Project Management- Unit III

Unit III
Project Management
Technical Analysis: selection of technology, material input and
utilities, plant capacity, location & site, machinery and equipment,
structures and civil work, environmental aspects, project charts
and layouts.
Financial Estimation: Project cost, source of finance, cost of
production.

Technical Analysis
• It’s a continuous exercise.
• Needs to be done simultaneously when
project is being examined.
• Two Broad Purpose:
– To ensure that the project is technically feasible
i.e. all inputs required are available.
– To facilitate the most optimal formulation of the
project in terms of technology, size, location and
so on.

Selection of Technology
• For manufacturing a product/service,
sometimes two or more alternatives are
available. Eg:
– Steel - either from Bessemer process or open
hearth process.
– Cement - either by dry process or the wet process.
– Soda – either by electrolysis or chemical process.
– Soap – either by semi boiled process or fully
boiled process.

The Choice of Technology
• The choice of technology is influenced by variety
of considerations:
1. Plant Capacity: Often there are close relationship
between plant capacity and production technology.
Certain product technology sometimes can meet the
plant capacity.
2. Principal Inputs: In some cases, raw materials
available also influences the technology chosen.
Quality of limestones determines the process for
cement manufacturing.
3. Investment Outlay and Production Cost: There can
be an impact of technology on investment options
and the overall production cost. It needs to be
assessed carefully.

Contd..
4. Use by Other Units: Technology adopted
should be proven by successful use by other
units, preferably in India.
5. Product Mix: Total product mix generated by
the technology is important.
6. Latest Developments: Technology used should
be carefully chosen keeping in mind the
obsolescence in near future.
7. Ease of Absorption: The ease with which a
particular technology can be absorbed also
influences the choice of technology.
Sometimes there is a scarcity of trained
personnel when high level technology is used.

Appropriateness of Technology
• It refers to those methods which are suitable
for local economic, social and cultural
conditions. The technology used should be
evaluated in terms of following questions:
• Whether the technology utilizes local raw materials?
• Whether the technology utilizes local man power?
• Whether the goods/ services produced cater to the
basic needs?
• Whether the technology protects ecological balance?
• Whether the technology is harmonious with social and
cultural conditions of the country?

Technical Arrangements
• To obtain technical know how collaboration is sought.
When collaboration is sought, following aspects of the
agreement should be worked out in detail
– The nature and support to be provided during the
designing of the project, selection and procurement of
equipment, installation and erection of the plant,
operation and maintenance, training the project
personnel.
– Process and performance guarantees.
– The price of technology in terms of licensing fee.
– Benefit of any R&D services.
– Period of collaboration agreement.
– Termination of the agreement in case of failure in
obligation.
– Force Majeure situations.

Material Input and Utilities
• Another important aspect of technical analysis is
defining the materials and utilities required.
• Material inputs and utilities are broadly classified
into four categories:
– Raw materials
• Agricultural products
• Mineral products
• Livestock and forest products
• Marine products
– Processed industrial materials and components
– Auxiliary materials and factory supplies
– Utilities

Contd..
• Raw Materials
1. Agricultural Products
– Quality needs to be examined.
– Quantities available and future potential.
2. Mineral Products
– Quantum of exploitable deposits and their properties.
– Location, size and depth of deposits along with the viability of open cast
or mining.
– Composition of the ore, level of impurities, chemical properties etc.
3. Livestock and Forecast Products
– Sometimes secondary data is not that accurate, therefore specific survey
may be required to obtain more reliable data on livestock produce and
forest products.
4. Marine Products
– Assessing the potential availability of marine products and cost of
collection is difficult.

Contd..
• Processed Industrial Materials and Components
— Includes base metals, semi-processed materials,
manufactured parts, components and sub assemblies.
— These are important inputs for a number of industries.
— Their properties (Physical, mechanical, chemical and
electrical) are important to understand.
— What is the total requirement of the project?
— How much quantity from domestic and/or foreign
sources?
— Dependability of supplies?
— Past and future trends in prices?

