Project Analysis and Management

Course code MBA 613

• Credit H 2
 Project Analysis and
Management
Course Objectives

This course is designed to enable students to:

• Know basic concepts of project analysis and planning,

• Understand sources of project ideas and project identification,

• Explain feasibility study from different analyses perspective,

• Know mechanisms of project financing,

• Prepare project documentation & project appraisal,

• Appreciate project implementation, controlling & evaluation

techniques
 The Project Management Framework

Chapter i - General introduction

Chapter ii - Project cycle

Chapter iii - project identification

Chapter iv - project preparation

Chapter v - Social cost benefit analysis (scba)

 Chapter i - introduction

Learning objectives
Understand the growing need for better project management
• Explain what a project is, provide examples of projects, list
various attributes of
• projects, and describe the triple constraint of projects

• Discuss the relationship between project, program, and

portfolio management and the contributions they each
make to enterprise success
 Introduction
• Projects exist in every sphere of business, markets,

and industry.

• a project is a problem scheduled for solution.”

Problem refers to the gap between where you are and

where you want to be, with an obstacle that prevents

easy movement to close the gap.

 Reflection

• What is a Project?

• What characteristics do projects have?

 1.1 Meaning and definition of project

The word Project comes from the Latin word Projectum, which means "something that
comes before anything else happens“. www.wikipedia.org

• According to the British Standard 6079 of 1996 (as cited by ICMR,

2007), a project is defined as:
• a unique set of coordinated activities, with definite
starting and finishing points, undertaken by an individual
or organization to meet specific objectives within defined
schedule, cost, and performance parameters.
• The Project Management Institute (2004) has also defined a
project as a temporary endeavour undertaken to create a
unique product or service.
 There are many definitions of a project

• A project is an organized effort to do something useful or attain

a useful end result which is sometimes defined as a plan, venture or

enterprise (Angus and Norman, 1997).

• A project is “a unique endeavor to produce a set of deliverables

within clearly specified time, cost and quality constraints”.

• Project is a unique process intended to achieve target outcomes

(Zwikael and Smyrk, 2009).

• A project is defined as one shot, time tested, goal directed, major

undertaking requiring the commitment of varied skills and resources.

A project is a temporary endeavour undertaken
to create a unique product or service.

It is :
• performed by people
• constrained by limited resources
• planned, executed and controlled
 .

Examples of a project :

 New business establishment,

 Expansion of existing business,

 Launching new product,

 Replacement of old equipment, machinery, etc.,

 Environmental protection,

 Cost reduction project,

 Total Quality Management (TQM)

Developing a new product or service.

Effecting a change in structure, staffing, or style of an organization.

Designing a new transportation vehicle.

Constructing a building or facility.

Building a water system for a community in a developing country
 .

Project facturés
1. Temporary
• A project has a definite beginning and definite end

• The duration of a project is finite

• The opportunity or market window is usually temporary, most
projects have a limited time frame in which to produce the
product or service
• The project team - as a team - seldom outlives the project. Most
projects are performed by a team created for the sole purpose of
performing the project
 Unique result
• Projects involve doing something that has not been done before in the same
environment
• The project may require some innovation to be completed

• Projects involve doing something that has not been done

before
• The presence of repetitive elements does not change
the fundamental uniqueness of the project work
• For example, many thousands of office buildings have been
developed, but each individual facility is unique-different owner,
different design, different location, different contractors, and so
on.
• Example 2: A development project (ex. Water and sanitation)
 Progressive elaboration
• A project occurs step by step to define the
product or service, in a so called “progressive
elaboration” process.
• for instance, the development of a chemical
processing plant begins with the process
engineering to define the characteristics of
the process, and ends with the final assembly.
 .

• Progressively means "proceeding in steps; continuing steadily by

increments,“ while elaborated means "worked out with care and detail;

developed thoroughly“

Example . The product of an economic development project may initially be

defined as: "Improve the quality of life of the lowest income residents of

community X.“

As the project proceeds, the products may be described more specifically

as, for example: "Provide access to food and water to 500 low income

residents in community X.

" The next round of progressive elaboration might focus exclusively On

increasing agriculture production and marketing, with provision of water

deemed to be secondary priority to be initiated once the agriculture

component is well under way.

 .

• Projects have a defined timescale: Projects have a

clearly specified start and end date within which the

deliverables must be produced to meet a specified

customer requirement

• Projects have an approved resource and budget:

Projects are allocated a level of financial expenditure within

which the deliverables must be produced to meet a

specified customer requirement

• Projects involve an element of risk: Projects entail a

level of uncertainty regarding cost, schedule or

performance outcome and therefore carry project risk.

 Activity 1.1

One author defined project as “a one shoot, time

limited, goal directed, requiring the commitment of
various skills and resources”.
Therefore, explain in brief what he meant by a “one
shoot”, “time limited”, and “goal directed”.
 How Projects are “Born”?
• Projects are “born” when a need is identified by the
customer
Sources of projects can be:
• Market Demand
• Business need
• Customer request
• Technological advance
• Legal requirement
• Social need
 Key features include
 Identifying what is needed or to be achieved (requirements)
 Addressing needs, concerns, and expectations
 Balancing competing constraints [scope, quality,
schedule, budget, resources, and risks
 The Triple Constraint of Project Management :
• Meeting stakeholder needs and expectations
involves balancing competing demands
among :cost, quality, scope, and time.

Q = f (T, C, S)

• Where Q is Quality, S is Scope and T is Time.

• Project quality is affected by balancing these three

factors.
• Projects fail when:
a) Estimates are faulty
b) Time, talent and resources are insufficient or incorrectly applied
 Managing the Triple Constraint

• Project Scope
– How much work is to be done? Increasing the scope causes more
work to be done, and vice versa.

• Time
– The schedule of the project. Modifying the schedule alters the start
and end dates for tasks in the project and can alter the project’s
overall end date.

• Cost
– The cost required to accomplish the project’s objectives. Modifying
the cost of the project generally has an impact on the scope, time, or
quality of the project.
 # Involves uncertainty

• Because each project is unique, it is sometimes

difficult to define clearly the project objectives,
estimate, time, quality, etc.

# Projects are multidisciplinary

They require input from people with different kinds of

knowledge and expertise.
 .

# Projects are complex

They are composed of many interconnected elements and

require inputs from groups outside the project.

# Projects are characterized by conflict

Scope, schedule and estimate are conflicting with each

other.

The needs of various stakeholders conflict with each other.

Some of the most intense and intractable conflicts are

those between members of the project team.

 Difference b/n operations & projects
Operations and projects share similar characteristics
• Has purpose/objectives
• Require input (financial, manpower, material, etc.)
• Generate output (goods and/or services)

Projects operation
• 􀂃 Operate over space and time Planned, executed, and controlled.
To attain its objectives and To sustain the business
•
terminate
Create own character, Semi permanent charter,
organization, and goals organization, and goals

• Catalyst for change •Maintain status quo

• Unique product or services Standard product or services

• Heterogeneous teams Homogeneous teams

• Start and end date Ongoing

 Projects versus operations
• Operations Projects
Completely
Repetitive Totally unique
• All of our work falls somewhere on the spectrum
between repetitive and unique.
• Projects are unique, and the more unique they are
the more difficult they are to manage.
• At the other extreme, work that is almost
completely repetitive has been automated and is
performed by computers or robots.
 Subprojects.
• Projects are frequently divided into more manageable components or

subprojects.

• Subprojects are often contracted to an external enterprise or to

another functional unit in the performing organization. Examples

include:

• Subprojects based on the project process, such as a single phase.

• Subprojects according to human resource skill requirements, such as

the installation of plumbing or electrical fixtures on a construction

project.

• Subprojects involving technology, such as automated testing of

computer programs on a software development project.

• Subprojects are typically referred to as projects and managed as such.

 Role of Projects in National Development

 The main beneficiaries of projects include employees,

the government, customers, neighbors, and suppliers,

micro, small, and medium enterprises, and others.

 through increased employment is the benefits of
projects.
 poor community that provide input supplies to these
companies, also stand to benefit from increased
demand for their products.
 The government also benefits from projects
 .
 Society at large is the main beneficiary of
infrastructure projects.
 Generally, projects provide incentives and
innovations for mitigation unpleasant , and
to transfer technology, knowledge and
resources.
 Classification of project

• Projects range in size, scope, cost and time from mega international projects

costing millions of dollars over many years to small domestic projects with a low

budget taking just a few hours to complete

i. On the basis of time: short vs. long-duration

ii. On the basis of type of products (project producing goods-sugar factory project;

services-telecommunication projects; knowledge & info research projects

iii. Scope-project catering for regional, national or international

iv. Size (large, medium & small-scale projects)

v. On the basis of sectors

vi. Technology (labor intensive, capital, energy)

vii. Ownership (private, public, joint-venture, cooperative, NGOs)

 Common Project Processes
• Initiation
– Defines the project objectives and grants authority to the project manager.

• Planning
– Refines the project objectives and scope and plans the steps necessary to
meet the project’s objectives.

• Executing
– Puts the project plan into motion and performs the work of the project.

• Controlling
– Measures the performance of the executing activities and compares the results
with the project plan.

• Closing
– Documents the formal acceptance of the project’s product and brings all
aspects of the project to a close.
 The project management challenge

Meeting or exceeding stakeholder needs and

expectations invariably involves balancing
competing demands among:
• Scope, time, cost, and quality
• Stakeholders with differing needs and
expectations
 WHAT IS PROJECTMANAGEMENT?
Project management is the application of knowledge, skills, tools,
and techniques to project activities to meet project requirements.
Project management is accomplished through the application
and integration of the project management processes of
initiating, planning, executing, monitoring and controlling, and
closing”
Project management brings together a set of tools and
techniques -performed by people-to describe, organize, and
monitor the work of project activities to meet project
requirements
PM is the discipline of Planning; Organizing; Securing; and
Managing resources to achieve project goals
 Core Project Management Competencies

1. Business/Organizational competencies

2. Management Competencies

3. Professional Project Management

Competencies
 Business / Organizational Competencies

1. Business Literacy
• Understand contemporary business fundamentals and
comprehend the business environment of the company,
• Align the project vision with the company’s business
vision.

2. Corporate Procedures and Tools

• Understand established policies, procedures and tools, and
how to apply them to the project.

3. Institutional or Corporate Culture

• recognize and understand the corporate culture and its
 Management Competencies
These are the “soft-skills” or people-oriented competencies that are required of any manager

1. Communications

• Communicate effectively using clear writing and verbal skills

• Communicate tactfully and candidly, avoid jargon

• Make stakeholders aware of all relevant issues

• Be an excellent listener.

2. Issue Management

• Identify, analyze, prioritize and develop mitigation plans for issues threatening the project.

3. Financial Acumen

• Comprehend how decisions affect the project’s bottom line

• Grasp general financial and accounting principles and practices that affect operations

• Appreciate and recognize the links between operations and company’s financial performance,

which is essential to create value for all of the organization’s stakeholders.

 .

4. Leadership

• Motivate project team members

• Set SMART objectives

• Maintain a positive outlook

• Take responsibility

• Make decisions

• Provide constructive feedback

5. Learning and Knowledge Management

• Keep abreast of technological change

• Learn from and reflect on past experience

• Ensure effective training and development of self and team members

• Find the most expedient way to develop new skills and knowledge required to undertake new

projects

6. Negotiations

• Undertake continual adjustments with stakeholders in a persuasive manner

 .

7. Organization

• Arrange and organize assets so that needed tools, resources and data are easily

accessible

• Create, organize and maintain an effective team structure

8. Problem Solving & Decision Making

• Analyze and correctly define a problem

• Evaluate potential alternatives to solve the problem

• Select the optimum solution,

• Implement, monitor and control the selected solution.

9. Relationship Management

• Consult and provide advice

• Facilitate discussions and resolve conflicts

• Develop positive relationships with key project stakeholders

• Recognize and impartially deal with people from other cultures

• Establish trust, credibility and earn respect

 .

10. Strategic Thinking

• Anticipate future impact of decisions by analyzing a big-picture view

• Strategically position the project within the business to align it to the enterprise’s

short and long term objectives

11. Team Building

• Assemble the project team with the right mix of skills, then promote and create

teamwork

• Understand and know how to share information

• Coach and mentor members as required

• Delegate responsibility, promote support and positive interaction

12. Time Management

• Effectively manage competing priorities

• Be resourceful

• Use time as a valuable resource

 Technical Competencies

• These are competencies required for a project manager to be accountable for and lead the

project to a successful completion by satisfying customer expectations, and the implementing

organization’s objectives

1. Budget Planning

• Understand and know how to perform cost/benefit analyses

• Use sound rationale

• Ensure that all factors are included

• Maintain focus on budget

• Consults with client and management if estimated final costs are above budget

2. Customer Focus
• Develop familiarity with and a thorough understanding of client’s needs
• Be able to satisfy realistic expectations
• Interact and reach agreements with the client from the project’s outset
3. Contract/procurement Management
• Understand and know how to use purchasing procedures and tools
• Draft contracts with clear and agreed upon term and conditions

• Administer contracts to achieve successful completion

 .

4. Quality Management

• Plan and implement steps to obtain and assure quality results or products for total

customer satisfaction

• Be able to take corrective actions

• Effectively perform verification of project quality standards

5. Resource Management

• Ability to identify and make optimal use of both human and non-human resources

6. Schedule Management

• Ability to organize the work in a logical way so that it is executed effectively

• Ability to manage the schedule

7. Scope Definition

• Ability to establish a clear scope and define the extend of the project

• Set up and understand verification and approval procedures.

 .

8. Issues/Change/Assumptions Management

• Devise and implement a change control process when needed

• Document and track issues

• Monitor assumptions and make decisions in a timely manner

• Understand and use problem-solving techniques

9. Risk Management

• Understand how to identify, assess, document and manage internal and

external project risks

• Develop response plans, contingencies and mitigation measures

10. Project Controls and Process Management

• Understand and know how to use standard project management tools and

techniques to schedule, plan, track and correct project performance

• Know how to make effective use of technical and management methodologies

 .

