Name S.

AMEER ABBAS

Roll No. 520955311

Course MBA-Semester-3
Project Planning &
Subject
Scheduling
Subject Code PM 0003-Set-1
1. Detail the top down and bottom up approach of cost estimation:

There are three main cost estimating approaches which can be

summarised as: top-down, bottom-up, and sideways (comparative).

Top Down
Top-down estimating takes a description of the needs/requirements
(the ‘top’) and produces directly an estimate of the effort/material or cost to
achieve the solution.
For example to estimate the cost of a new office building you might decide
the floor area needed, based on the number/size of rooms wanted and
multiply that by a construction cost per square metre to arrive at the
estimated building cost.

This approach can sometime used to estimate the cost of IT projects if:
• The size and complexity of requirements can be described in a quantifiable
way
• There is a recognised formula to translate requirements into effort or cost.
The most common technique is based on Function Points, a measure of the
amount of functionality or complexity in a system requirement. A formula
translates this into effort based on a number of driving parameters. Whilst
the approach appears scientific, the formula is often empirical (i.e. without
any (analytical basis) and the parameters require subjective judgments such
as degree of complexity).
Once a total effort or cost estimate is obtained this can be partitioned using
typical proportions. For a software development project typical proportions
are Requirements 20%, Design 20%, Development 40%, Test 20%. If you
do this remember everything is driven by the original estimate and
partitioning is not improving that estimate.
 The top-down technique is useful in the early stages of a project to
provide indicative estimates, once requirements have been captured. It goes
directly from requirement to solution, so estimates are quick to produce, little
design work is needed and the formula based approach facilitates what-if
analysis. The technique can only be used however if a proven algorithm is
available, is highly sensitive to the parameters used and gives no insight into
the solution needed.

Bottom Up
Bottom up estimating involves taking the requirements, producing an
initial design, identifying the work (and materials) needed to realise each
component in the design (the ‘bottom’) then summing these up.
Using the previous example, to estimate the labour cost of the new office
building, identify all the work components (build walls, paint walls, fit
windows etc.) work out a cost for each one and sum them to get a total cost.
The design can be broken down to increasing levels of detail to improve
confidence. There is no rule on how far to go; more effort is needed to
develop a detailed design but this yields more information resulting in a more
accurate estimate.

The bottom-up technique can be applied in almost any situation, the basis of
the estimate is clear and can be refined to clarify uncertainties or increase
accuracy.
The main disadvantages are that it requires the design to be available and it
needs the most information and effort to produce.

2.Explain the various key determinants of Cost:

No two infrastructure projects will cost the same amount of money no

matter how similar they are. Apart from basis technical factors, the wide
range of how economic and institutional conditions in different Member
States will itself always lead to variations. Nevertheless, the fundamental
project costs are based on the actual cost of the land, materials, equipment
and labor in the region where the project is being procured. These basic costs
will vary depending upon a number of factors which are discussed below.

KEY DETERMINANTS OF COSTS

The Project Specification

The specification defines the physical attributes of a project. With a

road, for eg., given levels of forecast traffic will lead to specification of the
required length, depth and width of the road pavement, the material to be
used for surfacing, the number of lanes, bridges and junctions etc. for
buildings, the required function and expected occupancy rate will lead to a
specification of total floor space and floor plate size, height , internal and
external appearance, floor loading, heating and lighting requirements etc.
Generally, the more detailed the specification and the larger the project, the
more expensive it will be.

Location
Location affects project costing via institutional factors and through
geographical realities. Institutional factors can affect initial project cost
estimates in a number of ways. Consents procedures in particular may be
more arduous in some countries affecting the time in will take to successfully
implement a project. Allowance for the costs involved in sustaining a long
public consultation exercise in an example. Where major projects are likely to
be strongly opposed on environmental grounds, more cost may have to be
allowed for environmental mitigation measures.

Form of Procurement / Contract

As explained earlier the form of procurement and contract used by the
project sponsor can alter the estimated cost of a project. Cost savings may
be made by means of lump sum contracts although these are usually
marginal in relation to the total project costs.

