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UNIT 3BUDGETING, COST & RISK ESTIMATION IN PROJECT MANAGEMENT Q1) What are the means of financing? What are the types of financing?A1) Finance is defined as the management of money and includes activities such as investing, borrowing, lending, budgeting, saving and forecasting. The easiest way to define finance is by providing examples of the activities it includes. There are many different career paths and jobs that perform a wide range of finance activities. Below is a list of the most common examples :-i) Investing personal money in stocks, bonds or guaranteed investment certificates (GICS).ii) Borrowing money from institutional investors by issuing bonds on behalf of a public company.iii) Lending money to people by providing them a mortgage to buy a house withiv) Using Excel spreadsheets to build a budget and financial model for a corporation.v) Saving personal money in a high interest savings account.In other words, financing is borrowing money with a promise to repay that money and some additional fee, or interest over a period of time.Project financing is a loan structure that depends on the project's cash flow for repayment, with the projects assets, rights and interests. It is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors.There are mainly two types of finance :-i) Debt Finance:- Generally the cash which one acquire to maintain or run one's business is known as debt finance. Debt finance does not provide ownership control to the money lender, the borrower must repay the principal amount along with the agreed interest rate. The interest rate is calculated based on the loan amount, duration, the purpose for borrowing the specific type of finance and inflation rate. Debt finance can be classified into three types:-1) Short-term Debt Finance :- Loans generally needed for a period of more than one hundred and eighty days is called short-term debt finance. These loans are borrowed for covering the shortage of finance and temporary or occasional requirements. Short term finance is required for daily business activities such as paying wages to staffs or getting raw materials.2) Medium-term Debt Finance :- Loans generally required for a period of more than one hundred and eighty to three hundred and sixty five days is called medium-term debt finance. The business generally depend on the way of using the funds and it repays the loan from the sources of the cash-flow of the businesses.3) Long-term Debt Finance :- Loans generally required for a period of more than three hundred and sixty five days is called long-term debt finance. This type of finance is mostly needed for buying plant, land, restructuring offices or buildings etc for a business. Long term finance has a better interest rate than short-term finance. ii) Equity Finance :- Equity finance means raising capital for businesses by issues or offering shares of the company. Renowned companies use this finance to raise additional capital for the expansion of their business. Basically, each share is an owner's unit for that specific company.The other types of finance are:-i)Public Finance :- Public finance deals with the study of the state's expenditure and income. It includes only the government's finances. It can be classified into three types:-A) Public expenditure, which means the expenses incurred by the government for its maintenance and for the welfare and preservation of the economy, society and the nation, B)Public revenues, which include all the receipts and income irrespective their nature and source which the government acquires during the given period, C) Public debt, which means the loans raised which is a source of public finance.ii) Personal Finance:- Personal finance includes the ways which families or individuals get, budget, spend and save monetary resources over a period, considering different future life events and financial risk.iii) Corporate Finance :- Corporate finance includes financial activities pertaining to running a corporation. It is a department or division which oversees the finance functions of a company.iv) Private Finance :- Private finance denotes an alternative method of corporate finance helping a company raise fund to avoid monetary problems with a limited time frame Q2) What are the sources of finance ? How Government assist towards project management for start-ups ?A2) Businesses can raise capital through various sources of funds which are classified into three categories.1) Based on period - The period basis is further divided into three sub-division.i) Long term source of finance - This long term fund is used for more than five years. The fund is arranged through preference and equity shares and debentures etc and is accumulated from the capital market.ii) Medium term source of finance - These are short term funds that last more than one year but less than five years. The source includes borrowings from a public deposit, commercial banks, commercial paper etc.iii) Short term source of finance :- These are funds just required for a year. Working capital loans from commercial bank and trade credit etc are a few example of these sources. 