Contd..
• Auxiliary Materials and Factory Supplies
– Like chemicals, additives, packaging material, paint,
varnishes, oil, cleaning materials etc.
– Feasibility study needs to be undertaken in order to
understand the demand of such materials.
• Utilities
– Power, water, steam, fuel etc.
– Detailed assessment of such utilities can be made only
after project formulation w.r.t. location, technology and
plant capacity.
– Successful operation of project depends upon adequate
availability of utilities.
– What quantities are required? What are the sources of
Supply?
– What are the potential availability and likely shortage
scenarios?

Capacity Planning & Facility
Location

Capacity planning
• Capacity is the maximum output rate of a production
or service facility
• Capacity planning is the process of establishing the
output rate that may be needed at a facility:
– Capacity is usually purchased in “chunks”
– Strategic issues: how much and when to spend
capital for additional facility & equipment
– Tactical issues: workforce & inventory levels, &
day-to-day use of equipment

Plant Capacity
• Also referred to as production capacity.
• Volume or number of units that can be
produced in a given period.
• Can be measured in two ways:
– FNC (Feasible Normal Capacity)
• Capacity attainable under normal working conditions
– NMC (Nominal Maximum Capacity)
• Capacity attainable technically (installed capacity)

Measuring Capacity Examples
• There is no one best way to measure capacity
• Output measures like kgs. per day are easier to understand
• With multiple products, inputs measures work better
Type of Business
Input Measures of
Capacity
Output Measures
of Capacity
Car manufacturer Labor hours Cars per shift
Hospital Available beds Patients per month
Pizza parlor Labor hours Pizzas per day
Retail store
Floor space in
square feet
Revenue per foot

Capacity Information Needed
• Design capacity:
– Maximum output rate under ideal conditions
– A bakery can make 30 custom cakes per day when
pushed at holiday time
• Effective capacity:
– Maximum output rate under normal (realistic)
conditions
– On the average this bakery can make 20 custom
cakes per day

Calculating Capacity Utilization
• Measures how much of the available capacity is
actually being used:
– Measures effectiveness
– Use either effective or design capacity in denominator
(FNC or NMC)
 100%
capacity
rateoutputactual
nUtilizatio 

Example of Computing Capacity Utilization: In the bakery example the design
capacity is 30 custom cakes per day. Currently the bakery is producing 28 cakes
per day. What is the bakery’s capacity utilization relative to both design and
effective capacity?
93%(100%)
30
28
(100%)
capacitydesign
outputactual
nUtilizatio
140%(100%)
20
28
(100%)
capacityeffective
outputactual
nUtilizatio
(NMC)design
(FNC)effective


• The current utilization is only slightly below its design
capacity and considerably above its effective capacity
• The bakery can only operate at this level for a short period of
time

How Much Capacity Is Best?
• The Best Operating Level is the output than results in the
lowest average unit cost
• Economies of Scale:
– Where the cost per unit of output drops as volume of output increases
– Spread the fixed costs of buildings & equipment over multiple units,
allow bulk purchasing & handling of material
• Diseconomies of Scale:
– Where the cost per unit rises as volume increases
– Often caused by congestion (overwhelming the process with too much
work-in-process) and scheduling complexity

Best Operating Level and Size
• Alternative 1: Purchase one large facility, requiring one large
initial investment
• Alternative 2: Add capacity incrementally in smaller chunks as
needed

Factors Influencing Capacity
Decisions
• Technological Requirement
– There is certain minimum economic size determined by the
technological factor.
• Input Constraints
– In India, availability of certain inputs like power, basic raw
material etc have impact on plant capacity decisions.
• Investment Costs
– Investment cost per unit of capacity decreases as the plant
capacity increases.

Contd..
• Market Conditions
– If market for the product is strong, high capacity plant is
preferred and vice versa.
– Sometimes market potential is expected to rise in future,
then also capacity should be large.
• Resources of the firm
– A firm cannot choose large capacity beyond the available
financial and managerial capability.
• Government Policy
– Concept of ‘minimum economic capacity’ has been adopted
in several industries because of Govt. policies.

Facility Location
• Facility location is the process of identifying
the best geographic location for a service or
production facility.
• Is there any difference between “Location” and
‘Site”?