11. Environmental, Health and Safety

 Understand and know how to comply with regulations

 Implement a positive attitude toward health and safety in

the design and execution of the project
 Ensure safe and environmentally friendly deliverables

12. Hand-over management

 Understand and know how to co-ordinate, implement, test
and deliver a project in order to produce an effective
working system or product
13. Information Management
Ability to manage project documentation (technical and
management) and data or information requirements
 Benefits of Project Management

• The ultimate benefit of implementing project management

techniques is having a satisfied customer.
• Completing the full project scope in a quality manner, on time,
and within budget provides a great feeling of satisfaction.
• It could lead to additional business.

• Successful projects can expand your career opportunities.

• You feel the satisfaction of being on a winning team.

• Through the project you expand your knowledge, enhance your

skills, and prepare for more complicated projects.
• When projects are successful, everybody wins!
 Project success factors
• Stakeholder involvement

• Executive management support

• Clear statement of requirements

• Proper planning

• Realistic expectations

• Smaller project milestones

• Competent staff

• Ownership

• Clear vision and objectives

• Hard working and focused staff

 PROJECT ANALYSIS
• According to Chandra (2006) and Cuury and Weiss (1993), project

analysis involves:

• Estimating and comparing the beneficial effects of an investment with its

costs.

• Such a comparison is done with in a broader economic framework that

basis on which full costs and benefits are identified and valued.

• Both the resources required (in the form of finance, materials, and

manpower) and the generated benefits (such as cost savings, increased

production, and institutional development) are estimated in advance.

• Costs and benefits are calculated in financial and economic terms or

defined (if quantification is not possible) with sufficient precision to

permit a reasoned judgment to be made as to the optimum set of action

 Unforeseen Circumstances-
Class Discussion

• Once a project is started, unforeseen

circumstances may impact the project in various
ways such as scope, cost, or schedule.
• Can you name a few unforeseen events?
• What should the manager do in such cases?
 Hint

Before taking any action:

• Analyze and understand the unforeseen
event and determine its impact on the
project.
• Use the agreed change control process to
obtain approval prior to implementing any
changes
 Activities
1. Why organization pursue projects ?

2. Jot down list of project activities.

3. One author defined project as “ a one shoot

,time limited, goal directed , requiring the commitment of

various skills and resources.
Explain in brief what he meant by a one shoot , time bound ,
and goal oriented.
Identify projects you have been involved, what were the objective, the
constraints, the schedule, the resources
Discuss something you did during the past summer or winter break, such as
take a vacation, etc. how those activities relate to project management
 CHAPTER II - PROJECT CYCLE
• is the stages through which the project passes from

inception to its completion.

• Is a continuous process made up of

– separate stages each with its own characteristics

and

– complementary stages (phases) and each setting a

ground for the next one.

All projects are divided into phases, and all projects,

large or small, have a similar life cycle structure.

• Starting the project ,organizing and preparing ,

carrying out the project work and closing the project

• At a minimum, project will have a beginning or

initiation phase, an intermediate phase or phases,

and an ending phase.

• Each phase has a defined endpoint

 Project Lifecycle
Cost &
Intermedi
• .
Staffing
ate
level
Phases Final
Initial (one or Phase
Phase more)

Time
Start Finish

Milestones :
• defined state of the project
• decision point
 Project Life Cycle

Feasibility

Management
Planning
Concept Execution

Termination
 .

• The way in which projects are planned and

carried out follows a sequence that has become
known as the project cycle
• A project cycle is a collection of project phases
that defines:
• What work will be performed in each phase
• What deliverables will be produced and when
• Who is involved in each phase
• How management will control and approve work
produced in each phase
 Activity
Take one project in which you are familiar.
• Describe the activities to be performed at ech
phase.
 Beginning
 Organizing and preparation
 Implementation
 Closing
.
• Project cycle is a phase by phase definition of a project from its start to

completion.

• Number of phases within the project varies as the project sponsors requirements

or as project fields’ requirements.

• According to UNEP , united nations Environment programme(2005) a

project in general has five phases:

1. Identification

2. Preparation and formulation

3. Review and approval

4. Implementation

5. Evaluation
 1. Project identification
• Project identification starts from an
understanding of objectives .
It involves identifying environmental problems and
interests of beneficiary.
2. Project preparation and formulation
This comprises of :
 Feasibility study
 Establishment of baseline and target data
 Project implementation plan
 3.Project review and approval
• a project review and approval mechanism comprising of
inter-divisional review
4.Project implementation
Comprises of monitoring and risk assessment
5. Project Evaluation

• assessing the project to identify what has been

achieved, and to identify lessons that have been learned.

Evaluation findings are

 Generic project cycle (EU )
• .
 Project phases

• During the Programming phase, the situation is analyzed to identify

problems, constraints and opportunities which development cooperation could

address.

• During the Identification phase, ideas for projects and other development

actions are identified and screened for further study

• During the Formulation phase, relevant project ideas are developed into

operational project plans

• During the Financing phase, project proposals are examined and a

decision is taken on whether to fund the project.

• During the Implementation phase, the project is mobilized and

executed

• During the Evaluation phase, assessing the project to identify what has been

achieved, and to identify lessons that have been learned. Evaluation findings are

used to improve the design of future projects

 World Bank Project Cycle
• The concept of the project cycle was first popularized by a

World Bank publication by Warren Baum in 1970 with four

elements (identification, preparation and analysis, appraisal

and implementation) and evaluation was added in a later

version in 1978.

1. Identification

2. Preparation and analysis

3. Appraisal

4. Implementation

5. Evaluation
 The project
. cycle
1.Identification

5. Evaluation 2. Preparation &

& closure Appraisal

Proposal
Appraisal development

4. Implementation
Financing
decision
3. Project
planning

60
Identification  Potential projects emerge from specialists, local leaders and national development strategies.
 Identification of potential stakeholders, particularly primary stakeholders.


.
Carry out problem assessment and decide upon key objectives.
Assess alternative strategies for meeting objective.

 The technical, institutional, economic, environmental, and financial issues facing the
Preparation
• .
and Appraisal
project studied and addressed —including whether there are alternative methods for
achieving the same objectives.
 Assessing feasibility as to whether and determining whether to carry out more advanced
planning.
 Evaluation of all of the feasibility studies to determine the ability of the project to succeed

Detailed  The project solution is further developed in as much as detail as possible

Planning

Implementation  The project plan is implemented over a specified time period.

and  Monitoring of project performance with a management information
monitoring system to enable correction of implementation problems as they arise.

Evaluation  On-going and final assessment of the success of the project against
& closure original objectives, to learn lessons to help improve future projects.
 UNIDO Project Cycle
United Nations Industrial Development Organization

1. The pre investment phase,

– Project identification

– Project preparation

– Appraisal & investment decision

2. Investment phase, and

– Acquisition phase

– Commissioning phase

– Test production & marketing phase

3. Operational phase.
 Project Cycle According to UNIDO (United Nation Industrial

Development Organization )
1. pre-investment studies (project identification)
* Opportunity Studies/Project Identification:
* Availability of natural resources
* Existing agricultural pattern
* Future demand for goods, increasing population,
purchasing power
* Exports and import substitution
* Environmental impact assessment
* Functioning similar project of other countries
* Possible linkages with other industries
 .

# Extension by backward and forward linkage

# Industrial policies
# General input climate of economy
# Expansions to an existing project to have large
scale of economy
# Export potential
# Availability and cost of production factors

These opportunity studies can be categorized as area studies,

industry studies and resources based studies
 .
Pre-feasibility studies/pre-selection:
 To analyze that:
• All possible alternatives examined
• The project concept justifies detailed analysis
• A critical area necessitates in-depth investigation
• Project idea is either attractive for investment or non-viable
• The environment situation at the site in line with national
standards
• Support functional studies to convert specific areas such as:
• marketing
• Raw material and factory supplies
• laboratory and Oliphant testing
• location
• Environmental impact assessment
• Economics of scale and
 Feasibility study/preparation

# Feasibility study should provide all data,

define and critically examine the commercial,
technical, financial, economic and
environmental aspects for each alternative.
# The data should be based on investigated
efforts rather than on guess.
# A window dressing approach should be
avoided.
 .

Appraisal report/Appraisal:
 The appraisal report will prove whether the pre-
production expenditures were well spent, project
appraisal as carried out by financial institutions
concentrates on the health of the company to
be financed, the returns obtained by equity
holders and the protection of its creditors.
 Appraisal reports as a rule deal with the
industries in which it will be carried out and its
implications for the economy as a whole.
 2. Investment phase
• The investment phase can be divided in to the
following stages.
– Establishing the legal, Financial and organization basis
– Technology acquiring and transfer
– Detailed engineering design and contracting
– Pre-production marketing, including the securing of
supplies and setting up the administration of the firm.
– Recruitment and training of personnel
– Plant commissioning and start- up
 3. Operating phase
• The problems of the operational phase need to
be considered from both a short and a long term
view point.
• The short term view relates to initial period after
commencement of production.
• Most of the problems have their origin in the
implementation phase.
• The long-term view relates to chosen strategies
and the associated production and marketing
 Phase-to-Phase Relationships

• There are three basic types of phase – to – phase relationships :

• A Sequential relationship : where a phase can only start

once the previous phase is complete

• An Overlapping relationship : where the phase starts prior

to completion of the previous one ( Fast tracking ). Overlapping

phase may increase risk and can result in rework .

• An Iterative relationship : where only one phase is

planned at any given time and the planning for the next is

carried out as work progresses on the current phase and

deliverables
Project Management Process Groups:Overlap
Input Measure the financial, administrative and regulatory
Indicators
Development Indicators and their Use
resources provided by the Government and donors. It is
necessary to establish a link between the resources used and the
results achieved in order to assess the efficiency of the actions
carried out.

Output Measure the immediate and concrete consequences of the

Indicators measures taken and resources used: E.g.: Number of schools
built, number of teachers trained
Outcome Measure the short-term results at the level of beneficiaries.
Indicators The term ‘results indicators’ is used as well. E.g.: School
enrolment, percentage of girls among the children entering in first
year of primary school
Impact They measure the long-term consequences of the outcomes.
Indicators They measure the general objectives in terms of national
development and poverty reduction. E.g.: Literacy rates
Output indicators would be located at the level of Activities, as they are direct
consequences of Activities implemented, Outcome indicators correspond to indicators
at the level of the Results in a Logical Framework, Impact indicators are measures at
the level of the Purpose and the Overall Objectives (one could distinguish between
initial and long-term impact).
 Activity
By taking an elementary school construction project of your

environment

a) Short list the series of activities to be involved from its

project idea generation up to implementation.

Classify these activities under :

.1. Identification

2. Preparation and analysis

3. Appraisal

4. Implementation

5. Evaluation
 CHAPTER 3 : PROJECT IDENTIFICATION

At the end of this unit,

students will be able to:
CONTENT
 Understand the sources of
1.Project Idea –
project ideas.
meaning  explain project ideas
2.Sources of Project  Differentiate between macro

Ideas and micro sources of project

1.Macro sources ideas.

2.Micro sources
 Idea generation or project identification

.
Preliminary screening or pre feasibility study

• . Project feasibility or feasibility study

Market & demand Technical Financial Social cost benefit Environmental

Analysis Analysis Analysis Analysis & risk analysis

Detailed project reporter formal approval from sponsors

Planning, organizing & scheduling of project activities

Direction & controlling of activities

Termination of project (commissioning)

PROJECT IDENTIFICATION is the conception
stage in a project’s life cycle
• At this stage, there are main activities that
should take place.
 Idea conception
 Identification of needs and
 problem recognition
 Formulation of objectives
 Idea conception
3.1 Project Idea – meaning

• A good business idea is a prerequisite for a successful

project venture.

• It needs to be developed and transformed into a viable

project opportunity.

• A project idea is the response of a person’s or organization

to solve an identified problem or to meeting perceived

needs in the environment .

• Finding a good idea is the first step in transforming a

project idea into implementation.

 Ideas are the response of :

• Need –based i.e. solving a person or

organizational problem
• demand based i.e. need to get
product or service
• Resourced based i.e. a need to use
resources
 3.2 Sources of Project Ideas

• To search for promising project idea is the first step

towards establishing a successful venture.

• As traditional adage goes on, the key to success

lies in getting into the right business at the

right time.

• Good project ideas-the key to success –are elusive.

• So a variety sources should be tapped to identify

them. Sources of project ideas can be categorized into

• Macro and micro sources.

 3.2.1 Macro sources
• Macro Environment Analysis

 Environmental analysis can be done for ongoing

business or new one using PEST/STEP Model.

 STEP analysis can be an effective strategic instrument

for realizing market growth, decline and the potential

of the business.

 By looking into the outside environment , the company

can frame strategic planning process for the future out

of its present situation.

Tools for identifying project opportunities
A study of STEP factors is helpful in projecting demand for various

goods /services. Ideas can be generated from analysis of the step factors.

1.Sociological factors, e.g. values , life styles, demographics ,culture,

education trends, immigration & emigration, family size

2. Technological factors e.g. R&D, new products & processes,

advancement in manufacturing process,

3. Economic factors, e.g. government policies, disposal income,

unemployment rate, economic growth, inflation, interest rates, demand

and supply of the commodity

4. Political factors, e.g. policy , legislation, political parties, relationship

with neighboring countries, tax structure, environmental regulation,

stability of the government, world political trends

A model for organizational environment
.
 3.2.2. Micro- Analysis
• A realistic appraisal of corporate strengths and
weaknesses is essential for identifying investment
opportunities which can be profitably exploited.
• To fulfill needs and improve shortages of
products/services project ideas can be emerge.
• Porter five forces model is useful to understand
the competition for company’s competitive
advantage
 Five Forces Model Analysis for generating
ideas
• Threat
• Of
• New
• Entry

• Competitive • Buyer
• Supplier
• Power
• Rivalry • Power

• Threat
• Of
• Substitution
 SWOT Analysis for identifying ideas
• Strength other staff

 Strong back up and support from • Opportunity

University and Government  Government strategic plan
 Steady customer base  Tremendous demands on industrial

• Weakness boilers

 Limited product range and product • Threats

differentiation  Many competitors in market
 Poor Management and quality
control  Other product substitution
 Insufficient awareness to the
technology application and safety
sense is at primitive stage

 Lack of certified trained and

qualified technician, engineers or

 .

