a) Draw a critical path diagram including the activities of all the phases until hand over.

The Project Kawasoti Pharma is a huge project with a declared period of around 25 months. The project seems large enough with a sub-division of three phases within, which are namely the following: Phase I: This phase only has a period of approx 20 months. The main activities to be conducted under the phase include Construction, Procurement of Machineries and Setup of the Production unit. Phase II: The second phase is a little shorter one of a period of two months approximately. It is mainly focused on the startup parts before the operations begin. The main activities to be conducted are Acquisition and training of human resources. Phase III: The last phase is of around three months as a whole. After the recruitment & hiring of the human resource, the plant is almost ready for the operations. The main activities to be conducted are Production of Trial products, market feedback and handover to the formal SBU team. The unique feature of the project is that it is composed of three projects within, each individualized and each led by one project coordinator. Such WBS shall ensure not to have any sort unscheduled variances within these projects. As the three phases are completely different from one another so are best run by different coordinators but due to mutual dependence are bound to start one after another. Eventually a Senior Project manager looks after the entire project. Critical Path Diagram A critical path diagram would show the best path to complete the project efficiently and timely. Including the activities and its respective time period, a critical path was constructed. The path shows clearly all the critical activities and the activities with slack period within the project. The path including all the critical activities only shall be the critical path for the project and its resulting time period critical period.

Figure 1: CPM diagram for Kawasoti Pharma

Since the declared period of the project for the client is of 25 months. But on observation of the critical path diagram, it can be seen that the period of project is of 24 months only. If the estimates of optimistic, normal and pessimistic days for the activities were provided, the exact margin of safety in estimating period of project completion could be calculated. But even on absence of those data, it can be argued that the project team has maintained a safety margin of one month. Specified time = 25 months Expected time = 24 months So, if estimates of optimistic, normal and pessimistic days for the activities were provided, a Z score could be calculated using formula,

After the calculation of this Z score, using Z-table the probability maintained for the completion of project could be determined. Activities with Slack period: Activity F G H I Duration of activity 2 months 3 months 1 month 4 months EET 4th month 4th month 6th month 4th month LET 11th month 11th month 13th month 12th month Slack Period available 7 months 7 months 7 months 8 months

Remaining all other activities excluding the above four, are the critical activities falling in the critical path. Hence the project has multiple critical paths due to large number of critical activities included. Short descriptions of activities within the project, included in three phases are the following: A. Procurement process for construction of Admin building, Production plant This is part of phase I of the project. It is a short activity of 2 months. As the name itself defines procurement, it mainly includes the identification of land for the construction of Admin building & production plant. It is a critical activity of the project. B. Start Construction of admin building This is also a part of phase I of the project. This is again a critical activity. It is a longer activity of 12 months. This includes the entire construction of the Admin building for the company. C. Procurement process of furniture, generator, vans, computers, MIS software This is again part of phase I of the project. It is a critical activity. Since, it is about the simple procurements of units like furniture, generator, vans, computers, MIS software etc, so it is a shorter activity of 2 months. This is the establishment phase for the Admin building. D. Start construction of production plant It is another crucial stage of phase I of the project, where the construction of production complex is done in two parts. It is the 1st part carrying 12 months period. It is again a critical activity. E. Procurement process of production equipment and underground boring As explained above, it is the 2nd part of the construction of production complex. It includes the construction of OH water tank and underground boring. This is a 2 months activity and it is also one of the critical activities. F. Construction of boring It is a slack activity as shown in the table above with details of slack period available. It is again continuation of 2nd part of construction of production complex and has a period of 2 months 4

more. It is a part of phase I of the project, where the construction of underground boring is completed. G. Start procurement of equipment It is again part of phase I of project and is a slack activity. Here the equipments are procured & settled down for the production complex. This activity also has a shorter span of three months. H. Test water This is shortest activity of phase I and is again a slack activity. Though a slack activity but this can only be started after completion of the construction of the underground boring as the boring water shall be tested in this phase. I. Start procurement of furniture, generator, vans,, computers, MIS software Like activity C, it mostly about procurement of parts but this time it is for the production complex. Here again, procurements of units like furniture, generator, vans, computers, MIS software etc is conducted. But due to larger capacity has a longer span of four months but is a slack activity. J. Equipment setup This is towards the end of phase I of the project. All the procured equipments in previous activities need to be set up in duration of just two months. This makes the production unit fully furnished & established. It is one of the critical activities. K. 1 Audit & close phase I It is closure of phase I of project where the role of one of the project coordinator comes near to end. It is the last activity of phase I with duration of 2 months and is a critical activity. L. Start procurement process of HR consultant (first activity of phase II) It is a very short activity of a month. Here, a HR consultant needs to be hired for around 60 days for phase II of the project. It is a critical activity. K.2 Initiate and complete staff recruitment (last activity of phase II)