Location Strategy
• Infrequent decision based on:
– Demand outgrowing existing capacity.
– Local changes in labor productivity, exchange rates,
costs, local attitudes.
– Shifts in demographics and customer demands.
• Location options:
– Don’t move, expand an existing facility.
– Maintain current sites, add another facility.
– Close an existing facility and move to another
location.

Factors That Affect Location Decisions
• General factors.
• Global Region or Country decision.

General Factors
• Globalization.
• Market (customer) proximity
– High population areas, close to JIT partners
• Raw Material/Suppliers proximity
– Transportation costs, perishability, bulk purchase
• Labor proximity and productivity
– Proximity—local wage rates, unions, special skills availability
– Productivity—low cost may be linked to low productivity and vice
versa)
• Government Policies
– Govt. restrictions and inducements.
– Restrictions in urban congestion and inducements in
backward areas.
• SEZ, concessional finance, income tax benefits etc.

Contd..
• Availability of Infrastructure
– Power, transportation, water and communications
– Power: Useful in electricity intensive projects.
• Quantum of power available, prices, stability etc.
– Transportation: inputs transportation and output
distribution. (rail, road, sea or air)
• Availability, reliability and cost of transportation.
– Water: Adequate water supply is essential given the plant
capacity and type of technology.
– Telephone and internet.
• Competitor proximity
– Clustering—due to a major resource in the area.
• Others: Climatic conditions, General living
conditions, Proximity to ancillary units, ease of
coping with pollution.

Global Region or Country
• Key International Locations
– North America, Europe, Pacific Rim.
• Key Considerations
– Political/legal concerns.
– Cultural issues (including business).
– Infrastructure: supplies, communication, utilities.
– International trade issues.
• Exchange rates.
– Market access issues.
– Labor availability, attitudes, productivity, costs.
– Quality-of-life issues.

Location Analysis Methods
• Analysis should follow 3 step process:
– Step 1: Identify dominant location factors
– Step 2: Develop location alternatives
– Step 3: Evaluate locations alternatives
• Factor rating method
• Load-distance model
• Center of gravity approach
• Break-even analysis
• Transportation method

Factor-Rating Method
• Six steps:
1. Develop a list of relevant factors.
2. Assign a weight to each factor reflecting its relative
importance to the firm.
3. Develop a rating scale for the factors.
4. Score each location on each factor based on the scale.
5. Multiply the scores by the weights for each factor and total
the weighted scores for each location.
6. Make a recommendation based on the maximum point
score, considering other [quantitative?] factors.

A Load-Distance Model Example: Matrix Manufacturing is considering where
to locate its warehouse in order to service its four Ohio stores located in
Cleveland, Cincinnati, Columbus, Dayton. Two sites are being considered;
Mansfield and Springfield, Ohio. Use the load-distance model to make the
decision.
• Calculate the rectilinear distance:
• Multiply by the number of loads between each site and the four cities
miles4515401030dAB 

Calculating the Load-Distance Score
for Springfield vs. Mansfield
•
• The load-distance score for Mansfield is higher than for
Springfield. The warehouse should be located in Springfield.
Computing the Load-Distance Score for Springfield
City Load Distance ld
Cleveland 15 20.5 307.5
Columbus 10 4.5 45
Cincinnati 12 7.5 90
Dayton 4 3.5 14
Total Load-Distance Score(456.5)
Computing the Load-Distance Score for Mansfield
City Load Distance ld
Cleveland 15 8 120
Columbus 10 8 80
Cincinnati 12 20 240
Dayton 4 16 64
Total Load-Distance Score(504)

Center-of-Gravity Method
1. Place the locations to be supported on a coordinate
system (like a graph).
2. Calculate the center of gravity:
Where:
xi = x-coordinate of location i.
yi = y-coordinate of location i.
li = quantity (load) of goods moved to/from location i.


i
ii
cg
l
xl
coordinateX


i
ii
cg
l
yl
coordinateY

The Center of Gravity Approach
• This approach requires that the analyst find the center of gravity of the
geographic area being considered
• Computing the Center of Gravity for Matrix Manufacturing
• Is there another possible warehouse location closer to the C.G. that should be
considered?? Why?
10.6
41
436
l
Yl
Y;7.9
41
325
l
Xl
X
i
ii
c.g.
i
ii
c.g. 