• SWOT-Analysis is a technique to indentify and

evaluate ideas in terms of their potential

strengths ,weaknesses, opportunities and threats.

SWOT-Analysis will enable you to :

1. Continue with the selected idea and make a full

feasibility study

2. Make change to the business idea

3. Drop the business idea completely

 Assignment

• Generate one project idea , and

justify how you obtain it . Describe its
features and explain the detail of its
phases.
 CHAPTER IV - PROJECT PREPARATION

• Once ideas emerged from idea source they need to be

screened and evaluated.

• Project idea need to be screened and assessed for

viability once they have been identified.

• Hence, in this chapter discussion will be on :

1. Pre-feasibility studies/ Preliminary screening and

2. Feasibility study in project scanning & selection

Identification of suitable projects whose desirability and

suitability should conform to the established objectives
 4.1 Preliminary screening
• Preliminary Screening:

• Preliminary screening is done with a view to avoid unnecessary cost and

efforts in detailed study, if idea is not looking worthwhile in first instance

• DEFINITION : Preliminary screening can be defined as a series of steps

to know whether or not a complete detailed feasibility study should be

made.

 This calls from a quick preliminary screening by experienced

professionals who could also modify some of the proposal.

 At this stage the analyst should eliminate proposals that are

technically unsound
 Some kind of preliminary screening is required to eliminate ideas which prima

facie are not promising .

OBJECTIVES OF PRELIMINARY SCREENING

• To determine whether project (idea) is promising

business opportunity or not.
• Whether it justified a detailed analysis or not
• To find out any critical aspect on which success or
failure depends
• To formulate a plan for detailed feasibility study
 The following aspects maybe looked into

1.consistency with the government priorities

2. Availability of inputs/Availability of raw materials & resources.

The resources and inputs required for the project must be assured.

3. Adequacy of markets/marketability or demand

Is there market for the idea? Are you provide what you want ?

4. Profitability if the idea implemented.

5. Financial requirements

5.Acceptablity of risk level

6.Technological changes, competition from substitutes, competition

from imports ,etc.
 .

When a firm evaluates a large number of project ideas regularly, it is helpful to

streamline the process of preliminary screening.

For this purpose, a preliminary evaluation may be translated into a project rating

index.

The steps involved in determining the project rating index are as follows.

1. Identify factors relevant for project rating

2. Assign weights to these factors (the weights are supposed to reflect their relative

importance)

3. Rate the project proposal on various factors ,using a suitable rating scale(Likert

scale is appropriate)

4. For each factor ,multiply the factor rating with the factor weight to get the factor score.

5. Add all the factor scores to get the overall project rating index.

Once the project rating index is determined , it will be compared to judge whether the

project is prima facie worthwhile or not.

 Project rating index
Factor Factor VG G A P VP Factor
weight 5 4 3 2 1 score

Input availability 0.25 √ 0.75

Technical know-how 0.10 √ 0.40
Reason bless of cost 0.05 √ 0.20

Adequacy of market 0.15 √ 0.75

Complementary relationship with 0.05 √ 0.20
other products

Stability 0.10 √ 0.40

Consistency with government 0.10 √ 0.30
priority

Dependence on firm’s strengths 0.20 √ 0.1

Rating index 4.0
 4.2 Preparing a project Feasibility study in project
scanning & selection

Once the preliminary appraisal for the projects and idea screening

have been conducted ,the next step is undertaking a feasibility study .

What is feasibility study ?

• It is a way of testing proposed activities to see if they
can work successfully.
• Feasibility study is the best input for developing project
plan
• The project Feasibility studies are detailed analysis of
the project in different dimensions that lead to an
investment decision.
 .
 Feasibility literally means whether some idea will
work or not.
 It involves an examination of the operations,
financial, HR and marketing aspects of a business
 OBJECTIVES OF PROJECT FEASIBILITY STUDY
 It guarantees the success of Project

• It works as basic terms of reference for Project

• It describes the nature and complexity of Project

• It gives an idea about investment in Project

• It also provides us the possible future difficulties

• It gives an idea about economic and social benefits

 ..

• There is no universal format for a feasibility study. Feasibility

studies can be adapted and shaped to meet the specific needs of
any given situation.

• A feasibility study is designed to provide an overview of the primary

issues related to a business idea.

• In other words, a feasibility study determines whether the business

idea makes sense.

Types of Feasibility:
• Technical Feasibility Safety Feasibility:

• Managerial Feasibility: Political Feasibility:

• Economic Feasibility: Market Feasibility:

• Financial Feasibility Environmental Feasibility:

• Cultural Feasibility: Social Feasibility:

 Since the feasibility study can be undertaken
in various ways

. For our purpose we will consider the following

facet of project analysis

1. Market & demand analysis

2. Technical analysis

3. Financial and Economic Analysis

4. Social cost benefit analysis (scba)

4.2.1 Market and demand Analysis in project
scanning & selection
• The major objective of market analysis is to
determine whether there is a gap between demand
and supply, i.e., is there a market for the product?
Output of a product ('000)
Period Demand Supply Gap
2000 250 150 50
2001 270 200 70
2002 300 210 90
2003 400 250 150
2004 500 250 250
2005 600 300 300
 Market Analysis

A. Marketing
• It is the interaction between producers and
consumers. The four marketing instruments for which
a market analyst should take account of usually called
the market-mixes (or the four P's) are:
Product mix Quality . Promotion Advertising
Design Packaging Public relations
Service Personal sale Sales promotion
Brand policy

. Price Place
Positioning of quality and price Channels of distribution
High Distribution density
Rebates (discount) and terms Lead time and stock
of sale Transport
Financing Conditions
 B Market Research
• Market research is the systematic assessment of information on

market. It requires an effective marketing system, data

assessment and data assessment organization.

• 1) Marketing System :What is the interaction between market

participants, such as the relationship between the enterprise and

competitors, enterprise and customer, enterprise and agents, etc?

• 2) Data Assessment: The two main ways of market data

assessment are desk research (already existing information) and

field research (Interview, tests, observations). Sometimes these

two ways of getting information may over lap (i.e., applied

simultaneously). There can be general and specific market data.

 General market data, such as:
– General economic conditions (GNP, population, income
level, etc)
– Government policies (consumption, production,
restrictions, taxes, incentives, etc)
– Import and export

– Import and export substitution

– Consumer behavior

• Specific market data, such as demand and supply

of the specific product
Customer Analysis and Market Segmentation,

• it involves analysis of what, why, how, when, how much, and where customer

purchase a product.

• Market structure of the product (Consumer goods or capital goods market)

• Market segmentation (i.e. Uniform customer behavior such as children and

adult market; organizational and Individual market, etc)

• Market Analysis (market volume, market potential, market share, sales,

production program inputs, etc)

• Export market so as to meet international standards

• Imports

• You need to be clear about the type of customer you will target, and why they will

respond to your offering.

• Identify your target market segments or groups: What knowledge do you have of

your market segments or groups? How many are there? What will they buy? How
 C. Analysis of the Channels of Distribution

• Identify the various possible chains connecting

producers and end users. These are often:
• Whole sellers distribution
• Retailers distribution
• Direct to customers
 D. Analysis of Competitors
• List your competitors and note their perceived strengths and weaknesses. You need to

understand why they are competition to your proposed business. Ask the question: How can

you attract customers from them (i.e. your

• competitors)? Price should not be the only answer; whole of life value, product features,

distribution and promotion strategies, and after sales options may all be part of the purchase

decision.

• Assess how competitors use market-mix (i.e., the 4 P's).

• General information about competition (sales, market share, etc)

• For example, Market Share

• Shell --------------------------- 40%

• Agip --------------------------- 10%

• Total --------------------------- 20%

• Mobil -------------------------- 30%

• This helps as a profile of reaction and main strength and weakness of

competitors to compare with own situation.

 E. Analysis of the Socio-Economic Environment
• Analysis of the socio-economic environment commonly focuses
on two things:

• (i) Phase of the life cycle of the industry anticipated to

enter Life Cycle of the Product

• Start Up Growth Maturity Declining

• Start Up- the industry is infant; people do not know its

existence and its usefulness.

• Growth Period- people know the industry and its use.

• Maturity- the industry becomes a common practice or activity

and then the market will be filled with the product.

• Declining (Shrinkage) - the product lacks market step by step.

 (ii) Wider socio-economic environment

• Society and culture

• Social and economic policies
• Customs and habits
• Ecology and environmental protection plans
• Inflation and Demography
• Politics and Laws
• Development of domestic and international
trade, etc.
F. Marketing Strategy: Marketing strategy involves in
• Geographical area strategy - Where shall I have my project?

• Channel of distribution strategy - Shall I use Wholesale, Retail sale,

Agent, etc?

• Market share and Price strategy:

– Cost Leadership

– Differentiation

– Marketing Targeting

– 4 P's (Product, Place,Promotion, and Price

Product market relations strategy:

– Market Penetration

– Market development

– Diversification Competition and Market Expansion, etc

 G. Marketing Cost
• The marketing cost arises from the marketing strategy, such as
packaging,
• storage,

• salaries,

• commission,

• discounts,

• promotion and advertisement,

• transport,
• insurance,
• distribution,
• supplies,

• market research, etc

 5.Demand Forecasting

• After gathering information about the various aspects

of the market and demand from primary and
secondary sources, attempt may be made to estimate
future demand.
• Demand Forecasting is the art of predicting
demand for a product or a service at some
future date on the basis of certain present and
past behaviour patterns of some related
events.”
Characteristics of a Good Demand
Forecasting
Accuracy
Simplicity
Economy
Timeliness
Availability
Methods of Demand Forecasting
1.Survey of buyer’s intentions
2.Collective opinion method
3.Expert opinion method
4.Controlled experiments
5.Study of general economic environment
These methods can be grouped in two categories

1. Qualitative method

2.Time series projection methods

 5.1. Qualitative method

These methods rely on the judgment of experts to translate qualitative

information into quantitative estimates. The important methods are :

i. Jury of executive opinion method:

 A panel of experts or senior managers is brought together in committee to

pool members’ individual forecasts.

 Then having agreed (or at least discussed )their individual cases a forecast

emerges.

 As the quality of forecasts on depends on the quality of participants the jury

should comprises best possible teams.

 If the views of more number of experts are obtained, and if their views differ significantly,

then a forecast can be safely arrived at by taking the average of the expert’s predications
 under this method opinions are sought from a group of managers on the

expected future sales they are then translated into sales estimates
 The advantages of this method:
 It is an expeditious method for developing a demand forecast

 It permits a variety of factors like economic climate, competitive,

environment, consumer preference, technological developments,

and so on, to be included in the subjective estimates provided by

the experts

 It has immense appeal to managers who tend to prefer their

judgment to mechanistic forecasting procedures.

The disadvantages of this method are:

 The biases underlying subjective estimates can not

be unearthed easily.

 The reliability of this technique is questionable

 ii. Delphi method
opinions are sought from a group of experts who don’t know

the identity of each other, any divergent opinions are then

mailed back to back for further opinion until a consensus is

obtained.

1.A group of experts is sent a questionnaires by mail and asked

to express their views.

2. The responses received from the experts are summarized

without disclosing the identity of experts.

3. The process may be continued for one or more rounds till a

reasonable agreement emerges.

 .

 Delphi method appeals to many

organization for the following
reasons:
 It is understandable to users

 It seems to be more accurate and

less expensive than traditional face-
to-face group meetings
 5.2. Time Series Projection Methods

.These methods generate forecasts on the

bases of the historical time series. The
important time series projection methods
are:
i. Trend projection method

ii. Exponential smoothing method

iii. Moving average methods

 i. Trend projection method:
This involves determining the trend of consumption by analyzing past consumptions
data and then projecting future consumption by extrapolating the trend.

• The most common method of extrapolation is the linear regression.

Y=a+b1x
• In forecasting the independent variable is time, we will use t instead of x.

• We will use Tt in place of y. Thus, for a linear trend , the estimated sales volume
expressed as a function of time can be written as follows.

• Tt= a+ b1t
Where Tt =Trend values of time series in period t.

a =intercept of the trend line of the relationship

b1 = slope of the relationship

 .

Computing the slope b1 and intercept a

b1 = ∑t Yt – (∑t ∑yt)/n Where

∑t2 –(∑t)2 /n
∑ ­
Yt=demand in time t
a= Ý- b1 t
n=number of observation
t = Mean of t: that is ∑t/n
Ý=Mean of Y, that is
Ý=∑Y/n

Consider the time series for bicycle sales over the past ten
years
 Illustration, Bicycle sales Time series

Year t 1 2 3 4 5 6 7 8 9 10
Sales(1000s) (Y) 21.6 22.9 25.5 21.9 23.9 27.5 31.5 29.7 28.6 31.4

We can compute a and b1 as follows

t Yt
tYt t2
1 21.6 21.6 1
2 22.9 45.8 4
3 25.5 76.5 9
4 21.9 87.6 16
5 23.9 119.5 25
6 27.5 165.0 36
7 31.5 220.5 49
8 29.7 237.6 64
9 28.6 257.4 81
10 31.4 34.0 100
∑t= 55(t=5.5) ∑ Yt =264.5(Ý=26.45) ∑tYt =1545.5 ∑t2 =385
 .

