Professional Documents
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Question: 1. Discuss the Key Business Consideration Relevant for Project Financing Decision
Corporate finance is an area of finance dealing with financial decisions business enterprises make
and the tools and analysis used to make these decisions. The primary goal of corporate finance is to
maximize corporate value while managing the firm's financial risks. Although it is in principle
different from managerial finance which studies the financial decisions of all firms, rather than
corporations alone, the main concepts in the study of corporate finance are applicable to the financial
problems of all kinds of firms.
The discipline can be divided into long-term and short-term decisions and techniques. Capital
investment decisions are long-term choices about which projects receive investment, whether to
finance that investment with equity or debt, and when or whether to pay dividends to shareholders.
On the other hand, the short term decisions can be grouped under the heading "Working capital
management". This subject deals with the short-term balance of current assets and current liabilities;
the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the
terms on credit extended to customers).
The terms corporate finance and corporate financier are also associated with investment banking.
The typical role of an investment bank is to evaluate the company's financial needs and raise the
appropriate type of capital that best fits those needs.
Capital investment decisions are long-term corporate finance decisions relating to fixed assets and
capital structure. Decisions are based on several inter-related criteria. (1) Corporate management
seeks to maximize the value of the firm by investing in projects which yield a positive net present
value when valued using an appropriate discount rate. (2) These projects must also be financed
appropriately. (3) If no such opportunities exist, maximizing shareholder value dictates that
management must return excess cash to shareholders (i.e., distribution via dividends). Capital
investment decisions thus comprise an investment decision, a financing decision, and a dividend
decision.
Management must allocate limited resources between competing opportunities (projects) in a process
known as capital budgeting. Making this capital allocation decision requires estimating the value of
each opportunity or project, which is a function of the size, timing and predictability of future cash
flows.
Project valuation
In general, each project's value will be estimated using a discounted cash flow (DCF) valuation, and
the opportunity with the highest value, as measured by the resultant net present value (NPV) will be
selected (applied to Corporate Finance by Joel Dean in 1951; see also Fisher separation theorem,
John Burr Williams: theory). This requires estimating the size and timing of all of the incremental
cash flows resulting from the project. Such future cash flows are then discounted to determine their
present value (see Time value of money). These present values are then summed, and this sum net of
the initial investment outlay is the NPV.
The NPV is greatly affected by the discount rate. Thus, identifying the proper discount rate - often
termed, the project "hurdle rate" - is critical to making an appropriate decision. The hurdle rate is the
minimum acceptable return on an investment—i.e. the project appropriate discount rate. The hurdle
rate should reflect the riskiness of the investment, typically measured by volatility of cash flows, and
must take into account the financing mix. Managers use models such as the CAPM or the APT to
estimate a discount rate appropriate for a particular project, and use the weighted average cost of
capital (WACC) to reflect the financing mix selected. (A common error in choosing a discount rate
for a project is to apply a WACC that applies to the entire firm. Such an approach may not be
appropriate where the risk of a particular project differs markedly from that of the firm's existing
portfolio of assets.)
In conjunction with NPV, there are several other measures used as (secondary) selection criteria in
corporate finance. These are visible from the DCF and include discounted payback period, IRR,
Modified IRR, equivalent annuity, capital efficiency, and ROI (see list of valuation topics).
Valuing flexibility
In many cases, for example R&D projects, a project may open (or close) paths of action to the
company, but this reality will not typically be captured in a strict NPV approach. Management will
therefore (sometimes) employ tools which place an explicit value on these options. So, whereas in a
DCF valuation the most likely or average or scenario specific cash flows are discounted, here the
“flexibile and staged nature” of the investment is modelled, and hence "all" potential payoffs are
considered. The difference between the two valuations is the "value of flexibility" inherent in the
project.
The two most common tools are Decision Tree Analysis (DTA) and Real options analysis (ROA);
they may often be used interchangeably:
DTA values flexibility by incorporating possible events (or states) and consequent management
decisions. (For example, a company would build a factory given that demand for its product
exceeded a certain level during the pilot-phase, and outsource production otherwise. In turn, given
further demand, it would similarly expand the factory, and maintain it otherwise. In a DCF model, by
contrast, there is no "branching" - each scenario must be modelled separately.) In the decision tree,
each management decision in response to an "event" generates a "branch" or "path" which the
company could follow; the probabilities of each event are determined or specified by management.
