Vous êtes sur la page 1sur 10

Net present value method (also known as discounted cash flow method) is a popular
capital budgeting technique that takes into account the time value of money. It uses net present
value of the investment project as the base to accept or reject a proposed investment in projects
like purchase of new equipment, purchase of inventory, expansion or addition of existing plant
assets and the installation of new plants etc.

## Advantages Of Net Present Value (NPV)

1. NPV gives important to the time value of money.
2.In the calculation of NPV, both after cash flow and before cash flow over the life span of the
project are considered.
3. Profitability and risk of the projects are given high priority.
4. NPV helps in maximizing the firm's value.

## 1. NPV is difficult to use.

2. NPV can not give accurate decision if the amount of investment of mutually exclusive projects
is not equal.
3. It is difficult to calculate the appropriate discount rate.
PV is an indicator of how much value an investment adds. In financial theory, if there is a
choice between two mutually exclusive alternatives, the one yielding the higher NPV should
be selected and generally speaking the following is true:

##  If the NPV of an investment is greater than zero, accept!

 If the NPV of an investment is less than zero, reject!

The Internal rate of return is a discounting cash flow technique which gives a rate of
return that is earned by a project. We can define the internal rate of return as the discounting rate
which makes a total of initial cash outlay and discounted cash inflows equal to zero. In other
words, it is that discounting rate at which the net present value is equal to zero. Internal Rate of
Return (IRR) is a financial metric for cash flow analysis, primarily for evaluating investments,
capital acquisitions, project proposals, programs, and business case scenarios.

## The Advantages of Internal Rate of Return are listed below.

It considers the time value of money even though the annual cash inflow is even and
uneven.

1. The profitability of the project is considered over the entire economic life of the project.
In this way, a true profitability of the project is evaluated.
2. There is no need of the pre-determination of cost of capital or cut off rate. Hence,
Internal Rate of Return method is better than Net Present Value method.

## 3. Sometimes, the pre-determination of cost of capital is very difficult. At that time,

Internal Rate of Return can be used to evaluate the project.

## The disadvantages of Internal Rate of Return are listed below.

1. This method assumed that the earnings are reinvested at the internal rate of return for the
remaining life of the project. If the average rate of return earned by the firm is not close to the
internal rate of return, the profitability of the project is not justifiable.

## 2. It involves tedious calculations.

3. This method gives importance only to the profitability but not consider the earliest recouping
of capital expenditure. The reason is that sometimes Internal Rate of Return method favours a
project which comparatively requires a longer period for recouping the capital expenditure.
Under the conditions of future is uncertainty, sometimes the full capital expenditure cannot be
recouped if Internal Rate of Return followed.

4. The results of Net Present Value method and Internal Rate of Return method may differ when
the projects under evaluation differ in their size, life and timings of cash inflows.

## IRR RULE OF ACEPTANCE AND REJECT

The IRR rule states that if the internal rate of return (IRR) on a project or an investment
is greater than the minimum required rate of return, typically the cost of capital, then the project
or investment should be pursued. Conversely, if the IRR on a project or investment is lower than
the cost of capital, then the best course of action may be to reject it.

BASIS FOR
COMPARISON NPV IRR

## Meaning The total of all the present IRR is described as a rate at

values of cash flows (both which the sum of discounted
positive and negative) of a cash inflows equates
project is known as Net Present discounted cash outflows.
Value or NPV.

## Expressed in Absolute terms Percentage terms

What it Surplus from the project Point of no profit no loss
represents? (Break even point)

## Decision It makes decision making It does not help in decision

Making easy. making

## Rate for Cost of capital rate Internal rate of return

reinvestment of
intermediate cash
flows

## Variation in the Will not affect NPV Will show negative or

cash outflow multiple IRR
timing

## Project Initial NPV (Rs. IRR (%) Remark

Investment Crore)
(Rs. Crore)
A 300 780 17.5 Accept as NPV of the project is 780
which is 260% of initial investment
and its profitable
B 200 -10 9.8 Reject as NPV of the project is -10 and
negative NPV is always rejected
C 250 450 16.7 Accept asNPV of the project is 450
which is 180% of initial investment
and its profitable
D 100 140 12.4 Accept as NPV of the project is 140
which is 140% of initial investment
and its profitable
E 350 700 12 Accept as NPV of the project is 700
which is 200% of initial investment
and its profitable
F 100 60 18 Reject as NPV of the project is 60
which is 60% of initial investment
which is less than the profit made by
other projects.
G 400 400 13.8 Reject NPV of the project is 400 which
is 100% of initial investment which is
less than the profit made by other
projects
As if project A,C,D and E is accepted total initial investment limit is fulfilled of Rs. 1000
crore as total initial investment will be (300 + 250 + 100 +350=1000)

Business processes are simply a set of activities that transform a set of inputs into a set
of outputs (goods or services) for another person or process using people and tools. We all do
them, and at one time or another play the role of customer or supplier.