• t = 55/10 = 5.5
• Ý = 264.5/10= 26.45
• b1 =1545.5-(55) (264.5)/10 = 1.10
• 385- (55)2/10

• a =26.45-1.10 (5.5) =20.4

• Therefore, Tt =20.4 +1.1t

• The slope is 1.1 indicates that over the past 10 years the
firm experienced average growth in sales of about 1,100
units per year.
• If we assume that the past 10 years trend in sales is good
indicator of future
• T11 = 20.4 +1.1 (11) = 32.5
• Thus, using the trend component only we would forecast sales of

32,500 bicycles next year

 Classwork
1.Consider the following time series.
Gross revenue data(in millions Birr)for Ethiopian
Airlines from 2002 to 2006 below.
year 1 2 3 4 5
Revenue 24 29 35 36 42

What is the forecast for =6 ?

 ii. Exponential smoothing method
• Exponential smoothing uses a weighted average of past
time series values as the forecast
Ft+1=Ft+aet

• Where:
Ft+1=forecast for year t+1
a= smoothing parameter (which lies b/n 0 and 1)
et = errors in the forecast for year t = st-Ft
• For choosing a consider 0 to 1 and choose the value which
minimizes the mea squared error.
 Forecast
t Data (St) Forecast (Ft) Error (et=st-Ft) Forecast for t +1
1 28 29 -1 F2=29+.2(-.1)=28.8
2 29 28.8 .2 F3= 28.8+.2(.2)=28.8
3 28.5 28.8 -0.3 F4=28.8+.2(-0.3)=28.7
4 31 28.7 2.3 F5=28.7+.2(2.3)=29.2
5 34.2 29.2 5 F6= 29.2+.2(5)=30.2
6 32.7 30.2 2.5 F7=30.2 +.2(2.5)=30.7
 Activity
• A street vendor in Piazza started his business in
2003 and has receipt(Birr in ‘000) as follows:
• 2003 = 5
• 2004 = 6
• 2005 = 8
• 2006 = 8
Forecast cash flows for 2007 ?
Assume your first forecast is 5.5.
 iii. Moving Average Method:
• under this method, the forecast for the next
period is equal to the average of the sales for
several preceding periods.
• To illustrate the use of the moving average
technique, consider the following time series
year 1 2 3 4 5 6 7 8 9 10 11 12

sales 28 29 28.5 31 34.2 32.7 33.5 31.8 31.9 34.3 35.2 36

 .
• Forecast for t +1
• Ft+1=(st+st-1+st-2+st-3)/n
• Where
• Ft+1 =forecast for the next period
• St = sales of the current period
• n =period over which average is done

• Illustration

• In a four years period the forecast for 13 years will be

 Forecasts
t Data Forecast
Ft
St(Sales)
1 28
2 29
3 28.5
4 31
5 34.2 29.1 F5=(28+29+28.5+31)/4=29.1
6 32.7 30.7 F6=(29+28.5+31+34.2)/4=30.7
7 33.5 31.6
8 31.8 32.9
9 31.9 33.1
10 34.3 32.5
11 35.2 32.9
12 36 33.3 F13=(31.9+34.3+35.2+36)/4
13 34.5
 Uncertainties in demand forecasting
• Demand forecasting is subjected to error and

uncertainly that arise from three main sources

i. Data about past and present market lack.

 The analysis of past and present markets, which
serves as the springboard for the projection exercise,
may be vitiated by the following inadequacies of data:
 Lack of Standardization: price, quantity, cost, income, etc

 Few Observations
 Influence of Abnormal Factors
 ii. Methods of Forecasting

 Methods used for demand forecasting

are characterized by the following
limitations:
 Inability to Handle Unquantifiable Factors
 Unrealistic Assumptions
 Excessive Data Requirement
 iii. Environmental Changes
 The environment in which a business functions

is characterized by numerous uncertainties.

 The important sources of uncertainty are:

 Technological Change

 Shift in Governmental Policy

 Developments on the international prospect

 Discovery of New Sources of Raw Material

 Coping With Uncertainties
 Giving the uncertainties in demand forecasting,
adequate efforts, along the following lines, may
be made to cope with uncertainties.
 Conduct analysis with data based on uniform and
standard definitions.
 In identifying trends, coefficients and relationships,
ignore the abnormal.
 Critically evaluate the assumptions of the forecasting
methods and choose a method which is appropriate to
the situation.
 .
 Adjust the projections derived from quantitative
analysis in the light of unquantifiable, but significant,
influences.
 Monitor the environment imaginatively to identify
important changes.
 Consider likely alternative scenarios and their impact
on market and competition.
 Conduct sensitivity analysis to asses the impact on the
size of demand for unfavorable and favorable
variations of the determining factors from their most
likely levels.
 b) Opportunity and issue analysis.

 A SWOT and core issue analysis are conducted for a

company before the product are identified.

 Strength - parent company has to launch successfully another

product

 Weakness - limited resources

 Opportunity - growth witnessed in the medium-priced segment of

a product market at the expense of low-priced same product.

 Threat - growing acceptance of new product launches

 With the limited resources, launching a product in different areas and

whether to use a new brand name or should it extend the existing

brand name are the issues to be analyzed

 c) Objectives
 Objectives have to be clear-cut, specific and achievable.
 Achieving breakeven, attaining specific sales volume, attaining top-of-mind

recognition in the target segment and setting retail outlets can be the

objective of a firm.

d) Marketing strategy.
• Covers
–Target segment, from the point view of who your customers are.
–Positioning, is how a product is placed in customers’ mind
– creation line, to launch a single variant or more than one variant.
– Price,
– Distribution,
– Sales force,
– Sales promotion and advertising.
.
 e) Action program

This entails operationalising the

strategy in to time phased activities

 4.2.2. Technical analysis
The broad purpose of technical analysis is :
a)To ensure that the project is technically feasible in the
sense that all the inputs required to set up the project
are available

b)to facilitate the most optimal formulaization of the

project in terms of technology ,size location, and so

on.
 This section covers the following issues very
broadly

1. Raw material and supply study

2. Location, site, & environmental impact

3. Production program and plant capacity

4. Technology and engineering study

5. Human Resource and organization

 4.2.3.1. Raw Materials and Supplies
Study
• The selection of raw material and supplies depends primarily on the:
 technical requirements of the project and
 the analysis of supply markets.
• Important determinants for the selection of raw materials and factory supplies are:
 environmental factors such as resource depletion and population concerns, as

well as

 criteria related to project strategies for example, the minimization of supply risks

and the cost of materials inputs.

• In order to keep the cost of the supply low, key aspects are to be identified and

analyzed in terms of:

 requirements availability

 cost and

 risks which may be significant for the feasibility of a project.

 .

• The approach taken in this respect is:

 first to classify the raw materials and supplies

 then to specify the requirement,

 check there availability and then estimate their cost.

1.1 Classification of Raw Materials and Supplies
a) Raw Materials (Unprocessed and Semi Processed).

i. Agricultural Products

ii. Livestock and Forest product

iii. Marine Product:

Availability of marine products may not only depend on

ecological factors but also on national policy & bilateral

& multilateral arguments

 .

IV. Mineral products:

• Detailed information on the proposed exploitable deposit is
essential.
• Unless the reserves are known to be very extensive, the study
should give details of the:
 viability open cast or underground mining,
 the location,
 size,
 depth
 quality of deposit and
 the composition of the ore with other elements i.e. impurities.
• A detailed analysis of :
 physical,
 chemical and
 other properties of the subject ore be processed and the results
 b) Processed Industrial Materials and
Components

• Such inputs can be generally classified under:

 base metals;

 semi processed materials relating to a wide variety of industries

in different sectors and manufactured parts, components and

subassemblies for assembly-type industries, including a number

of durable consumer goods and engineering goods industry.

 In all these cases, it is necessary to define requirements

availability and costs in some detail to ensure that the

specification in the case of the two latter categories suit

the production programs envisaged for the projects.

 c) Factory supplies
i. Auxiliary Materials and Utilities

• A part from basic raw materials and processed industrial materials and

components all manufacturing projects require various auxiliary materials

and utilities, usually subsumed as factory supplies.

A detailed assessment of the utilities required (electricity, water, steam,

compressed air, fuel, effluent disposal) can only be the made after analysis

and selection of location, technology and plant capacity, but a general

assessment of these is a necessary part of the input study.

ii) Packaging materials and containers:

• All types of containers and packaging materials serve in principle the

following two purposes:

 physical holding and protection of a product (semi-finished) and

 achieving the marketing objectives defined in the marketing concept.

 d) Recycled Waste

• The issue of waste disposal is assuming

increasing importance in developing countries,
depending on the type of production process.

• Waste combustion of high-risk waste is technically

feasible provided adequate measures are taken
and appropriate technologies are applied.

• The disposal of effluents is technically feasible

provided the appropriate installations have been

selected.
 e) Spare Parts:

In spite of regular maintenance all machinery and equipment

will finally break down after a certain lifetime.

• Various spare parts will be required to keep a plant in

operation. The importance of
 correctly identifying essential spare parts,

 the quantities required and

 available suppliers

• cannot be overemphasized because interruption of

production owning to lack of essential spare parts is often
the reason for projects failure.
•
 f) Supplies for Social and External Needs

• A remote location or some other reason might

require the project (or the company) to provide and
pay for
 foodstuffs,

 medicine,

 clothing,

 education and training materials etc.

• for the employees and perhaps also their families.

Sometimes it may be necessary for the investing
company to take responsibility for maintenance of
 1.2. Specification of Requirements
• In order to estimate the requirement of materials and
supplies during the future operation of the plant, such
requirements should be identified, analyzed and
specified in the study both quantitatively and
qualitatively.
• A number of factors could have a strong influence on
the type, quantities, and qualities of the project inputs
in particular the following:
i. Socio- economic factors:
ii. Commercial and financial (business) factors
iii. Technical factors
 1.3 Availability and Supply
• The source and the constant availability of basic production materials are crucial

to the determination of the technical and economic viability as well as the size

of most industrial projects.

• A feasibility study must show how the materials and inputs required will be

provided.
• General availability, data about :
 materials potential users, and
 supply sources and programs

• will have to b analyzed and described. A final assessment of input requirement

can be made on only after the plant capacity as well as the technology and

equipment to be used are defined.

• If a basic input is available within a country, its location and the area of

supplies, whether concentrated or dispersed should be determined.

• The alternative uses likely to be made of such materials and the consequent

impact on availability should be assessed for the project in question

 .

• The question of transportability and

transport costs should be carefully analyzed.

• When the basic material has to be imported

either in whole or in part, the implication of such
imports should be fully assessed.
 First the sources of imported inputs have to be

determined.
 Secondly, the uncertainly of inputs should be sated.

 Thirdly, the implication of domestic production of

basic materials that was being imported should be

 1.4 Input Alternatives

• In many projects different raw materials can be

used for the same production.

• When this is the case, the raw materials must

be analyzed to determine which is most
suitable taking all relevant factors in to
consideration.

• If alternative materials are used, discussion

should be also include an assessment of the
environmental impact of each material.
 1.5 Supply Marketing and Supply Program

• Supply marketing : The objectives of supply marketing are basically :

 cost minimization,

 risk minimization (reliability of supplies) and

 the cultivation of relation with supplier.

• Supply Program: The overall purpose of the outline of a supply program in the

feasibility study is to show how supplies of materials and inputs will be secured.

• Cost estimates should be based on the supply program presented.

• A supply program should deal with the following:

 Identification of Supplying Sources and Suppliers

 Agreement and Regulations

 Means of Transport

 Storage

 Risk Assessment
 .

• A distinction should be made between external and

internal project risks factors, including:
 failure of suppliers to meet their obligations,

 delayed consignments,

 supply shortages,

 quality defects,

 transport breakdown,

 utility malfunctions,

 strikes,

 climate variations,

 changed import regulations and

 shortages of foreign exchange for imports

 1.6. Costs of Raw Materials and Suppliers
a) Unit Costs

• Not only the availability but also the unit costs of basic materials and

factory supplies have to be analyzed in detail as this is a critical factor

for determine project economies.

• The cost of alternative means of transport should also be considered.

• For imported materials and inputs CIF prices (including costs, insurance

and freight) should be invariably be adopted together with clearing

charges (including loading and unloading) port charges, tariffs, local

insurance and taxes, and costs of internal transport to the plant.

b) Annual Costs

• Estimates of annual operating costs for materials and supplies are to

be made.
 .

• It should be made clear whether the cost estimates refer

 to a hypothetical level of production at full capacity utilization during

the operation phase

 or to the first year (or some other year) of operation phase according

to the time schedule for project implementation .

• Some costs vary with the production level the plant in

question, while others are more or less fixed. Taking into

consideration the expected variations in the proposed plant, it

is advisable to divided cost item into variable and fixed costs.

• In order to arrive at the total operating costs by product as well

as by total costs per year, the estimated costs per unit are

multiplied by the total number of unit to be produced.

 c) Overhead Costs of Supplies

• When estimating material and input requirements of

the project, the project planner has to plan not only
for the level of production cost center but also at the
level of service, administration and sales cost
centers.
 4.2.3.2. Location, Site and Environmental Impact
Assessment

• Location and site are often used synonymously but must be distinguished.

• The choice of location should be made from a fairly wide geographical area,

within which several alternatives sites can be considered.

• For each project alternatives the environmental impact of erecting and operating

the industrial plant should be assessed.

• The main criteria or key requirements for selecting proper locations & sites

should always be identified at an early stage of the study.

• Location Analysis

• Location analysis has to identify a location suitable for the industrial project

under consideration.

• The feasibility study should also indicate on what grounds alternatives locations

have been identified and give reasons for leaving out other locations that were

suitable but not selected.

 .

• Traditional approach to industrial location focused, on the proximity of

raw materials and marketing’s, mainly with a view to minimizing

transport costs.