Once the tree is constructed: (1) "all" possible events and their resultant paths are visible to
management; (2) given this “knowledge” of the events that could follow, management chooses the
actions corresponding to the highest value path probability weighted; (3) then, assuming rational
decision making, this path is taken as representative of project value. See Decision theory: Choice
under uncertainty.
ROA is usually used when the value of a project is contingent on the value of some other asset or
underlying variable. (For example, the viability of a mining project is contingent on the price of gold;
if the price is too low, management will abandon the mining rights, if sufficiently high, management
will develop the ore body. Again, a DCF valuation would capture only one of these outcomes.) Here:
(1) using financial option theory as a framework, the decision to be taken is identified as
corresponding to either a call option or a put option; (2) an appropriate valuation technique is then
employed - usually a variant on the Binomial options model or a bespoke simulation model, while
Black Scholes type formulae are used less often - see Contingent claim valuation. The "true" value of
the project is then the NPV of the "most likely" scenario plus the option value.
Quantifying uncertainty
Given the uncertainty inherent in project forecasting and valuation, analysts will wish to assess the
sensitivity of project NPV to the various inputs (i.e. assumptions) to the DCF model. In a typical
sensitivity analysis the analyst will vary one key factor while holding all other inputs constant,
ceteris paribus. The sensitivity of NPV to a change in that factor is then observed, and is calculated
as a "slope": ΔNPV / Δfactor. For example, the analyst will determine NPV at various growth rates in
annual revenue as specified (usually at set increments, e.g. -10%, -5%, 0%, 5%....), and then
determine the sensitivity using this formula. Often, several variables may be of interest, and their
various combinations produce a "value-surface" (or even a "value-space"), where NPV is then a
function of several variables. See also Stress testing.
Using a related technique, analysts also run scenario based forecasts of NPV. Here, a scenario
comprises a particular outcome for economy-wide, "global" factors (demand for the product,
exchange rates, commodity prices, etc...) as well as for company-specific factors (unit costs, etc...).
As an example, the analyst may specify specific growth scenarios (e.g. 5% for "Worst Case", 10%
for "Likely Case" and 25% for "Best Case"), where all key inputs are adjusted so as to be consistent
with the growth assumptions, and calculate the NPV for each. Note that for scenario based analysis,
the various combinations of inputs must be internally consistent, whereas for the sensitivity approach
these need not be so. An application of this methodology is to determine an "unbiased" NPV, where
management determines a (subjective) probability for each scenario – the NPV for the project is then
the probability-weighted average of the various scenarios.
Achieving the goals of corporate finance requires that any corporate investment be financed
appropriately. As above, since both hurdle rate and cash flows (and hence the riskiness of the firm)
will be affected, the financing mix can impact the valuation. Management must therefore identify the
"optimal mix" of financing—the capital structure that results in maximum value. (See Balance sheet,
WACC, Fisher separation theorem; but, see also the Modigliani-Miller theorem.)
The sources of financing will, generically, comprise some combination of debt and equity financing.
Financing a project through debt results in a liability or obligation that must be serviced, thus
entailing cash flow implications independent of the project's degree of success. Equity financing is
less risky with respect to cash flow commitments, but results in a dilution of ownership, control and
earnings. The cost of equity is also typically higher than the cost of debt (see CAPM and WACC),
and so equity financing may result in an increased hurdle rate which may offset any reduction in cash
flow risk.
Management must also attempt to match the financing mix to the asset being financed as closely as
possible, in terms of both timing and cash flows.
The dividend decision
Whether to issue dividends, and what amount, is calculated mainly on the basis of the company's
unappropriated profit and its earning prospects for the coming year. If there are no NPV positive
opportunities, i.e. projects where returns exceed the hurdle rate, then management must return excess
cash to investors. These free cash flows comprise cash remaining after all business expenses have
been met.
This is the general case, however there are exceptions. For example, investors in a "Growth stock",
expect that the company will, almost by definition, retain earnings so as to fund growth internally. In
other cases, even though an opportunity is currently NPV negative, management may consider
“investment flexibility” / potential payoffs and decide to retain cash flows; see above and Real
options.
