The foremost aim of all the individual firm or a company is to earn maximum possible return from the investment on their project. In this aspect project promoters are interested in wealth maximization. Hence the project promoters tend to evaluate only the commercial profitability of a project. There are some projects that may not offer attractive returns as for as commercial profitability is concerned but still such projects are undertaken since they have social implications. Such projects are public projects like road, railway, bridge and other transport projects, irrigation projects, power projects etc. for which socio-economic considerations play a significant part rather than mere commercial profitability.… Read the rest
Project Management
Term Loans as a Project Financing Method
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.… Read the rest
Cash Flow Computations in Project Management
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.… Read the rest
Concept of Feasibility Study in Project Management
A feasibility study is an important tool for decision-making in project management. Accurate and adequate information about the project like technology, location, production capacity, demand, and impact on existing operations, cost and benefits to the company, time span for execution, resources needed should be included in the report. Alternatives if any should also be suggested.
Feasibility Study in Project Management can be defined as: “A tool for transforming the initial project- A tool for transforming the initial project-idea into a idea into a specific hypothesis of intervention, through the identification, the specification and the comparison of two or more alternatives directed to achieve the defined objectives, by producing a set of information helping the Project manager to take the final decision”
Market research or demand analysis, technical viability studies, financial or commercial feasibility studies are other wise known as functional or support studies to aid the decision-making. … Read the rest
Characteristics of Project Financing
Project financing involves non-recourse financing of the development and construction of a particular project in which the lender looks principally to the revenues expected to be generated by the project for the repayment of its loan and to the assets of the project as collateral for its loan rather than to the general credit of the project sponsor.
Project financing is commonly used as a financing method in capital-intensive industries for projects requiring large investments of funds, such as the construction of power plants, pipelines, transportation systems, mining facilities, industrial facilities, and heavy manufacturing plants. The sponsors (the sponsor(s) or developer(s) of a project financing is the party that organizes all of the other parties and typically controls, and makes an equity investment in, the company or other entity that owns the project) of such projects frequently are not sufficiently creditworthy to obtain traditional financing or are unwilling to take the risks and assume the debt obligations associated with traditional financing methods.… Read the rest
Basic Principles for Measuring Project Cash Flows
Estimating cash flows — the investment outlays and the cash inflows after the project is commissioned — is the most important, but also the most difficult step in capital budgeting. Estimating cash flows process involves many people and numerous variables.
A project which involves cash outflows followed by cash inflows comprises of three basic components. They are,
- Initial investment: Initial investment is the after-tax cash outlay on capital expenditure and net working capital when the project is set up.
- Operating cash inflows: The operating cash inflows are the after-tax cash inflows resulting from the operations of the project during its economic life.