Computing the Center of Gravity for Matrix Manufacturing
Coordinates Load
Location (X,Y) (li) lixi liyi
Cleveland (11,22) 15 165 330
Columbus (10,7) 10 165 70
Cincinnati (4,1) 12 165 12
Dayton (3,6) 4 165 24
Total 41 325 436

Break-Even Analysis
• Break-even analysis can be used for location analysis
especially when the costs of each location are known
– Step 1: For each location, determine the fixed and
variable costs
– Step 2: Plot the total costs for each location on one graph
– Step 3: Identify ranges of output for which each location
has the lowest total cost
– Step 4: Solve algebraically for the break-even points
over the identified ranges
• Remember the break even equations used for calculation
total cost of each location and for calculating the breakeven
quantity Q.
– Total cost = F + cQ
– Total revenue = pQ
– Break-even is where Total Revenue = Total Cost

The Transportation Method
• The transportation method of linear programming can
be used to solve specific location problems
• It could be used to evaluate the cost impact of adding
potential location sites to the network of existing
facilities
• It could also be used to evaluate adding multiple new
sites or completely redesigning the network

Machinery and Equipment
• Selection of machineries and equipments is dependent
upon
– plant capacity and production technology
– Type of project
• In manufacturing, various machines can perform same
function with varying degree of accuracy.
• For selecting machinery and equipments for
manufacturing industry:
– Estimate the likely levels of production
– Define various machining and other operations
– Calculate the machine hours required for each operation

Contd..
• The equipments required for the project may
be classified into:
– Plant (process) equipments.
– Mechanical equipments.
– Electrical equipments.
– Instruments
– Controls
– Internal transportation system
– Spare parts and tools.

Contd..
• Constraints in selecting machineries and equipments
– There may be limited availability of power for electricity
intensive plant. (electrical furnace)
– There may be difficulty in transporting a heavy equipment to a
remote location
– Workers may not be able to operate sophisticated equipments
(CNC)
– Import policy of govt. may preclude the import of certain
machineries and equipments.
• Procurement of Plant Machinery
– Orders can be placed to different suppliers or turnkey contracts
may be given.
– Selection of supplier is dependent upon the quality, expected
delivery schedules, payment terms and performance guarantee.
– If in-house technical expertise is inadequate, external
consultants may be employed.

Structures and Civil Work
1. Site preparation and development
2. Building and structures
3. Outdoor works

Site preparation and development
• This covers the following:
1. Grading and leveling of the site
2. Demolition and removal of existing structures
3. Relocation of existing pipelines, cables, roads,
power lines etc.
4. Reclamation of swamps and draining and
removal of standing water
5. Connections for the following utilities from the
site to the public network: power, water,
communications, roads, railways etc.

Building and Structures
• It can be divided into:
1. Factory or process building
2. Ancillary building required for stores, warehouses,
laboratories, maintenance services, supply centers
etc.
3. Administrative building
4. Staff welfare buildings, cafeteria, medical services
5. Residential building

Outdoor Works
• Includes:
1. Supply and distribution of utilities (water,
electric power, communication, gas etc.)
2. Handling and treatment of emissions, wastages
and effluents
3. Transportation and traffic signals
4. Outdoor lighting
5. Landscaping
6. Enclosure and supervision (boundary wall, fence,
barrier, gates, doors, security posts etc.)

Environmental Aspects
• A project may cause pollution in various ways. It may
throw gaseous emissions, may produce liquid and solid
discharges, it may cause noise, heat and vibrations.
• Some projects produce physical goods like cement,
steel, paper, chemicals etc. are likely to cause more
environmental damage.
• Key issues that needs to be considered are:
– What are the types of effluents and emissions generated?
– What needs to be done for proper disposal of effluents
and treatment of emissions?
– Will the project be able to secure all environmental
clearances and comply with all statutory requirements?

Project Charts and Layouts
• After completion of principal dimensions of the
project – market size, demand analysis, plant
capacity, production technology, machineries and
equipments, buildings and civil works, conditions
obtaining at plant site and supply of inputs to the
project- project charts and layouts may be prepared.