Management must also decide on the form of the dividend distribution, generally as cash dividends
or via a share buyback. Various factors may be taken into consideration: where shareholders must
pay tax on dividends, firms may elect to retain earnings or to perform a stock buyback, in both cases
increasing the value of shares outstanding. Alternatively, some companies will pay "dividends" from
stock rather than in cash; see Corporate action. Today, it is generally accepted that dividend policy is
value neutral (see Modigliani-Miller theorem).
Decisions relating to working capital and short term financing are referred to as working capital
management. These involve managing the relationship between a firm's short-term assets and its
short-term liabilities.
Decision criteria
Working capital is the amount of capital which is readily available to an organization. That is,
working capital is the difference between resources in cash or readily convertible into cash (Current
Assets), and cash requirements (Current Liabilities). As a result, the decisions relating to working
capital are always current, i.e. short term, decisions.
Working capital management decisions are therefore not taken on the same basis as long term
decisions, and working capital management applies different criteria in decision making: the main
considerations are (1) cash flow / liquidity and (2) profitability / return on capital (of which cash flow
is probably the more important).
The most widely used measure of cash flow is the net operating cycle, or cash conversion cycle. This
represents the time difference between cash payment for raw materials and cash collection for sales.
The cash conversion cycle indicates the firm's ability to convert its resources into cash. Because this
number effectively corresponds to the time that the firm's cash is tied up in operations and
unavailable for other activities, management generally aims at a low net count. (Another measure is
gross operating cycle which is the same as net operating cycle except that it does not take into
account the creditors deferral period.)
• Cash management. Identify the cash balance which allows for the business to meet day to
day expenses, but reduces cash holding costs.
• Inventory management. Identify the level of inventory which allows for uninterrupted
production but reduces the investment in raw materials - and minimizes reordering costs -
and hence increases cash flow; see Supply chain management; Just In Time (JIT); Economic
order quantity (EOQ); Economic production quantity (EPQ).
• Debtors management. Identify the appropriate credit policy, i.e. credit terms which will
attract customers, such that any impact on cash flows and the cash conversion cycle will be
offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and
allowances.
• Short term financing. Identify the appropriate source of financing, given the cash
conversion cycle: the inventory is ideally financed by credit granted by the supplier;
however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to
cash" through "factoring".
Question 2: Draft a project report relating to launching a medium- sized software firm
Answer: 2
KANICHAI Tech is the software house which is concentrating on Indian projects specially to participate
in development of Pakistan thus enhancing IT value and strength in country.
Mission Statement: Giving quality products to the active economy drivers in market
Vision: Focusing on providing quality services to the target market which is playing important role in
country economy and progress i-e Business concerns, manufacturing concern, banks and educational
institutes. Thus we can promote technology within these working concerns which results into their
efficient participation in Pakistan’s eonomy and progress.
1-Market Analysis: The Indian IT industry today has an impressive story to tell. Much like the successful
startup that one would have not heard of a few years ago but is all of a sudden the talk of the town. The
Pakistan IT industry has started to appear on the radar of firms like Gartner and IDC and in reports by AT
Kearny and the World Bank. It is a transformed industry growing exponentially and creating a stir.
1.1 Estimated Size of IT Industry: From its nascent beginnings in the late 1980s, the industry has
successfully arrived to a point where its value proposition has been validated over and over again. The
largest members are grossing 15-25 million dollars in revenues, and receiving 100 million dollar
valuations. Most tech companies are growing in excess of 30% a year annually. The industry as a whole
is doing over 2 billion dollars a year in revenue, up from less than a billion dollars a few years ago.
About half of this growth is coming from foreign, software and high end services projects. IBM, Cisco
and Microsoft are expanding Pakistan operations aggressively while several startups are now backed by
VCs such as e-Planet Ventures, Motorola, and Adobe.
Sectors and countries have achieved in 15-20 years, Pakistan’s technology scene is poised to achieve in
less than a decade.
Putting it all together, the Indian Technology industry is very different from what it was in the early
1990’s. From 4 founding companies in 1994, PASHA’s current membership exceeds 370. From 4,619
full-time employees in 2004, current employment is at 12,232 and rising.