• The modern view requires consideration of commercial, technical and

financial factors, but also of the social and environment impact a

project might have.

• Key Factors in Location Analysis includes:

1. Natural environment, geographical conditions and project requirements.

2. Ecological impact of the project, environmental impact assessment

3. Socio-economic policies, incentives and restrictions and government plans

and policies

4. Infrastructural service, conditions and requirements, such as the existing

industrial infrastructure, the economic and social infrastructure the

 The Natural Environment
• Climatic conditions a part from the direct impact on project costs of such

factors as dehumanization, air conditioning, refrigeration or special

drainage, the environmental effects may be significant.

• Information should be collected on temperature, rainfall, flooding, dust,

times and other factors for different locations.

• Climatic conditions are relevant in different ways; means of transport may

become less reliable for products to distant markets.

• The construction, operation and management of the plant may be less

efficient or more expensive if adequately skilled labor force is reluctant to

work in areas with extreme climate conditions.

• Climate conditions can be specified in term of air temperature, humidity,

sunshine hours, winds, precipitation hurricane, risk etc.

• aspects are in general more relevant for the selection of suitable sites.
 .

• There include soil, water levels, and a number of

special site hazard such as earthquakes and
susceptibility to flooding all of which extend over
grater areas.
• Ecological requirements: some projects may not have
a negative environmental impact themselves but
rather be sensitive to such effects.
• Management and workers may be reluctant to work in
a factory located in a polluted area with health risks.
 Environment Impact Assessment

• The site environment impact analysis will cover the

impact of the project and the alternatives (in terms of

size, technology etc) on the surrounding area, including

its population, flora and fauna( plants & animals).

• This analysis should be integrative and interdisciplinary,

assessing the overall impact which taking into account

the synergetic effects of inter-linked systems.

• Environmental benefits or costs of a project are usually

externalities or side effects that affect the society in

whole or in part.
 Environment Conflicts

• Environmental conflicts might also lead to:

 compensation claims,

 substantial costs for purification equipment, and

 possibly a risk that the plant will have to be closed down.

• The potential risks related to the location of projects that have negative

environmental impact must be seriously considered in the feasibility study.

Including potential conflicts with existing and future neighboring

industries, urban settlements and other elements should be identified

and analyzed in so far as they may affect the investment decisions.

• Objectives of Environmental Impact Assessment

• The general objective of environmental impact assessment in project

analysis is to ensure that development projects are environmental sound.

 The specific objectives of environmental impact assessment are
as follows:

To promote a comprehensive, interdisciplinary investigation of

environmental consequences of the project and its alternatives for
the affected natural and cultural human habitat.

To develop an understanding of the scope and

magnitude of incremental environmental impacts (with
and without the project) of the proposed projects for
each of the alternatives project designs.

 To incorporate in the designed any existing

regulatory requirements
 .

 To identify measures for mitigation of adverse

environmental impacts and for possible

enhancement of beneficial impacts.
 To identify critical environmental problems requiring

further investigation
 To assess environmental impact quantitatively and

qualitatively, as required, for the purpose of

determining the overall environmental merit of
each alternative.
 Socio-Economic Policies
•Role of Public Policies

•Government regulations and restrictions may be critical for the location of

project.

•Project with certain characteristics may be allowed only in certain regions.

•Investment in export processing zones and other specified regions are

sometimes exempted from taxes or would benefit from other types of

subsidy
•Fiscal and Legal Aspects

•The legal, regulations, and procedures applicable for alternatives locations

should be defined.

•The corporate and individual income taxes, exercise duties, purchase

taxes and other national or local taxes should be ascertained for

different locations together with the incentives and concessions

 Infrastructural Conditions
a)Infrastructure dependence
 Technical infrastructure

 Transport and communication

b)Factory supplies
 Effluent and Water

 Electricity

 Fuel

c)Human resources

d)Infrastructural service
 Resources or Market Orientation
• Criteria to location selection is the impact on a particular project

of factors such as:

 the availability of raw material and inputs

 the proximately of centers of consumption and

 the existence of basic infrastructure facilities.

• Project based on specific raw materials are for obviously reasons

located at the source.

• The simplest location model is to calculate the transport,

production and distribution costs at alternative locations

determined principled by the availability of raw materials and

 .
• For projects that are not unduly resources or
market-oriented, optimum location could well
combine reasonable :
 proximately to raw material and markets,

 favorable environmental condition,

 a good pool of labor,

 adequately power and fuel at reasonable cost,

 equitable taxes,

 good transports,

 adequate water supply and

 facilities for waste disposal.

Assessment of Location
• As far as the financial feasibility of alternative
locations is concerned, the following data, as well
as related financial risks, should be assessed
 production costs (including environmental protection

costs)
 Marketing costs.

 Investment costs (including environmental protection)

 Revenues

 Taxes, subsides, grants and allowances

 Net cash flows

 Site Selection
• Once the location is decided upon, a specific project site and, if
available, site alternative should be defined in the feasibility study.

• The structure of site analysis is basically the same for location

analysis and the key requirement, identified for the project give
guidance also for site selection.

• For sites available within the selected are the following

requirements and conditions are to be assessed.
 Ecological condition on site (soil, site hazards climate etc.)
 Environmental impact (restrictions, standards, guidelines,)
 Social-economic conditions (restrictions, incentives,
requirements)
 Local infrastructure at site location (existing, industrial,
infrastructure economic and social infrastructure, availability of
critical project impact such as labor and factory supplies)
 Strategies aspects (corporate strategies regarding possible
 .

 Cost of land

 Site preparation and development, requirement and costs

• Requirements and Relevant Factors

• Site Requirement

• A project may depend on particular site condition,

which should be identified and described in the
feasibility study.

i. Cost of land

ii. Construction requirements

iii. Local conditions-infrastructure

 .

• The availability and cost of electricity is common for most sites

within a given location.

• Transport is very important when comparing the suitability of

different sites.

• Where water is requirement for the manufacturing processes

such assessment is more important and the source and cost of

the water supply has to be estimated at alternatives sites.

iv. Effluent and waste disposal

• The disposal of effluent may be a problem for many industries.

• The possibilities for effluent disposal at different sites should be

carefully studied bearing in mind the type of effluent.

• v. Human resources .
• Recruitment of managerial staff and labor may be a critical

factor for the viability of a project.

• The study must therefore pay carefully attention to the

question of labor availability, conditions related to recruitment

and facilities for training.

• It may be necessary to develop a social infrastructure next to

the envisaged site like:

 housing,

 primarily school,

 medical and

 social centers to attract the requirement staff and labor force.

 4.2.3.3. Production Program and Plant
Capacity
• Production program

• Production program consist of the whole range of project

activities and requirement, including production levels to

be achieved under the technical, ecological, social and

economic constraints.

• This necessitates identifying the principal products or

products range including by-products, determining the

volume of production, & relating production capacity, to

the flow of materials and performance of services at the

selected site.
 Determination of the production program

a) Market requirements and marketing concept

• The range and volume of products to be

produced depends primarily on the market
requirements and the proposed marketing
strategies.

• A production program should define the levels of

output to be achieved during specified period
and from this viewpoint, it should be directly
related to the specific sales forecasts.
 .

• It would be prudent to recognize that full production

may not be practicable for most projects during the

initial production operations.

• Owing to various technological, production operations,

and commercial difficulties most projects experiences

initial problems that can take the form of :

 a gradual growth of sales & market penetration on the one

hand and,

 a wide range of production problems such as the adjustment

of labor & equipment to the technology selected on the other.

 .
• Even if full production were to be achieved in the first

year, marketing and sales might prove to be a bottleneck.

• Depending on the nature of the industry production &

sales target of 40-50% of overall capacity for the first

year should be considered reasonably.

• Once a production program defines the levels of outputs

in terms of end products & possible of intermediate

products & the interrelation b/n various production lines &

processes, the specific requirements of materials & labor

should be quantified for each stage.

 b) Technology and know-how

• An important factor in determining the production program and plant

capacity is the technology and know-how to be utilized in the project.

• Specific processes are often related to certain levels of production or

become technically and economically feasible only at such levels.

• The nature of technology choice and usage constitutes a key factor in the

determination of plant capacity.

• Each technically possible alternative must in addition consider:

 social,

 ecological,

 economic and

 financial conditions,

• because production programs and plant capacity are functions of various

 c. Plant capacity
• Plant capacity (also referred to as production capacity) refers to the volume or number

of units that can be manufactured during a given period.

• Plant capacity may be defined in two ways:

 feasible normal capacity and

 nominal maximum capacity.

• Feasible normal capacity refers to the capacity attainable under normal working

conditions.

• This may be established on the basis of:

 the installed capacity,

 technical conditions of the plant,

 normal stoppages, & downtime for maintenance,

 holidays, and

 shift patterns.

• The nominal maximum capacity is the capacity which is technically attainable and this

often corresponds to the installed capacity guaranteed by the supplier of the plant.
 ,

• Plant capacity is influenced by the following factors:

i. Technological requirement

• For many industrial projects, particularly in process

type industries, there is a certain minimum
economic size determined by the technological
factor.

• For example, a cement plant should have a capacity

of at least 300 tons per day in order to use to rotary
kiln method: otherwise; it has to employ the vertical
shaft method which is suitable for lower capacity.
 ii. Input constraints

• In developing countries, there may be

constraints on the availability of certain inputs.
 Power supply may be limited,

 basic raw materials may be scarce;

 foreign exchange available for imports may be

inadequate.

• Constraints of these kinds should be borne in

mind while choosing the plant capacity.
•
 . Resources of the firm
• The resources, both managerial and financial available to a firm define a

limit on its capacity decision.

• Obviously, a firm cannot choose a scale of operations beyond its financial

resources and managerial capability.

vi. Government policy

• The capacity level may be influenced by the policy of the government.

• Traditionally, the policy of developing countries was to distribute the

additional capacity to be created in a certain industry among several

firms regardless of economics of scale.

• This policy has been substantially modified in recent years and the

concept of ‘minimum economic capacity’ has been adopted in several

industries.
 vii. Economic of scale

• While production costs undoubtedly fall with increasing

volumes of production, the economic, technical and ecological
effects vary from country to country and industry to industry.

• Therefore plant capacity must be related to economies of

scale.

viii. Minimum economic size and equipment constraints

• The concept of minimum economic size is applicable to most

industries and projects but is of varying significance for
different types of industries.

• A cement plant of less than 300 tons per day is for instance
not considered economical.
 4.2.3.4. Technology and Engineering Study

Definition of technology
• Technology is defined as the application of
scientific knowledge for productive purposes.
• This entails the use of science to produce
products, services or processes.
 Assessment of technology required
• The primary goals of technology assessment are to
determine and evaluate the

1. impacts of different technologies on the society and

national economy, such as
 cost-benefits analysis,

 employment and income effects,

 satisfaction of human needs etc,

2. impacts on the environment (environmental impact

assessment) and

3. techno-economic feasibility assessed from the point of

view of the enterprise
 .
• To allow the careful assessment of the suitability of
the technological alternatives a logical sequence
should be followed:
i. Problem identification,
ii. technology description and project layout,
iii. technology market and alternatives,
iv. assessment of availability,

v. technology forecast,
vi. assessment of the local integration,

vii. description of the social economic impact,

viii. environmental impact assessment

 i. Problem identification

• Problem identification should identify, describe,

and assess the critical elements of the technology
required and,
• special consideration should be given
to existing or possible future constraints on the
acquisition and use of available technologies
to further development needs and to the possibility of
feasible technological alternatives.
 ii. Technology description and project layout

• The preparation of a plant layout and design is essential for every project.

• The first initial stage should be the preparation of a preliminary project plan and

layout on the basis of the production activities and the technologies alternative

envisaged.

• These second stage of project layout and design can only be drawn when the details

relating to technology plant capacity and machine specification are finalized.

• The preliminary project layout should include several charts and drawings, which

need not be according to scale, but which would define the various physical features

of the plant and their relationship with one another.

• For most projects, functional charts and layout drawing at this stage should include

the following:

a) General functional layout, defining the principal physical or location features and

flow relationships of machinery and equipment, civil works and construction and

various ancillary and service facilities

 .

b) Basic characteristics of the technology

c) Material-flow diagrams, indicating the flow of

materials and utilities

d) Transport layout, indicating roads, railway and other

transport facilities up to their point of connection
with public networks

e) Utility lines for electric power, gas, telephone,

sewage and emissions, both internal and external up
to the point connecting with pubic networks.

f) Areas for extension and expansion

 iii. Technology market and alternatives

• The selection of appropriate technology is undoubtedly

one of the key elements of such a study.

• The study should identify both alternatives technologies

and alternatives sources of technology.

• The evaluation would then aim at selecting the technology

and the source from which it may be secured.

• The study should also discuss the contractual terms and

conditions which may be of special significance in relation

to the acquisition of a particular technology.

 iv. Assessment of availability

• The market for industrial technology is highly imperfect

with alternatives technologies and sources available

from only one or a few sources and alternatives

production technologies may be difficult to find.

• In this connection, the UNIDO Industrial and

Technological Information Bank (INTIB) became

operational in 1980

• Its main objectives being to ensure a quicker, easier

and greater flow of information to people who need to

select technologies.
 v. Technology forecast

• Technological forecast provides an assessment

and forecast of technological trends during the
project implementation phase and the project life
cycle or the period limited to the planning horizon
for the project.
• A technology forecast is especially important for
investment projects in highly innovative.
 vi. Assessment of the local integration
• An issue of major significance in technology choice is the

level of integration or local value added that can be

achieved with respect to a particular technological usage.

