Project Management

Chapter 8 : Financial Analysis

Project Cost

Means of Financing the Project

Share Capital
Term Loans
Debenture Capital
Deferred Credit
Miscellaneous Sources

Working Capital Requirements and Financing

Time Value of Money

Costs of Different Sources of Finance

Cost of Debt
Cost of Preference Capital
Cost of Equity Capital
Cost of External Equity
Weighted Average Cost of Capital

Evaluation of Project Investments

Non-Discounted Criteria
Discounted Cash Flow Criteria

Risk Analysis of Project Investments

Techniques of Risk Analysis

Sensitivity Analysis
Scenario Analysis

Social Cost Benefit Analysis

UNIDO Approach

Chapter Summary

The primary objective of any project is to earn reasonable returns for the investment made. The project manager must examine the financial feasibility of projects when selecting a project for implementation. In this process, the project manager first estimates the total cost of the project and then identifies various means for financing the project. Share capital, term loans, debenture capital, deferred credit are some of the means for financing a project. Then the project manager identifies the working capital needs of the project and the means for financing the needs.

The project manager uses two criteria to evaluate rate of returns of project investments: non-discounted criteria and discounted criteria. The time value of money is ignored in non-discounted criteria, but is considered in discounted criteria. The important methods in the non-discounted criteria are Average Rate of Return and Payback Period method. The time value of money is considered in the discounted criteria and Net Present Value, Internal Rate of Return and Profitability Index are important methods in this criteria.

Sensitivity analysis and scenario analysis are used by the project manager analyze the risks involved in each project investment. Also, the project manager studies each project proposal from the point of view of society. Project managers use Social Cost Benefit Analysis to study a project's impact on society. The United Nations Industrial Development Organization (UNIDO) has developed an approach, called UNIDO approach in this regard.

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