The number of QA Professionals has doubled in the last 3 years and 20% of those employed in the sector
are foreign qualified. Fast becoming a hub of high performance business, the questions now asked are if
growth this year will be 28% or 50%, if there will be enough skilled HR to staff demand, if there will be
enough office space available next year.
Our main idea is to open a software house in Karachi which would be the biggest software house in the
Pakistan. We will have mainly two departments.
o KANICHAI TECH will launch new software and will introduce a new idea in history of Pakistan.
o We will introduce software that will help the disable people. This idea has been taking from
research work of Dr. Sue who first introduced the idea of starting software of such kind.
4. The Market
KANICHAI TECH has identified four distinct market segments that will be interested in the software
product. These segments are the most likely consumers of the software. The segments are as follows:
• IT Intensive Corporate - The corporate and commercial business which are focusing on IT
software and having IT oriented environments e.g. banks, manufacturing concerns.
• Proactive Educational Concerns- Educational institutes who are taking an active role in the
education of their students will be looking for aids that they can use at educational places to help
with their students learning progress.
• Agencies- Internationally many countries have agencies that act as brokers to connect service
providers with individuals. The agencies have generally been formed as a result of a settlement or
payout from a lawsuit (including class action).
4.1Competitive Edge
There is several companies on the market selling business and educational products for this target
segment. KANICHAI TECH will leverage their competitive edge by incorporating entertainment into
their software product, a means of creating interest while using the software. This interest will increase
the amount of time that the users use the software, thereby increasing the effectiveness of the program.
KANICHAI TECH is convinced that the customer interest and trust towards the product instead of having
to be forced to use it.
KANICHAI TECH has been inspired by development in IT industry. KANICHAI TECH has forecasted
revenues of Rs.400, 397 and Rs.490, 000 for years two and three.
4.3 Keys to Success
• Develop business and educational software that is constructive and supportive. If it is not so, it
likely will not be used.
• Implement a strong marketing campaign to develop awareness of the software and its benefits
within all of the business centers, educational institutes, brokerages.
• Design strict financial controls for the organization.
4.4 Objectives
KANICHAI TECH is a start-up organization. The following assets and professional services will be
needed for the formation and start of operations.
The market for life skills training software can be segmented into four groups. The first is centers for
independent living, the second is school districts, the third is proactive parents, and the last is agencies
charged with special education administration. Each of the four segments is distinct and will be
communicated with in different ways. These four segments have been chosen because they are the main
purchasers of products for individuals with developmental disabilities.
The software industry for individuals with developmental disabilities has just begun to grow. Only within
the last few years has there been a significant increase in the number of computers found in classrooms
using specialized software. Competing with the software companies are products that have printed
pictures on them, typically laminated cards. While these cards are helpful, they are less interactive.
Market Segmentation
KANICHAI TECH has identified four distinct market segments for their products:
• Centers for Independent Living- These are typically not-for-profit entities that assist
individuals with developmental disabilities. The centers help clients with transition skills, making
them more independent. These centers offer a wide range of life skills training for the individuals.
• School Districts- All students are guaranteed an education therefore the school districts must
provide the appropriate education until the individual is 21 years old. School districts are
consumers of these products in pursuit of their goal of providing the students with an appropriate
education.
• Proactive Parents- These are parents of individuals with developmental disabilities who are
taking an active role in their child's education/life skill training. Reinforcing these skills as much
as possible is useful; therefore there are many parents that will purchase the software for home
use.
• Agencies- Many states, often as a reaction to a lawsuits (individual and class actions) have set up
agencies or brokerages whose purpose is to dispense money from the state to the service
providers assisting the individuals in need.
• Money from the state to the service providers assisting the individuals in need.
SWOT Analysis:
Strength:
Vast market
Untapped target market to cover
Variety of products according to clients demand
Threats
Globalization trend
High turn over rate
Impact of Economy deterioration in market.
6-Technical Analysis:
6.1 Labor
The pros:
• Each person has full knowledge about the full production cycle
• People are doing various tasks what makes especially young people excited about their work
• There is a very good possibility to manage the work load especially in crisis situations like "all
hands on pump"
Our software house will be situated in main SADDAR area of Karachi. Size of our software house would
be approximately 2 acre.
