate to individual work items to establish a
baseline for measuring performance
z Cost control: controlling changes to the project
budget
Exercise-I
Classify the cost items as direct or indirect , fixed or variable or semi
fixed.
a. Salary of the production department manager who oversees
manufacturing.
b. Salaries of company founders.
c. Cardboard trays used to package sets of garments
d. Salary of the Web graphics designer who prepares the online
illustrations and layout.
e. Annual maintenance service agreement for the conveyer belt.
f. Wages paid to labor
g. Utilities such as water, electricity, waste for the warehouse.
h. Cost of ingredients
Assignment – I
Main Readings
Chapter 1, Financial Management, I.M. Pandey (IXth
Edition), ( Page 7 onwards), PPT , Internet, Hand Out
and Library
Q. How can you apply the basics of Project costing in the
fashion industry? (Answer in 1 page)
Q. Chapter 1- Page 15 Q- 6
Q. Make a 1 page summary of the key learnings from the
class
Two of you will give presentation
Learning Tools
Website: www.finishingschool.pbworks.com,
Financial Management, I.M. Pandey (IXth Edition)
Contact: [email protected], 9811228852
Note: Some important points
Answers in A4 page – Hand written
Individual submission
Those who will not submit the assignment
within 5 minutes of start of the next class will be
marked absent
See the Assessment Plan on the internet for
other details
Readings (PowerPoint, Word Document
uploaded on intranet, Internet research, Library
and Recommended Books)