You may see business processes pictured as a set of triangles as shown below. The purpose of
this model is to define the supplier and process inputs, your process, and the customer and
associated outputs. Also shown is the feedback loop from customers.

## Business process reengineering (BPR) is a management approach aiming at

improvements by means of elevating efficiency and effectiveness of the processes that exist
within and across organizations. The key to BPR is for organizations to look at their business
processes from a "clean slate" perspective and determine how they can best construct these
processes to improve how they conduct business.

Business process reengineering is also known as BPR, Business Process Redesign, Business
Transformation, or Business Process Change Management.

Such an approach is pictured below. It begins with defining the scope and objectives of your
reengineering project, then going through a learning process (with your customers, your
employees, your competitors and non-competitors, and with new technology). Given this
knowledge base, you can create a vision for the future and design new business processes.
Given the definition of the "to be" state, you can then create a plan of action based on the gap
between your current processes, technologies and structures, and where you want to go. It is
then a matter of implementing your solution.

## In summary, the extreme contrast between continuous process improvement and

business process reengineering lies in where we start (with today's process, or with a clean
slate), and with the magnitude and rate of resulting changes.
Hammer and Champy (1993) define BPR as

"... the fundamental rethinking and radical redesign of business processes to achieve dramatic
improvements in critical contemporary measures of performance, such as cost, quality, service,
and speed."

## NEED FOR RE-ENGINEERING – WHEN AND WHY:

Each organisation must determine itself when it is appropriate for them to reengineer.
Reengineering should be done only if it can help in achieving an enhanced strategic position.
Some strategic indicators that require reengineering include

1. Realisation that competitors will have advantage in cost, speed, flexibility, quality or service

##  New basis of competition/new competitors

 New regulations

##  New technologies in play.

So, if the company is at the cutting edge of an industry that has just undergone major changes
reengineering might not be appropriate.

However, if the organisation operates with old models instead of new technologies and
approaches used by others, reengineering may be urgently needed. Even if technical
performance is adequate, other improvements may be needed – such as training, organisational
change, leadership development etc. In such circumstances also reengineering is required.

## HOW TO IMPLEMENT A BPR PROJECT

The best way to map and improve the organization's procedures is to take a top down approach,
and not undertake a project in isolation. That means:
Starting with mission statements that define the purpose of the organization and describe what
sets it apart from others in its sector or industry.

 Producing vision statements which define where the organization is going, to provide a clear
picture of the desired future position.

 Build these into a clear business strategy thereby deriving the project objectives.

 Defining behaviours that will enable the organization to achieve its' aims.

## WHO IS INVOLVED IN REENGINEERING?

For reengineering to be successful, people from different levels in the organisation need
to be involved. In fact, the mandate and inspiration of reengineering must come from the
highest leadership. Most critical is the support of Chief Executives. In addition other
Champions will have to be identified. They have to be the opinion makers and influence those
who can shape the organisation to support the reengineering implementation. Strategic and
tactical steering teams also play an important role. Their function is to provide strategic
direction to the reengineering process and help the management of change through effective
communication in order to resolve organisational issues. A reengineering czar can also be
appointed

## To be successful, business process reengineering projects need to be top down, taking in

the complete organization, and the full end to end processes. It needs to be supported by tools
that make processes easy to track and analyze. If you would like help with your BPR project
The most direct benefit that companies derive from reengineering is significant in the process
improvement (50 to 100%). Costs are lowered while speed, quality and service are dramatically
improved. Unfortunately, reengineering seldom makes a significant impact on the
organisation’s bottom line (only 20% of the time.) Reengineering has a greater chance of
success if it is viewed as leading to growth and value creation. In addition, there are costs to
reengineering that must be considered before deciding for such a right strategy for an
organisation. Wayne Code, President of Vallen Inc. explains, “These changes may be traumatic,
but the pain is outweighed by the gains made in the move towards the significant goals set.
Change occurs when the pain of change is less than the pain of staying the same
When changes in the market are only incremental firms may successfully adapt
themselves by modifying current marketing. However market changes can be so far reaching that
the competence of the firm to continue to compete effectively is called into question. In such a
circumstance the concept of strategic windows is applicable