2) Based on Ownership - This sources of finance are divided into two categories.i) Owner's funds - This fund is financed by the company owners, also known as owner's capital. The capital is raised by issuing preference shares, retained earnings etc. These are for long term capital funds which form a base for owners to obtain their right to control the firm's management and operations.ii)Borrowed funds :- These are the funds accumulated with the help of borrowings or loans for a particular period of time. This source of fund is the most common and popular amongst the businesses. 3) Based on Generation :- This source of income is categorized into two divisions.i) Internal sources :-The owners generated the funds within the organization. Example includes selling off assets etc.ii) External sources :- The fund is arranged from outside the business. For example , issuance of equity shares to public, debentures etc.The sources of business finance are retained earnings, equity, term loans, debt, letter of credit, debentures, euro issue, working capital loans and venture funding etc. With the latest improvement in India's ease of business ranking, there has been a higher push by the government to also create a nurture a startup ecosystem in the economy.Different fields of startups like fintech, edtech, pharma, e-commerce, supply chain, and even consumer marketing are gaining momentum due to increased funding and supportive policies. This initiative not only supports great minds but allows competition and equal representation in the business world. India has launched many initiatives to boost the entrepreneurship network of India.1) Start-up India :- Launched on 16th January 2016 by Prime Minister Narendra Modi, it falls under the Department of industrial policy and promotion. The idea has been to give support to entrepreneurs by the ease of compliance and relaxed norms along with a credit guarantee fund launch for startups.2)Aspire :- India always aims to improve the rural region by launching plans to support the poor. ASPIRE is one such plan which falls under the MSME, which targets the enthusiasm for innovation and development, mainly in the Agro-industry.3)MUDRA Bank :- The Micro Units Developments Refinance Agency (MUDRA) Bank is a credit facility launched to support rural start-ups. Many small scale foods and beverage startups have succeeded due to support from the MUDRA scheme.4) Ministry of Skill Development and Entrepreneurship :- This Ministry and its wise allocation of resources show India's dedication to promote entrepreneurship. A ministry made to take care of and cater to the startup world, continuously plans skill development sessions, tutorials, events and seminars while also looking after gap funding.5)Atal Innovation Mission :- Setup by Niti Aayog, the ideology of this Mission is to create cooperation between state, central, and local innovation schemes and execute entrepreneurship spirit right from schools to corporates.6)E-biz Portal :- Launched in 2013, e-Biz is a one of a kind portal that allows Government to Business interactions (G2B). With 24*7 online functioning, it acts as on single forum for all transactions, clearances and activities from both parties.7) DIDF:- The Dairy Processing and infrastructure Development Fund of DIDF is a fund structure under NABARD where milk producing companies, milk unions will find support.8)SIP-EIT :- The support for international patent protection in electronics & information technology focuses on helping technology start-ups which are the recent trending category of business.9)Multiplier Grants Scheme :- Launched under the department of electronics and information technology, MGS focuses on increasing Research and Development to develop key products and packaging structures.10) Credit Guarantee Scheme for Startups :- Commonly known as CGSS, this scheme also concentrates on providing financial stability to micro and small industries. It gives loans with zero collateral, with additional help in the form of subsidized interest rates. The scheme has been known to target manufacturing units, while also managing a corpus of Rs. 100 lacs. Q4) Explain the cost control describing operating cycle, budgets and allocations. Determine the financial needs for projects. What is impact of leveraging on cost of finance.A4) Business firms aim at producing the product at the minimum cost. It is necessary in order to achieve the goal of profit maximization. The success of financial management is judged by the action of the business executives in controlling the cost. This has led to the emergence of cost accounting systems. Cost control by management means a search for better and more economical ways of completing each operation. Cost control is simply the prevention of waste within the existing environment. This environment is made up of agreed operating methods for which standards have been developed. These standards may be expressed in a variety of ways, from broad budget levels to detailed standard costs. Cost control is the procedure whereby actual results are compared against the standard so that waste can be measured and appropriate action taken to correct the activity.The operating cycle is simply the amount of cash flow that a company needs to maintain and grow the company. It is the cash flow needed to move the product. When a company has a short operating cycle than the company requires less cash to maintain the operation of the company so the