Contd..
Important charts and layout drawings are:
1. General Function Layout- shows relationship
between equipments, buildings and civil works.
• Primary function is to facilitate smooth and economical
movement of raw materials, WIP and finished goods.
– The flow of materials should be in one direction with minimum
possible crossing.
– Godowns, workshops etc. must be functionally situated with
respect to main factory building.
2. Material Flow Diagram- it shows the flow of
materials, utilities, intermediate products, final
products, by products and emissions. Quantity flow
diagram may also be prepared.
3. Product Line Diagram- these show how the
production would progress along with the main
equipments.

Contd..
4. Transport Layout- This shows the distances and means of
transport outside a product line.
5. Utility Consumption Layout- This shows the principal
consumption points of utilities and their required
quantities and qualities (water, power, gas etc.)
6. Communication Layout- This shows how various parts of
the project will be connected by telephone, internet,
intercom etc.
7. Organizational Layout- this shows the organizational set
up of the project along with information on personnel
required for various departments and their inter-
relationships.

Contd..
8. Plant Layout- It concerns with the physical layout of the
factory. In some industries the plant layout is dictated by the
production process adopted. The important considerations in
preparing the plant layout are:
– Consistency with production technology
– Smooth flow of goods from one stage to another
– Proper utilization of space
– Scope of expansion
– Minimization of production cost
– Safety of personnel

• In a project appraisal exercise, three basic
questions needs to be answered:
– Can we produce goods or services?
– Can we sell goods or services?
– Can we earn a satisfactory return on the
investment made in the project?
• To answer these, technical appraisal, market
and demand appraisal and financial appraisal
is required.

Cost of Project
• Conceptually, the cost of project represents the total of all items of
outlay associated with the project which are supported by long
term funds. In includes:
– Land and site development
– Building and civil works
– Plant and machinery
– Technical know-how and engineering fees
– Expenses on foreign technicians and training of Indian technician
abroad.
– Miscellaneous fixed assets
– Preliminary and capital issue expenses
– Pre-operative expenses
– Margin money for working capital
– Initial cash losses

Contd..
• Land and site development
– The cost of land and site development is the sum
of:
• Basic cost of land including conveyance and other allied
charges
• Premium payable on leasehold and conveyance charges
• Cost of leveling and development
• Cost of laying approach roads and internal roads
• Cost of compound wall and gates
– The cost of land varies considerably depending
upon its location.

Contd..
• Building and civil works
– It covers the following:
• Building for main plant and equipment
• Building for auxiliary services like steam supply, workshops,
laboratory, water supply etc.
• Godowns, warehouses and open yard facility.
• Non-factory building like canteen, guest houses etc.
• Quarters for essential staff
• Silos, tanks, wells, basins, bins etc necessary for installation
of plants and equipment
• Garages
• Sewers, drainage etc
– Once the desired structures are identified, cost
estimates can be carried out.

Contd..
• Plant and machinery
– It consists of:
• Cost of imported machinery
– FOB value
– Shipping, freight and insurance cost
– Import duty
– Clearing, loading, unloading and transportation charges
• Cost of indigenous machinery
– FOR Cost
– Sales tax, Octroi and other taxes
– Railway freight and transport charges etc.
• Cost of stores and spare
• Foundation and installation charges

Contd..
• Technical know-how and engineering fees
– Often its necessary to engage technical consultants from
abroad for advice and help in various technical matters.
– The amount payable for such costs is a component for
total project cost.
• Expenses on foreign technicians and training of Indian
technicians abroad
– Services of foreign technicians are needed sometimes.
Also domestic technicians may undergo training abroad to
understand the technology involved.
– Cost of travel, boarding, lodging etc. adds to the overall
expenditure.

Contd..
• Miscellaneous Fixed Assets
– Fixed machinery which is not the part of direct
manufacturing process can be termed as miscellaneous
fixed asset. It can be furniture, tools, office machinery,
laboratory equipment, piping system and so on.
• Preliminary and Capital Issue Expenses
– Expenses incurred for identifying the project, conducting
the market survey, preparing the feasibility report, drafting
the memorandum of articles of association and
incorporating the company are referred to preliminary
expenses.
– Expenses borne in connection with raising the capital from
the public are referred to as capital issue expenses.

