BBA – Vi SEMESTER

UNIT-1 :OVERVIEW
Idea
Plan Concrete Entity
Factory
Design
Building
Highway
Products
Services
PROJECT PRODUCTION
 Producing automobiles
 Automobile factory
 Treat patient
 Construct hospitals
 Manufacture
 Conceive new
product
 Develop prototype  Produce multiples

Done once Done

Repetitively
 An undertaking or a venture to accomplish
some goals or objectives
 A set of interrelated jobs whose
accomplishment leads to completion of project
 Jobs or activities consume time and resources.
 Projects at personal level
 Projects at local neighbourhood
 Organisational projects
 National level project
 Global projects
 Well defined collection of job
 Generally non- repetitive
 Jobs are related through precedence
 Jobs are independent
 Jobs consume both time and resources
 Co-ordination is require between individual,
groups and organisation
 Time, cost and performance of the projects
must be monitored and control
 Long term effects
 Irreversibility
 Substantial investment
 Future uncertainty
 Time element
 Measurement problems
  Capital investment may be classified in various
ways:-
• Physical asset
• Monetary asset
Basis of Asset • Intangible asset

• Strategic investment
• Tactical investment
Basis of Decision

• Mandatory investment
• Replacement investment
Basis of planning
• Diversification investment
and control • R&D investment
 Planning

Analysis

Selection

Financing

Implementation

Review
Operating Administrative Strategic
decisions decisions decisions
Lower level Middle level Top level
Minor resource Moderate resource Major resource
Short term Medium term Long term
 Market analysis
 Technical analysis
 Financial analysis
 Economic analysis
 Ecological analysis
 Potential
Market market
analysis Market
share

Technical
Technical viability
analysis Sensible
choices
 Risk
Financial
analysis
Return

Benefits
Economic and costs
analysis Other
impacts

Environmental
damage
Ecological
analysis
Restoration
measure
All the above analysis are require for conducting feasibility study
 To ensure the selection of the possible
profitable capital project.
 To ensure effective control of capital
expenditure.
 To make estimation of capital expenditure in
budget period.
 To facilitate coordination of interdepartmental
project funds.
 To ensure maximum profitability by allocating
the available investment
 Techniques of capital
budgeting

Non-
Discounting /modern
discounting/trational

Average rate of Net present Internal rate of Profitability

Pay-back period
return value(NPV) return ( IRR) index (PI)
 Capital budgeting is a two staged process :
 Identifying growth opportunity through
strategic planning
 Individual investment opportunities are
analysed and evaluated in detail
 The determination of long term goal and
objectives of the organisation , and adoption of
course of action and the allocation of resources
necessary for carrying out these goals
 Strategy involves matching of the firms
capabilities with the opportunities available in
the market
 Grand strategy

Growth Stability Contraction

Vertical Divestiture
Concentration Diversification Liquidation
integration

Concentric Conglomerate
 Allocation of resources is key strategic
decision. Portfolio planning tools have been
developed to guide the process of strategic
planning and resource allocation. Three tools
are:
1. BCG MATRIX
2. GENERAL ELECTRICS SPOTLIGHT MATRIX
3. McKINSEY MATRIX
The BCG Matrix (Growth-Share Matrix) was
created in the late 1960s by the founder of the
Boston Consulting Group, Bruce Henderson, as
a tool to help his clients with efficient allocation
of resources among different business units. It
has since been used as a portfolio planning and
analysis tool for marketing, brand management
and strategy development
The BCG Matrix helps managers classify business
units/products as low or high performers
using the following criteria:
1. Relative market share (strength of a business
unit's position in that market)
2. Market growth rate (attractiveness of the
market in which a business unit operates)
This classification places business units/products in the following
four categories:
1. Stars – BUs/products characterized by high-growth and high-
market share. They often require heavy external investment to
sustain their rapid growth as they may not be producing any
positive cash flow. Eventually, their growth will slow, and they
will turn into cash cows.
2. Cash Cows - BUs/products characterized by low-growth, high-
market share. These are well established and successful BUs that
do not require substantial investment to keep their market share.
They produce a lot of cash to be used for other business units
(Stars and Question Marks) of the company.
3. Question Marks - BUs/products characterized by low-market
share in high-growth markets. They require a lot of financial
resources to increase their share since they cannot generate
enough cash themselves. The crucial decision is to decide which
Question Marks to phase out and which ones to grow into Stars.
4. Dogs - BUs/products with low-growth, low-market share. In
addition, they often have poor profitability. The business strategy
for a Dog is most often to divest. However, occasionally
management might make a decision to hold a Dog for possible
strategic repositioning as a Question Mark or Cash Cow.
The BCG model follows the following major
steps:
1. Identify major organizational business units
(BUs) and identify RMS and MGR for each BU
2. Plot the BUs on the BCG Matrix
3. Classify the BUs as Question Marks, Stars, Cash
Cows and Dogs
4. Develop strategies for each BU based on their
position and movement trends within the
matrix
 MARKET SHARE