company can sell at small margins. If the company has a long operating cycle the company will end up costing more even at a moderate level. Kerzner, H., 2009, a manager wants to keep the operating cycle short to cut down on the cost required to run the business. It is the process that distributes the cash of the company, turn the cash into product, get the product out to the consumer, and returning the cash to the company and stockholders.Budgeting takes the assumptive cost of the project, set a budget, and compare the projected cost to the actual cost of the project. This is comparing the actual money being spent on the project in comparison to the budget that was projected for the operating life cycle. A big way to keep close attention to the budget is through the s-curve. Cost allocation is a process of providing relief to shared service organization's cost centers that provide a product or service. In turn, the associated expense is assigned to internal client's cost centers that consume the products and services. For example:- the CIO may provide all IT services within the company and assign the costs back to the business units that consume each offering.An effective cost allocation methodology makes an organization to identify what services are being provided and what they cost, to allocate costs to business units and to manage cost recovery. Starting a new business is one of the biggest challenge that makes sure that we will have enough money to challenge the first months. Without adequate financial resources, our business will have a hard time finding its footing. To ensure we have adequate funds, it is important to estimate our financial needs before starting a new business. The first step is to figure out our expenses. These can be divide into one-time start-up costs and recurring expenses. Add up costs :- One-time costs may include such items as legal and professional costs for incorporating or registering our business, starting inventory, license and permit fees, office supplies and equipment, long-term assets, such as machinery, a vehicle or real estate, consulting services and website design.Recurring expenses will include such items as salaries, rent or lease payments, raw materials, marketing costs, office and plant overhead, financing costs, maintenance and professional fees.Once we have determined our initial and follow on expenses , we will need to estimate how much money we will have at our disposal. Calculate your financial resources :- Estimate how much starting capital we will have and the amount of revenue we will be able to generate each month during the start-up period. To calculate the latter, research our potential market and industry averages to come up with realistic numbers.Now, plug our estimated financial resources and our estimated expenses into a set of financial projections for our business. A quick examination of our projections will show if we will have a financial shortfall. To meet any gap in funds, here are sources we can tap:-1) Personal investment :- Most start-ups require some personal investment by the entrepreneur -either cash or personal assets used as collateral to secure financing. If we foresee a cash shortfall, we may need to dig deeper into our personal assets.2) Friends and family :- Many new entrepreneurs depend on capital from family and friends (sometimes known as "love money"). Family and friends often don’t mind waiting to be repaid until profits start rolling in, but it can be challenging to mix business with personal relationships.3) Debt financing :- Lenders offer various types of debt financing including term loans and lines of credit. Some lenders offer loans specifically designed for new business ventures that come with flexible repayment terms.4) Outside equity financing:- Businesses with high growth potential may be able to secure start-up money from angel investors, business incubators (also known as accelerators) or venture capital funds. Funds from these sources are usually given in exchange for an equity position in the company.5) Grants and subsidies :- Some companies may be eligible for government grants and subsidies to help with start-up costs. In corporate finance, financing decision has gained greater importance because the optimal capital structure can be created through proper mix of finance. Corporate managers generally prefer borrowings over other means of financing. Management of a company has to be very careful while deciding the extent of financial leverage in its capital structure because the right use of financial leverage can increase the shareholders wealth whereas its improper use would adversely affect the interest of shareholders. This study examines the empirical effects of corporate capital structure(financial leverage) on cost of capital and the market value of selected firms of Indian Cement Industry for the period from 2000-01 to 2007-08. The research evidence of the study indicates that no impact of financial leverage on cost of capital was found in the cement industry in India, i.e., no significant linear relationship between the financial leverage and cost of capital exists, and there is no correlation between the financial leverage and total valuation within the cement industry. In other words, financial leverage does not affect the total valuation of a firm in the cement industry in India. Q5) What do you mean by risk ? What are the types of risk ? What is the process of risk management ?A5) Risk is any unexpected event that can affect our project- for better or for worse. Risk can affect anything: people, processes, technology and resources. These are events that might happen and we may not be able to tell when. Like flu season hitting our team all at once, or a key product component being on backorder. Some examples of project risks are:- Scope risks, cost risks, time risks, technology risks etc. In order to view risk exposure and uncertainty in greater detail, let's have a glance at the different types of risks- uncertain events and conditions- that may impact project objectives. Following are the types of risk associated with projects.1) Technical Risk :- Example of this risks are not confident that a particular requirement is achievable given the constraint of existing technology.2) Supply Chain :- Example of this chain are we may have a problem easily procuring high quality materials and parts for our prototype or production units3)Manufacturability Risks :- Can we produce prototype components and assemblies quickly and reliably enough to meet the schedule and project expense objectives? Can we produce production units even more reliably?4) Unit Cost :- Can we produce our product at or below the budgeted cost of goods? Is our customer's Total Cost of Ownership going to fit within their budget?5) Product fit/ Market :- Will our potential customers like what we are producing and pay us enough for it?6)Resource Risks :- Will we get enough resources to meet the planned target? What if a key person leaves the company or gets hit by the proverbial beer truck?7) Program management :-Major scope change during the project.8)Interpersonal :- For example, if there is a no effective communication between members of the development team, or between the team and management.9)Regulatory :- What are the regulations we will need to meet, and how will we gain our regulatory approvals with a minimum delay of our launch?These are just a few difficulties that could impact our ability to achieve our project objectives. The list of potential or near certain risks and issues is certainly long and if we include even the very low risks, it could easily overwhelm us with too many problems to solve. All risk management processes follow the same basic steps, although sometimes different jargon is used to describe these steps. Together these 5 risk management process steps combine to deliver a simple and effective risk management process.Step 1: Identify the Risk :- We and our team uncover, recognize and describe risks that might affect our project or its outcomes. There are a number of techniques we can use to find project risks. During this step we start to prepare our Project Risk Register.Step 2: Analyze the risk :- Once risks are identified we determine the likelihood and consequence of each risk. We develop an understanding of the nature of the risk and its potential to affect project goals and objectives. This information is also input to our Project Risk Register.Step 3: Evaluate or Rank the Risk :- We evaluate or rank the risk by determining the risk magnitude, which is the combination of likelihood and consequence. We make decisions about whether the risk is acceptable or whether it is serious enough to warrant treatment. These risk rankings are also added to our Project Risk Register.Step 4: Treat the Risk :- This is also referred to as Risk Response Planning. During this step we assess our highest ranked risks and set out a plan to treat or modify these risks to achieve acceptable risk levels. How can we minimize the probability of the negative risks as well as enhancing the opportunities? We create risk mitigation strategies, preventive plans in this step. And we add the risk treatment measures for the highest ranking or most serious risks to our Project Risk Register.Step 5: Monitor and Review the Risk :- This is the step where we take our project risk register and use it to monitor, track and review risks.The risk management process also helps to resolve obstacles when they occur, because those problems have been envisaged, and plans to treat them have already been developed and agreed. We avoid impulsive reactions and going into fire-fighting mode to correct problems that could have been anticipated. This makes for happier, less stressed project teams and stakeholders. The end result is that we minimize the impacts of project threats and capture the opportunities that occur. Q6) How do you analyze and identify risk ? What are the measures taken for risk handling ?A6) Risk analysis includes examining how project outcomes and objectives might change due to the impact of the risk event. Once the risks are identified, they are analyzed to identify the qualitative and quantitative impact of the risk on the project so that appropriate steps can be taken to mitigate them.Before we are able to analyze the risk in our project, we have to acknowledge that risk is going to happen in our project. By planning for risks, we begin the process of knowing how to identify, monitor and close out risks when they show up in our project. Part of that process is risk analysis. It is a technique that helps us to ease risk. There are also tools that can assist. We should at the very least, have a risk tracking tool or use a risk tracking template to identify and list those risks.Risk analysis is the process that figures out how likely that a risk will arise in a project. It's important to know that risk analysis is not an exact science, it's more like an art.Risk identification is also a process, but in this case it lists all the potential project risk and what their characteristics would be. If this sounds like a risk register, that's because our findings are collected there. This information will then be used for risk analysis. Though this process starts at the beginning of the project, it's an iterative process and continues throughout the project life cycle. Risk and uncertainty are inherent parts of all project work. There are ways we can mitigate and manage risk. When teams have a good risk management process in place, then we can identify and deal with all the project's risks in an appropriate manner. Here are 9 risk management steps that will keep our project on track:-1) Create a risk register:- Create a risk register for our project in a spreadsheet. Include fields for date of the risk being logged, risk description, likelihood, impact, owner, risk response, action and status.2) Identify risk :- Brainstorm all current risks on our project with the project's key team members and stakeholders. Identify risk that relate to requirements, technology, materials, budget, people, quality, suppliers, legislation and any other element we can think of.3) Identify opportunities:- When we identify risks, also factor in positive risks and opportunities. For example, include all events that in some ways could affect our project in a positive manner. What would the impact be, for instance, if too many people turned up to the concert? What could we do to exploit this opportunity and plan for it? Just as we anticipate and plan for problems, prepare for unlikely successes.4) Determine likelihood and impact:- Establish how likely the risk is to occur (on a scale from 1-5) and determine the impact of each risk according to time, cost, quality and even benefits if it were to occur ( again on a scale from 1-5). For example, a likelihood of five could mean that the risk is almost certain to occur, and an impact of four could mean that the risk would cause serious delays or significant rework if it were to happen.5) Determine the response:- Focus our attention on those risks that have the highest potential impact and likelihood of happening(i.e., an estimate of three or more on the scale mentioned in No.4). Identify what we can do to lower the likelihood and impact of each risk. 6) Estimation:- Once we have determined what we will do to address each risk, estimate how much it will cost us to do so. For example, using the concert- how much will it cost to look after the performer's health before the show, and how much will it cost to prepare for a backup?7) Assign owners:- Assign an owner to each risk. The owner should be the person who is most suited with a particular risk and to monitor it. 8) Regularly review risks:- Set aside time at least once a week to identify new risks and to monitor the progress of all logged items. Risk management is not an exercise that only happens at the beginning of the project, but something that must be attended to in all of the project's lifecycles.9) Report on risks:- Make sure that all risks with an impact ad likelihood of four and higher ( on the 1-5 scale) are listed on our status report. Encourage a discussion of all the risks at steering committee meetings so that executives get a chance to give input and direction. Q7) Explain the concept of work break down structure ? Describe new venture valuation of the asset based, earnings based and discounted cash flow models.A7) A work breakdown structure is a deliverable-oriented hierarchical decomposition of the work to be executed by the project team to achieve the project objectives and create the required deliverables. A WBS is the cornerstone of effective project planning, execution, controlling, monitoring and reporting. All the work contained within the WBS is to be identified, estimated, scheduled and budgeted.A well- designed WBS describes planned outcomes instead of planned actions. Outcomes are the desired ends of the project, such as a product, result, or service and can be predicted accurately. Actions, on the other hand, may be difficult to predict accurately. A well- designed WBS makes it easy to assign elements of th WBS to any project activity. A good WBS should exhibit following characteristics:* Definable - can be described and easily understood by project participants.* Manageable - a meaningful unit of work where specific responsibility and authority can be assigned to a responsible individual.* Estimateable - duration can be estimated in time required to complete, and cost can be estimated in resources required to complete.* Independent - minimum interface with or dependence on other ongoing elements.*Integratable - integrates with other project work elements and with higher level cost estimates and schedules to include the entire project.* Measurable - can be used to measure progress, has start and completion dates and measurable interim milestones.* Adaptable - sufficiently flexible so the addition or elimination of work scope can be readily accommodated in the WBS framework. Here are some tips in developing a WBS that can express works effectively:-1. Always express WBS activities at the lowest levels of granularity in verb form2. Review the WBS. Make sure all deliverables have been fully covered by the works defined in the WBS.3. Ensure that testing and training have been taken into account.4. Ensure that non-IT work packages are also included such as, documentation and review activities are included in the structure.5. Ensure that other supporting activities such as, product/service launch and implementation activities are planned.New Venture Valuation ( Asset based, Earnings based, Discounted cash flow models):- New venture valuation methods are the ways in which a startup business owner can work out the value of their company. These methods are important because more often than not startups are at a pre- revenue stage in their life-span so there aren't any hard facts or revenue figures to base the value of the business on.Asset based valuation is a form of valuation in business that focuses on the value of a company's assets or the fair market value of its total assets after deducting liabilities. Assets are evaluated, and the fair market value is obtained. For example, landowners may collaborate with appraisers to work out a property's market worth. Over time, property values increase, and a proprietor may realize a piece of property is worth more today than it was five years ago. The new value is quoted and is used in the asset-based approach. On the other hand, liabilities often occur at true market value. Usually, no further calculations are done. Asset valuation determines the cost of recreating a similar business. Two methods of Asset- based valuation methods are :-1. Asset Accumulation Valuation - The asset accumulation valuation method bears a striking superficial similarity to the widely known balance sheet. In the asset accumulation method, all the assets and liabilities of a business are compiled, ad a value is assigned to each one. The value of an entity is the difference between the value of its assets and liabilities.2. Excess Earnings Valuation - On the other hand, the excess earnings approach is a combination of the income and assets valuation methods. Other than evaluating a company's tangible assets and liabilities, the method can also be used to work out a business's goodwill.Earnings based valuation is based on the present value of future cash flows of one's business. Future earnings of the business are estimated by making adjustments for extraordinary items such as seasonal fluctuations. They key element all investors look after is earnings.Capitalizing past earning determines an expected level of cash flow for the company using a company's record of past earning, normalizes them for unusual revenue or expenses and multiplies the expected normalized cash flows by a capitalization factor. The capitalization factor is a reflection of what rate of return a reasonable purchaser would expect on the investment, as well as a measure of the risk that the expected earnings will not be accomplished.Discounted future earnings is another earning value approach to business valuation where instead of an average of pas earnings, an average of the trend of predicted future earnings is used and divided by the capitalization factor.Discounted cash flow analysis represents an important valuation approach. It involves forecasting how much cash flow the company will produce in the future and then, using an expected rate of investment return, calculating how much that cash flow is worth. A higher discount rate is typically applied to startups, as there is a high risk that the company will inevitably fail to generate sustainable cash flows.The trouble with Discounted cash flow is the quality of the DCF depends on the analyst's ability to forecast future market conditions and make good assumptions about long-term growth rates. In many cases, projecting sales and earnings beyond a few years becomes a guessing game. Moreover, he value that DCF models generate is highly sensitive to the expected rate of return used for discounting cash flows. So, DCF needs to be used with much care. Q8) What is cost benefit analysis? Write a note on efficient investment analysis.A8) Cost benefit analysis(CBA) is a technique used to conduct an assessment of the benefits and costs anticipated with a project. When people or organizations undertake new projects, it is advisable that they use cost-benefit analysis to establish whether such projects should be embarked on or not.It is the process used to measure the benefits of a decision or taking action minus the costs associated with taking that action. A CBA involves measurable financial metrics such as revenue earned or costs saved as a result of the decision to pursue a project.One of the ways to conduct cost-benefit analysis is by establishing a benefit to cost ratio(benefits divided by costs). For instance, if a currency such as the dollar were used, the cost-benefit ratio would tell the analyst the amount of dollars in benefits the project would receive per amount of dollars invested. If the ratio exceeds 1.0, it means the benefits would be greater than the costs. Conversely, if the ratio is less than 1.0, it means that the benefits would be less than the costs incurred.Cost benefit analysis is a framework to assess the merits of an activity( project, policy) from the perspective of society. It involves:* measuring the gains and losses( benefits and costs) from an activity to the community using money as the measuring rod, and*aggregating those values of gains and losses and expressing them as net community gains or losses.Cost-benefit analysis is used to help people make decisions. Depending on when the analysis is undertaken, cost-benefit analysis can provide information to help assess:1) whether a project or activity will be or is worthwhile:*Should we invest in this project?*Which of these two projects should we support?i) Which project will give us the best pay off per dollar invested?ii) Which project will generate the highest value to society once we have paid for it?2) Whether a project or activity has been worthwhile.In the process of conducting a cost-benefit analysis, the information generated may also inform:* what it would take to make the potential benefits of an activity actually materialize, and* the progress of an activity and how it should proceed/be revised, based on the benefits and cost identified. Efficient Investment analysis is defined as the process of evaluating an investment for profitability and risk. It ultimately has the purpose of measuring how the given investment is a good fit for portfolio. Furthermore, it can range from a single bond in a personal portfolio, to the investment of a startup business and even large scale corporate projects.Investment analysis means the process of judging an investment for income, risk and resale value. It is important to anyone who is considering an investment, regardless of type. Investment analysis methods generally evaluate 3 factors: risk, cash flows and resale value.* Risk:- The first factor evaluated in any investment analysis is risk. The reason for this is simple, if the risk of the investment is too great then loss is quite likely. In this case, cash flows and resale value generally do not mater because the investment is worth nothing. To evaluate risk, one simply uses a variation of the following formula: Rate of occurrence multiply the impact of the event = riskDespite this, risk is not a definite factor. One must evaluate all the factors related to the investment, market, industry, governmental, company etc.* Cash flow:- The second factor of investment analysis is cash flows. Cash flows occur in many ways: dividends from a publicly traded stock, interest payments on a bond, or even free cash flow which can be distributed to the investors in a small business. Cash flows are one of the methods of repayment on an investment. Many methods of evaluating cash flows are: future value of cash flows and discounted cash flow analysis. Avoiding the cash flow analysis is a faster way to loss of investment capital.*Resale value:- The third factor of investment analysis is resale value. Profit from resale is made through again in the market value of the asset. When the asset is sold to another investor for a value higher than the original purchase price, profit from resale value has occurred. In the process of investment analysis, an investor will want to measure the expected rate of growth on the asset to make sure that the value of this and any associated cash flows are larger than the loss of investment and the estimated value of the risk of the investment.Investment analysis example:- For example, Dion is a personal financial plannr. With this job Dion spends all of his days making sure that investors, from employees to entrepreneurs, are choosing investments which fit their life plan and needs. Dion must be an expert in investment analysis.Currently, Dion is working with two clients. He is working with a successful 25 year old and a 90 year old grandmother who is a retiree. He must make careful decisions for both. It all begins with an investment analysis form to make sure he understands the goals of each party. Q9) What is cash flow projections ?Explain the concept of strategic investment decisions.A9) Cash flow projection is a breakdown of the money that is expected to come in and out of the business. This includes calculating the income and all of the expenses, which will give the business a distinct idea on how much cash will be left with over a specific period of time.Understanding and forecasting the flow of money in and out of the business, can aid entrepreneurs take best decisions and avoid unnecessary cash flow crisis. After all, knowing whether the next month will see a financial feast or famine can help the team make better decisions about spending, saving and investing in their business today.In order to properly create a cash flow forecast there are two concepts one has to know: accounts receivable and accounts payable. "Receivable" refers to the money the business is expecting to collect, such as customer payments and deposits, but it also includes government grants, rebates and even bank loans and lines of credit.Accounts payable refer to the exact opposite, i.e., anything the business will need to spend money on. It includes payroll, taxes, payments to suppliers, inventory etc.A cash flow projection is essentially a breakdown of expected receivables versus payables. It gives an overview of how much cash the business is expected to have on hand at the end of each month.These projections take less than an hour to produce but can go a long way in helping entrepreneurs identify and prepare for a potential shortfall, and make best choices when running their business. Strategic investment decision making involves the process of identifying, evaluating and selecting among projects that are likely to have a big impact on a company's competitive advantage. The decisions will influence what the company does( the set of product and service attributes that define its offerings), where it does it ( the structural characteristics that determine the scope and geographical dispersion of its operations), and how it does it ( the set of operating processes and work practices it uses).Investment decision making has all the elements of a classic cost-benefit analysis. Accordingly, one might expect the process to be supported by a large and a thorough body of literature. Surprisingly, this is not the cause. As Shank(1996) points out, the four steps involved in making strategic investments- identifying spending proposals, quantitative analysis of the incremental cash flows, assessing qualitative issues that cannot be fitted into the cash flow analysis, and making a "yes" or "no" decision- are poorly covered in textbooks and receive only marginally better coverage in the journals:Step one receives virtually no attention in the formal literature- proposals just appear, somehow. Step two gets nearly all the attention. Step three is a stepchild, always made to feel guilty because it can't fit into step two. Step four is assumed to flow logically out of step two. There is due consideration for the "soft" issues in step three, but decisions , as described in textbooks derive largely from the quantitative analysis. Q10) Explain the financial criteria for capital allocation?A10) The capital allocation framework should focus on what the company believes to be the optimal balance between the interest of key stakeholders, address all main uses of capital that are relevant for the business, and set out governance and decision making process around major capital decisions.The most common uses of capital by listed companies include:-* Investment in organic growth:- It is a long term strategy, where investments generally take years to generate returns. Company management must decide which re-investment opportunities are worth pursuing to build long term value. Generally, shareholders appoint directors to make capital allocation decisions, however, professional investors also have a responsibility to monitor these decisions to confirm long-term sustainable returns on the capital they themselves allocate towards listed companies on behalf of their clients and beneficiaries.* Financing mergers & acquisitions:- It is a common use of capital which depends heavily on the strategic rationale and financial terms of the deal in question as well as on successful integration of the acquired business. While mergers and acquisition deals offer a great potential for significant value enhancement, much academic research suggest that M&A activity often destroys value. It is unsurprising that investors pay attention to the company's M&A strategy, also the reason why companies management should clearly articulate key principles of their M&A approach and how M&A discipline is maintained.*Debt policy:- Debt obligations are financial contracts between creditors and users of capital. Even though individual debt obligations are issued and repaid, a prudent core level of debt will typical constitute part of a company's permanent capital. For creditors, debt capital enjoys reasonably high predictability and visibility given that much of the listed company's debt is issued as publicly traded fixed income securities with known yields to maturity and known returns on repaid debt.*Dividends:- These are valued by shareholders as they offer them a cash return on their investments. A stable growth in dividend payments id generally seen a a sign of a high quality shareholder friendly company , while a clear dividend policy implemented by management contributes to the perception of a mature cash generative business, whose management is confident in the predictability and quality of its revenues and cash flows. On the other hand, given the value many shareholders attach to dividends, dividend cuts are often punished by the market and can result in a significant share price decline and taint the reputation of the board and management.* Cross-shareholdings:- It still remain a common practice in some markets, is another area of capital allocation that can create value in certain circumstances, for example, when such a structure reinforces critical partnerships and supply chain relationships. But in many cases cross- shareholdings do not play these strategic roles for the companies and in such cases can be an ineffective, or inappropriate, use of capital. From an investor perspective, all cross-shareholdings should be part of a capital allocation plan and reviewed on a regular basis to confirm they add value to the business and its strategic objectives.
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