Site Characteristics
A site can be affected by soil and drainage conditions and access
restrictions which can affect the original cost estimates. The amount of
excavation, piling and foundation activities required are particularly affected
by poor ground conditions. Where there is uncertainty about ground
conditions, accurate project costing cannot be achieved unless a soul survey
in undertaken. This may require the sinking of boreholes to obtain soil
samples at different levels beneath the surface.

New Build or Improvements

Generally, the construction of new infrastructure is more expensive
than improvements ot existing infrastructure, or the refurbishment of
building. This is primarily because the “non –building” costs such as land
purchase, foundations, services provision etc. do not have to be included
when simply upgrading existing structures.

Tax Liabilities
An organization will be liable to pay tax on its purchases. Some
organizations and types of project are not liable to pay taxes, or else these
can be reclaimed. Local government projects and infrastructure for public use
are examples. Some public or quasi –public sector companies, voluntary and
private sector organizations can be liable and these tax costs can have a
significant impact on gross construction costs.
Timescale
Generally, the longer a project takes, the greater the project costs will
be. Project timescales are dependent on the specification of a project.
Usually, the larger a project is the longer it will take to implement. This is not
always the case; if substantial additional resources are used, project may
take a lot longer than expected because its phasing is dependent upon other,
linking projects or public finance programmes. A project which involves non –
continuous phases in usually more expensive than one undertaken without
interruption because of the additional costs involved in re-mobilizing plant
and contractors.

3. What are the various advantages of ratio analysis?

Ratio analysis is one the techniques of financial analysis to evaluate

financial condition and performance of a business concern. In finance, ratio
analysis is carried out to judge the liquidity of the organization. It helps the
analysts to find if a company is capable enough to pay its liabilities. Moreover
it also helps to show the operating efficiency and internal return of an
organization. Keep in mind that the ratio is good or bad only if it is compared
to the industry in which the organization is operating in.

According to Myers “ Ratio analysis of financial statements is a study of

relationship among various financial factors in a business as disclosed by a
single set of statements and a study of trend of these factors as shown in a
series of statements.”

Advantages and Uses of Ratio Analysis

There are various groups of people who are interested in analysis of financial
position of a company. They use the ratio analysis to work out of particular
financial characteristic of the company in which they are interested. Ratio
analysis helps the various groups in the following manner:-

1. To workout the profitability: Accounting ratio help to measure the

profitability of the calculating the various profitability ratios. It
helps the management to know about the earning capacity of the
business concern. In this way profitability ratios show the actual
performance of the business.

2. To workout the solvency: With the help of solvency ratios, solvency

of the company can be measured. These ratios show the
relationship between the liabilities and assents. In case external
liabilities are more that of the assets of the company, it shows the
unsound position of the business. In this case the business has to
make it possible to repay its loans.

3. Helpful in analysis of financial statement: Ratio analysis help the

outsiders just like creditors, shareholders, debenture holders,
bankers to know about the profitability and ability of the company
to pay them interest and dividend etc.

4. Helpful in comparative analysis of the performance: With the help

of ratio analysis a company may have comparative study of its
performance to the previous years. In this way company comes to
know about its weak point and be able to improve them.

5. To simplify the accounting information : Accounting ratio are very

useful as they briefly summarize the result of detailed and
complicated computations.

6. To workout the operating efficiency: Ratio analysis helps to work

out the operating efficiency of the company with the help of various
turnover ratios. All turnover ratios are worked out to evaluate the
performance of the business in utilizing the resources.
 7. To workout short-term financial position: Ratio analysis helps to
work out the short – term financial position of the company with
the help of liquidity ratios. In case short-term financial position is
not healthy efforts are made to improve it.

Accounting ratios indicate the trend of the business. The trend is useful for
estimating future.
 Name S.AMEER ABBAS

Roll No. 520955311

Course MBA-Semester-3
Project Planning &
Subject
Scheduling
Subject Code PM 0003-Set-2
1.What is Cash flow analysis? Explain with an example.

