Technical Analysis & Financial Analysis
- 1. Presented by: Anshul Agrawal P. Asha
- 3. Technical Analysis Technical analysis represents study of the project to evaluate technical and engineering aspects when a project is being examined and formulated. It is a continuous process in the project appraisal system which determines the prerequisites for meaningful commissioning of the project. Technical analysis broadly involves a critical study of the following aspects,
- 4. Material Input and Utilities Selection of Technology Product mix Plant capacity Facility Location Machinery and Equipment Structures and Civil Work Environmental Aspects Project Charts and Layouts
- 5. 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.
- 6. Technical analysis involves defining the materials and utilities required. Concerned with: Define requirements for materials & utilities Specify their properties Setting up a supply chain Material inputs and utilities are broadly classified into four categories: a. Raw materials: Agricultural products , Mineral product, Livestock and forest products, Marine products b. Processed industrial materials and components c. Auxiliary materials and factory supplies d. Utilities
- 7. For manufacturing a product/service, sometimes two or more alternatives are available. Examples: 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.
- 8. The product mix, also called product portfolio, is the set of all product lines and items that a company offers for sale. For instance, A vehicle manufacturer may have two product lines: motorbikes and cars. Product mix decisions need to be taken for the whole product mix and affect each line. Concerned with: Product mix decision Market requirements Flexibility in production Quality of products
- 9. Also referred to as production capacity. Capacity is the maximum output rate of a production or service facility. 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 or installed capacity
- 10. • 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
- 11. 5. Facility Location: Facility location is the process of identifying the best geographic location for a service or production facility. • General factors. • Global Region or Country decision.
- 12. General Factors: • Globalization • Market (customer) proximity • Raw Material/Suppliers proximity • Labour proximity • Government Policies • SEZ, concessional finance, income tax benefits etc. • Availability of Infrastructure • Transportation • Competitor proximity – Clustering—due to a major resource in the area.
- 13. Global Region or Country Factors: • 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.
- 14. 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 • Centre of gravity approach • Break-even analysis • Transportation method
- 15. 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.
- 16. 6. Machinery and Equipment: Selection of machineries and equipments is dependent upon – plant capacity and production technology – Type of project 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 The equipments required for the project may be classified into: – Plant (process) equipments. – Mechanical equipments. – Electrical equipments. – Instruments. – Internal transportation system. – Spare parts and tools.
- 17. 7. 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.
- 18. 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.)
- 19. 8. 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?
- 20. 9. 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. 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.
- 21. 3. Product Line Diagram- these show how the production would progress along with the main equipments. 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 interrelationships. 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.
- 22. FINANCIAL ESTIMATION: Cost of Project Means of finance Estimates of Sales and Production Cost of production
- 23. Cost of Project: Cost of project is the aggregate of costs estimated to be incurred on various heads for bringing the project into existence Tools to estimate costs: •Analogous Estimating •Parametric Estimating •Three Point Estimating •Bottom up Estimating
- 24. Analogous Estimating • Use data from similar projects to decide a similar total/cost. • Analogous estimating uses a similar past project to estimate the duration or cost of your current project, thus the root of the word: analogy. • Used when there is limited information regarding your current project, an analogous estimate is considered “top-down” and is generally not as accurate as other estimating techniques. • Because the project manager’s and the team’s, experience and judgment are applied to the estimating process, it is considered a combination of historical information and expert judgment. For example, if it cost $7,100 to develop a website a few months ago and you are responsible for developing a new similar website, you estimate it to cost $7,100. Disadvantage : for analogous estimates to be viable and useful, they’re heavily reliant on accurate historical data. Advantage: It’s very quick and easy, and can be used with limited information available about the project.
- 25. Parametric Estimating Parametric estimating, a more accurate technique for estimating cost and duration, uses the relationship between variables to calculate the cost or duration. Essentially, a parametric estimate is determined by identifying the unit cost or duration and the number of units required for the project or activity. For example, if it took me two hours to mow my one acre yard last week and this week I’m mowing four acres, I could estimate that it will take eight hours to mow. However, if the first one hour was spent transporting my tractor and preparing it to mow, the estimate would need to be scaled appropriately: 1 hour for transporting and then four hours to mow, for a total of five hours.