As defined, it is mostly about training of the human resource after the recruitment process. It is again a critical activity of 2 months. It is the closure of phase II as well. M. Finalize procurement of HR consultant It is again a critical activity. It is the 2nd activity of phase II where finally a HR consultant for this phase of project is finalized in one month time. N. Initiate procurement process of raw materials, package goods, outsourcing activities and software procurement (phase III) This is beginning of the phase III of the project. It is about the start of the procurement of the raw materials and goods for the production of trials products for the pharma, i.e., locating various suppliers & fixing the rates etc. It is a critical activity of 2 months O. Start procurement of raw material, package goods, outsourced goods Here, the supplier deals have been finalized and the goods are finally procured for the start of production of the trail products. It is a critical activity of month duration. P. Start test production, commercial production and handover (last activity phase III) It is the final phase of entire project that begins with test production, taking the market feedback, commercialization and then lastly ends with the handover to the formal SBU team. It is a longer activity of four months and is again a critical activity of the project.

b) Calculate the initial investment requirement of the project by approximately dividing into year I and year II investments. Prepare the NPV and IRR of the project. Regarding the cost of capital they have been using 12% WACC as per attached schedule 1. But for the current project the WACC has to be revised because now there will be more equity capital and less debt. Breakdown of investment costs into Year I and Year II: Cost Year I Year II

Acquisition of land Construction of Admin unit Furnitures and cupboards Construction of Production complex (incl. OH tank) Deep boring for water Procurement of production equipment and set-up Acquisition of generators, UPS from central office Procurement of 2 pick-up vans Procurement of 12 computers, accessories Procurement and installation of softwares HR consultant Recruitment of mid-managers & contract workers Insurance Raw materials for trial productions Packaging materials Intermediate goods under outsourcing

15000000 30000000 1000000 50000000 500000 60000000 1600000 4000000 400000 750000 200000 1440000 480000 200000 150000 300000 Rs. 2770000

480000

Rs. 163730000 Notes:

As our CPM diagram expects the project to end in 24 months, we have allocated costs only for 24 months.

Softwares costs have been divided with the assumption that two out of four softwares will later be used 75% by the main office. Particulars of Cash Flow Particulars Kawasoti Pharma equity Bank Loan (20% of investment) Nikhil Ventures capital Net cash inflow Net cash inflow Net cash inflow Net cash inflow Net cash inflow Lumpsum to Nikhil Ventures Net cash inflow Net cash inflow Net cash inflow Cash flow (70,000,000.00) (35,000,000.00) (70,000,000.00) - 22,500,000.00 23,850,000.00 25,281,000.00 26,797,860.00 (145,000,000.00) 28,405,731.60 30,110,075.50 31,916,680.03 7

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9

Year 10 Net cash inflow Year 11 Net cash inflow Year 12 Net cash inflow Year 13 Net cash inflow Year 14 Net cash inflow Year 15 Net cash inflow Now, to calculate Net Present Value and IRR of the project: Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Cash flow Discount % (175,000,000.00) - 22,500,000.00 23,850,000.00 25,281,000.00 (118,202,140.00) 28,405,731.60 30,110,075.50 31,916,680.03 33,831,680.83 35,861,581.68 38,013,276.58 40,294,073.17 42,711,717.56 45,274,420.62

33,831,680.83 35,861,581.68 38,013,276.58 40,294,073.17 42,711,717.56 45,274,420.62

9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9%

PV Cash Flow 17,374,128.30 16,895,941.28 16,430,915.38 (70,480,074.05) 15,538,907.94 15,111,231.57 14,695,326.11 14,290,867.60 13,897,540.97 13,515,039.84 13,143,066.26 12,781,330.50 12,429,550.76

105,623,772.45 NPV (Minus Nikhil) Bank Loan (35,000,000.00) Company NPV 140,623,772.45 NPV for Kawasoti Pharma over 15 years time period after deducting Nikhil ventures and Bank loan Rs. 140623772.45 IRR with our assumpions 13.89%

As the capital sturcture has changed, WACC will also differ. Debt % Equity % Tax Rate 20% 80% 25%

Own + Nikhil Cost of equity Ventures (Avg.) 20.66% Cost of debt 9% WACC 17.87800% Note: As the returns for Nikhil Ventures quity is very high for the first six years, the overall Cost of equity is increased.