Contd..
• Pre-operative expenses
– Expenses incurred till commencement of the project like
establishment expenses, rent, rates and taxes, travelling
expenses, insurance charges, mortgage, start up expenses
etc.
– If delay in project is there, then these expenses are pushed
up.
• Provision of contingencies
– It is provided to take care certain unforeseen expenses and
price increase over and above the normal inflation rate.
– Total cost can be divided into:
• Firm cost (those items which have been acquired already)
• Non-firm cost (Provision of 5-10% estimated cost contingency)

Contd..
• Margin money for working capital
– Principal support for working capital is provided by banks and
trade creditors. However certain part of working capital
requirement comes from sources of long term finance. This is
referred to as ‘margin money for working capital’.
– Mostly required to meet overruns in capital cost. A margin of
working capital is blocked by the financial institutions initially so
that it can be utilized later when needed.
• Initial cash losses
– Most of the projects incur cash losses in the initial years.
– Sometimes they are not disclosed to make the project appear
attractive and public investment can be easily initiated.
– Provision for such losses are important. Failure to do so, it may
impact the firms liquidity and can impair the operations as well.

Introduction:
Decision
making
Decide which
assets to buy
Determining
what is total
investment
required for
buying
assets.
How much
working
capital
required.
To decide
sources to
tap the total
investment.

Parameter for choosing sources of
fund
• Cost of source of fund.
• Tenure.
• Leverage planned by the company.
• Financial condition prevalent in the economy.
• Risk profile of both the company as well as the
industry in which the company operates.

Classification according to term
finance
• Short term finance.
• Medium term finance.
• Long term finance.

Short Terms Finance
• Short term finance are required primarily to
meet working capital requirements.
• The focus is on maintaining liquidity at a
reasonable cost.

Short
Term
Finance
Working
Capital
finance
Trade
Credit
Inter-
Corporate
Deposits
Commercial
Paper

Working Capital Finance By
Commercial Banks
• Commercial banks grants short terms finance
to business firms which is known as “Bank
Credit”.
• Bank Credit may be granted in the following
ways:-
Loans
Purchase/ Discounting of bills.
Cash Credit

Trade Credit
• Trade credit represents credit granted by the
suppliers of goods, etc. as an incident of sale.
Merits Demerits
Credit for the purpose
of raw material or
finished goods.
Less flexible
No security
No interest payable

Inter Corporate deposits
• A deposit made by one company to another is
called as inter-corporate deposit.
• It is generally for working capital funding & is
for period not exceeding six months.

Commercial Paper (CP)
Commercial paper is an unsecured money
market instrument issued in the form of a
promissory note.

Advantages
• High credit ratings
• Flexibility.
• Provides exit options.
Disadvantages
• Limited applicability.
• Low bank credit limits.
• A high degree of control.

Medium Term Finance
Medium term finance is defined as money
raised for a period for 1 to 5 years.
The medium term funds are required by a
business mostly for the repaired and
modernizing the machinery.

Medium Term Finance
Commercial
Banks &
State
Financial
Institutions
Lease
Financing
Hire
Purchase
External
Commercial
Borrowings

Lease financing
• It is a contract In which the assets is purchased
initially by the lessor (leasing company) and
thereafter leased to the user(leasee company)
who pays a specified rent at periodical intervals.

Advantages & Disadvantage
 The holder only pays
for use.
 Better liquidity.
 Fixed rate.
 Minimal sales risk.
 Commitment to contract
for entire valid period.
 Higher fixed cost per
month.
 More expensive than
purchase.

Hire Purchasing
• Hire purchase transaction, the goods are
delivered by the owner to another person on
the agreement that such person pays the
agreed amount in the periodical installment.

Advantage
• Cheaper than a
(‘unsecured’) personal
loan.
• relatively quick.
• Deposits are lower than
with personal loans.
Disadvantages
• Higher monthly
payment;
• hidden fees

External Commercial Borrowing
1. ECB’s refer to commercial loan in the form of bank
loans, buyers credit, suppliers credit, securitized
instruments.(E.g. Floating rates notes and Fixed
rates bonds) availed from non-resident lenders with
minimum average maturity years.
2. ECBs mean foreign currency loan raised by residents
from recognized lenders. Financial leases and Foreign
Currency Convertible Bonds are also covered by ECB
guidelines.