Cash flow is essentially the movement of money into and out of ones
business; it’s the cycle of cash inflows and cash outflows that determine your
business’ solvency. Cash flow analysis is the study of the cycle of business’
cash inflows and outflows, with the purpose of maintaining an adequate cash
flow for your business, and to provide the basis for cash flow management.
Cash flow analysis involves examining the components of your
business that affect cash flow, such as accounts receivable, inventory,
accounts payable, and credit terms. By performing a cash flow analysis on
these separate components, you’ll be able to more easily identify cash flow
problems and find ways to improve your cash flow.

A quick and easy way to perform a cash flow analysis is to compare the total
unpaid purchases to the total sales due at the end of each month. If the total
unpaid purchases are greater than the total sales due, you’ll need to spend
more cash than you receive in the next month, indicating a potential cash
flow problem.

Cash Flow Statement Overview

The cash flow statement shows a company’s money flow in and out
over a fixed period of item. Most companies report their cash flow statement
on a quarterly of monthly basis. The cash flow is broken out into three
reporting areas:
(1)Operating

(2)Investing

(3)Finance

The cash flow statement was originally known as the flow funds statement or
statement for changes in financial position.
Purpose of the Cash Flow Statement
The cash flow statement is intended to provide information on a firm’s
liquidity or solvency. The cash flow provides a clear understanding of a
company’s financial resources at a given point in time.

Operating Activities
Operating activities represents the incoming and outgoing cash
activities to run the day- to- day operation of a business. The net cash flow
from operating activities the monies made from the sales of products and
services these are items include receipts from goods sold, tax payments, and
interest received from loans the operating activities is the most critical
component of the cash flow statement , because it shows if a company is
able to turn a profit based on its current business model at this exact
moment in time. If a company is unable to turn a profit from their business
activities, odds are the company will be experiencing finance issues and or
making investments if hardware or software with our any proof of success.

Investing Activities
Investment activities represent the cash flow from the purchase of
long term assets required to make or sell goods and services. Investment
activities also include purchases of stocks or other securities. A major issue
that potential investors have with the investing activities section in that the
money listed here represents activities paid for in cash. So, if a company
were to purchase $5 million dollars worth of equipment with only $1 million
cash and $4 million in financing, only the $ 1 million will show up under
investing activities.

Financing Activities
Financing cash flow is related to money in and out to investors and
shareholders. When a company raises funds from bonds or stock, this is
considered cash in. while dividends paid out to investors and interest paid to
bond holders is considered cash out.
Example of a Cash Flow Statement
Cash provided (or used) by:
Operating activities $XXX
Investing activities $XXX
Financing activities $XXX
Net increase (decrease) in cash and cash equivalents $XXX
Cash and cash equivalents at beginning of year $XXX
Cash and cash equivalents at end of year $XXX
A cash flow provides an investor insight into a company’s credit
worthiness and overall financial health. While for a company the cash flow is
one of the major components for budgeting efforts and future planning.

2.Explain the concept of cost control in project budgeting:

The project budget is a prediction of the costs associated with a

particular company project. These costs include labor, materials, and other
related expenses. The project budget is often broken down into specific
tasks, with task budgets assigned to each.

In summary, the purpose of budgeting is to:

1. Provide a forecast of revenues and expenditures i.e. construct a model

of how our business might perform financially speaking if certain
strategies, events and plans are carried out.
2. Enable the actual financial operation of the business to be measured
against the forecast.

Cost Control System

Any system of keeping costs within the bounds of budgets or standards
based upon work actually performed. Cost Control is typically a level in the
budget element breakdown structure.

The processes of gathering, accumulating, analyzing, reporting and

managing the costs on an on-going basis. Includes project procedures,
project cost changes, monitoring actual versus budget, variance analysis,
integrated cost/schedule reporting, progress analysis and corrective action.
The discipline of reconciling planned and actual money figures to physical
parts of the project. Cost control also involves careful treatment of
changes (including claims), trend forecasting and authorization for
payment. Cash flow forecasting is also a cost control function.

