Page 203 - DMGT521_PROJECT_MANAGEMENT

Project Management

Notes 2. Multiple time constraints: When the managers face an investment budget that is set for
several periods, the actions taken in the first period will affect the actions taken in the
subsequent periods. Similarly, actions taken in the second period will affect the actions
taken in other periods. This is because the projects undertaken will generate cash flows
that the managers can use to finance other projects.

Notes A firm limits the investment budget to control the expansion rate so that it will not
be over-extended.

Self Assessment

Fill in the blanks:
11. At this point in time, ………………… has not been developed to handle projects with
different risk levels.
12. When the ………………… face an investment budget that is set for several periods, the
actions taken in the first period will affect the actions taken in the subsequent periods.
13. The ………………… life of a project is not always a clear-cut indication of whether a
financial manager should use short-term or long-term financing.

14. The ………………… manager has an easy job of determining the appropriate combination
of projects that is affordable and brings in the highest value.

11.8 Summary

 Cash flow is the movement of money into or out of a business, project, or financial
product.
 The initial investment is the after tax cash outlay on capital expenditure and net working
capital when the project is set up.
 New Technological Developments tend to render existing plants obsolete.
 A Plant may be physically usable, its technology may not be obsolete, but the market for
its products may disappear or shrink and hence its continuance may not be justified.
 The time period for which a firm wishes to look ahead for purposes of investment analysis
may be referred to as its investment planning horizon.

 The cost of debt is relatively simple to calculate, as it is composed of the rate of interest
paid.
 The cost of equity is more challenging to calculate as equity does not pay a set return to its
investors.
 Cost of capital is determined by the market and represents the degree of perceived risk by
investors.
 Cost of capital is an important component of business valuation work.
 The financial manager will stop accepting projects once the marginal return generated by
the project is exactly offset by the marginal cost faced by the firm.

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