We need to install high quality machinery. For this purpose we will import our computers from U.S
market and their technical people will install the computers and networking.
6.4 Training
For better and efficient use of the imported machinery we will send our experiences programmers to U.S
for training.
6.5 Software House capacity:
We will arrange 24-hours open at our software house and employees will have morning and night shifts.
So we can increase the production capacity of our software house and ultimately more people will get
employment.
Biggest constraint is load shedding. For this purpose we will arrange generators. Generators will increase
our cost but it will increase our results accordingly.
6.7 Methodologies
Software house may use a number of various methodologies to produce the code. These can include:
• The Waterfall Model, including project management methodologies like PRINCE2 or PMBoK
• Agile Software Development, such as Extreme Programming and SCRUM
There are also some methodologies which combine both, such as the Spiral Model, RUP or MSF.
7-Financial Analysis
The estimated cost of project is Rs 15,670,000 according to proposal research and market
studies.
Partner’s Equity:
Borrowings
7.3 Projections
Start-Up Expense
Expense Heads Amount in Rs
Legal 10,000
License 2,000,000
Marketing 210,000
Furniture 900,000
Fixtures 350,000
50, 00,000
Computers
Hardware & software
Laptop
Printer
Projector
Main Server
-Networking
Assets
Current Assets
2009 2010 2011
Cash 400,000 450,000 650,000
Accounts Receivable 600,000 550,000 500,000
Inventory 165,000 165,000 200,000
Prepaid rent 600,000 675,000 650,000
Bill Board 50,000 (100,000) 250,000
Total Current 865,000 1,940,000 2,250,000
Fixed Assets
Furniture 900,000 900,000 1,000,000
Fixture 350,000 350,000 350,000
Computer Hardware 345,000 345,000 500,000
Equipment 425,000 425,000 500,000
Less: Accumulated (100,000) (100,000) (100,000)
Depreciation
Total Fixed Assets 1,920,000 1,920,000 2,250,000
Total Assets 3,785,000 3,860,000 4,450,000
Capital Stock
2009 2010 2011
Ms. Amna Riaz 700,000 700,000 700,000
Ms. Sadaf Zehra 700,000 700,000 700,000
Mr. Shahab Mustafa 700,000 700,000 700,000
Ms. Khudija Riaz 700,000 700,000 700,000
Profit 15,000 30,000 90,000
Total Capital 2,715,000 2,730,000 2,790,000
Total Liab & Capital 3,785,000 3,860,000 4,450,000
KANICHAI TECH will leverage their competitive edge of combining business, education and
manufacturing concerns within their software product to help them quickly gain market share. All of the
competitors software concentrates on skill development. While this is useful, it does have customer
oriented. KANICHAI TECH has added entertaining elements into their software, encouraging the
students to use the software and have fun while they learn.
KANICHAI Tech’s marketing strategy will be to raise visibility of the software product among the
decision makers who are business and institutional handlers. The campaign will be targeted to reach these
people/organizations so that they are aware of the options they have in developing IT environment.
Lastly, the sales strategy will seek to convince the prospective customers that there can be significant
gains in learning through KANICHAI Tech’s carefully designed software.
8.1 Marketing Strategy
KANICHAI TECH's marketing strategy reflects their perception of the industry: that most of the
companies operating today are operated by business and manufacturing concerns; that they make number
of products; but not many people know about the products, and overall awareness is poor. The reality is
that so many prospective customers in Pakistan are unaware of the different available products.
KANICHAI TECH will employ an aggressive marketing strategy to raise awareness of their
products among customers who are in need of these products, and thereby increasing software purchases.
KANICHAI TECH will be advertising heavily in various industry journals and magazines as a proven
method of reaching the target audience. The ads will generate awareness of KANICHAI TEC Hand will
lead the customers to KANICHAI TECH's website where they can demo the software. This strategy is
based on the philosophy that you can have a great product, but if no one knows about it you are not going
to be successful.
