This report has been prepared to provide the management of the Plastic Mould Manufacturer with the project life cycle that it should adopt to implement the new automated system of production. The analysis aims to offer the management the essential financial calculations that should be used to assess the financial feasibility and long-term profitability of the system. The first part of the report deals with the project life cycle while the second part focuses on financial management about the implementation of the new production system.
Brief background of the project
The Plastic Mould Manufacturer plans to purchase a new automated machine for $ 100,000. The machine will require minimum supervision and will significantly reduce labor and production costs. Assuming that risks associated with the project will not impact it negatively, it will pay back within approximately 3.44 years. The project will improve the organization’s efficiency.
Project scope management
Project scope life cycle
Scope management refers to the processes that are employed in project management. They ensure that the project includes all the necessary work required for successful completion. The following stages are included in the project scope management process (Wysocki, Beck & Crane 2000). These include initiation, planning of scope extent, the definition of the project scope, verification of the project scope, and control of scope change (Project Management Institute 2008).
The project scope concerning the case study effectively. This is especially the case where the right procedures are followed. As it has been noted above, scope management relies, to a large extent, on the skills, proficiency, and capability of the persons concerned in the process. Such knowledge is demanded in sectors like planning and communication skills (Schmidt 2009). In case a project is steered by individuals with limited knowledge in the two sectors, failure is inevitable. This is especially the case for long term considerations.
The process of hiring the individuals involved in this project scope management will also influence its outcome (Rothman 2007). As has been demonstrated in the text above, the selected individuals have a high impact on the results of project scope management. As such, the involved executive members of the human resource department should create a customized plan that they will employ in hiring personnel into this management team (Lock 2007).
The project under discussion is supposed to have an economic life of six years. The project scope of the above-mentioned purchasing project is based on the approximated productive life of the machine being purchased. This is the broad definition of the scope of the project under study. The first stage in the scope management of this project should be initiation. This refers to the formal authorization of the project to begin. This stage is influenced by the executive personnel in the organization. If their knowledge concerning project appraisal is limited, this will affect the process negatively. Such a scenario can occur if the culture of the organization is weak. Weak in this sense means that the culture does not encourage backward vertical consultation.
The culture of the firm may also be weak in terms of not fostering new ideas and technology into the working systems that are in place. The culture of an organization has been argued to be fundamental in determining its performance. The organizational culture profile has been employed in varied avenues in determining the type of culture that exists in organizations (Laufer & Hoffman 2000). The theory of organizational culture is true as it is clear from this case study. A weak organizational culture is detrimental to the performance of an organization. On the other hand, the organization may have a positive culture. In such an environment, backward vertical consultation and new ideas are encouraged. Such a setting will ensure that the initiation stage does not take a longer period compared to the period expected by the strategic planners.
The next step involves documenting the scope of the project. It involves planning the project in great detail. These deliberations should be based on expert judgment, identification of alternatives, a benefit/ cost analysis, and product analysis. A scope management plan should be the product of this stage. It is vital to base the scope management plan for professional procedures. Application of shoddy procedures during this stage will result in problems, in the future (Rothman 2007). In this case, such problems may be manifested in terms of machinery breakdown, unsustainable maintenance expenses, and lack of practical alternative ways of dealing with tasks in case the machine does not work as expected. This amplifies the need for project management to employ a variety of professionals while managing projects for maximum yields.
Scope definition involves defining the project scope in many small manageable units. This ensures that the project scope is translated into specific roles, resource allocation, and expectations. This streamlines the process of starting any venture, and the continuity of the project. The output from this stage is influenced by the planning techniques of the individuals involved. Any misinformation on their part will lead to a poorly planned project scope. However, the use of technology in planning the work breakdown will influence the process positively (Shtub, Bard & Globerson 2005). The possession of planning and organizing skills by the project manager will also influence the process positively. Such planning should be based on the conditions surrounding the project at that time as well as, predicted conditions in the future of the project (Project Management Institute 2008).
Scope verification involves getting a formal acceptance for the output of the above-described processes. The stakeholders involved should sign and verify the outputs of the previous levels of project scope management. Such verification should be conducted when the stakeholders are sure that the organization and planning of scope have been conducted following the right procedures. Therefore, this process should be allocated for a sufficient period. This may not be achieved if the company is in a hurry to replace the existing machine. This may be in a bid to avoid the costs associated with using the existing machine (Turner 1995).
Scope change control refers to planning for any changes, expected or unexpected, within the scope of a project. This stage of planning involves setting out guidelines on how to manage changes in the project scope. The only limitation that may arise from this stage is being unable to capture unexpected occurrences. As such, the planning team may not be able to set out an outline of how to handle such highly unpredictable changes.
The project scope concerning the case study effectively. This is especially the case where the right procedures are followed. As it has been noted above, scope management relies, to a large extent, on the skills, proficiency, and capability of the persons concerned in the process. Such knowledge is demanded in sectors like planning and communication skills. In case a project is steered by individuals with limited knowledge in the two sectors, failure is inevitable. This is especially the case for long term considerations.
The process of hiring the individuals involved in this project scope management will also influence its outcome. As has been demonstrated in the text above, the selected individuals have a high impact on the results of project scope management. As such, the involved executive members of the human resource department should create a customized plan that they will employ in hiring personnel into this management team (Lock 2007).