HIGH LOW
MARKET GROWTH RATE

STARS QUESTION MARKS

HIGH

CASH COWS DOGS

LOW
 STARS QUESTION MARKS

---------
CASH COWS DOGS
(FUNDS GENERATED) ( FUNDS RELEASED)
 Business Unit Strength

Strong Average Weak

High Winners Question

Winners
Mark

Industry Medium Average

Attractiveness Winners Losers
Business

Low Profit
Losers Losers
Producers
 The GE/McKinsey Matrix is a nine-cell (3 by 3)
matrix and it is primary used to perform
business portfolio analysis on the strategic
business units (SBU) of a corporation. A
business portfolio is the collection of all the
business units within a corporation and a large
corporation has normally many SBUs..
 The two components used to evaluate
businesses, which also serve as the axes of the
matrix, are the 'attractiveness' of the relevant
industry and the unit's 'competitive strength'
within the same industry. Each axis is then
divided into Low, Medium and High.
Six steps are necessary to implement the
GE/McKinsey analysis:
1. Determine which factors are relevant for the
corporation in the industry where it operates
2. Assign a weight to each factor
3. Score each factor
4. Multiply the relative scores and weights
5. Sum all up and interpret the graph
6. Perform a review / sensitivity analysis
TO STIMULATE FLOW OF IDEAS FOLLOWING
ARE HELPFUL:-
 SWOT Analysis

 Clear articulation of objectives

 Fostering a conducive climate

 OBJECTIVES

STRENGTHS WEAKNESSES

OPPORTUNITIES THREATS

ALTERNATIVE
PROJECT
POSSIBILITIES
A promising investment idea enables the firm to
exploit opportunities in the environment. Hence a
firm must systematically monitor the environment
and asses its competitive abilities. The key sectors
of environment are:
 Economic sector

 Governmental sector

 Technological sector

 Socio- demographic sector

 Competition sector

 Supplier sector
Appraisal of corporate strengths and weaknesses
is required for identifying investment
opportunity. Following aspects are to be
considered:
 Marketing and distribution

 Production and operations

 Research and development

 Corporate resources and personnel

 Finance and accounting

 Porter model
 Life cycle approach
 Experience curve
Variety of sources should be tapped to identify good
project ideas
 Analyse the performance of existing industries
 Examine inputs and outputs of various industries
 Review import an exports
 Study plan outlays and governmental outlines
 Suggestions from financial institutions
 Investigate local material and resources
 Study technological developments
 Analyse social and economic trends
 Possibility of reviving sick units
 Trade fairs
 Generating new project ideas
From the above mentioned sources it is possible to
develop long list of project ideas. Therefore some
kind of preliminary screening is required to
eliminate ideas which prima facie are not
promising. For this purpose following aspects may
be looked into;
 Compatibility with the promoter
 Consistency with the governmental priorities
 Availability of inputs
 Adequacy of market
 Reasonableness of cost
 Acceptability of risk level
To streamline the process of preliminary screening a
project rating index may be determined as follows:
 Identify factors relevant for project rating

 Assign weights to these factors

 Rate the project on various factors using suitable

rating scale
 For each factor multiply the factor rating with the
factor weights to get factor score
 Add all factor score to get the overall project rating
index
There are six main entry barriers that result in
positive NPV:
 Economies of scale

 Product differentiation

 Cost advantage

 Marketing reach

 Technological edge

 Governmental policy
Capital structure :-
Capital structure refers to the proportion of debt and
equity in the total capitalisation . It is also known
as financing mix of the firm.
Factors affecting capital structure of the firm are:-
Cost of capital
Nature of assets
Business risk
Regulations
Control
Market conditions
Equity shares
Preference shares
Bonds and debentures
Term loans
Internal accruals
Working capital advances:- cash credits/ overdrafts,
loans. Discounting of bills, Letter of credit
Miscellaneous sources like: deferred credit, Lease and hire
purchase, commercial papers, certificate of Deposit,
Factoring, Securitisation etc
Venture capital( in detail)
Raising capital from international markets like
euro issues etc.
 Public offering:
 IPO,s
 Seasoned equity offering
 Bond offerings
 Right issue
 Private placement of shares
This chapter discuss the estimates and the
projections requires for financial appraisal.
Projection relating to three financial statement
will b discussed:-
 Profit and loss statement

 Cash flow statement

 Balance sheet
Cost of project represent the total item of outlay associated with
a project which are associated with long term funds. It is
sum of outlays of following
 Land and site development

 Building and Civil works

 Plant and machinery

 Technical knowhow
 Miscellaneous Assets :
Assets which are not part of the direct
manufacturing process are called as
miscellaneous assets.
contd..
 Preliminary expenses :
The expenses made at the beginning stage of the
project like market survey, drafting memorandum
and articles of association. Under section 35D of
income
tax the preliminary expenses should not exceed 5%
of the
capital employed.
 Provision for contingencies : adjusted with inflation,
contingencies taken for unforeseen expenses. Firm cost-
5%,Non-firm cost-10%.

 Margin money for working capital :

working capital that will be financed from
long term sources.