• The study should define the extent of integration that

should be proven technology that has already been

applied and utilized and which can be related to local

conditions.
• The parameters of the appropriate level of integration
should be indicated.
 vii. Description of the social economic impact

• Public policies with regard to the acquisition of

foreign technologies, technology absorption and
development have to be identified.
• The socio-economic infrastructure, including the
structure of the labor force may have a significant
impact on the feasibility of the technology to be
selected for the project.
viii. Environmental impact assessment
• This issue has been discussed in detain previously.
 Selection of Technology
• The choice of technology is influenced by variety considerations
this are:
 plant capacity: To meet a given capacity requirement perhaps only a
certain production technology may be viable.
 principal inputs: For example, the quality of limestone determines
whether the wet or dry process should be used for a cement plant.
 investment outlay and production cost: The effect of alternative
technologies on investment outlay and production cost over a period of
time should be carefully assessed.
 use by other units: The technology adopted must be proven by
successful use by other units, preferably in the specific country
 product mix: The technology chosen must be judged in terms of the
total product-mix generated by it, including saleable by-products.
 latest developments: The technology adoption must be based on
the latest developments in order to ensure that the likelihood of
technological obsolescence in the near future at least, is minimized.
 .

ease of absorption: The ease with which a particular

technology can be absorbed can influence the choice
of technology.
• Sometimes a high level technology may be beyond the
absorptive capacity of a developing country which may
lack trained personnel to handle that technology
ecological and environmental impact
 Appropriateness of technology
• Appropriate technology refers to those methods of
production which are suitable to local economic, social
and cultural conditions.

• The advocates of appropriate technology should be

evaluated in terms of the following questions:
i. Whether the technology utilizes local raw materials?

ii. Whether the technology utilizes local man power?

iii. Whether the goods and services produced cater to the basic
needs?

iv. Whether the technology protects ecological balance?

v. Whether the technology is harmonious with social and cultural

 Means of Technology Acquisition
• When technology has to be obtained from some other

enterprises, the means of acquisition have to be

determined.

• These can take the form of:

 technology licensing,

 outright purchase of technology or

 a joint venture involving participation in ownership by the

technology supplier.

• The implications of these methods of acquisition should

be analyzed.
 Contract Terms and Conditions
• The contractual terms and conditions for technology acquisition

and transfer which are likely to be of particular significance to

the project need to be highlighted in the feasibility.

• These may differ in emphasis from project to project, but

certain contractual issues should be of significance in most

cases. These are:

a) Definition: The details of the technology including processes

and products together with the technology service required

from the technology supplier should be clearly defined.

• This should include all necessary documentation such as blue

prints, specifications, production drawings etc.

 b) Duration:
• Since the duration of a technology agreement must be adequate

for affective technologies absorption, the period required for such

absorption should be defined, together with the scope for

progressive technological upgrading and renewal.

c) Warranty: The appropriate warranty or guarantee relating to the

technology and know-how supplied should be indicated.

d) Access to improvements: Provision should be made for the

licensee to have access to improvements made by the licensor

during the period of agreement.

e) Industrial property rights: Patents and other industrial rights

pertaining to a particular technology should be identified .

 .
f) Payments: Technology payments can be in the form of a lump sum

payment or continuing royalties or a combination of the two. The

suggested form and appointed level of payment should be

indicated.

g) Territorial sales rights: The implications of exclusive and non-

exclusive sales rights for the country where the project is located

and neighboring countries or other geophysical regions should be

examined in the feasibility study.

h) Training: For the absorption of technology training is essential.

• The study should indicate where and when training would be

required either in the plant of the licensor or through supply of

expert personnel in the plant of the licensee.

 Civil Works

• Structures and civil works may be divided into three categories:

site preparation and development, buildings and structures

and, outdoor works.

Site preparation and development

• This covers the following

(i) grading and leveling of the site,

(ii) demolition and removal of existing structures

(iii) relocation of existing pipelines, cables, roads, power lines,

etc;

(iv) reclamation of swamps and draining and removal of standing

 .

(v) connections for the following utilities from

the site to the site to the public network:
 electric power (high tension and low tension),
 water for drinking and other purposes,
 communications (telephone telex, internet etc,)
 roads, railway sidings and

(vi) other site preparation and development

work.
 Building and structures
• Buildings and structures may be divided in to :

(i) factory or process buildings,

(ii) ancillary buildings required for stores, warehouses,
laboratories, utility supply centers, maintenance
services, and others
(iii) administrative buildings
(iv) staff welfare buildings cafeteria and medical
service buildings and
(v) residual buildings.
• Outdoor works cover .

(i) supply and distribution of utilities (water, electric

power, communication, steam, and gas)
(ii) handling and treatment of emission, wastages and
effluents
(iii) transportation and traffic signals;
(iv) outdoor lighting
(v) landscaping and

(vi) enclosure and supervision (boundary wall,

fencing, barriers, gates, doors, security posts

etc,)
4.2.3.5. Human Resource and Organization

• The human resources requirement at various levels

and during different stages of the project must be

defined as well as their availability and cost.

• On the basis of the quantitative human resource

requirement of the project, the availability of

personnel and training needs, the cost estimates
for wages, salaries other personnel-related
expenses and training are prepared for the
financial analysis of the project.
 Categories and Functions
• Human resources as required for the
implementation and operation, industrial project
need to be defined by categories such as
 management as supervision personnel and
 skilled and unskilled workers and
By functions such as
general management,
production management and supervision,
 administration (accounting, purchase etc.)
 production control,
machine operation and transport
 .

• The numbers, skills and experiences required

depend on:
the type of industry,
the technology used,
plant size,
the cultural and socio-economic environment of the
project,
location as well as proposed organization of the
enterprise
 Socio-Economic and Cultural Environment

• Human resources requirement not only depends on techno-

economic and financial or commercial factors but also are

determined to a certain extent by socio and socio-economic

conditions in the country and location of the project.

i. Legislation and labor terms

• Labor terms can be regulated by legislation of trade union contracts

or be based on common practice.

• The prevailing rules regarding leave will have an impact on the

effective numbers of working hours and days per year and

therefore affect the human resources requirement given the

production targets and other conditions.

 ii. Labor norms

• A common error in the definition of human resource requirement is

the adoption of labor norms prevailing in industrialized countries.

• Realistic estimates should instead be made on the basis of

experience of and comparison with similar industrial projects in the

project country and region.

iii. Occupational safety

• In many developing countries minimum standards of occupational

safety have not been established or are not enforced strictly

enough.

• A feasibility study must therefore also assess the relevant existing

regulations on occupations safety including future trends and

analyze their impact on investment and production costs.

 iv. Health care and social security

• The project analyst should also identify and consider necessary plant

components regarding arrangements for health care and social security for the

human resources to be employed.

• The cost of such components will have to be estimated and include in the cost

tables of the study.

• Project Related Requirements

a) Identification of requirements

• Staff and labor requirements have to be planned for the implementation or pre-

production phase as well as for the start-up and operation phases.

• Particular attention should be paid to those enterprise functions which are

essential for the feasibility of the investment and for which special professional

skills and experience of employment and workers are required as in the areas of

enterprise management
 .

• Some common examples of mistakes and their

consequence are:
Failure to provide the project implementation
team with experienced and committed personnel
often to delays and additional costs.
Bad timing of recruitment may lead to delays and
poor utilization of production capacity during the
first operating years.
Over optimistic estimates regarding duration and
quality of training as well as bad timing often have
similar consequences.
 .
Inadequate maintenance and supply of raw materials
and utilities may lead to unplanned and costly
production stops that could have been avoided with
more experienced and skilled personnel.
Bad timing of marketing and sales, inexperienced sales
persons and sales managers lack of legal advice before
signing of contracting etc may result in sales volumes
and revenues not keeping pace with production;
Unskilled drivers may cause transport delays damages,
losses and deteriorations in quality of the products
being transported.
 b) Timing of requirements

Pre -production phase:

• During the pre-production phase, it may be
assumed that labor requirements occur mainly in
conjunction with preparatory measures needed
to start the operational phase.
• Thus the managerial staff, supervisors, some
foremen, and special machine operators have to
be recruited in advance, not only to be trained,
but also to attend to the construction of building
and the installation of equipment that they will
later be operating.
 ii. Operational phase:
• Requirements during the operating phase may
vary over time.
• capacity utilization is usually improved gradually
and additional shifts may be introduced bringing
about production and possibly additional
requirements in certain personnel categories.
• A distinction should be made between variable
and fixed wage and salary costs as well between
the local and foreign lab our components.
 Organizational Set-Up
• Organization is the means by which the
operational functions & activities of the
enterprises are structured and assigned to
organizational units represented by managerial
staff, supervisors and workforce,
• with the objective of coordinating and
controlling the performance of the enterprises
and the achievement of its business targets.
 .

• Human resource requirements will obviously also depend on:

 the management structure,
 organizational layout,
 operating plan and other factors related to the financial and commercial
features of the project.
• The organizational structure of an enterprise indicates the
delegation of responsibilities to the various functional units of the
company and is normally shown in a diagram
• Usually, the organization is designed primarily in line with the
different functions in the enterprise such as finance, marketing,
purchasing, and manufacturing.
• However, there is no unique organization pattern.
• It is also possible to base organizational structures on products or
productions lines (for instance profit or cost centers) or on
geographical areas or markets; the latter are typical for marketing
organizations.
 Organizational Design
• The organization design for both the construction
and the operating phase depends on internal and
external project requirements and conditions.
• It is prepared for the following two reasons:
First, the organization of the project and
enterprises should aim at the optimal
coordination and control of all project inputs,
which make it possible to implement the project
strategic economically.
 .
Secondly, the organizational set up serves to
structure the investment and production costs
and to determine the costs linked with the
corresponding organization units.
• The design of the organization usually includes
the following steps:
i. The goals and objectives for the business are stated;
ii. The functions that are necessary to achieve the goals
are identified;
iii. The necessary functions are grouped or related;
 .

iv. The organizational framework or structure is

designed;
v. All key jobs are analyzed designed and described,
vi. A recruitment and training program is prepared.
• The organizational planner will then have to
consider some of fundamental aspects of optimal
organization. These may include:
i. The span of control that is the numbers of
employees reporting to supervisor.
ii. The number of organization levels
 .

iii. A subdivision of activities by functions, process,

equipments, location, product or classes of
customers.
iv. The distribution of responsibilities and authority.
• Availability and Recruitment
a) Assessment of supply and demand
• The following factors should be given due
consideration when the availability and
employment of human resources are analyzed:
 .

The general availability of relevant human resource

categories in the country and the project region,
The supply and demand situation in the project region.
Recruitment policy and methods
Training policy and program
b) Recruitment planning
• Recruitment policy and methods and means of
the retaining key personnel for long periods,
probable terms of employment and possible
fringe benefits to employees and their families
should be identified
 .

• Difficulties in the recruitment of key personnel (such as

managers, supervisors and skilled labor) can be dealt with in
different ways:
 Recruitment is combined with intensive training of key personnel in
order to meet quality requirements
 Foreign expertise is recruited.

• An attempt is often made to compensate for the lack of

experience of local managerial latent through the employment
of foreign personnel, either by hiring individual expatriate or
by signing management contracts with foreign companies
 Training Plan
• Since the lack of experienced and skilled personnel can constitute a

significant bottleneck for project implementation and operation in

developing countries, extensive training programmers should be designed

and carried out as part of the implementation process of investment

projects.

• Training can be provided at the factory by managerial and technical

personnel and others, by specially recruited experts or by expatriate

personnel.

• The timing of training programs is of crucial importance since personnel

should be sufficiently trained to be able to take up their positions as and

when required.
 Cost Estimates

• The manning tables prepared for each department can be

used for estimating labor costs.

• When estimating the total wage and salary costs provision

should be made for the following personnel overhead costs.
 Social security, fringe benefits, and welfare costs

 Installation grant, subsistence payment and similar costs that

occur in connection with recruitment and employment

 Annual deposits to pension funds

 Direct and indirect costs of training

 Payroll taxes
 Class presentation activity

Suppose you want to establish food oil extraction or

cement factory share company so that study the
technical feasibility based on the following points
and present it to your class within 3 minutes.

1. Raw material and supply study

2. Location, site, and environmental impact

3. Production program and plant capacity

4. Technology and engineering study

5. Human Resource and organization

4.2.3 Economic and Financial Analysis
1 Economic Feasibility:
• There is a significant difference between economics and finance.

• Finance is a fund management science

• The basic principle of finance is saving money and lending

money.
• These operations are accomplished with the help of financial institutions.

The science of finance deals with the interrelation of the concepts of time,

risk and money.

• Economics is a social science.

• The science of economics studies the production, consumption and

distribution of services or goods.

• The science of economics is trying to explain how economies work and

 .
• Also we can find various types of economics too. The most

mentioned types of economics are :

 Microeconomics : microeconomics studies interactions between

individual markets.

 Beside the markets, microeconomics is focusing on

specialization and supply and demand relations.

Macroeconomics : macroeconomics is targeting the same

objects like microeconomics just on a larger scale.

 It is not focusing on single, individual markets but on large,

national variables. These variables can be national income and

output, price inflation and unemployment rate

 .

 The government and government agencies

calculate the economic indicators of a project

before permitting the project or financing it.
 There are two levels of influence:
 Internal Or Micro-economic: The internal economics

relate to the viability of the project and the soundness of

the business case.
 Financial models and proven accountancy techniques are

applied during the evaluation phase to ensure the

economic viability of the project.
 .

 A typical example is the case of an oil-fired power station

which had to be mothballed over halfway through
construction, when the price of fuel oil rose above the
level at which power generation was no longer economic.
 It is not uncommon for projects to be shelved when the
cost of financing the work has to be increased and the
resulting interest payments exceed the foreseeable
revenues.
 The external economics, often related to the political climate,
can have a serious influence on the project.
 Higher interest rates or exchange rates, and additional taxes
on labour, materials or the end product, can seriously affect
the viability of the project.
 Thus, factors which can affect a project are
 tariff barriers, interest rate, taxes, temporary embargoes,
shipping restrictions.
 Economic justification

• Are Total Benefits higher than Total Costs?