Financial cash flow analysis
Definition of terms
The capital budget refers to an amount of money that has been set aside by an entity to purchase fixed assets (Turner 1995). Capital budgeting or the investment appraisal is the method by which an entity analyzes whether long term investments, expenditures, or major capital are worth pursuing or implementing. Different entities employ different investment appraisal methods as a variety of methods exist. These methods include the internal rate of return, net present value, equivalent annuity, profitability index, real options analysis, and payback period (Agarwal & Mishra 2007).
The discounted payback period refers to the calculated period it takes an organization or investors to break even concerning the initial investment expenditure (Shapiro 2004). The unit of this measurement is the same as that of the payback period. However, the latter method does not take into account the, monetary time value.
The net present value is also referred to as the net present worth. This term defines the value applied in capital budgeting to establish the productivity of a venture or investment (Shtub, Bard & Globerson 2005). The net present value applies a subtraction method where the cash outflows present value is deducted from the cash inflows present value. Projects that are characterized by positive net present values are also marked by more benefits that help organizations realize their objectives. Therefore, the company will be refunded by the project concerning the; costs of the assets, project investment costs, and the risk premium. A 0 net present value means reflects a situation where the benefits are equal to the costs (Baker & English 2011). A negative net present value means that the benefits are less than the costs.
Risk premium refers to the rate of return used in sums to compensate an institution or entity for potential errors that can be made while estimating future cash flows (Peterson & Fabozzi 2002).
Cash flows define the movement of cash out of or into a project or investment. Cash flows define revenue and expenses that are associated with an entity. The statement of cash flows is used to analyze the financial well-being of any institution. Such institutions have to have a basic objective of creating profit from their activities (Agarwal & Mishra 2007).
The internal rate of return defines the discount rate that is applied in the capital budgeting process with a zero net value present is equal to zero. Theoretically, a project or investment is assumed to be economically sound as its internal rate of return increases. The internal rate of return is normally employed in determining the most economically viable project or investment among several projects (BEDI 2005).
Profitability describes the ability of a venture, project, entity, or investment to yield financial gain. Profitability is measured using the ratio of price to earnings. These ratios are metrics of a financial nature that are used to analyze the ability of a business to produce yields as compared to its everyday expenditure. These ratios can also be used to analyze the financial progress of a company (Holland & Torregrosa 2008). These terms have been used in this report as they are terms that have been used repeatedly to describe the capital budgeting process.
Cash flows analysis
The net present value = $ 5, 881 (after tax)
The internal rate of return = (after tax) 17.72%
The calculated payback period for the project is 3.44 years
The net present value is positive. Therefore, the financial viability of the project has been confirmed as the company will be refunded by the project concerning the; costs of the assets, project investment costs, and the risk premium
The internal rate of return is greater than the discount rate of 16%. This value of the internal rate of return confirms that the project will be feasible about financial outcomes. This comparison means that the factors surrounding the purchase of the automated machine enable it to be a financially viable venture. Changes in the rates of discount could negatively impact the project outcomes. However, the analysis shows that the expected small changes in the rates of discount will not have significant changes in the project outcomes.
Factors that influence the discount rate
The level of risk posed by a venture or project to an entity or an organization is directly proportional to the discount rates employed. The higher the risk the development attracts, the higher the discount rates employed in capital budgeting. The level of inflation may have influenced the discount rate employed in the process of capital budgeting. The level of inflation and the discount rate are directly proportional to each other. High inflation rates result in high discount rates (Dayananda 2002).
At a discount rate of 16%
The net present value = $ 5, 881 (after tax)
The internal rate of return = (after tax) 17.72%
The calculated payback period for the project is 3.44 years
At a discount rate of 14%
The net present value post-tax is $13 394
The internal rate of return post-tax is 17.72%
The payback period post-tax is 3.44 years
The critical analysis of the project presents very important lessons regarding the implementation of the new production machine. The lessons are very essential in knowing the financial implications for the management of Chinese Plastic Mould Manufacturer. The analysis shows that the financial metrics used could greatly impact the outcomes of the project. Strict adherence to the capital budgeting will correlate with the project outcomes. The net present value of the project is quite good for the execution of the project. The internal rate of return is greater than the discount rate of 16%. The lesson learned here is that the project will be viable because the internal rate of return is greater than the discount rate. The net present value of the project is positive. This implies that the expected benefits will be greater than the expected costs. The lesson learned here is that the cost implications of the project should be minimized as much as possible. The two threats that might impact the project negatively are high inflation and tax rates because they will change on an annual basis. However, the financial analysis should be adjusted according to reflect the changes in tax and inflation rates.
Based on the findings of the project, several recommendations could be made to ensure a successful implementation. First, it is suggested that the management should carry on with the purchasing and usage of the new production machine. This suggestion is based on the promising internal rate of return and net present value. Second, the management should have a clear scope of the project that will highlight the important features of the project that will ensure that it succeeds. The roadmap should contain all the procedures that will accompany the adoption of the new machine. Third, it is recommended that the project management team should closely evaluate the project outcomes to compare the costs and benefits frequently. Through this, factors that could negatively impact the project will be identified and rectified. Fourth, to reduce the number of errors, personnel should be trained continuously regarding the project execution.
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