Q1 Explain the concept of ‘Zero date of project in project management.
Answer:
✓ Zero date of project means a date is fixed from which implementation of the project begins.
✓ It is a starting point of incurring cost. The project completion period is counted from the zero date.
✓ Pre Project activities should be completed before zero date. These activities are:
i) Identification of project
ii) Determination of plant capacity
iii) Selection of technical help
iv) Selection of site
v) Selection of survey of soil/plot etc.
vi) Manpower planning and recruiting key personnel
vii) Cost and finance scheduling
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Q2 What is Project Cost Accounting?
Answer:
✓ Project cost accounting is essentially a service that supports Project Management. It is the process of recognizing, measuring, recording and reporting the project cost data (MIS) to its stakeholders about the project milestones and costs.
✓ One of the most important requirements of Project Cost Accounting is estimating the “Cost to Completion” and therefore, differs from “financial and corporate accounting” significantly.
✓ Project costing starts with a Budget, a benchmark, with which the current performance is continuously measured. Note that “What cannot be measured cannot be managed/ controlled” (Peter Drucker).
✓ Reporting on cost overruns, physical overruns, time overruns is the essential part of the
Project Costing.
✓ Finally, timeliness in reporting on project costs and milestone over runs is much more important than precision in reporting.
Q3 What are the advantages of post completion audit?
Answer:
Post completion audit evaluates actual performance with projected performance. It verifies both revenues and costs. The advantages of completing post completion audit are:
✓ The experience gained is highly valuable for future decision making since it can highlight
mistakes that can be avoided and areas of improvements brought about.
✓ Identify individuals with superior abilities in planning and forecasting.
✓ It helps in discovering biases in judgment.
✓ It induces healthy caution among the sponsors of projects as project sponsors make over- optimistic projections for their proposals.
✓ It helps in exerting discipline in the investment planning and control process.
Q4 Write a brief note on project appraisal under inflationary conditions
Answer:
Project Appraisal under Inflationary Conditions:
Project Appraisal normally involves feasibility evaluation from technical, commercial, economic and financial aspects. It is generally an exercise in measurement and analysis of cash flows expected to occur over the life of the project. The project cash outflows usually occur initially and inflows come in the future.
During inflationary conditions, the project cost increases on all heads viz. labor, raw material, fixed assets such as equipment's, plant and machinery, building material, remuneration of technicians and managerial personnel etc. Beside this, inflationary conditions erode purchasing power of consumers and affect the demand pattern. Thus, not only cost of production but also the projected statement of profitability and cash flows are affected by the change in demand pattern. Even financial institutions and banks may revise their lending rates resulting in escalation in financing cost during inflationary conditions. Under such circumstances, project appraisal has to bed one generally keeping in view the following guidelines which are usually followed by government agencies, banks and financial institutions.
(i) It is always advisable to make provisions for cost escalation on all heads of cost, keeping in view the rate of inflation during likely period of delay in project implementation.
(ii) The various sources of finance should be carefully scrutinized with reference to probable revision in the rate of interest by the lenders and the revision which could be effected in the interest bearing securities to be issued. All these factors will push up the cost of funds for the organization.
(iii) Adjustments should be made in profitability and cash flow projections to take care of the inflationary pressures affecting future projections.
(iv) It is also advisable to examine the financial viability of the project at the revised rates and assess the same with reference to economic justification of the project. The appropriate measure for this aspect is the economic rate of return for the project which will equate the present value of capital expenditures to net cash flows over the life of the projects. The rate of return should be acceptable which also accommodates the rate of inflation per annum.
(v) In an inflationary situation, projects having early payback periods should be preferred because projects with long payback period are more risky.
Under conditions of inflation, the project cost estimates that are relevant for a future date will suffer escalation. Inflationary conditions will tend to initiate the measurement of future cash flows. Either of the following two approaches may be used while appraising projects under such conditions:
(i) Adjust each year's cash flows to an inflation index, recognizing selling price increases and cost increases annually; or
(ii) Adjust the 'Acceptance Rate' (cut-off) suitably retaining cash flow projections at current price levels.
An example of approach (ii) above can be as follows:
Normal Acceptance Rate : 15.0%
Expected Annual Inflation : 5.0%
Adjusted Discount Rate : 15.0 × 1.05 or 15.75%
It must be noted that measurement of inflation has no standard approach nor is easy. This makes the job of appraisal a difficult one under such conditions.
Q5 What are the contents of the Project Report?
Answer:
The following aspects need to be taken into account for a Project Report -
1. Promoters: Their experience, past records of performance form the key to their selection for the project under study.
2. Industry Analysis: The environment outside and within the country is vital for determining the type of project one should opt for.
3. Economic Analysis: The demand and supply position of a particular type of product under consideration, competitor’s share of the market along with their marketing strategies, export potential of the product, consumer preferences are matters requiring proper attention in such type of analysis.
4. Cost of Project: Cost of land, site development, buildings, plant and machinery, utilities e.g. power, fuel, water, vehicles, technical knowhow together with working capital margins, preliminary/pre-operative expenses, provision for contingencies determine the total value of the project.
5. Inputs: Availability of raw materials within and outside the home country, reliability of suppliers cost escalations, transportation charges, manpower requirements together with effluent disposal mechanisms are points to be noted.
6. Technical Analysis: Technical know-how, plant layout, production process, installed and operating capacity of plant and machinery form the core of such analysis.
7. Financial Analysis: Estimates of production costs, revenue, tax liabilities profitability and sensitivity of profits to different elements of costs and revenue, financial position and cash flows, working capital requirements, return on investment, promoters contribution together with debt and equity financing are items which need to be looked into for financial viability.
8. Social Cost Benefit Analysis: Ecological matters, value additions, technology absorptions, level of import substitution form the basis of such analysis.
9. SWOT Analysis: Liquidity/Fund constraints in capital market, limit of resources available with promoters, business/financial risks, micro/macro economic considerations subject to government restrictions, role of Banks/Financial Institutions in project assistance, cost of equity and debt capital in the financial plan for the project are factors which require careful examinations while carrying out SWOT analysis.
10. Project Implementation Schedule: Date of commencement, duration of the project, trial runs, cushion for cost and time over runs and date of completion of the project through Network Analysis have all to be properly adhered to in order to make the project feasible.
Corporate actions.
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