PROJECT CASH FLOWS
II. TACTICAL DEVELOPMENT OBJECTIVES
• Often specified with respect to desired rate of return (ROI)
• other criteria used: net profit before taxes, cash flows, net present value
• returns reflect the sources of and cost of the capital employed:
• the cost of risk venture capital or equity depends upon return expected by shareholders 1. DEBT: EQUITY
• Cost of funds borrowed from a funding/loan institution vary according to interest rates, duration, size of loan
• cost of loans is less than the cost of risk equity
• average cost of capital is dependent upon “gearing ratio” (debt:equity ratio)
• when interest rates are low, D/E ratio is high
• equity-based companies do better when interest rates are high 2. RATE OF RETURN
• What is an appropriate rate of return?
• Projects represents risk and are more hazardous compared to other ventures
• Hence higher returns needed to be worthwhile
• most banks look at 20-25% ROI as favorable
• other option is to assign a risk premium of 5% over normal return
• the higher the intensity or more untried the technology, the higher the risk premium III. Sources of funding
There are two basic sources of funding:
1) Capital assistance and
2) private investment capital assistance = loans, grant aid, cash grants for developing nations, this comes from external loans (World Bank, Commonwealth Development Corporation, Banco International de Desarollo, etc.) grant aid: USAID, UNIDO, WHO, Swiss, Japanese, Norwegians developed countries: subsidies and enterprise grants
1) CAPITAL ASSISTANCE
Most loans provided are low interest rate, extended repayment, concessionary in nature high percentage of Asian Development Bank loans are of this type. 10% of all such loans are via the World Bank grant-aid/grants are not paid back, real benefit is in reducing trade imbalances (export promotion loans) assistance is often provided in form of technology transfer from government
2) CREDIT INSTITUTIONS
• Typically accessed by small borrowers
• Consist of state finance corporations, and cooperative credit societies with numerous branches
• Provide small loans promptly—minimum bureaucracy
• Some technical and marketing assistance also provided
• Briefing to borrowers on purpose and use of credit should also be provided (not often done) 3) PRIVATE INVESTMENT
• Can be foreign or domestic
• private or public sale of equity (shares/stock)
• backed up by commercial financing
• venture capital or private equity
• venture capital available through specialized companies / funds
• they expect high rates of return 4) VENTURE CAPITAL
Criteria include:
- annual growth rates of 25-50%
- pre-tax margins of at least 35%
- minimum ROI of at least 30%
- public offering of stock in 5-8 years - must be unique technology / idea / IP
- 30% ownership of project by venture capital firm - minimum investment of around $500,000 - exit strategy on public sale of 4-7x 5) PUBLIC SALES
Accomplished through offering of shares large publicly-traded companies offer shares for sale, but often not to the general public, Public sale is considered for a diversification
6) JOINT VENTURES
Developing nations have attracted foreign investment via joint ventures
• Why? Land is cheaper, labor cheap, favorable investment climate
• often this is an arrangement between a local owner and foreign investor
• production often targets the export market due to limited local market (product too expensive)
• regulations as to percentage ownership vary from country to country
• Many joint ventures with foreigners call for foreign partner providing technical expertise
• if “technical expertise” has no experience within country, project usually started as a pilot
• only if technical experts are really experienced should construction start immediately
• site must achieve recommended criteria
• Most loan institutions consider cash as king
• consultants taking an equity position can seldom convince them to recognize their consulting rates
• equity fund / venture capital partners are very skeptical of anything but cash
• they will want to see the company established, land purchased, business plan, financials, distribution of shares, compensation packages, etc. prior to taking the plunge
Evaluating Joint Venture Partners
• Partners can be cash or in-kind (e.g., land) participants
• if in-kind (“sweat equity”), the value of shares is often less than par value
• if partners come in late, they don’t receive a 1:1 (par) disbursement of shares
• if land is to be used as equity, have it appraised by three parties: your own appraiser, the land owner’s appraiser, and by a neutral third-party (take the average)
7) OTHER FUNDING ISSUES
• A bad track record on debt service, loan payback affects funding.
• Seeking of personal guarantees from promoters on part of funding agencies
• most companies go bankrupt due to lack of cash (undercapitalized), not lack of profits
• financial crisis often result in rapid failure, whereas technological crisis can be solved
• recognition of adequate funds for implementation phase is critical
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9. PROJECT SCHEDULING
The Topics that will be addressed in this Module include:
1. Define Planning vs. Scheduling
2. Define and Illustrate Basic Scheduling Concepts 3. Define Logic Relationships and Critical Path
What is Scheduling?
There are multiple ways of defining scheduling. Scheduling is:
- Forming a network of activities and event relationships that portrays the sequential relations between the tasks in a project…
- Planned completion of a project based on the logical arrangement of activities, resources…
By looking at the aforementioned definitions of scheduling, do you see a difference between planning and scheduling?
Let’s take a look -
…Placing the project and its activities in a workable sequenced timetable…
…A detailed outline of activities/tasks with respect to time…
While scheduling is all of these things, the main thing to remember is that scheduling is the development of planned dates for performing project activities and meeting milestones.
By looking at the aforementioned definitions of scheduling, do you see a difference between planning and scheduling?
Let’s take a look on the next page.
1. PLANNING VS. SCHEDULING
“I keep six honest serving men (they taught me all I knew); their names are what and Why and When and How and Where and Who.”
--- Rudyard Kipling Planning involves making decisions with the objective of influencing the future. Another way to consider planning is as the “thinking” phase. Defining activities, their logical sequence, and their relationship to each other are all planning functions. In planning you answer the following questions:
1) What will be performed?
• This question is answered by determining the final project product necessary for achieving project success.
This is done in the initiation phase before the development of your WBS.
2) How will it be performed?
• This question is answered by determining the processes, procedures, and methodologies used to complete the project.
3) Where will it be performed?
• This answer varies for each type of project. For example, if it’s a construction project, the “where” will be the physical location of the building or road etc. If the project is a software development project, the answer could be the physical location of the project team or the final location of the project software.
4) Who will perform the work?
• This question is answered by determining if the work will be contracted or will use in-house resources. Then, the question will be examined in even more detail: if a contractor, what type of contractor, and if company resource, what department and who in each department?
5) In what sequence?
• This question involves determining the order in which activities will be performed to complete the project.
With five main questions answered, only one last question remains: when. This question involves scheduling.
Scheduling determines the timing of operations in the project. The schedule will determine the specific start and completion dates for the project and all project activities. Another way to look at scheduling is to consider it the “action” or
“doing it” phase. In scheduling you answer the question:
6) When will the work be performed?
• Scheduling includes the project start and completion dates, project deliverables and milestones dates, and the start and completion dates for all activities needed to successfully complete the project.
Equipped with an understanding of the difference between planning and scheduling, let’s look on the next page at the scheduling requirement needed in an earned value management system (EVMS).
A. PROJECT SCHEDULING
To satisfy the earned value management system (EVMS) criteria, the schedule must:
• Include logical ties for all activities
• Include all key milestones and deliverables
• Reflect the agreed to project baseline
• Integrate with the cost baseline
On the following pages, we will discuss the process for developing a project schedule, including how to ensure it is logical and how to ensure that it includes all key milestones and deliverables.
Project scheduling in the earned value management system involves a clear, five step process. This process aids managers in determining the project schedule and, eventually, the project schedule baseline. The process steps are:
1. Develop the list of project activities 2. Sequence the list of project activities
3. Determine the relationships between activities 4. Establish the duration for each activities
5. Determine the project duration (start and completion dates)
- For the purpose of explaining the process in detail, we will use the BEST Management Books project.