8.3 Sales Strategy
KANICHAI TECH will use an aggressive sales campaign that will rely on conference participation as
well as target cold calling. There are numerous industry conferences throughout the country
that are specifically for educators. The conferences are the places where people get together and share
strategies that work with their colleagues in different departments and different states. While the
conferences are not typically packed with vendors, KANICHAI TECH will be present since the
conferences are a captive assortment of the right people – the educators that are in the trenches working
with the special students. The conferences will be an excellent networking opportunity and should
develop significant sales.
The second prong of the sales strategy will be a campaign aimed at contacting key decision makers and
introducing them to KANICHAI TEC Hand their products. Research will be done to determine target
business, manufacturing concerns and educational institutes and money has been given to agencies to
disperse to various service providers. This information will be valuable in determining who the proper
consumer for the special software is. These personal contacts will help generate significant sales.
8.3.1 Sales Forecast
The following table and charts present sales forecasts in a monthly format as well as yearly projections.
Forecasts have been conservatively estimated to increase the likelihood of attainment. Sales have been
broken down by customer group.
A fulfillment house will be contracted to produce, package, and ship the hard copy software product to
purchasers. Download of the software from the KANICHAI TECH website will be available. This will
drastically reduce cost of goods if purchasers use the download only purchase option.
Purchaser download of the software from the KANICHAI TECH website will be available. This will
drastically reduce cost of goods if purchasers use the download only purchase option.
Sales Forecast
Sales
KANICHAI TECH has several milestones, presented in the following table and chart, which will be
instrumental in the success of the organization.
Milestones
Busines
Business plan completion 1/1/2004 2/15/2004 Rs.0 Sue
Development
Organizational hiring
3/15/2004 5/1/2004 Rs.0 Sue HR
complete
Totals Rs.0
KANICHAI TECH will develop a website that will be used as both a marketing and sales tool. On the site
interested parties can receive more information regarding the company and the current product list. Once
the beta version of the software is ready interested customers can download a trial version of the software
for their evaluation. The website will also provide people with company contact information to allow
them to ask any questions that they may have.
Online sales will be contracted to one of the third party Internet sales businesses, such as Yahoo!
Shopping. The site will provide customers with a download only purchase option.
9.1 Website Marketing Strategy
The website will be marketed using simple yet effective means. The first method is inclusion of the URL
address in all promotional activities. This will be especially important because it will allow all interested
parties to view screen shots of the software and download a trial version of the product. KANICHAI
TECH recognizes that no ad will be able to communicate everything; therefore KANICHAI TECH will
rely on the website to provide the additional information. The second marketing tool for the website will
be comprehension search engine submission. The submission process will provide KANICHAI TECH
will many visitors to the website. This will be accomplished when an interested party searches on "autism
software" or some other set of keywords. The search engine will then list a number of "hits" that
correspond to the search terms.
9.2 Development Requirements
KANICHAI TECH will employ one computer science student for the design and development of the
website. Development will occur concurrently with the development of the software.
9.1 Personnel Plan
Bibliography:
http://www.pasha.org.pk/
IT professional of NADRA and Plexus (Pvt) Limited
www.wikipedia.com
Answer: Q 3
Financial institutions appraise a project from the marketing, technical, financial, economic and
managerial angles. The principal issues considered and the criteria employed in such appraisal are
discussed below in this article.
Market Appraisal: The importance of the potential market and the need to develop a suitable
marketing strategy cannot be over emphasized. Hence efforts are made to:
Examine the reasonableness of the demand projections by utilizing the findings of available surveys,
industry association projections, Planning Commission projections, and independent market surveys
(which may sometimes be commissioned).
Assess the adequacy of the marketing infrastructure in terms of promotional effort, distribution
network, transport facilities, stock levels etc.
Judge the knowledge, experience, and competence of the key marketing personnel.
Technical Appraisal: The technical review done by financial institutions of focuses mainly on the
following aspects:
1. Product mix
2. Capacity
3. Process
4. Engineering know-how and technical collaboration
5. Raw materials and consumables
6. Location and site
7. Building
8. Plant and equipments
9. Manpower requirements
10. Break even point.
The technical review is done by qualified and experienced personnel available in the institutions
and/or outside experts (particularly where large and technologically sophisticated projects are
involved).