• Which are there better alternatives?

•  Cost-benefit analysis

Economic Evaluation Tools

• Benefit-Cost Analysis
• Cost Effectiveness Analysis
• Financial Analysis
• Fiscal Impact Analysis
• Economic Impact Analysis
 2 .Financial Feasibility:
• Financial feasibility involves the capability of the project organization to

raise the appropriate funds needed to implement the proposed

project.

• In many instances, project proponents choose to have additional

investors or other sources of funds for their projects.

• In these cases, the feasibility, soundness, sources and applications of

these project funds can be an obstacle.

As appropriate, loan availability, credit worthiness, equity, and loan

schedule still be reviewed as aspects of financial feasibility analysis.

• Also included in this area are the review of implications of land

purchases, leases and other estates in land.

• Basically, financial analysis should accompany the design of
the project from the very beginning.

• This is only possible when the financial analyst is integrated

into the feasibility study team at an early stage.

• From a financial and economic point of view, investment

can be defined as a long term commitment of economic
resources made with the objectives of producing and
obtaining net gains (exceeding the total initial investment)
in the future.
 .

 You need to lay out the capital you require to

start the business.

 The objective of financial analysis is to

determine the financial viability of the project.

1. Startup costs

2. Means of financing

3. Projected profitability

4. Cash flow of the project

5. Investment worthiness- using criteria

•
.
Financial analysis and final project appraisal involves

the assessment ,analysis and evaluation of the required project

input, the output to be produced and the future net

benefit ,expressed in financial terms.

Cost of project
• Cost of project is costs incurred for which the goods (service)
are believed to serve the project for a long period of time.
• Cost of project represents the total of all items of
outlays associated with a project which are supported by
long term funds.
• It’s the sum of the outlays on the following.
 2.1 Total investment costs
• Investment required during plant operation
• The economic life time is different for the various
investments (buildings, plant, machinery and
equipment, transport equipment etc).
• In order to keep a plant in operation, each item
must therefore be replaced at the appropriate
time and the replacement costs must be included
in the feasibility study.
 Pre-production expenditures

• In every industrial project certain expenditure

due, for example, to the acquisitions or
generation of assets are incurred prior to
commercial production.
• These expenditures, which have to be capitalized,
include a number of items originating during the
various stages of project preparation and
implementation.
• These are:
 i. Preliminary capital-issue expenditures.
These are expenditures incurred during the
registration and formation of the company, including
legal fees for preparation of the memorandum and
articles of association and similar documents and for
capital issues.
ii. Expenditures for preparation studies.
There are three types of expenditures for preparatory
studies:
 Expenditures for pre-investment studies; consultant fees for
preparing studies,
 engineering and supervisor of erection and construction;
 other expenses for planning the project
 iii. Other pre-production expenditures
. Included among other pre-production expenditures are the following:

 Salaries, fringe benefits and social security contributions of personnel

engaged during the pre-production period.

 Travel expenses

 Preparatory installation, such as workers, camps, temporary offices and

stores.

 Pre-production marketing costs, promotional activities, creation of the sales

network etc.

 Training costs including fees, travel, living expenses, salaries and stipends of

the trainees and fees payable to external institutions;

 Know-how and patent fees

 Interest on loans accrued or payable during construction

 iv. Trial runs, start-up and commissioning expenditures.

• This item includes fees payable for supervision of

starting-up operation, wage, salaries, fringe benefits
and social security contributions of personnel
employed, consumption of production materials and
auxiliary supplies, utilities and other incidental start-
up costs.
• Operating losses incurred during the running period
up to the stage when satisfactory levels are achieved
also have to be capitalization.
 .

• In allocating pre-production expenditures one

of two practices is generally followed:
All pre-production expenditures may be
capitalized and amortized over a period of
time that is usually shorter than the period
over which equipment is depreciated.
 A part of the pre-production expenditures may be
initially allocated, where attributable to the
respective fixed assets and the sum of both
amortized over a certain number of years
 v. Plant and equipment replacement costs .
Such costs included all pre-production expenditure as
described above and related to investment needed
for the replacement of fixed assets.

• A gain the estimates include the supply, transport,

installation and commissioning of equipment,
together with any costs associated with down time,
production losses as well as allowance for physical

contingencies.
 Fixed assets
• As indicated above fixed assets comprise fixed
investment costs and pre-production expenditures.
Fixed investment costs :
• Fixed investment should include the following main cost
items, which may be broken down further, if required
 Land purchases, site preparation and improvements

 Building and civil works

 Plant machinery and equipment, including auxiliary equipment

 Certain incorporated fixed assets such as industrial property

rights and lump – sum payments for know-how and patents.
 Net working capital
• Net working capital is defined to embrace current
assets (the sum of inventories, marketable
securities, prepaid items, accounts receivable and
cash) minus current liabilities (accounts payable).
• It forms an essential part of the initial capital outlays
required for an investment project because it is
required to finance the operations of the plant.
 )
Accounts receivable (debtors

• Accounts receivable are trade credits extended to

product buyers as a condition of sale; the size of this
item is therefore determined by the credit sales policy
of the company.
• It is given by the following formula

credit , terms(in, months)

Debtors  value, of , annual , gross , sales
12
 2 .2 Production Costs
• It is essential to make realistic forecasting of
production or manufacturing costs for a project
proposal in order to determine the future viability of
the project
• Definition of production cost items
• The definition of production costs divides production
costs in to four major categories;
1. Factory costs,
2. Administrative overhead costs,
3. Depreciation costs, and
4. Cost of financing.
• The sum of factory and administrative over head
costs is defined as operation costs.
 Factory costs:

• Factory costs include the following:

Materials predominantly variable costs such as raw
materials factory supplies and spare parts.
Labor (production personnel) fixed or variables costs
depending on type of labor and cost elements)
Factory overheads (in general fixed costs).
• Administrative overheads:
• This include salaries and wages, social costs rents
and leasing costs etc
 Depreciation costs.
• Depreciation costs are charges made in the annual
net income statement (profits loss account) for
the productive use of fixed assets.
• Depreciation costs present investment
expenditures (cash outflow during the investment
phase) instead of production expenditures (cash
outflow production).
• Depreciation charges must therefore be added
back to net cash flows
 .

• Net cash flows are calculated from the net profits

after corporate tax, as obtained from the net
income statement.
• Depreciation costs do have an impact on net cash
flows because higher the depreciation charges,
the lower the taxable income and the lower the
cash outflow corresponding to the payable on
income.
• Financial costs. Financial costs (interests) are
sometimes considered as part of the
administration overheads.
 Unit costs of production

• For the purpose of cash flow analysis it is sufficient

to calculate the annual costs.

• At the feasibility stage, however, an attempt

should also be made to calculate unit costs to
facilitate the comparison with sales prices per unit.

• For single product projects units costs are

calculated simply by dividing production costs by
the number of units produced (therefore unit costs
usually vary with capacity utilization).
 Direct and indirect costs

• Direct costs are easily attributable to a production unit or

service in terms of costs of production, materials and
production labor.

• Since indirect costs (factory administration overheads

such as management and supervision, communications,
depreciation and financial charges) cannot be easily
allocated directly to a particular unit of output.

• They must first be apportioned to cost centers and

thereafter to the unit’s cost price by way of surcharges
obtained from the cost accounting department
 .

• Direct costing is an accounting method that

avoiding the problem of determining surcharge
rates.
• The direct variables and direct fixed costs are
deducted from the revenue generated by a
certain products (or product group) and the
remaining surplus or margin together with the
margins generated from other products is then
available to cover the indirect costs.
• The surplus then remaining is called the
operational margin (excluding costs of finance).
 2.3 Marketing costs

• Marketing cost comprises the costs for all

marketing activities. It may be divided into

1. direct marketing costs for each product or

product group, such as:
 packaging and storage (if not included in the
production costs)
 sales costs (salesmen commissions, discounts,
returned products, royalties, product advertisement
etc)
 transport, and distribution costs.
 Indirect marketing costs such as:

 overhead costs of the marketing department (personnel material and communications,

 markets research,

 public relations, and

 promotional activities, not directly related is a product etc).

• The analysis of these costs involves their assignments to various cost

group such as territories, certain classes of customers (wholesalers,

retailers, government institutions etc) and products or product group.

• Marketing and distribution costs fall into the category of period costs

even if variable and as such are charged against the operations of the

accounting period in which they are occurred.

• For depreciable investments as required, for marketing and distribution

(for example delivery trucks), depreciation charges are to be included in

the computation of total marketing costs

 .2.4 Project Cash Flows
• Cash flows are basically either receipt of cash (cash

inflow) or payments (cash outflows)

• Typical operational cash flows for a project are shown

below.

• Operational cash outflows

 Increase in fixed assets (investment)

 Increase in net working capital

 Operating costs (less depreciation)

 Marketing expenses

 Production and distribution costs

 .

• Operational cash inflows

 Revenues from selling of fixed assets
 Recovery of salvage value (end of project)
 Revenues from decrease of net working Capital
 Sales revenues
 Other income due to plant operations

• Basic assumptions underline cash flow

discounting in financial evaluation
• The basic assumption underlying the discounted cash-
flow concept is that money has a time value.
• A sum of money available now is worth more than an
 .

• This difference can be expressed as a percentage rate

indicting the relative change for a given period which,
for practical reasons, is usually a year.

• Considering that a project may obtain a certain amount

of funds (F).

• If this sum is repaid after one year including the agreed

amount of interest (I) the total sum to be paid after one
year would be (F+I) where, F+I= F (1+r) and r is defined
as the interest rate (in percentage per year) divided by
100 (if the interest rate is, for example 12.0 per cent
then r equals 0.12).
 2.5 Financial evaluation

• Financial analysis seeks to ascertain whether the proposed

project will be financially viable in the sense of being able to

meet the burden of servicing debt and whether the proposed

project satisfy the return expectations of those who provide

capital.

• The important facets of financial evaluations are:

1. Net present value (NPV)

2. Internal rate of return (IRR)

3. Benefit cost ratio (BCR)

4. Payback period (PBP)

5. Accounting rate of return (ARR)

1. Net present value (NPV)

The NPV of a project can be defined as the value obtained by

discounting all cash outflows and inflows attributable to a
capital investment project by a chosen percentage.

The present value of a project is the present value

of all future cash flows discounted back to today’s
time 0 values.
n
Ct
NPV  t
 Io
t 1 (1  K )
Where; Ct = cash flow at the end of period t
K = required rate of return
n = useful life of project
Io = initial cost of project

NPV = present value of cash flow – present value of initial cost

Decision criteria for NPV
 Present value
• Future cash flows must be discounted to arrive at their
present value using an appropriate rate of interest.
• The present value is derived by applying the formula.

 The interest rate applied discount future cash in

order to arrive at its present value depends on
investor's views of future interest rates.
 This is called the discount rate
 It reflects the risk that future cash will be worth less
by way of inflation than current cash
 NPV rule
• NPV > 0, Accept the project – it maximizes investors wealth
• NPV < 0, Reject the project
• NPV = 0, Indifferent

• Illustration:
1. A firm is considering investing in a project which costs 6,000 Br
and has the following cash flows
Time payment receipts Disc.10% Disc. disc.
payment receipts
0 24,800 1.0000 24800
1 11435 .9091 10395
2 7035 .8262 5813
3 10264 .7531 7711
Total 24800 23919
NPV -881
 .

2. A company is considering a project which requires an initial

payment of Birr 100,000, but will generate cash savings of Birr
40,000 in year 1, Birr 10,000 in year 2, Birr 20,000 in year 3 and
Birr 40,000 in year 4.

Calculate the NPV for 10% discount rate.

Year Investment Cash inflow Disc. Factor Discounted cash
10% flow
0 100,000
1 40,000 0.9091
2 10,000 0.8264
3 20,000 0.7513
4 40,000 0.6830
NPV
 .

• A firm is considering investing in a project which costs

6,000 Br and has the following cash flows
year 1 2 3 4
Cash flow 1500 3000 2000 2500

• The cost of capital is 10%and the project has no salvage value. Using
the NPV method advise the firm on whether to invest in the project.
Year Cash flow PVIF(10%) PV

1 1500 0.9091 1363.65

0.8264 2479.20
• .2 3000
3 2000 0.7513 1502.60
4 2500 0.6830 1707.50
Total PV 7053.00
Less Project Costs (6000.00)
NPV = 1053.00

Decision: Accept the project since NPV >0

 Advantages of NPV

 Considers time value of money

 Gives a decision criteria

 Recognizes uncertainty of cash flow by discounting

 Uses all project cash flows

• Disadvantages of NPV
 Gives absolute values which cannot be used to
compare project of different sizes
 There is difficulty in selecting the discount rate to use

 It does not show the exact profitability of the p

 b) Internal Rate of Return (IRR)
• IRR is the discount rate which gives a zero NPV.

• We are trying to find the discount rate which gives a zero

NPV.

• The calculation of the IRR requires a number of iterative

trials ,i.e. using the trial and error method, by increasing

the discount rate until the NPV=0. When the NPV =0,you

have determined the IRR of the project.

• NPV is considered theoretically superior , but some

managers prefer to use IRR, while others are more

comfortable with NPV.

 Find IRR
Cash flow Year 0 Year 1 Year 2 Year 3
Purchase (24,000)
Receipts 10,000 10,000 7,000
Net cash flow (24,000) 10,000 10,000 7,000
Discount factor 5% 1.00 0.9524 0.9070 0.8638
Present value (24,000) 9,524 9070 6047
NPV 641
Using a discount rate of 10% gives a negative NPV, and using a
discount rate of 5% gives a positive NPV.
Therefore, the IRR to give a zero NPV must lie somewhere in
between. See the graph below
Find IRR that makes NPV zero
 Illustration
year 0 1 2 3 4
Cash Flow (100,000) 30,000 30,000 40,000 45,000

The IRR is the value of r which satisfies the following equation

.
100,000 = 30,000 + 30,000 + 40,000 + 45,000
(1+r)1 (1+r)2 (1+r)3 (1+r)4

The calculation of r involves a process of trial and error. We try

different values of r till we find that it equals to 100,000.
Let us r =15%, which makes as :
30,000+ 30,000 + 40,000 + 45,000 =100.802
(1.15) (1.15)2 (1.15)3 (1.15)4

This value is slightly higher than our target value 100,000. So we

have to increase the value of r from 15% to 16%
30,000 + 30,000 + 40,000 + 45,000 =98,641
(1.16) (1.16)2 (1.16)3 (1.16)4
 .

