Posts Selected From the Category "Project Management"

In order to assess the operational efficiency of a project and its profitability most of the industrially advanced countries employed various technique for the purpose of profitability analysis.

Profit is the primary objective of an enterprise. The word profit implies a comparison of the operations of business between two specific dates which are usually separated by an interval of one year. The maximization of profit within a socially acceptable limit implies that a proper regard for public interest has been shown. Really it is the growth of profit which enables a firm to pay higher dividends to its ordinary shareholders.

According to the Economists point of view profit is the reward for entrepreneurship. Various factors influence the profit variations. They are as follows.

1. The volume of sales plays a tremendous part in profit making. So long as a sustained maximum volume continues at the top of capacity curve, break – even point would be far away.
2. To attain real sophistication in profit calculation, the true profits at any given volume which should exist at a planned break even point are separated from the profits created by the performance at one attained volume. 
3. A change in variable costs and selling prices changes both the break even point and the marginal profit.

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Project financing may be defined as the raising of funds required to finance a capital investment proposal which is economically separable. The assets, contracts cash flows are separated from the parent company and the assets acquired for the projects serve as collateral for loans. The repayments are made from the revenue generated from the projects. Also, the lending institution has to ensure that the investment on the proposed project will generate sufficient returns on the investments made and that loan amount disbursed for the implementation of the project will be recovered along with interest within a reasonable period of time.

Term loans are meant for tying up the capital cost of the project. The primary source of such loans is financial institutions. Commercial banks also provide term finance in a limited way. The financial institutions provide project finance for new projects as also for expansion/diversification and modernization, whereas the bulk of term loans extended by banks is in the form of working capital term loan to finance the working capital gap. Though they are permitted to finance infrastructure projects on a long term basis, the quantum of such financing is marginal.…

Financial appraisal or evaluation is a must for every project even though the outcome may not be the decision criteria for establishing the project. Financial appraisal of a project deals with cash flows. Cash, which goes out of the firm, is known as cash outflow. Typically an investment in a project is an out flow. The cash that is received in future from the project is an inflow. We should remember that cash is different from income. Cash flow and not income flow is central to project evaluation. The results of an evaluation of a project are only as good as the accuracy of our estimation of cash flows. The following illustrates computation of cash outflow.

Cash outflow on installation of a machine includes;

1. Cost of new equipment
2. Labor and erection costs
3. Maintenance cost

While computing such outflows we should not include interest costs on debt employed. If the cost is not incurred all at once but over a period of time say as in installment purchase then the out flow will continue in subsequent years also till the entire cost is paid out.…