Long Term Finance
• Long term finance refer to those requirements
of funds which are for a period exceeding 5-10
years.

Long
term
finance
Share
Debentures
New Debt
Instruments
Retained
Earnings
Depository
Schemes
Venture
Capital
Securitization

Shares
A shares indicates a smaller unit into which the overall
requirement of a company is subdivided.
TYPES OF SHARES
THERE ARE TWO TYPES:
Equity shares
Preference shares

Debentures
• It means a document containing
acknowledgement of indebtedness issued by a
company and giving an undertaking to repay
the debt at a specified date.

New Debt Instrument
• Zero interest bond (ZIB)
• Deep discount bonds (DDB)
• Junk bonds
• Convertible debenture

Retained Earnings
• Retained earnings means that part of trading
profits which is not distributed in the form of
dividends but retained by directors for future
expansion of the company.

Merits & Demerits Of Retained
Earnings
Merits :-
Ready Availability
Cheaper than External Equity
No Ownership Dilution
Positive Connotation
Demerits :-
Limited Finance
High Opportunity Cost

Global/ American/ Indian
Depository Receipts
• GDRs :-
A negotiable certificate held in the bank of one country
representing no. of shares traded on the exchange of
another country.
• ADRs :-
It allows US investors to buy shares of ADS companies
without the cost of investing directly in Foreign Stock
Exchange.
• IDRs :-
It allows foreign companies to raise the funds from
Indian markets.

Venture Capital
• The venture capital financing refers to
financing & funding of the small scale
enterprises, high technology & risky volumes.

Securitization
• Securitization is a process in which illiquid
assets are pooled into marketable securities
that can be sold to investors.
Advantages Disadvantages
Reduces assets liability
mismatch
Cost
Locking in profits Size limitation
Liquidity Risk

Others
• Incentive sources
– The govt. and its agencies may provide financial
support to certain type promoters or setting up
industrial units in certain locations.

Cost of Production
• Given the estimated production, the cost of
production may be worked out. The major
components of cost of production are:
– Material cost
– Utilities cost
– Labour cost
– Factory overhead cost

Material Cost
• The most important element of cost, the material cost
comprises of the cost of raw materials, chemicals,
components and consumables required for production.
• While estimating the material cost, the following points
should be kept in mind:
– The requirement of various material inputs per unit of
output may be established on the basis of theoretical
assumption, experience of the industry, performance
guarantees and specification of machinery suppliers.
– Total requirement of inputs can be calculated by
multiplying requirement per unit of output with expected
output
– The prices of material inputs are defined in CIF terms.
– The present cost of various material inputs is considered.
– If seasonal fluctuations in the prices are regular, the same
must be considered in estimating the cost of material
inputs.

Utilities
• It mainly consists of water, power and fuel.
• It can be determined on the basis of norms,
consultants etc or the consumption standards in
the industry (whichever is higher).
• Power tariff must be considered on the basis of
power tariff structure of the concerned electricity
board.
• Cost of captive power will reflect the cost of fuel.
• The cost payable to local authorities and charges
payable to some other firms of water may be
shown separately.

Labour Cost
• Labour cost is the cost of all the manpower employed in the factory.
• The requirement of workers depends on the number of
operators/helpers required for operating various machines and
manning various services.
• Supervisory personnel and administrative staff should be calculated
on the basis of general norms prevailing in the industry.
• In estimating remuneration rates, the prevailing rates in the
industry/area should be taken into account. Remuneration include
basic pay, dearness allowance, concession, PF contribution, bonus
payments etc.
• It is advisable to make detailed analysis, at least in the beginning.
• Appraisals should also be considered depending upon the
industry/company norms.

Factory Overheads
• The expenses on repairs and maintenance, rent,
taxes, insurance on factory assets and so on are
collectively termed as overhead expenses.
• Repairs and maintenance expense are lower in
initial years and become higher in later years.
• Rent, taxes and insurance may be calculated on
existing rates.
• A provision should be made for meeting
miscellaneous factory expenses. In addition, a
contingency margin may be provided on the
items of factory overheads.

Project Management- Unit III

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Project Management- Unit III