PROJECT REVIEW AND

ADMINISTRATIVE
ASPECTS
 INTRODUTION
A Project is monitored during the
implementation Phase so that time & cost over
run are minimised.After a project is
Commissioned its Performance Is Periodically
Reviewed to see whether its Performance has
been in line with expectations. If things turn
sour, The abandonment may also have to be
examined.
Various facets of Project Review:-
 Control of in progress projects
 Post-completion audits
 Abandonment Analysis
 Administrative aspects of capital budgeting
 Agency problem
 How sound is the capital budgeting system
 Control of in progress projects
A lot of efforts is expended in selecting capital
projects, things often wrong in implementation
phase. This is evident from the frequent cost
&time over-runs witnessed in practice.
There are two aspects of controlling in progress
capital projects:-
 Establishment of internal control procedures

 Use of regular progress reports

 Post-completion audits
An audit of a project after it has been
commissioned is referred to as a post audit.
Regular post completion audits of capital
projects are:-
 Provide a documented log of experience that

may be valueable in improving future decision

making
 Enable the firm in identifying individuals with

superior abilities in planning and forecasting

 Help in discovering systematic biases in
judgment
 Include healthy caution among project
sponsors
 Serve as a useful training ground for
promising
executives who need broader business
experience and exposure
ROI Defined as:-
NET INCOME/BOOK VALUE OF ASSETS
The book ROI has two serious flaws:-
 Constant economic rate of return but book

ROI displays wide variation across time.

 There is an upward bias in ROI book of

business which has substantial investment in

intangible assets.
Constant economic rate of return but
variable book ROI
Economic rate of return for a given year =
Cash flow + change in present value
Present value at the beginning of the year
Book return on investment For a given year =

Cash flow + change in book value

book value at beginning of the year
 Abandonment Analysis

Capital expenditure mgt is a dynamic process.

Its cannot be regarding as a commitment till
the end of project life. As time rollon, changes
occur which can alter the attractiveness of
projects or entire duvision.
This technique used to analyse a new project
can also be used to analyse whether an existing
project should be continued or terminated.
 Differences between Existing & New
Project
EXISTING PROJECT
• Most of Investment
Represent a sunk cost,
which is not relevant for
project analysis.
• The estimates of its future
cash flow are likely more
precise.
• The dis.rate used for
Reappraising is different.
NEW PROJECT
Most of Investment is still
to be made,hence it is relevant
cash outflow.
The estimates of its cash flow
are to be more Uncertain.
The dis.rate used for
Reappraising of terminated
The following decision rules:-
IF ACTION

PVCF<SV<DV DIVEST
PVCF<DV<SV TERMINATE
SV<PVCF<DV CONTINUE
SV<DV<PVCF DIVEST
DV<SV<PVCF CONTINUE
DV<PVCF<SV TERMINATE
 Behavioral issue in project
Abandonment
The investment decision should be guided by
the net present value
Applied to a project `continuation Vs
abandonment` decision
The rule says:-
 If the present value associated with

abandonment is > Net present value associated

with continuation.
 If the present value associated with
continuation is > Net present value associated
with abandonment.
OVERCOMING RESISTANCE
For this following measure may be used:-
o Follow certain rules
o Develop proper rewards & penalties
o Institute relatively independent reviews
 Managing divestments
Divestment are becoming commonplace,
corporate should approach them systematically
& rationally.
Guidelines for managing divestment:-
 Regard divestment as a normal part of business

line
 Consider as one of the many responses to a

situation
 Administrative aspects of capital
Budgeting
 Identification of promising investment
opportunities
 Classification of investment
 Submission of proposals
 Decision making
 Preparation of capital budget & appropriation
 Implementation
 Performance review
 Agency Problem
Manager enjoy substantial autonomy and have
a natural inclination to pursue their own goals.
this is the agency problem.
To Prevent from being dislodged from their
position, managers may try to achieve some
acceptable level of performance as far as
shareholder welfare is concerned.
 They seek to following:-
 Preside over a big empire that give them

power, stature, and high compensation.

 Pursue pet project that draw on their specail

skills and competencies so that their position

in the organisation is entrenched.
 Enjoy generous compensation & lavish

perquisites.
 Shirk efforts because identifying &

implementing high NPV projects is very

demanding proposition.
 Avoid risks because acceptance of high firm-
specific risks, although quite acceptable to
diversified shareholders, can threaten the
security of their job and the growth prospects
with the firm.
Agency cost can be mitigated by monitoring
the action and behaviour of managers & by
offering them right incentives that motivate
them to maximise value.
By monitoring:-
Its helps in checking more
visible agency problems like empire building,
excessive perquisites, managerial absenteeism,
aand frauds.
 By incentive compensation:-
A well conceived
incentive compensation plan goes a long way
in aligning the interest of managers and
shareholders.
Following guidelines in compensation plan :-
 Integrated the incentive plan into total

compensation architecture
 Select the right set of performance measure

 Use objective criteria

 Reward relative performance
 Lengthen the decision making horizon of the
executives
 Evaluating the capital budgeting
System of an org…
Its may be evaluated in following criteria :-
 Results

 Techniques

 Communication

 Decentralisation

 Intelligibility

 Flexibility

 Control

 Review