Reasonableness of the Estimate of capital Cost: While assessing the capital cost estimates, efforts are
made to ensure that (1) padding or under-estimation of costs is avoided, (2) specification of
machinery is proper, (3) proper quotations are obtained from potential suppliers, (4) contingencies
are provided for, and (5) inflation factors are considered.
Reasonableness of the Estimate of Working Results: The estimate of working results is sought to be
based on (1) a realistic market demand forecast, (2) price computations for inputs and outputs that are
based on current quotations and inflationary factors, (3) an approximate time schedule for capacity
utilization, and (4) cost projections that distinguish between fixed and variables costs.
Adequacy of rate of return: The general norms for financial desirability are as follows:
• Internal rate of return: 15 percent
• Return on investment: 20-25 per cent after tax
• Debt service coverage ratio: 1.5 to 2.0
In applying these norms, however, a certain amount of flexibility is shown on the basis of the nature
of the project, the risks inherent in the project, and the status of the promoter.
Appropriateness of the Financing Pattern: The institutions consider the following in assessing the
financial pattern.
Economic Appraisal: The economic appraisal looks at the project from the larger social point of
view. The methodology adopted by financial institutions for the purpose of economic evaluation
(also referred to as social cost benefit analysis) is labeled as Partila Little Mirrlees approach. In
addition to the calculation of the economic rate of return as per this approach to the calculation of the
economic rate of return as per this approach, they also look at two other economic indicators: (1)
effective ate of protection, and (2) domestic resources cost. Admittedly, the economic review done
by financial institutions is not very rigorous and sophisticated. Also, the emphasis placed on this
review has diminished. Now it is hardly done.
Managerial Appraisal: In order to judge the managerial capability of the promoters, the following
questions are raised:
Resourcefulness: This is judged in terms of the prior experience of the promoters, the progress
achieved in organizing various aspects of the project, the skill with which the project is presented and
the ability to raise committed capital and unforeseen shortfall financing.
Understanding: This is assessed in terms in terms of the credibility of the project plan (including,
interalia, the organization structure, the staffing plan the estimated costs, the financing pattern, the
assessment of various inputs, and the marketing programs) and the details furnished to the financial
institutions.
Answer: 4
There may be some terminology and definition differences related to risk analysis, risk assessment and
business impact analysis. Although several definitions are possible and can overlap, for purposes of this
article, please consider the following definitions:
•A risk analysis involves identifying the most probable threats to an organization and analyzing the
related vulnerabilities of the organization to these threats.
•A risk assessment involves evaluating existing physical and environmental security and controls, and
assessing their adequacy relative to the potential threats of the organization.
•A business impact analysis involves identifying the critical business functions within the organization
and determining the impact of not performing the business function beyond the maximum acceptable
outage. Types of criteria that can be used to evaluate the impact include: customer service, internal
operations, legal/statutory and financial.
Most businesses depend heavily on technology and automated systems, and their disruption for even a
few days could cause severe financial loss and threaten survival. The continued operations of an
organization depend on management’s awareness of potential diKANICHAIters, their ability to develop a
plan to minimize disruptions of mission critical functions, and the capability to recover operations
expediently and successfully. The risk analysis process provides the foundation for the entire recovery
planning effort.
A primary objective of business recovery planning is to protect the organization in the event that all or
part of its operations and/or computer services are rendered unusable. Each functional area of the
organization should be analyzed to determine the potential risk and impact related to various
diKANICHAIter threats
Regardless of the prevention techniques employed, possible threats that could arise inside or outside the
organization need to be assessed. Although the exact nature of potential diKANICHAIters or their
resulting consequences are difficult to determine, it is beneficial to perform a comprehensive risk
assessment of all threats that can realistically occur to the organization. Regardless of the type of threat,
the goals of business recovery planning are to ensure the safety of customers, employees and other
personnel during and following a diKANICHAIter.The relative probability of a diKANICHAIter
occurring should be determined. Items to consider in determining the probability of a specific
diKANICHAIter should include, but not be limited to: geographic location, topography of the area,
proximity to major sources of power, bodies of water and airports, degree of accessibility to facilities
within the organization, history of local utility companies in providing uninterrupted services, history of
the area’s susceptibility to natural threats, proximity to major highways which transport hazardous waste
and combustible products.