- 26. Example You are the project manager for the annual Earth Day 5k road race, with three primary components: marketing, registration, and race-day coordination. For marketing, there will be 500 flyers printed up at a cost $0.20 each. It took two weeks for the flyers to be printed for last year event, so you estimate two weeks for the printing of the brochures for this event. Last year it took one week to design the on-line registration form and the cost to host the registration website was $850.00 ,You estimate the same this year. There will be four people used to coordinate the race. Each resource will be paid $25 per hour and they will be working an estimated seven hours, based on the race last year.
- 27. Marketing Cost: $100 for brochures (parametric estimating 500 x $0.20) Duration: two weeks (analogous) Registration Cost: $850 (analogous) Duration: one week (analogous) Coordination Cost: $700 (parametric estimating 4 x $25 x 7) Duration: 7 hours (analogous)
- 28. Three Point Estimation Get three different estimates and take an average to calculate the total Assuming you’re done with ballpark estimating and the client has asked for a proper budget estimate, you need to start using more accurate estimating techniques. Three point estimation is a way to calculate a realistic cost estimation using a best case estimate, worst case estimate and most likely case estimate. There are different ways of using these numbers, depending on how you want to weight the result but a simple way to use the data is to use the formula (Best + Worst + Most likely) / 3 = Expected estimate
- 29. As an example, after discussing with your team, you estimate the time to design a web page as follows: Best – 3hrs Worst – 9hrs Most likely – 5hrs (Best + Worst + Most likely) / 3 = Expected estimate (3 + 9 + 5) / 3 = 5.7 hrs Advantage of three-point estimating is that it reduces risk The only real disadvantage of three-point estimating is that it takes a bit longer to do.
- 30. Bottom-up Estimation Estimating all the individual parts and add them together to get the total. When you’re at the point of creating a statement of work, it can be helpful to do a bottom-up estimate. Bottom-up estimating uses a work breakdown structure (WBS), taken from project plan, and breaks down a project into its individual tasks which are then estimated separately and then added together to calculate the total project cost.
- 31. Means of finance: 1. Short term finance. 2. Medium term finance. 3. Long term finance
- 32. Short Term Finance: • Short term finance are required primarily to meet working capital requirements. • The focus is on maintaining liquidity 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. 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.
- 33. 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. 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. External Commercial Borrowing •External commercial borrowing are loans in India made by non-resident lenders in foreign currency to Indian borrowers. They are used widely in India to facilitate access to foreign money by Indian corporations and PSUs.
- 34. Long Term Finance: • Long term finance refer to those requirements of funds which are for a period exceeding 5-10 years .
- 35. Estimates of Sales and Production:
- 36. Cost of production: The major components of cost of production are : Materials : The most important element of cost , the material cost comprises of the cost of raw materials, chemicals, components and consumable stores required for production. It is a function of the quantities in which these materials are required and the prices payable for them. Utilities : Utilities consist of power , water , and fuel. The requirements of power , water, and fuel may be determined on the basis of norms specified by the collaborators, consultants, etc or the consumption standards in the industry, whichever is higher. Labor : Labor cost is the cost of all manpower employed in the factory. labor cost naturally is a function of the number of employees and the rate of remuneration. Factory Overhead : The expenses on repairs and maintenance, rent, taxes, insurance on factory assets , and so on are collectively referred as factory overhead.
- 37. For example, Company A produced 1,000 tables. To produce 1,000 tables, the company incurred costs of: $12,000 on wood $2,000 on wages for the carpenters $500 on wages for the security guards to overlook the manufacturing facility $100 for a bag of nails to hold the tables together $500 for factory rent and utilities Total product costs: $12,000 (direct material) + $2,000 (direct labor) + $100 (indirect material) + $500 (indirect labor) + $500 (other costs) = $15,100 total product cost. Therefore, Company A incurred total product costs of $15,100 to produce 1,000 tables, or a unit product cost of $15,100 / 1,000 = $15.10.