c) How do you compare the financial proposal on Indian venture finance with the prevailing bank rate? Is it costlier than the bank loan? (No need of cash flow, you can show it by simple calculation) How much are you willing to offer to the venture partner? Send your offer to Nikhil Venture Associates India at email jainikhil1000@yahoo.com, and getthe reply and finalize for inclusion in project report. Venture Investor is investing Nrs. 7 crore (Approx 40% of Total Investment) Total Investment is 17.5 core Return for venture capitalist of 14.5 cores from the parent investors at the end of six year with seven core initial investment Bank Loan 9% year Total Bank Loan 20% of Total Investment Bank Loan = 3.5 Crore

Total Bank Interest Amount per Year = 0.315 Total Bank Interest Amount in 6 year = 1.89 Total Return from Capital Venture is 7.5 crore, which is 107% return approx

Indian Venture Capitalist is equity financing for the project whereas bank loan is debt financing. As company has huge amount of debt already so it's better to finance with equity. Yes, it is costlier than bank loan because in six year of time frame if we take loan in 9% we have to pay 1.89 crore but if we do venture capitalist then we have to pay 7.5 crore as a return. To: jainikhil1000@yahoo.com From: ceo@kawasoti.com Subject: Regarding offer of interest rate to venture capitalist Dear Sir, I went through your offer and the idea was good but our project is not so highly profit motive. We cannot provide you the return of approximately 107% on your investment. I can provide you return of 15.5% per annum, as it is a cost of equity for our project. I hope you will understand our problem related to return after 6 year. However, we can always find the middle way through which we both can have win -win situation. I hope you can come up with new ideas so that we can collaborate with one another. I hope for your positive response as soon as possible. Thank You

To: ceo@kawasoti.com From: jainikhil1000@yahoo.com Subject: Regarding the reply of offer letter

Dear Sir, We thank you for your reply and valuable suggestion about win-win suggestion. The offer about the interest rate is low according to our board of director decision. Therefore, we are not eager to

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invest in your project as a venture capitalist. However in future we will like to work with your organization. Thank You d) What sort of post project structure would you recommend for continuation of the production and selling activities? Use of existing structure New divisional structure A separate subsidiary

In our opinion, divisional structure would be the best post project structure in this case for continuation of the production and selling activities because of the following reasons: The parent company has many different business units producing diverse products like zinc, cement, sugar and mineral water. This indicates that the company is involved in unrelated businesses from the beginning and they are going to get involved in one more unrelated business with the pharmaceutical company. So, since the company is involved in more than one product category, it becomes appropriate for the firm to be organized on the basis of product divisions and therefore have divisional structure. In a typical divisional structure, a particular division is entirely responsible and accountable for a particular product or a product category. Also, if the divisional structure is used, the firm can further benefit from the various kinds of advantages divisional structure offers. First, in divisional structure, the divisions are autonomous. So this facilitates in the direct performance measure for each division and leads to better performance for both the employees and managers. It is very essential for the pharmaceutical business to perform as expected because the firm is already burdened with heavy debt. Another advantage of using divisional structure is that it is more efficient in performing within each division as specialization also occurs within each division and in coordinating work among different divisions which is essential because the company is involved in various kind of product categories. Also, there is more flexibility to respond when there is a change in the market and firms will have a simpler process if they need to change the size of the business by either adding or removing divisions. So, it will be quite easy for the firm when the project will end after 15 years. In this case, the Indian investors are also involved. The Indian investors are investing only in the pharmaceutical business and not on the parent company itself or on its other businesses. So, adoption of divisional structure is also essential for dealing in money matters with the Indian investors.

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Though not explicitly stated in the case about the current existing structure, it seems like the firm is using a functional structure which isnt that suitable for a firm with various kinds of products. A separate subsidiary would also have been appropriate if the operations of the pharmaceutical company would go on continuously. But the total project life is only 15 years. So, we recommend that after the project has been handed over to the formal SBU team, a separate division be created for the pharmaceutical business and all the activities be brought under the division.

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Phase 1: Construction, Procurement of machineries and setup of production Unit Time: 20 months Risk Risk Event Likelihood Severity Hideability Score Mitigation Planned Riots from local community at construction sites 7 6 2 84 Prior consultation with the local communities Machines not delivered on time Lack of skilled manpower for setup of production unit Labor issues during construction Bureaucratic hurdles during procurement of specialized machineries 8 3 6 7 7 7 5 7 4 3 5 7 224 Early order of machinery 63 Hiring consultant to supervise installation 150 Negotiations and offering attractive pay packages Applying for permissions from government 343 authorities

e) Prepare a risk analysis and mitigation plan for the project.

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Failure in deep water boring Imported machinery not up to the standard Damage of machineries during procurement

3 5 4

7 9 9

6 6 9

Construction of water reserves and relying on 126 public water 270 Ensuring that the return policy is entertained 324 Insuring against the damage

The most prominent risk during Phase 1 of the project is that of bureaucratic hurdle during the procurement process. In a country like Nepal, where there is so many layers of hidden government structure preventing or obstructing a project initiative like this, a high score in this risk even is warranted. In case of anything that has to do with health of common people, such layers are expected. However, had there been a clear mandate on what sort of permissions are needed at various levels of procurement process, a large cushion to mitigate this risk wouldn't be necessary. Best mitigation plan that can be thought of is applying for the permissions and clearances well before hand and contacting the authorities at various checkpoints to avoid any delay in procurement of not only the machineries but also of the raw materials. It is the bureaucratic hurdles like these that prevent multinational companies to enter into Nepal despite various other attractions that this country offers for doing business. Another major risk event is delay in delivery of machinery. And this risk event party occurs due to the bureaucratic hurdles as well as due to the problems of transportation. Riots from local community is also expected as the project will likely cause some kind of environmental impact due to waste discharge. Furthermore, labor issues during the construction of project is also one major risk event for which a mitigation plan would be an attractive pay per hour scheme. Due to all these risk events, the likelihood of Phase 1 completing in 20 months is a faint possibility. Overtime, extra employees and extra cost should be expected. Phase 2: Acquisition and Training of Human Resources Risk Event Likelihood Severity Hideability Risk Score 8 7 7 5 4 5 4 4 6 160 112 210 Time: 2 months Mitigation Planned

Lack of skilled HR consultant Inavailability of skilled mid level managers Misunderstanding about the project

Hiring foreign expert consultant Attractive pay package Clear articulation from upper level managers

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deliverables during training Training extended beyond 2 months Training exceeding cost 4 5 4 4 3 3 48 60 Strict scheduling of training activities Strict cost control

During Phase 2 of the project, misunderstanding of the project deliverables during training is the most important risk event to deal with. This is a vital part of the project as, the HR consultant or senior level managers should be able to impart to the trainees what is expected of that and what is the vision of the project. The deliverables that are expected during each phase of the project from not only mid level managers but also other employees should be clearly articulated during training. Failure to do so would lead to a serious misunderstanding and so time management and resource management problems will be inevitable. However, proper planning and coordination would minimize the risks associated with Phase 2 and hopefully it will be able to complete within the 2 months time frame. Phase: Production of trial prodcuts, market feedback and handover to SBU Team Risk Event Likelihood Severity Hideability Risk Score 7 7 6 294 Time: 3 months Mitigation Planned

Production delay due to labor problems

Negotiations and offering attractive pay packages Proper servicing of equipments Quality control Getting government approval beforehand Insurance and attractive payment to test subjects

Machinery failure Health problems during drug testing Government restrictions against the drug Lack of sample population for testing

5 3 2 2

5 10 9 3

3 4 2 3

75 120 36 18

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Market survey not ready in time

140

Preparing questionnaire and feedback beforehand Keeping stock raw materials Hiring proper IT consultant

Raw material not delivered on time Procured softwares not serving project objectives Delay in handover to SBU team

8 4

7 5

3 2

168 40

150

Proper time management, paying overtime when necessary Proper IT and documentation

Knowledge transfer problem during handover (Production process)

96

During phase three of the project, the most important risk is the production delay due to labor problems. In Nepal, manufacturing sector has been plagued with problems of labor and there seems to be no right mix of mitigation plan to solve this problem. Other than offering extra wage or salary, and sometimes way more than what the employees deserve is necessary if the team wants to complete a project on time. Another risk event is failure of machinery obstructing the production process. This arises mainly due to lack of or inefficiency of skilled manpower to operate the machineries. These skilled people are rare in Nepal and retaining the ones employed is also challenging due to their high demand. An unique risk associated with project like this is the risks during testing phase of drugs. The team should be glad that these risks are not as paramount as in countries like United States where, any problems arising in this phase will have serious ramifications including imprisonment in some cases. However, as this is something that is concerning health of common people certain ethical consideration is absolutely necessary. To avoid risks associated with testing as well as for future, quality control should be done strictly to avoid any sort of production defects so that health of people is not jeopardized. Furthermore, an important aspect that should be taken into consideration is the transfer of knowledge when handing over to the SBU. People directly involved in the project would have more knowledge about the production process and other things associated with the project and if that knowledge is not transferred well then SBU would be left in a limbo of information asymmetry and they would have to learn from scratch which is more time and resources consuming. In conclusion, the time assigned to Phase 1 and Phase 3 doesn't seem

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to be enough as these phases are the ones that have many risks associated with them. Some of these risks don't have a fully effective mitigation plan requiring more cushion of time and cost.

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