Potential exposures may be classified as natural, technical, or human threats. Examples include:
Natural Threats: internal flooding, external flooding, internal fire, external fire, seismic activity, high
winds, snow and ice storms, volcanic eruption, tornado, hurricane, epidemic, tidal wave, typhoon.
Technical Threats: power failure/fluctuation, heating, ventilation or air conditioning failure, malfunction
or failure of CPU, failure of system software, failure of application software, telecommunications failure,
gas leaks, communications failure, nuclear fallout.Human Threats: robbery, bomb threats, embezzlement,
extortion, burglary, vandalism, terrorism, civil disorder, chemical spill, sabotage, explosion, war,
biological contamination, radiation contamination, hazardous waste, vehicle crash, airport proximity,
work stoppage (Internal/External), computer crime.
All locations and facilities should be included in the risk analysis. Rather than attempting to determine
exact probabilities of each diKANICHAIter, a general relational rating system of high, medium and low
can be used initially to identify the probability of the threat occurring. The risk analysis also should
determine the impact of each type of potential threat on various functions or departments within the
organization. A Risk Analysis Form, can facilitate the process. The functions or departments will vary by
type of organization. The planning process should identify and measure the likelihood of all potential
risks and the impact on the organization if that threat occurred. To do this, each department should be
analyzed separately. Although the main computer system may be the single greatest risk, it is not the only
important concern. Even in the most automated organizations, some departments may not be
computerized or automated at all. In fully automated departments, important records remain outside the
system, such as legal files, PC data, software stored on diskettes, or supporting documentation for data
entry.
The impact can be rated as: 0= No impact or interruption in operations, 1= Noticeable impact,
interruption in operations for up to 8 hours, 2= Damage to equipment and/or facilities, interruption in
operations for 8 - 48 hours, 3= Major damage to the equipment and/or facilities, interruption in operations
for more than 48 hours. All main office and/or computer center functions must be relocated.
Certain assumptions may be necessary to uniformly apply ratings to each potential threat. Following are
typical assumptions that can be used during the risk assessment process:
1. Although impact ratings could range between 1 and 3 for any facility given a specific set of
circumstances, ratings applied should reflect anticipated, likely or expected impact on each area.
2. Each potential threat should be assumed to be “localized” to the facility being rated.
3. Although one potential threat could lead to another potential threat (e.g., a hurricane could spawn
tornados), no domino effect should be assumed.
4. If the result of the threat would not warrant movement to an alternate site(s), the impact should be rated
no higher than a “2.”
To measure the potential risks, a weighted point rating system can be used. Each level of probability can
be assigned points as follows:
To obtain a weighted risk rating, probability points should be multiplied by the highest impact rating for
each facility. For example, if the probability of hurricanes is high (10 points) and the impact rating to a
facility is “3” (indicating that a move to alternate facilities would be required), then the weighted risk
factor is 30 (10 x 3). Based on this rating method, threats that pose the greatest risk (e.g., 15 points and
above) can be identified.
9.. Estimating potential losses for each business function based on the financial and service impact, and
the length of time the organization can operate without this business function. The impact of a
diKANICHAIter related to a business function depends on the type of outage that occurs and the time that
elapses before normal operations can be resumed
CONCLUSION
The risk analysis process is an important aspect of business recovery planning. The probability of a
diKANICHAIter occurring in an organization is highly uncertain. Organizations should also develop
written, comprehensive business recovery plans that address all the critical operations and functions of the
business.
The plan should include documented and tested procedures, which, if followed, will ensure the ongoing
availability of critical resources and continuity of operations. A business recovery plan, however, is
similar to liability insurance. It provides a certain level of comfort in knowing that if a major catastrophe
occurs, it will not result in financial diKANICHAIter for the organization.
Insurance, by itself, does not provide the means to ensure continuity of the organization’s operations, and
may not compensate for the incalculable loss of business during the interruption or the business that never
returns.
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Prepare a project outline of a large infrastructure project (e.g. Metro Rail, an international airport,
Expressway, Palm Islands etc). The project opted for can be a proposed project/ already completed
project or even a project in progress. Elaborate the following in detail: