Question Paper Project Management - II (242) : October 2005 Section D : Case Study (50 Marks) This section consists of questions with serial number 1 - 5. Answer all questions. Marks are indicated against each question. Do not spend more than 80 - 90 minutes on Section D.
Case Study Read the case carefully and answer the following questions:
1.
a. b.
Estimate the cost of project indicating different broad cost heads. Estimate the means of finance. (8 + 2 = 10 marks) < Answer >
2.
Prepare the projected profitability statement for the first five years of operations. (15 marks) < Answer >
3.
Prepare the projected cash flows from long-term funds point of view for five years. Assume the terminal value of fixed assets, excepting land, to be 100% of the book value at the end of 5th year. (8 marks) < Answer >
4.
Appraise the project using the following criteria: (a) (i) NPV (ii) Modified IRR The management of the company has decided to reinvest the intermediate cash inflows in government securities at an average yield of 6 percent. (b) Also compute the Debt Service Coverage Ratio (DSCR) schedule and comment on the same. (6 + 4= 10 marks) < Answer > 5.
Once data is available on the principal dimensions of the project – market size, plant capacity, production technology, machineries and equipments, plant site and supply of inputs to the project – project layouts may be prepared. Discuss briefly the different types of layout a project manager should work on while designing the project. (7 marks) < Answer > Duro Tubes and Flaps Ltd.
As per the Automotive Tyre Manufacturers’ Association (ATMA), there has been a steady growth trend in Tube production over last 5 years. But the production of Tubes by organized Tyre companies has all along been much less than the requirement. This gap between Tyre and Tube production can be explained in terms of lack of interest on part of the Tyre manufacturers to produce Tubes due to low tonnage, low value and low value addition. But with much shorter life compared to tyre, tube requirement is actually at least 1.2 times of that and there exists a gap to the tune of about 200 Lacs numbers as per industry sources. This gap, which is growing by the day, is not being met by the Tyre manufacturers. This shortfall in tube production is partly met by small and medium scale industries. The ATMA has projected the demand of tyre industry to two fold its present volume
by FY 2011-12 and the demand for tubes, which has shorter life, is also expected to follow that figure. Mr. Bharat Ganguly, the Executive Director of Duro Polyprene (P) Ltd, was approached by Mr.S.K.Sharma on August, 2005 with regard to setting up a rubber tubes and flaps manufacturing unit at Samastipur in Bihar. Mr. Nagarjuna, Director (Finance) of Venus Rubbers Ltd. also joined with them to form Duro Tubes and Flaps Ltd., which was incorporated under Companies Act 1956, on 1st October, 2005. Promoters: Principal promoter Mr. Bharat Ganguly, is an engineer from Regional Engineering College, Durgapur (West Bengal) and LNCRT & LPRI diploma holder in Rubber Technology from the prestigious National College of Rubber Technology, London. A man with strong business acumen started dealing with rubber tubes twenty years ago. His company Duro Polyprene (P) Ltd. supplies tubes to almost all the secondary tube producers. The two primary co-promoters in his latest venture are Mr. P.K.Sharma and Mr. Nagarjuna. Mr. Sharma, a graduate mechanical engineer from REC Durgapur, joined Rubber Products Limited in Thane, Maharashtra as a management trainee in the year 1980. Initially he was associated with Marketing & Sales of rubber products. In July 1993 he was promoted to General Manager (mechanical) of section mill. During the brief tenure of four years, he successfully commissioned a new mixing mill in the production line. He used to arrange workshops with his subordinates and the front line executives of the client departments. This process has not only smoothened the long maintained strained rifts among them but also improved the productivity remarkably well in the client departments. He became GM (Production) in the year 1998 and subsequently became Executive Director (Works) in the year 2003. Since July 2003, he worked as the operational head of the entire rubber plant. His ability to manage people, to judge the problems as well as to work out the corresponding solution is well known to every individual associated with him. Mr. Nagarjuna, a Chartered Accountant and a Chartered Financial Analyst, has varied working experience in Indian industries. In the year 1975, he joined IFCI as a junior officer. After working there for ten years, he joined J K Tyres as manager (Finance), where he was the in-charge of financial control. In his tenure of four years the cost of production was reduced by 8%. Thereafter, he worked with MRF Tyres in Mumbai as DGM (Finance) for three years and then switched to Venus Rubbers Ltd. as GM (Finance) in the year 1997 and subsequently after five years he became Director (Finance). He has shown his sparkle of control skill in all his assignments. Project: The installed capacity of the plant is planned to be 2761 Tones per annum. Duro Tubes and Flaps Ltd.(DTFL) will produce primarily two types of tubes. One category consists of Automobile Tubes and the other Giant Tyre Flaps, which are primarily used for LCV/Trucks. Automobile Tubes can be further classified into 3 sub-types, which are (1) tubes for 2 or 3 wheelers, (2) tubes for Passenger car or Jeeps and (3) tubes for Light Commercial Vehicles (LCV) or Trucks. DTFL will cater to the demand for tubes and flaps of a wide range of vehicles. The tube size for 2 or 3 wheelers will be 2.25-16, 2.25-17, 23X200, 3.50-8, 3.50-10, 2.75-10, 2.75-17, 2.50-18, 3.00-18, 3.25-18, 3.25-16, 3.00-19, 4.00-8, 4.50-10. The tube size for Passenger cars/Jeeps will be 4.50-12, 155SR13, 5.20-14, 5.90-15, 6.00-16, 5.00-19, 6.00-19, 7.00-19, 8.00-19, F.78-15 and for Light Commercial Vehicles(LCV)/Trucks it will be 7.00-15, 7.50-16, 9.00-16, 8.25-20, 9.00-20, 10.00-20, 12.00-20, 12.4-28, 13.6-28. The company produces Tyre Flaps for the Light commercial vehicle and Truck segments also. Apart from manufacturing Tubes and giant Tyre Flaps, the company is also planning to start trading activities for tyres and tubes. The long and cordial relation of the promoters with premier Tyre manufacturers of the country gives it an edge in its trading activity. If this opportunity is explored properly by DTFL, it is likely to go leaps and bounds. The company has been approved as a supplier to Defense (DGS&D Rate Contract) and Association of State Road Transport Undertakings (ASRTU Rate Contract), which is awarded only after the parties are being thoroughly satisfied by undertaking stringent quality standard test. The company over the years, plans to develop extremely prestigious customer base both in domestic and the overseas market.
The plant layout of DTFL is being designed in consultation with various industry experts, so that it involves minimum plant material movement and manual handling. Manufacturing Process: DTFL has two broad categories of products namely tubes and tyre flaps. Tube Manufacturing Automobile Tube manufacturing needs different raw materials such as Raw Rubber, Carbon Black & other Chemicals viz., compounded in varying proportions for different types of tubes depending upon its uses. Proportion of raw materials required to prepare the basic compound are separated into ‘batches’. Before preparation of batches, materials are tested in laboratory to ascertain the quality. Batches are then mixed in Intermix mill for preparation of ‘stock batches’ Stock batches are then strained through extruders to get strained compounds. Straining activities is to eliminate any foreign matter out of rubber compound as otherwise it would result leakage in tubes. The strained compound is then mixed with some chemical additives, vulcanizing agents to get final compound. After the compound is prepared it is again put to mixing before being extruded through the extruder. Before extrusion the final compound is tested in the laboratory to ascertain quality of the final batch compound for production of tubes. The extruded tubes are then cut to sizes as per requirement and these are stored in leaf trucks for further maturing. Then a hole is punched on each size of cut tubes for fitting of the valves and thereafter tube lengths are joined together through splicing machine. Valve fixing is made after joining of tube through a valve-fixing machine. After fixing of the valve, raw tubes are inflated by compressed air. Before inflating, raw tubes are placed on respective size of ‘forma ‘ to have shape of the tubes. Inflated tubes are then placed in moulding presses for ‘curing’. Different sizes of moulds and formas are required for different sizes of tubes. Moulded tubes are then fitted with valve cores and deflated through deflation machine that sucks the air out of the tube. Deflated tubes are then inspected manually to identify manufacturing defects and then caps are fitted and the finalized tubes are transferred to store for packing. The end products viz. the tubes are first packed into individual sizes and then in bulk. Flap Manufacturing Like tube compound batches, a mother compound is prepared consisting of raw rubber, crumb rubber and other chemicals which are then mixed into intermix. This compound is soft and hot. It is then fed into another mixing mill with vulcanizing chemicals (Sulfur, Mercaptobenzothiazole (MBT)/ Benzothiazyl Disulfide (MBTS)) and thoroughly mixed with it. After that it is fed into another mixing mill from where a sheet of rubber of about 10mm thickness is taken out on a cutting table and it is then cut manually in strips according to the sizes of flap length. The cut strip is then fed into rubber moulds manually which are steam heated and are fitted in moulding presses. With the pressure and heat inside the moulds these strips take the shape of flap of different sizes and get cured. After a fixed time the moulds automatically get opened and the cured flaps are taken out manually from the moulds. After cooling it is then inspected, sides are trimmed manually. The matured flaps are then transferred to store for packing. Flaps are packed in gunny bags in bulk. Plant and Machinery Details of major Plant & Machinery in the works are as follows :
Description of Machineries Intermix Mill Mixing Mill Strainer Extruder & Extrusion line Leaf Trucks Splicing Machine Mechanical & Hydraulic Press Moulds Air Compressor Pump Motors
Nos. 2 2 4 2 30 4 24 80 4
Rate per unit (Rs.) 231,00,000/54,00,000/105,50,000/32,00,000/35,00,000/26,00,000/2,20,000/50,000/12,00,000/4,75,000/-
The Intermix Mills are being bought from ABL Incorporations. of USA. All the other machinery required have been acquired from indigenous sources except the Strainer, which is being supplied by a German company. Miscellaneous fixed assets like the office equipments worth of Rs.15,00,000 have to be purchased. Other Miscellaneous Fixed Assets will cost Rs.9,10,000. The custom duty applicable on imported capital equipment is 35% of basic cost. The average rate of excise for indigenous machines is 15%. The average cost of octroi, freight, transportation, loading, unloading and forwarding charges for indigenous machines is 4% of basic cost. The erection charges on an average come to 4% of the basic cost of the plant and machinery. The company is planning to purchase 100 acres of industrial land at Samastipur in Bihar. The legal consultant of the company is visiting Samastipur to check the legal disputes, if any, in the title deeds. The basic cost of this land comes to the tune of Rs.110 Lacs. The costs associated with registration and stamp duty will amount to 16% of basic cost of land. The cost of leveling of site is Rs.45,000. The cost of laying internal roads and approach roads are approximately Rs.5,62,000 and Rs.4,32,000 respectively. The cost of boundary walls and main gate come to be Rs.1,21,000. A deep bore well digging cost is Rs.82,000. A large water reservoir has to be built at a cost of Rs. 2.70 Lacs. The details of proposed buildings and civil works are as follows : Factory Building (13000 sq ft) at a cost of Rs.205.25 Lacs Administrative Building (5500 sq ft) at a cost of Rs.136.54 Lacs Utility Services Building like a Generator Room (2500 sq ft) at a cost of Rs.22.35 Lacs and staff quarters at Rs.32.30 Lacs. Raw Material Godown (6000 sq ft) at a cost of Rs.17.50 Lacs Finished Goods Godown (7000 sq ft) at a cost of Rs.18.93 Lacs Legal charges for drafting agreements for memorandum and articles of association cost them Rs.85,000. The cost of market survey was Rs.2,00,000. The company appointed Sayantan Consultants Pvt. Ltd for preparing the techno-feasibility report. Total expenditure for the preparation of feasibility report was Rs.75,000. Other expenses expected to be incurred by the company till the date of commencement of commercial production are as follows: Travelling expenses to the tune of Rs.2,65,000 Printing and Stationery expenses to the tune of Rs.2,23,000 Advertisement expenses to the tune of Rs.21,00,000 Interest & Insurance Premium during construction to the tune of Rs.4,37,000 Guarantee Commission to the tune of Rs.4,33,000 The projected estimate of manpower requirement is:
Man Power Skilled Semi-skilled Unskilled
Technical 39 49 38
Activity Land development Civil work Equipment erection Equipment testing Trial - I Trial - II Commercial Production
Non-technical 38 50 22 Start October10, 2005 November 2, 2005 February 1, 2006 May 1, 2006 July 20, 2006 September 5, 2006 April 1, 2007
Project Execution Schedule : Finish October 30, 2005 April 30, 2006 June 30, 2006 August 16, 2006 August 25, 2006 September 20, 2006 Raw Materials
Requirement: The main raw materials for manufacture of Tubes & Flaps are Rubber, Carbon Black, Rubber Chemicals, Process Oil & Crumb Rubber (for Flap). Natural Rubber is abundantly available in Kerala, South India. Carbon Black It is available from Philips Carbon Black Limited, Durgapur. The company mainly uses Carbon Black from Philips Carbon for their quality. Rubber Chemicals includes Calcium Carbonate H.S, Stearic Acid, Sulphur, Zinc Oxide, Paraffin Wax and other vulcanizing materials. All the chemicals are procured indigenously from companies like Bayer, ICI, NOCIL etc. apart from small manufacturers. These companies have their dealers and agents in Bihar and the materials are directly procured from the manufacturers. Process Oil is locally available in plenty. Crumb Rubber is a Rubber Dust made by grinding old Tyre. Other raw materials e.g., Valve, Core, non-enforcing white fillers etc.. A) Automobile Tubes : The Input Output ratio is equal to 1:1 i.e. the amount of production is equal to the amount of raw materials required. The cost of Raw Materials for the production of Automobile Tubes for the first year is estimated to be Rs.39237.50 per Metric Ton (MT). There after it is assumed that there will be a 5% increase per annum in raw material prices for the above product in the 2nd, 3rd, 4th and 5th years subsequently. B) Giant Tyre Flaps : The cost of raw materials for Giant Tyre Flaps is estimated to be 54 % of annual sales. Power : Electricity will be supplied by the Bihar State Electricity Board for a connected load of 525 K.W. Automobile Tubes : Tariff of Electricity - Rs.5.00 per unit (for the first year of production, thereafter it is expected to increase at the rate of 2% every year) Power Requirement – Direct requirement – 1.12 unit per kg of production Ancillary requirement – 180000 units (per annum) B) Giant Tyre Flaps : Cost of Power = 7% of total annual turnover. Cost of Fuel: A) Automobile Tubes : Year 1 Cost (in Rs. Lacs)
47.47
Year 2 74.10
Year 3 87.07
Year 3 93.25
Year 5 99.87
B) Giant Tyre Flaps : Cost of Fuel = 4% of total annual turnover. High Speed Diesel which is used for running the generators add up to Rs.2.42 Lacs, Rs.2.78 Lacs, Rs.3.20 Lacs, Rs.3.69 Lacs, Rs.3.69 Lacs for the first, second, third, fourth and fifth year respectively. The cost of Consumables is estimated at 1% of the total Raw Material Cost of each year. Other Manufacturing Expenses ( as % of Raw Material Consumption) Other Expenses Other information: 1.
Year 1 2.75% Rs.8.87 Lacs
Year 2 2.50% Rs.9.97 Lacs
Year 3; 4; 5 2.00% Rs.8.86 Lacs
The capacity utilization is expected to be 74.07% and 88.55% in the first and second years respectively. Thereafter, the capacity utilization of 100% is expected to be maintained. The company will have an installed capacity of : Installed Capacity A) Automobile Tubes 2/3 Wheeler Tubes Passenger Car/Jeep Tubes Light Commercial Vehicle/Truck Tubes B) Giant Tyre Flaps TOTAL Actual Production
(Nos.) 1512000 585000 324000 252000 2673000 Year 1 (Nos.)
Year 2 (Nos.)
Year 3 (Nos.)
Year 4 (Nos.)
1134000
132300 0
151200 0
151200 0
351000
468000
585000
585000
243000
324000
324000
324000
252000
252000
252000
252000
198000 0
236700 0
267300 0
267300 0
A) Automobile Tubes 2/3 Wheeler Tubes Passenger Car/Jeep Tubes Light Commercial Vehicle/ Truck Tubes B) Giant Tyre Flaps TOTAL
• • • •
•
Each 2/3 Wheeler Tubes weighs 0.45 kg
•
Each Passenger Car/Jeep Tubes weighs 1.20 kg
•
Each Light Commercial Vehicle/Truck Tubes weighs 2.70 kg
•
Each Giant Tyre Flap weighs 2.00 kg.
2. Wages for the project has to be calculated as under:
Year 5
A) Automobile Tubes 2/3 Wheeler Tubes (Per unit cost in Rs./No.) Passenger Car/Jeep Tubes (Per unit cost in Rs./No.) Light Commercial Vehicle/Truck Tubes (Per unit cost in Rs./No.) Giant Tyre Flaps (Per unit cost in Rs./No.)
Year 1
Year 2
Year 3
Year 4
Year 5
3.50
3.68
3.86
4.05
4.25
4.30
4.52
4.74
4.98
5.23
5.65
5.93
6.23
6.54
6.87
4.65 4.88 5.13 5.38 5.65 3. In order to meet escalation in cost, contingencies are to be provided at 10% on fixed assets yet to be created, excluding land.
4.
IFCI has agreed to extend a term loan of Rs.20.00 crore to DTFL. The implicit rate of interest is 9% per annum. The principal portion of the outstanding amount of loan is to be repaid in 4 installments. 1 st installment of 20% at the of the end of second year, 2nd installment at the rate of 20% of the outstanding portion the of the end of third year, 30% of the outstanding at the of the end of fourth year and at the rest in the end of the final year.
5.
Project cost in excess of promoters’ contribution, which is Rs.12 Crore and the term loan, has to be raised through a public issue of equity capital. Cost related to issue would be 5% of the size of the public issue. 6. Selling prices are as under: Year 1
Year 2,3,4,5
2/3 Wheeler Tubes ( unit S.P in Rs. / No.)
60.00
5 % increase p.a
Passenger Car/Jeep Tubes ( unit S.P in Rs. / No.)
95.00
5 % increase p.a
Light Commercial Vehicle/Truck Tubes ( unit S.P in Rs. / No.)
332.00
5 % increase p.a
B) Giant Tyre Flaps ( unit S.P in Rs. / No.)
165.00
5 % increase p.a
A) Automobile Tubes
7. The depreciation rates applicable are as follows: Particulars Company law purpose (SLM) Income Tax purpose (WDV)
Buildings 3.34% 5%
Machinery and Other assets 10.34% 20%
8. Selling and Administrative Overheads are estimated to be @ 10% of annual sales. 9. The following periodicities have been estimated for the computation of working capital: (Period in months) Particulars Raw Material Consumables Wirk in Progress Finished Goods Debtors Expenses
Periodicity 1.0 2.0 0.5 1.0 1.0 1.0
10. State Bank of India (SBI) has agreed to finance 75% of the working capital requirement. Interest on bank borrowings for working capital is 11%. 11. Margin money for working capital during first year should be included in the project cost. 12. Required return by shareholders of the company is 13%.
13. Tax rate applicable for the company is 30%. END OF SECTION D
Section E : Caselets (50 Marks) This section consists of questions with serial number 6 - 11. Answer all questions. Marks are indicated against each question. Do not spend more than 80 - 90 minutes on Section E.
Caselet 1 Read the caselet carefully and answer the following questions:
6.
The following caselet is about managing project teams. According to you what could be the characteristics of high performance teams? (9 marks) < Answer >
7.
Even the most successful project leaders sometimes find themselves at the helm of a group that falls short of expectations. Suggest some strategies to be considered for getting a project team back on track. (8 marks)< Answer >
The Software Engineering Institute of Carnegie Mellon University has defined a team maturity model. According to the maturity model, the team undergoes a five-stage process during the course of the project. The first stage is the initial level in which the team adopts an ad hoc or “invent as we go” approach. In the second stage, i.e., the repeatable level, the team utilizes planning techniques, gathers requirements and adopts a systematic approach towards the project execution. During the defined level, the project team follows defined methodological steps, uses process improvement techniques and visualizes the process from the perspective of integration. In the next level—the managed level, the team attempts to capture the metrics for estimation and process analysis. In the optimized level, the team attempts to optimize the operations or processes through the use of continuous organizational management techniques. Understanding this model would provide key insights into the maturity level that the team has to exhibit based upon which the team building efforts can be initiated. An important aspect of team building is the personal development of the members. Typically in some projects, the individuals are under a line manager and will be allocated to the project on request from the project manager. In such scenarios, it is perceived that the responsibility of personal development is still with the line manager. However, the project manager should assume the line manager’s role of performance or progress review and personal development matters with respect to the project. Project managers who do not recognize the interests, objectives and perspectives of the project team will find it difficult to garner cooperation and respect of the team. A critical component of team management is the management of communication channels. Majority of projects tend to fail on account of poor communication. Many a times, the project teams are unaware of what is expected from them and when they are supposed to complete a phase or the project. Clear information pertaining to the roles and responsibilities and the business case of the project eliminates any kind of ambiguities the team members may have. By organizing periodic meeting with the clients, sponsor and the team members,
the project manager can facilitate the collection of information, resolve issues, increase awareness and involve in decision-making. Motivation of the employees is a crucial element of any successful organization. For the success of a project, the availability of motivated staff is very much important. Employees can be motivated by a variety of initiatives and actions. Project organizations while attempting to keep their employee motivation intact should examine three aspects: The benefits offered to the members, flexibility in work practices and investment in employability of the members. For IT projects, investment in skills and employability can of immense use. Employees get motivated as they get a feel of the organization commitment towards them. While long-term motivational aspects can be dealt at an organizational level, at the project level this can be done by ensuring proper integration of the team with the organizational business. This creates a positive feel among the members, and thereby encourages them to exhibit continuous positive approach towards work and contribution to organizational success. On the other hand, organizations should try to refrain from acts that can de-motivate people easily. An essential aspect of project team management is the creation of a work environment that fosters creativity, ideas and cooperation from the team. Generally project managers tend to perceive their function as making people work. However, this is a wrong notion as the function is to make it possible for the people to work. Unless they change their perception, creation of a healthy, work-conducive environment is not possible. A good workplace is not just about cultivating the right skills and knowledge of the employees; it is about the culture and climate. Many project managers have realized this fact and managed their teams successfully by focusing on the development of a work-conducive environment along with the technical aspects of the project. Caselet 2 Read the caselet carefully and answer the following questions:
8.
Discuss the areas and concepts that Software Process Technology is benefited from. (8 marks) < Answer >
9.
The following article discusses about the concept of Software Process and the properties that characterize and distinguish these processes from the other process types. The special nature of the Software Process indicates its special characteristics. Discuss. (8 marks) < Answer >
The definition of Software Processes (SP) supplements the concept of a life cycle in the sense that it defines the skeleton and philosophy of carrying out an SP. But it is not sufficient to guide and control a development and/or maintenance project. An SP is a “coherent collection of policies, organizational structures, technologies, procedures and artifacts that are necessary to conceive, develop, install and maintain a software product” (Fuggetta, 2000). The necessity for human participation in a creative way and the absence of repetitive actions makes, neither the software development nor the maintenance a production process. However, there are some similarities between both types of processes, which are useful for the understanding of the software processes in a wider perspective. Like in the production
process, the software processes consist of two inter-related sub-processes; the production process and the management process (McLeod,1990). The production process strictly relates to the production and maintenance of the product, while the management process provides the necessary resources for the production process, and controls it. This control is possible when the production process feeds back information of its situation to the management process. The technology which automates and integrates the production process is called Software Process Technology (SPT). Primarily, this is done in a new work environment, known as “Process-centered Software Engineering Environment”, (PSEE), that supports the management and production processes in an integrated way. The main objective of the SPT is to control the inherent complexity of the SP with a clear understanding of the process in itself, and by an automated support, by means of a PSEE. A fundamental aspect to achieve this objective is the computerized process support, which is the presence of a model of processes and the right means of defining, modifying, analyzing and enacting it (Derniame et. al., 1999). One of the biggest challenges faced while using this technology would be the measurement of software processes. It is one of the basic aspects of the management of these processes. Traditionally, the software process measurement has focused on the measurement of projects and products but as a result of the increasing interest shown by software companies in the institutionalizing, modeling and improvement of their processes, software process models have become an important entity to be taken into consideration. Caselet 3 Read the caselet carefully and answer the following questions:
10. “The sources of project finance are categorized into equity markets, preferential capital, internal accruals, term loans, debentures, working capital advances, venture capital funds and international financial markets.” Explain the terms – internal accruals and venture capital fund. State how they can be used in project financing. (8 marks) < Answer >
11. Traditionally, there were limited options available for project financing. But now, with ecnomic liberalization, the options have significantly increased. Apart from the equity and debt financing, numerous other options are available to the Indian companies both at the domestic and international level. Discuss. (9 marks) < Answer >
During the last one decade, the project finance market has increased tremendously. According to the World Bank, it has disbursed $27 bn in the year 2002 towards various developmental projects. While the World Bank funding is more towards the societal development projects and upliftment of poor nations, global commercial banks have funded around $90 bn in 2002 towards private projects. The growth of the project financing activity during the last one decade took place due to certain economic factors such as low inflation, high growth of service sector, etc. As a result, almost all organizations, irrespective of their size, have embarked on numerous projects. The growth trends are likely to continue well into the future, especially with large economies like India and China requiring huge amounts of funds for their infrastructure projects. In
India, much of the developmental projects have been financed in the past through the planning commission allocations both at the central and the state level. However, with the liberalization of the economy, there has been a significant change in project finance activity in India. Today, private and public funding is also available for projects undertaken by the government and the corporates. The recognition of project finance as an important lending activity has enhanced the sources of funds for both the governments and the corporate. The sources of project finance are categorized into equity markets, preferential capital, internal accruals, term loans, debentures, working capital advances, venture capital funds and international financial markets. Depending on the capabilities of the firm and the scope of the projects, organizations use any one or a combination of these sources to meet the project financing requirements. The phenomenal growth of corporate debt market in India is a reflection of the increasing dependence of corporate India on debentures and bonds. A number of instruments are available in the Indian market for corporates—deep discount bonds, convertible debentures, floating rate bonds, secured premium notes, structured notes and indexed bonds. Another recent development is the private placement of debentures. Though this form of financing was also there earlier, this approach has become popular among the corporates recently. Mutual funds, banks, insurance companies and other financial institutions are the principal buyers of privately placed debentures. The growth of private placement can be attributed to its accessibility, flexibility, speed and lower issue costs. Considering the advantages of the private placement approach companies tend to prefer this route wherever, the issue size is small. However, the success of private placement is dependent on the trust and risk appetite of the financial institutions as they examine various factors like net worth of the company, interest cover, profits before tax, asset cover, debt-equity ratio and the dividend track record of the company etc. END OF SECTION E END OF QUESTION PAPER
Suggested Answers Project Management – II (242) : October 2005 Section D : Case Study 1.
a.
Cost of project: (in Rs. Lacs)
A i. ii. iii. iv. v. vi. vii. viii.
Land: Basic cost land Stamp duty @ 16%
110.00 17.60
Cost of leveling the site
0.45
Cost of laying internal roads
5.62
Cost of approach roads
4.32
Cost of boundary walls and main gate
1.21
Cost of tube-well digging
0.82
Cost of Water Reservoir
2.70 142.72
B
Building and Civil Works:
i.
Factory Building
ii.
Administrative Building
205.25 136.54
iii. iv. v vi.
Generator Room Staff Quarter Raw Material Godown Finished Goods Godown
22.35 32.30 17.50 18.93 432.87
C i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii.
xiv.
142.72
432.87
Plant and Machinery: Intermix Mill Strainer Custom duty on imported capital equipment @ 35% Mixing Mill Extruder and Extrusion Line Leaf Truck Splicing Machine Mechanical and Hydraulic Press Moulds Air Compressor Pump Motors Excise paid (iv + v + vi + vii + viii + ix + x + xi) × 0.15 Octroi, Freight, Transportation, Loading, Unloading, Clearing and Forwarding Charges @ 4% (iv + v + vi + vii + viii + ix + x + xi) × 0.04 Erection charges (i + ii + iv + v + vi + vii + viii + ix + x + xi) × 0.04
462.00 422.00 309.40 108.00 64.00 1050.00 104.00 52.80 40.00 48.00 4.75 220.73
58.86 94.22 3038.77
3038.77
D
Miscellaneous fixed assets (MFA)
i. ii.
Office Equipments Other MFAs
15.00 9.10
E
Preliminary expenses (Less issue expenses)
i. ii. iii.
Legal charges for memorandum and articles of association Cost of market survey Cost of preparing feasibility report
F
Pre-operative expenses
i. ii. iii. iv. v.
Travelling Expenses Printing & Stationary Expenses Advertising Expenses Interest & Insurance during Construction Period Guarantee Commission
24.10
24.10
0.85 2.00 0.75 3.60
3.60
2.65 2.23 21.00 4.37 4.33 34.58
34.58
G
Contingencies
i.
(B + C + D) x 0.10
349.57
H
Margin money for working capital
116.60
4142.82 Total Cost of Project (less issue expenses) Total cost of the project (Less the public issue expenses) = (A + B + C + D + E + F + G + H) = 4142.82 Lacs Money to be raised through public issue = 4142.82 – 2000 – 1200 = Rs.942.82 Lacs. 942.82 0.95
∴ Size of the issue = = Rs.992.44 Lacs and so the issue expenses = Rs.49.62 Lacs. ∴ Total preliminary expenses = 49.62 + 3.60 = Rs. 53.22Lacs. ∴ Total cost of project = 4142.82 + 49.62 = Rs.4192.44 Lacs. b.
Means of finance: Equity – Promoters – Public Term loan Total
(in Rs. Lacs) 1200.00 992.44 2000.00 4192.44
Computation of Working Capital (in Rs. Lacs) Particulars Raw materials Consumables Work in Progress
2.
Period (months) 1.0 2.0 0.5
Yr. 1
Yr. 2
Yr. 3
Yr. 4
Yr. 5
70.62
89.40
102.00
107.10
112.45
1.41
1.79
2.04
2.14
2.25
48.41
61.32
69.60
72.97
76.50
Finished Goods
1.0
115.46
146.53
166.34
174.44
182.92
Debtors
1.0
186.37
238.86
271.44
285.01
299.26
Working expenses
1.0
44.13
56.24
63.32
66.27
69.34
Total
466.41
594.15
674.73
707.94
742.72
Bank finance
349.80
445.61
506.05
530.96
557.04
Margin money (25%)
116.60
148.54
168.68
176.99
185.68
Profitability Statement: Rs. Lacs)
< TOP >
(in
Year 1 Net Sales
Year 2
Year 3
Year 4
Year 5
2236.41
2866.37
3257.26
3420.12
3591.13
Raw Material
847.47
1072.83
1224.00
1285.20
1349.46
Power & Fuel Consumables (1% of raw Material Cost)
193.53
250.14
281.57
293.58
305.72
8.47
10.73
12.24
12.85
13.49
Other manufacturing expenses
32.18
36.79
33.34
34.56
35.85
Wages
80.23
101.28
119.18
125.14
131.40
1161.88
1471.76
1670.32
1751.33
1835.91
Fixed Expenses Selling, Administrative and other Expenses
223.64
286.64
325.73
342.01
359.11
Total Fixed Expenses
223.64
286.64
325.73
342.01
359.11
OPBIDT
850.89
1107.97
1261.21
1326.78
1396.10
Less: Depreciation
367.55
367.55
367.55
367.55
367.55
OPBIT
483.34
740.42
893.66
959.23
1028.55
Interest on working capital
38.48
49.02
55.67
58.41
61.27
Interest on term loan
180.00
180.00
144.00
115.20
80.64
Total Financial charges
218.48
229.02
199.67
173.61
141.91
OPBT
264.86
511.41
694.00
785.63
886.64
10.64
10.64
10.64
10.64
10.64
254.22
500.76
683.35
774.98
875.99
0.00
65.83
178.23
232.15
283.65
254.22
434.93
505.12
542.83
592.35
Variable Expenses
Total Variable expenses
Less: Financial Charges
Preliminary Expenses Written off PBT
Provision for tax PAT
(@ 30%)
Working Notes: 1. 1. Sales Volume and Sales Value: (in Rs. Lacs)
Year 1
Year 2
Year 3
Year 4
Year 5
1512000
1512000
1512000
1512000
1512000
Passenger Car/Jeep Tubes (Nos.) Light Commercial Vehicle/Truck Tubes (Nos.)
585000
585000
585000
585000
585000
324000
324000
324000
324000
324000
B) Giant Tyre Flaps (Nos.)
252000
252000
252000
252000
252000
2673000
2673000
2673000
2673000
2673000
74.07%
88.55%
100.00%
100.00%
100.00%
1134000
1323000
1512000
1512000
1512000
510
595
680
680
680
351000
468000
585000
585000
585000
421
562
702
702
702
243000
324000
324000
324000
324000
656
875
875
875
875
252000
252000
252000
252000
252000
504
504
504
504
504
1980000
2367000
2673000
2673000
2673000
2/3 Wheeler Tubes (Nos.) (unit S.P in Rs./No.) (5 % increase per annum)
680.40
833.49
1000.19
1050.20
1102.71
60.00
63.00
66.15
69.46
72.93
Passenger Car/Jeep Tubes (Nos.) (unit S.P in Rs./No.) (5 % increase per annum) Light Commercial Vehicle/Truck Tubes (Nos.) (unit S.P in Rs./No.) (5 % increase per annum)
333.45
466.83
612.71
643.35
675.52
95.00
99.75
104.74
109.97
115.47
806.76
1129.46
1185.94
1245.23
1307.50
332.00
348.60
366.03
384.33
403.55
B) Giant Tyre Flaps (unit S.P in Rs./No.) (5 % increase per annum)
415.80
436.59
458.42
481.34
505.41
165.00
173.25
181.91
191.01
200.56
2236.4 1
2866.37
3257.26
3420.12
3591.13
Installed Capacity A) Automobile Tubes 2/3 Wheeler Tubes (Nos.)
Total Capacity Utilization Actual Production A) Automobile Tubes 2/3 Wheeler Tubes (Nos.) in M.T ( 1 No. = 0.45 Kg)
Passenger Car/Jeep Tubes (Nos.) in M.T ( 1 No. = 1.20 Kg)
Light Commercial Tubes (Nos.)
Vehicle/Truck
in M.T ( 1 No. = 2.70 Kg)
B) Giant Tyre Flaps (Nos.) in M.T ( 1 No. = 2.00 Kg)
Total Sales (Rs.in Lacs) A) Automobile Tubes
Net Annual Turnover
2. 2.
Raw Materials:
(Rs. In Lacs) Particulars
Year 1
Year 2
Year 3
Year 4
Year 5
1587.60
2031.75
2257.20
2257.20
2257.20
39237.50 622.93
41199.38 837.07
43259.34 976.45
45422.31 1025.27
47693.43 1076.54
224.53 847.47
235.76 1072.83
247.55 1224.00
259.92 1285.20
272.92 1349.46
1.12
1.12
1.12
1.12
1.12
1778112
2275560
2528064
2528064
2528064
180000
180000
180000
180000
180000
1958112 5.00 97.91
2455560 5.10 125.23
2708064 5.20 140.87
2708064 5.31 143.69
2708064 5.41 146.56
29.11 127.01
30.56 155.79
32.09 172.96
33.69 177.38
35.38 181.94
COST
47.47
74.10
87.07
93.25
99.87
B) Giant Tyre Flaps COST (4% of Sales) High Speed Diesel ( for Generator) Fuel Cost [A + B]
16.63 2.42 66.52
17.46 2.78 94.35
18.34 3.20 108.60
19.25 3.69 116.19
20.22 3.69 123.77
Raw Materials (Rs.in Lacs)
A) Automobile Tubes (i) Requirement (Input - Output Ratio = 1:1) (in M.T) (ii) (Cost in Rs./M.T.) (5% increase p.a.) (a) COST =[ (i) x (ii) ] B) Giant Tyre Flaps Requirement (54% of Sales) (b) COST Raw Material Cost [A +B] Power (Rs.in Lacs)
A) Automobile Tubes (i) Requirement 1.12 KW per Kg of Production (ii) Power Requirement ( in KW) for Manufacturing = [(i) x Actual Production in M.T x 1000] (iii) Power Requirement (KW) for Job Work (Given) (iv) Total Power Requirement (Units) = ( ii + iii) (v) (Cost in Rs./Unit) COST = [ iv x v] B) Giant Tyre Flaps COST (7% of Sales) Power Cost [A + B] Fuel (Rs.in Lacs)
A) Automobile Tubes
3.
3.
Allocation of contingencies and pre-operative expenses on different fixed assets: (Rs. In Lacs)
Cost Buildings
Pre-operative expenses
Contingencies
Total
432.87
43.29
4.28
480.44
3038.77
303.88
30.06
3372.71
MFA
24.10
2.41
0.24
26.75
Total
3495.74
349.57
34.58
Plant and machinery
4. 4. Depreciation as per Income Tax Act, 1961: (a) Buildings: (Rs. In Lacs) Opening balance
Year 1
Year 2
480.44
456.42.
433.60
411.92
391.32
24.02
22.82
21.68
20.60
19.57
456.42
433.60
411.92
391.32
371.75
Depreciation @ 5% Closing balance
Plant and machineries:
Year 3
Year 4
Year 5
Year 1
Year 2
Year 3
Year 4
Year 5
Opening balance
3372.7 1
2698.17
2158.53
1726.83
1381.46
Depreciation @ 20%
674.54
539.63
431.71
345.37
276.29
Closing balance
2698.1 7
2158.53
1726.83
1381.46
1105.17
MFAs :
(c)
(Rs. In Lacs) Year 1 Opening balance Depreciation @ 20% Closing balance
5.
(b)
(Rs. In Lacs)
Total Depreciation
Year 2
Year 3
Year 4
Year 5
26.75
21.40
17.12
13.70
10.96
5.35
4.28
3.42
2.74
2.19
21.40
17.12
13.70
10.96
8.76
703.91
566.73
456.81
368.70
298.05
5.
Depreciation for Companies Act, 1956: Rate of Depreciation
6.
Book Value (Rs. In Lacs)
Depreciation (Rs. In Lacs)
Buildings
3.34%
480.44
16.05
Plant & Machinery
10.34%
3372.71
348.74
MFA
10.34%
26.75
2.77
TOTAL
Other Manufacturing Expenses and Wages calculation:
367.55
6. (Rs. In Lacs)
Other Manufacturing Expenses
Year 1
(i) ( % of Raw Material Consumption) (ii) COST ( i x Raw Material Cost) (iii) Other Expenses Other Manufacturing Expenses (ii+ iii)
2.75% 23.31 8.87 32.18
2.50% 26.82 9.97 36.79
2.00% 24.48 8.86 33.34
2.00% 25.70 8.86 34.56
2.00% 26.99 8.86 35.85
3.50
3.68
3.86
4.05
4.25
4.30
4.52
4.74
4.98
5.23
5.65
5.93
6.23
6.54
6.87
4.65
4.88
5.13
5.38
5.65
80.23
101.28
119.18
125.14
131.40
Wages A) Automobile Tubes 2/3 Wheeler Tubes (Per unit cost of Wages in Rs./No.) Passenger Car/Jeep Tubes (Per unit cost of Wages in Rs./No.) Light Commercial Vehicle/Truck Tubes (Per unit cost of Wages in Rs./No.) B) Giant Tyre Flaps (Per unit cost of Wages in Rs./No.) Cost of Wages ( Actual Production in Units x Per unit cost of wages / 100000)
7.
Year 2
Year 3
Term loan Repayment Schedule: Year 1 2 3 4 5
8. Year 1 2 3 4 5
Opening balance 2000.00 2000.00 1600.00 1280.00 896.00
Year 4
Year 5
(in Rs. In Lacs)
Amount repaid 0.00 400.00 320.00 384.00 896.00
Closing balance
2000.00 1600.00 1280.00 896.00 0.00
Short-term bank finance:
Interest @ 9% 180.00 180.00 144.00 115.20 80.64 (in Rs. in Lacs)
Amount of Short-term loan 349.80 445.61 506.05 530.96 557.04
Interest @13% 38.48 44.02 55.67 58.41 61.27
9.
Computation
of Tax: Year 1
Year 2
Year 3
Year 4
Year 5
Profit before Tax
254.22
500.76
683.35
774.98
875.99
Add: Depreciation (SLM)
367.55
367.55
367.55
367.55
367.55
Less: Depreciation (WDV)
703.91
566.73
456.81
368.70
298.05
0.00
82.15
0.00
0.00
0.00
-82.15
219.43
594.09
773.83
945.49
0.00
65.83
178.23
232.15
283.65
Less: Unabsorbed Losses Taxable income Tax @ 30%
<
TOP > (Rs.
3. Cash flows from long-term funds point of view: In Lacs) Year 1
Year 2
Year 3
Year 4
Year 5
(+) PAT
254.22
434.93
505.12
542.83
592.35
(+) Interest on term loan (1-T)
126.00
126.00
100.80
80.64
56.45
(+) Depreciation (+) Preliminary expenses written off (–) Increase in WC margin
367.55
367.55
367.55
367.55
367.55
10.64
10.64
10.64
10.64
10.64
0.00
31.94
20.15
8.30
8.69
Year 0 Initial cash flow
(4192.44)
Operating cash flows:
Terminal cash flows: (+) Net salvage value of fixed assets (+) Net salvage value of WC* margin Total
• • •
2184.86 185.68 (4192.44)
758.41
907.19
963.97
993.36
3388.84
• Assumption that increases in margin money will be met out of internal cash accruals. • Terminal value of land is considered as Rs.142.72 Lacs • Terminal value of Buildings, Plant and Machineries as well as the Miscellaneous Fixed Assets is obtained as : (Rs. In Lacs) Building & Civil Works Plant & Machinery Miscellaneous Fixed Assets
480.44 3372.71 26.75 3879.90
Less : Total Depreciation
1837.75
2042.14
∴ Net salvage value of fixed assets = Rs.142.72 Lacs + Rs.2042.14 Lacs = Rs.2184.86 Lacs < TOP > 4.
a.
Cost of equity
= 13%
Cost of debt = 9%
Tax rate = 30% 2000 (4192.44 2000) 9 0.70 13 4192.44 4192.44
∴ Weighted average cost of capital = = 9.80 percent.
(i) The required NPV may be calculated as: = –
–
758.41 907.19 963.97 993.36 3388.84 2 3 4 1.098 (1.098) (1.098) (1.098) (1.098)5 4192.44 +
= – 4192.44 + 690.72+ 752.48+ 728.21 + 683.43+ 2123.44 = Rs. 785.84 Lacs. (ii) Terminal value of intermediate cash flows @ 6.00 percent = 758.41 (1.06)4 + 907.19 (1.06)3 + 963.97 (1.06)2 + 993.36 (1.06) + 3388.84 = Rs.7562.87 Lacs Modified IRR may be calculated from: where, TV = Terminal value n
= Life of the project
Then
TV − IO (1 + k) n
=0
k
= Modified IRR
IO
= Initial outlay
Terminal value − IO = 0 (1+k)5
or,
7562.87 − 4192.44 = 0 (1 + r)5
or, (1 + r) =
7562.88 4192.44
1/ 5
or, r = (1.1252 – 1) or, r = 12.52 percent. As the modified IRR is more than the cost of capital, so the project may be recommended.
b.
Estimation of yearwise debt service coverage ratio:
Year 1
Year 2
Year 3
Year 4
Year 5
PAT
254.22
434.93
505.12
542.83
592.35
Depreciation
367.55
367.55
367.55
367.55
367.55
10.64
10.64
10.64
10.64
10.64
180.00
180.00
144.00
115.20
80.64
0.00
400.00
320.00
384.00
896.00
4.51
1.71
2.21
2.08
1.08
Preliminary expenses Interest on term loan Principal Repaid DSCR
As we see from the above table that the expected DSCR is always more than unity, the project may be financed by the term lenders. It is also worth mentioning that since such a huge corpus of loan is being repaid in 4 installments starting at the end of the second year and a huge bullet payment in the fifth year, DSCR in the last four years is low but it never goes below unity. < TOP > 5. There are three basic types of layouts : process layout, product layout and fixed position layout. Process Layout In process layout, all machines are arranged according to the process or function they perform. For example, all drilling machines are arranged at one place, all lathe machines are arranged at another place, and all milling machines are arranged together at another place. As the arrangement is based on the function, this layout is also called functional layout. This layout is best suited for factories where production is intermittent (batch production) and different items of varied sizes and shapes are produced. In this layout, the workers will be confined to only one particular class of machines and will be able to acquire considerable skill in operating that type of machines. Therefore, they will be able to handle any type of job that requires that particular machines. Thus, the main advantage of this layout is its flexibility. On the other side of the coin, as the workers are conversant with only one particular type of machine, they sit idle when there is no work on that machine. This leads to avoidable labor costs.
Product Layouts Product layouts are also called ‘assembly lines.’ In this type of layout, all the machines are arranged in a line, and the sequence of the machines depends on the sequence of the operations to be performed for producing a particular product. The name ‘assembly lines’ is because such layout is most frequently used for assembling operations. The term product layout arises from the fact that the layout is based on the operations required for a particular product. This layout is suitable for producing items of mass production or repetitive production processes for which the demand is stable and the volumes are high enough. The main advantage of this type of layout is that the production process is highly efficient and easy to operate and control. The main disadvantage is this layout is highly inflexible. A major change in the design of the item to be produced calls for rebuilding the entire assembly line Fixed Position Layout This type of layout is used when the item to be produced is fragile, or too bulky to move around. For example, it is used in ship building, aircraft building, etc. In this layout, the item being produced remains at a fixed location all through the production process while men and machines are moved from place to place. The workers will be highly specialized in the tasks
they have to carry out. Often, the machines used are leased, as they are used for very short periods. The main advantage, obviously, is that large structures that cannot be processed in process or product layout can be handled in this layout What we have seen until now is basically the arrangement of machines that are actually required for the processing done in a factory. But along with the layout of machines, the layout of all the other paraphernalia should also be decided: the layout of the transportation facilities, communication systems, utilities like water and power, etc. Specifically, the most important layouts, other than the plant layout that have to be decided in advance are:
i.
General Functional Layout: In this layout, the relationship of the buildings and civil works and the equipments is shown. This layout is designed in such a way that the entire process of receiving raw materials, processing and the outward movement of the finished goods takes place smoothly and efficiently. ii. Transport Layout In this layout, the distances between various facilities outside the production line and the modes of transport between them are shown iii. Utilities Layout: The points of availability and consumption of each utility at each point are shown in this layout. iv. Communication Layout: It shows the communication lines between the various divisions the mode (say telephone lines) and their numbers. v. Organizational Layout: The number of people required, their requirement at each part of the project site, and their hierarchical relationship are shown in this layout. All layouts are designed before starting construction and installation of the machinery. They greatly facilitate installation of machinery and other facilities. < TOP >
Section E: Caselets Caselet 1 6.
Characteristics of High Performance Teams Some of the high performance team often display one or more of the following characteristics:
Commitment: Commitment provides values and thereby provides direction to the project teams. Commitment brings synergy and attracts interests of the team members towards the project objectives attainment. It also shapes the team’s rules and guides in decision-making. Unless the team’s goals are aligned with corporate mission and vision, the commitment among the team is difficult to achieve. Contribution: One aspect which is directly related to the effectiveness of the team is the contribution of the individual members. It depends to a large extent on the skills, expertise and motivation.
Communication: Communication is an important aspect of project management. In a project team, positive communication has energizing effect. Communications enable the team members to share ideas, seek help, debate, make mistakes, take risks etc. This helps in building cohesiveness and trust among the team members. Cooperation: The productivity of a team is dependent on the interdependencies. The FACTS model helps in identifying the team member’s behavior and his level of cooperation. The
behavior of an individual can be categorized into: Follow-through, Accuracy, Timeliness, Creativity and Spirit. Conflict Management: Conflicts are inevitable especially when a group of individuals are working together. If the conflicts are not resolved on time, they may lead to ill feeling, distrust, hidden agendas and stubborn positions leading to breakdown of unity. Conflicts can be better managed when individuals learn to shift their mindset about conflicts, other parties involved and their own ability to manage conflict. Change Management: Today’s business environment is no longer stable and hence, the need for constant change management initiatives. Project teams should realize this fact and should be geared up to face the changes. It is the responsibility of the project leaders to prepare the team for change management by way of encouraging them to take risks with necessary support and security. Connections: For any project team, it is important to pay attention to three important connections: The larger work organization, team members and other work teams. When the project is connected to the organization, the performance will be in line with the organizational priorities. When there is a connection among the team members, it results in peer support and cooperation. Connecting with other work groups would foster organizational unity, leverage talent, sharing resources across the organization and institutionalize learning. < TOP > 7.
Even the most successful leaders sometimes find themselves at the helm of a group that falls short of expectations. Some strategies to consider for getting a project team back on track are: Re-evaluating the team members by ensuring that everybody in the team member is contributing to the project cause. Just one or two employees with poor attitudes or lack of commitment can disturb the progress of an entire group. Unless every member realizes that he or she is contributing to the ultimate cause, and is equally responsible for the success or failure of the project, it becomes very difficult for the project manager to raise the effeciency level of the team. Some team members have regular work demands other than the project work that he has been temporarily assigned to. This kind of work pressure can affect his or her ability to complete project requirements with cent percent effeciency.Introducing a substitute participant for these individuals should be the right strategy. It is very important to ensure that there are sufficient number of employees in a team for meeting deadlines. If there are less number of employee than what should be in the team, then, there will be more pressure on the existing team members which will exaust them before time and time deadlines will not be met northe quality of work is expected to be maintained. The entire schedule gets disturbed. On the otherhand too many people can spoil the party. An opitmum level of members should be maintanied as per the need of the project. Scheduling special meetings to resolve interpersonal conflicts which may create unexpected complications that has a definite impact on the ultimate outcome of the project. It is quite often seen that different employees from different departments are selected for a project. But thay find it difficult to work in new environments and with new colleagues, due to which tey might lose focus or some interpersonal conflict may crop up. Conducting group meetings with a summary of accomplishments before addressing project problems. Everyone loves regognition and appraisals. This will somewhat boost the members when their accomplishment will get recognition. Then they will be more attentive to the problems so that they are able to resolve that. Acknowledging the individual contributions also motivate the team members to work towards the organizational objectives.
< TOP > 8. Software Process Technology benefits from a wide range of areas and concepts:
1.Technologies of software development and maintenance which provide the necessary tools and infrastructures to make it possible and economically feasible, to create and maintain complex software products that satisfy present and future needs. 2. Methods and Techniques in the software development and maintenance which entails the essential methodological support to benefit wisely from the technologies and carry out with success the development and maintenance activities. 3.Organizational Behavior, this is to say, the science of the organizations and people is useful because, in general, the software projects are carried out in groups that have to be coordinated and directed inside an effective organizational structure. 4.Marketing and Economy, since the efforts of the projects of software development and maintenance are not autonomous, like any other product, the software must be directed to satisfy the needs of real clients and users. In consequence, in the development and maintenance of software, it is necessary to pay attention to the complex relationships that arise between the various organizational, cultural, technological and economic factors. < TOP > 9.
The special nature of the Software Processes is determined by the following characteristics: a. They are complex. b. They are not typical processes of production; since they are directed by exceptions, they are very affected by unpredictable circumstances, and each has peculiarities that distinguishes it from the others. c. They are not processes of “pure” engineering either, since the appropriated abstractions are not known. (There isn’t an experimental science to back them up), they depend a lot on too many people, the design and production are not clearly defined, and the budgets, schedules and quality can not be programmed in a sufficiently reliable way. d. They are not (completely) creative processes because some parts can be described in detail, and some procedures are established previously. e. They are based on discoveries which depend on communication, coordination and cooperation within a pre-defined framework; deliverables generate new requirements; the costs of changing the software are not normally known; furthermore, its success depends on the participation of the user and the coordination of many roles (sales, technical development, client, etc.). < TOP >
10. Internal Accruals: Companies tend to tap the equity markets with IPOs for long-term funding and big investments. For smaller investments and short-term investments, majority of the firms try to meet the project funding through their internal accruals. The internal accruals of a firm consist of depreciation charges and retained earnings. Internal accruals can be a good source for project funding, if the plan outlay is not big and the retained earnings can meet the requirements. Some companies favor internal accruals since the funds are readily available and also eliminate the cost of issue and losses on account of under pricing. Venture Capital Fund: A venture capital fund is a fund, which in many ways is like mutual fund. It raises funds from several investors, who generally have a large appetite for risk and are looking out for greater returns.
These funds are then invested in several fledging enterprises, which need funds, but are unable to access them through the conventional sources such as banks and financial institutions. Typically, such enterprises are started by first generation entrepreneurs. Because such enterprises generally do not have any major collateral to offer as security, banks and financial institutions are averse to funding them. Since most of the ventures financed through this route are in new areas, the probability of their success is very low. The return generally comes in the form of selling the stocks when they get listed on the stock exchange. If the venture fails (more often then not), the entire amount gets written off. Venture capital funding may be by way of investment in the equity of the new enterprise or by way of debt or a combination of both, though equity is the most preferred route. Traditionally, the role of venture capital was an extension of the developmental financial institutions like IDBI, ICICI, SIDBI, State Finance Corporations, etc. TDICI (now ICICI ventures) and Gujarat Venture were one of the first venture capital organizations in India. Both these organizations were promoted by the financial institutions. There are a number of funds which are currently operational in India and involved in funding start-up ventures. Most of them are not true venture funds as they do not fund start-ups. They only provide mezzanine or bridge funding and are better known as private equity players.
< TOP > 11. Apart from the equity and debt financing, numerous other options are available to the Indian companies. Thanks to the opening up of the economy, new avenues of financing have found their way into India. Deferred credit, lease and hire purchase finance, unsecured loans and deposits, special schemes by developmental institutions, subsidies and sales tax deferments and exemptions and commercial paper are some of the alternative project finance avenues currently available in India. Apart from the equity and debt financing sources available domestically, companies can also tap international markets. Many Indian companies have tapped the international markets and raised the required funds through American Depository Shares and Global Depository Receipts. The Power Finance Corporation raised funds through syndicated euro currency Loans to the tune of $175 mn via two issues in 1997 and 1998. Similarly, Infosys Technologies and ICICI raised funds by tapping the US Equity market by issuing American Depository Shares. The Reliance Industries issued Yankee Bonds in the US capital market and raised funds for its expansion projects. The number of sources that companies can tap is on a rise. Depending upon the risk-return profile of the project and the extent of funding requirements, companies can tap one or a combination of sources to meet the funding requirements. Just as the government sponsored development projects adopt different methods of project financing for different kinds of projects, companies can also try to emulate the government models and overcome the funding constraints.
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