A strategic window focuses attention on the fact that there are only limited periods
during which the “Fit” between the key requirements of a market and the particular competencies
of a firm competing in the market is at an optimum Disinvestment should be contemplated also

##  1. The development of new primary demand opportunities

 2. The advent of new competing technologies
 3. Market redefinition caused be changes in the definition of the product itself and of or
changes in the product market strategies of competing firms
 4. Channel changes
Problems and opportunities
Existing businesses Confronted with changes in the marketplace which potentially disqualify the
firm from continued successful participation, several strategic options are available

##  1. Assemble resources needed to close the gap

 2. The firm may shift its efforts to selected segments where the fit between requirements and
resorts is it still acceptable
 3. The firm a shift to a low profile; milking business for short term profit
 4. The decision may be taken to exit from a particular market
All too frequently the strategic window is not clearly recognized or only half-hearted attempts
are made to assemble the new resources

The four basic strategic choices outlined above may be viewed at hierarchy in terms of resource
commitment

## The following questions may be helpful

 1. Careful analysis has to be made of the gap of which may emerge between the evolving
requirements of the market and the firm’s profile
 2. To what extent can the changes be anticipated?
 3. How rapid are the changes which are taking place?
 4. How long will realignment of the fundamental activities of the firm take
 5. What current commitments, distribution channels constrain adaptation?
 6. Can new resources and new approaches be developed internally or must they be acquired?

New entrants
Careful assessment of the firm’s strength and weaknesses Attention should be directed away
from narrow focus of familiar products. This requires a broader appreciation of overall
environmental, technical and market forces
The strategic window suggests that fundamental changes are needed in marketing
management practice. And particular in strategic market planning activities. Entry and
exit from markets is likely to occur with greater rapidity. This article suggests that as far as
anyone firm is concerned, a market also is a temporary vehicle for growth, a vehicle we
should develop or abandon as the circumstances dictate. With the help of this discussion
with management will help to convey to take this step further.

Restructuring is corporate management term for the take action of incompletely dismantling or
else reorganizing a company for the purpose of making its well-organized and consequently
more profitable. It usually involves selling off portions of the business and making severs staff
reductions. One of the mainly high profile features of the company and investment worlds is
corporate restructuring. Corporate restructuring is the procedure of redesigning one or more
feature of a company. Now are some examples of why corporate restructuring may take position
and what it can represent for the company.

## Methods of corporate restructuring

1. Joint ventures
2. Sell off and spin off
3. Divestitures
4. Equity carve out
5. Share repurchase
6. Leveraged buy outs
7. Management buy outs
8. Master limited partnerships
9. Employee stock ownership plans

## Suggested Corporate restructuring

Joint Venture
Joint ventures is a business enterprise for profit, in which two or more parties share
responsibilities in an agreed manner, by providing risk capital technology patent trademark
brand name to access to market. Joint ventures with multinational companies give to the
development of production capacity; transfer of technology and capital and over all dpenetrating
into global market. Entering into joint ventures is a part of strategic business policy to diversify
and enter into new markets, acquire finance, technology, patent and brand names.

## 1 – New insights and expertise

Starting a joint venture provides the opportunity to gain new insights and expertise. Think about
it; the market is now way easier for you to understand given the short-term partnership that you
have forged.

2 – Better resources
Forming a joint venture will give you access to better resources, such as specialized staff and
technology. All the equipment and capital that you needed for your project can now be used.

## Disadvantages of a Joint Venture

1 – Vague objectives
The objectives of a joint venture are not 100 percent clear and rarely communicated clearly to all
people involved.

## 2 – Flexibility can be restricted

There are times when flexibility is restricted in a joint venture. When that happens, participants
have to focus on the joint venture, and their individual businesses suffer in the process.

Divestiture

## A divestiture involves the sale, spinoff or shutdown of a business unit, division or

subsidiary. For small businesses that have no legally separate business units, a divestiture
generally involves the sale or disposition of a long-term key asset. A small business divestiture
may also involve the sale of a line of business.

1. Strategic Focus
Companies often divest assets and business units that no longer fit with the company's core
business. Divesting therefore helps companies maintain their strategic focus
2. Transparency and Value
Divestitures also provide greater operational transparency in companies with large and diverse