During the execution of a project, procedures for project control and

record keeping become indispensable tools to managers and other
participants in the construction process. These tools serve the dual purpose
of recording the financial transactions that occur as well as giving managers
an indication of the progress and problems associated with a project. The
problems of project control are aptly summed up in an old definition of a
project as "any collection of vaguely related activities that are ninety percent
complete, over budget and late." The task of project control systems is to
give a fair indication of the existence and the extent of such problems.

In addition to cost amounts, information on material quantities and

labor inputs within each job account is also typically retained in the project
budget. With this information, actual materials usage and labor employed
can be compared to the expected requirements. As a result, cost overruns or
savings on particular items can be identified as due to changes in unit prices,
labor productivity or in the amount of material consumed.

For cost control on a project, the construction plan and the associated cash
flow estimates can provide the baseline reference for subsequent project
monitoring and control. For schedules, progress on individual activities and
the achievement of milestone completions can be compared with the project
schedule to monitor the progress of activities. Contract and job specifications
provide the criteria by which to assess and assure the required quality of
construction. The final or detailed cost estimate provides a baseline for the
assessment of financial performance during the project. To the extent that
costs are within the detailed cost estimate, then the project is thought to be
under financial control. Overruns in particular cost categories signal the
possibility of problems and give an indication of exactly what problems are
being encountered. Expense oriented construction planning and control
focuses upon the categories included in the final cost estimation

3.Explain the importance of discounted cash flow:

In finance, discounted cash flow (DCF) analysis is a method of

valuing a project, company, or asset using the concepts of the time value of
money. All future cash flows are estimated and discounted to give their
present values (PVs) – the sum of all future cash flows, both incoming and
outgoing, is the net present value (NPV), which is taken as the value or price
of the cash flows in question.

Using DCF analysis to compute the NPV takes as input cash flows and
a discount rate and gives as output a price; the opposite process – taking
cash flows and a price and inferring a discount rate, is called the yield.

Discounted cash flow analysis is widely used in investment finance,

real estate development, and corporate financial management.

There are many variations when it comes to what you can use for your cash
flows and discount rate in a DCF analysis. Despite the complexity of
the calculations involved, the purpose of DCF analysis is just to estimate the
money you'd receive from an investment and to adjust for the time value of
money.

Discounted cash flow models are powerful, but they do have shortcomings.
DCF is merely a mechanical valuation tool, which makes it subject to the
axiom "garbage in, garbage out". Small changes in inputs can result in large
changes in the value of a company. Instead of trying to project the cash
flows to infinity, terminal value techniques are often used. A simple annuity
is used to estimate the terminal value past 10 years, for example. This is
done because it is harder to come to a realistic estimate of the cash flows as
time goes on.

The discount rate used is generally the appropriate Weighted average cost of
capital (WACC), that reflects the risk of the cash flows . The discount rate
reflects two things:

1. the time value of money (risk-free rate) – according to the theory of

time preference, investors would rather have cash immediately than

having to wait and must therefore be compensated by paying for the
delay.
2. a risk premium – reflects the extra return investors demand because

they want to be compensated for the risk that the cash flow might not
materialize after all.

An alternative to including the risk in the discount rate is to use the risk free
rate, but multiply the future cash flows by the estimated probability that they
will occur (the success rate). This method, widely used in drug development,
is referred to as rNPV (risk-adjusted NPV), and similar methods are used to
incorporate credit risk in the probability model of CDS valuation.

One of the most useful applications of DCF analysis is for business

valuation purposes. Here the analyst calculates the present value of the
company's future cash flows. The most common form of this analysis
involves using company-produced forecasts of cash flow for the next five
years, along with a "steady state" cash flow for year six and beyond. The
analyst will calculate the present value of the first five years' cash flows, plus
the present value of the capitalized residual value from the steady state cash
flow. Under this methodology, all years of the company's future cash flows
are impounded in the measure of value. Of course, it is critical that the cash
flows are reasonably estimated, with due care given to the various factors
than can affect future results of operations. The analyst must work with
knowledgeable company management, and gain a thorough understanding of
the business, its competitors, and the marketplace in general. Collateral
impacts of various decisions must be quantified and entered into the calculus
of the overall cash flows.