• Since the value is less than 100,000, we conclude that

the value of r lies between 15% & 16%.
• We can use the following procedures.
1. Determine the NPV of the two closest rate of return.
• NPV 15% =802 NPV 16% =1359
2. Find the sum of the absolute values of the NPV obtained
in step 1. 802 +1359 =2,161
3. Calculate the ratio of the NPV of the smaller discount
rate , identified in step 1. to the sum obtained in step 2.
802/2,161 =0.37
4. Add the number obtained in step 3 to the smaller
discount rate 15+0.37 =15.37%
 .
• Decision: Reject the project since IRR is less than the required rate of return

(cost of capital) Accept a project if IRR ≥ Cost of Capital

• Advantages of IRR
 Can be used to compare projects of different sizes

 Considers time value of money

 Indicates the exact profitability of the project

 Uses project cash flows

• Disadvantages of IRR
 Some project have multiple IRRs if their NPV profile crosses the x-axis more than

once (project cash flow signs change several time)

 Assumes re-investment of cash flows occurs at project’s IRR which could be

exorbitantly high

 Doesn’t provide a decision criteria

 Not conclusive for mutually exclusive projects

 3. Benefit cost ratio (BCR)

c) Profitability Index (PI)

present value index (PVI)
benefit-cost ratio
• It is the relative measure of project’s profitability
and can be used to compare project of different
sizes
• PI = present value of cash flows/Initial cost
• Decision criteria:
• If, PI >1, Accept project
• PI < 1, Reject project
• PI = 1, Indifferent
 Illustration: A project has the following cash flows

year 1 2 3 4
Cash flow 300 400 700 900

If the required rate of return is 9% and the project initial cost is

1500 Br, calculate the PI of the project and advice if the project is
acceptable Year Cash Flow PV
PVIF (9%)
1 300 0.9174 275.52
2 400 0.8417 336.68
3 700 0.7722 540.54
4 900 0.7084 637.46

Total PV = 1790

Decision: The project is acceptable since PI > 0

PVofC .F 1790
PI   1.193
int ial cos t 1500
 Advantages of PI .
 Recognized time value of money
 Compares projects of different sizes
 Gives a decision criteria

• Disadvantages of PI
 Does not indicate the risk
 4. Payback period (PBP)

d) Discounted payback period

• This is the number of year taken to recover the original
(initial) investment from annual cash flows.
• The lower the payback period the better the project is

• Illustration:

• Assume a company wants to invest in two mutually

exclusive projects of 1000 Br each generating the
following cash flows.
• If the required rate of return is 10%. Which of the
projects should the company invest in?
 .

Year 1 2 3 4 5 6
A 500 400 300 400 0 0
B 100 200 300 400 500 600

Year DCF of A Cum cash DCF of B Cum cash flow of

flow of A B
1 454.51 454.51 90.91 90.91
2 330.58 785.09 165.29 256.20
3 225.40 1010.49 225.40 481.60
4 273.21 1283.70 273.21 754.81
5 1283.70 310.46 1065.46
6 1283.70 338.68 1403.95

Pay back for B =  245.19  Pay back for A 2   214.91  2.95 years
4  4.79 years
 310. 46   225.40 

•The management should undertake project 1000-785.09)/225.40

• A since it has a lower pay bock period.
 Advantages of pay back method

 Considers time value of money

 Useful in assessing risk and liquidity of the project

• Disadvantages of pay back method

 Does not use all project cash flows
 Does not consider the performance of the project
after the payback period
 5. Accounting rate of return (ARR)

Average, annual, profits

ARR 100
Average, investiments
Illustration:
Assume 90,000 Br is invested in a project with the following after
tax net profits.

Year 1 2 3

Net Profit 20,000 10,000 30,000

The life of the project is 3 years and no salvage value, compute

ARR of the project

20,000  10,000  30,000

Average _ profits  20,000
3
 Average investment = ½ (90,000 +0) = 45,000

20,000
ARR  100  44%
45,000

• Advantages of ARR
 Easy to compute and use
 Computed from readily available accounting information
• Disadvantages of ARR
 Ignores time value of money
 Ignores uncertainty of cash flows and there is no
consideration of risk in calculation
 Uses accounting profits rather than cash flows
 Doesn’t give a decision criteria
 Not consistent with investor’s wealth maximization
 6. Break – even analysis (BEA)
• The break-even point is the number of units required
to build up a total contribution equal to the fixed cost,
at which point the profit is nil.
• To calculate the break-even point (in units)
Total fixed cost/ Contribution per unit =Number of units
sold to break even.

Contribution=Sales-variable cost
•
Sales price per unit Br 100
Variable cost per unit Br 50
Contribution per unit Br 50
Fixed cost Br 40,000

At what sales level does the

company break-even ?
 . Number of units sold to break-
Total fixed cost(Br 40,000) = even
Contribution per unit (Bir 50)
(800 units to break-even)
 Exercise

project “A "with a 3 year life and a initial cost of Br.

30,000 generates revenues of Br. 8,000 in year 1, Br.

12,000 in year 2, and Br. 17,000 in year 3.

project “B "with a 3 year life and a cost of Br. 28,000 generates

revenues of Br. 7,000 in year 1, Br. 9,000 in year 2, and Br.

15,000 in year 3.

If the discount rate is 5%, which of the project is most

promising?

1. Using NPV ?

2. Using Payback period ?

3. Using profitability Index ?

CHAPTER V - SOCIAL COST BENEFIT ANALYSIS (SCBA)

• SCBA called economic analysis, is a methodology developed

for evaluating investment projects from the point of view of

the society (economy) as a whole.

• It is based on the assessment of the utility of a project for the

society as distinct from the financial and economic utility for

the promoter group.

• While in the latter the focus is limited to financial benefits and

costs directly accruing to the enterprise, in social cost benefit

analysis the benefits and costs accruing to the society as a
whole are considered.
 .
So, to reflect the real value of a project to society, we
must consider the impact of the project on society.
• Impact
• Positive
• Negative
• (Social Benefit)
• (Social Cost)
• Thus ,when we evaluate a project from the view point
of the society (or economy) as a whole, it is called
Social Cost Benefit Analysis (SCBA) / Economic
Analysis
 .

• It is a technique for making enterprise

decisions, from society’s stand point.
• SCBA aids in evaluating individual projects
• Spells out broad national economic objectives
• Allocation of resources to various sectors
• SCBA is concerned with tactical decision
making within the framework of broad strategic
choices defined by planning at the macro level
 .

Scope of SCBA
• SCBA can be applied to both public and private investments .

Public Investment:

SCBA is important specially for the developing countries where

govt. plays a significant role in the economic development.

Private investment:

Here, SCBA is also important as the private investments are to

be approved by various governmental and Quasi-
governmental agencies which bring to bear larger national
considerations in their decisions.
 .

• Objectives of SCBA

The main focus of SCBA is to determine

I. Economic benefits of the project in terms of

shadow prices

II. The impact of the project on the level of savings

and investments in the society

III. The impact of the project on the distribution of

income in the society;

IV. The contribution of the project towards the

fulfillment of certain merit wants (self-sufficiency,
employment etc)
 .

Rationale for SCBA

• In SCBA the focus is on social costs and benefits of a project.

• These often tend to differ from the monetary costs and benefits of the project.

• Differences b/n the financial analysis & economic analysis are due to the

following reasons

The principal reasons for discrepancy are:

i. Market Imperfection (market prices are distorted)

ii. Externalities

iii. Taxes and subsidies

iv. Concern for savings

v. Concern for redistribution

vi. Merit wants

 i. Market imperfection
• Market prices, which form the basis for computing

the monetary costs and benefits from the point of

view of the project sponsor, reflect social values only

under conditions of perfect competition, which are

rarely, if ever, realised by developing countries.

• When imperfection exist, market prices do not

reflect social values.

• The common market imperfections found in

developing countries are:

 ,

1. Rationing

2. Prescription of minimum wage rates, and

3. Foreign exchange regulation.

• Rationing of a commodity means control over its price and

distribution.

• The price paid by a consumer under rationing is often

significantly less than the price that would prevail in a

competitive market.

• When minimum wage rates are prescribed, the wage paid

to labour are usually more than what the wage would be in a

competitive labour market free from such wage legislations .

 .

• The official rate of foreign exchange in most of

the developing countries, which exercise close
regulation over foreign exchange, is typically less
than the rate that would prevail in the absence
of foreign exchange regulation.
• This is why foreign exchange usually commands
premium in unofficial transactions
 ii. Externalities
• A project may have beneficial external effects.

• For example, it may create certain infrastructural

facilities like roads which benefits the

neighbouring areas.

• Such benefits are considered in SCBA, though they

are ignored in assessing the monetary benefits to

the project sponsors because they do not receive
any monetary compensation from those who enjoy
this external benefit created by the project.
 .

• Likewise, a project may have a harmful

external effect like environmental pollution.
• In SCBA, the cost of such environmental
pollution is relevant, though the project
sponsors may not incur any monetary costs.
• It may be emphasised that externalities are
relevant in SCBA because in such analysis all
costs and benefits, irrespective to whom they
accrue and whether they are paid for or not,
are relevant.
 iii. Taxes and Subsidies
• From the private point of view, taxes are definite costs

and subsidies are definite monetary gains.

• From the social point of view, however, taxes and

subsidies are generally regarded as transfer payments

and hence considered irrelevant.

iv. Concern for savings

• Unconcerned about how its benefits are divided between

consumption and savings, a private firm does not put

differential valuation on savings and consumption.

 ;

• From a social point of view, however, the division of

benefits between consumption and savings (which
leads to investment) is relevant, particularly in the
capital-scarce developing countries.

• A birr of benefits saved is deemed more valuable

than a birr of benefits consumed.

• The concern of the society for savings and

investment is duly reflected in SCBA wherein a
higher valuation is placed on saving and a lower
valuation is put on consumption.
 v.
v. Concern for redistribution

• A private firm does not bother how its benefits

are distributed across various groups in the
society.
• The society, however, is concerned about the
distribution of benefits across different groups.
• A birr of benefit going to an economically poor
section is considered more valuable than a birr
of benefit going to an affluent section
 vi. Merit wants
• Goals and preferences not expressed in the market place,

but believed by policy makers to be in the larger interest,

may be referred to as merit wants.

• For example, the government may prefer to promote an

adult education programme or a balanced nutrition

programme for school-going children even though these

are not sought by consumers in the market place.

• While merit wants are not relevant from the private point

of view, they are important from the social point of view.

 Two Principal Approaches for SCBA

1. UNIDO Approach

 United Nations Industrial Development Organization

2. Little and Mirrlees (L-M Approach) … also

called border Price Approach [I.M.D Little

and James Alexander Mirrlees] Approach

 THE UNIDO APPROACH TO SCBA
Traditional vs Modern approach

• The UNIDO amended its earlier approach to SCBA.

• The 1972 UNIDO Approach (Traditional):

• Valuation of inputs & outputs is based on domestic market

prices with adjustment for transfer payments (i.e., Subsidies,
taxes, and domestic interest payments).

• The domestic market is assumed to be perfectly competitive.

(This may not be true)

• The 1978 UNIDO Approach (Modern):

• Valuation of inputs & outputs is based on domestic

market prices with adjustment for:

 UNIDO Approach
The UNIDO method of project appraisal involves five stages:
1. Calculation of the financial profitability of the project measured at market
prices.

2. Obtaining the net benefit of the project measured in terms of economic

(efficiency) prices.

3. Adjustment for the impact of the project on savings and investments.

4. Adjustment for the impact of the project on income distribution.

5. Adjustment for the impact of the project on merit goods and demerit

goods whose social values differ from their economic values.

Each stages of appraisal measures the desirability of the project from different

angle.

• The measurement of financial profitability of the project in the first stage is

 Merit Goods
• Merit goods are goods and services that the
government considers beneficial for the public and
will encourage production and/or consumption of.
• Example Public education. Without the government providing public
education there would still be private schools but there would not be
enough schools to satisfy societies demand for education. There
would certainly be some families that couldn’t afford education
• Demerit Goods
• Demerit goods are goods the government discourages us from
producing or consuming because they are considered bad for us.
 ,

. Stage – 1: Financial profitability

Calculation of financial profitability of the project
a) A good technical and financial analysis must be
done before a meaningful economic (social)
evaluation can be made so as to determine financial
profitability.
b) Financial profitability is indicated by the Net Present
Value (NPV) of the project, which is measured by
taking into Account inputs (costs) and outputs
(benefits) at market price
 Stage – 2: Net benefit in terms of economic (efficiency
or shadow) prices

Obtaining the net benefit of the project at economic (shadow) prices

a) The commercial profitability analysis (calculated in stage 1) would be

sufficient only if the Project is operated in Perfect market. Because, only

in a perfect market, market prices can reflect the social value

b) If the market is imperfect (most of the cases in reality), net benefit of the

Project is determined by assigning shadow Prices to inputs and outputs .

Therefore, developing shadow pries is very much vital.

Shadow prices reflect the real value of a resource (input or output) to society
 .
• The term "Shadow Price" or "Shadow Pricing" is used to refer to

monetary values assigned to currently unknowable or difficult to

calculate costs

• Suppose that a project generated one additional unit of

education.

• The value of that additional unit of education to the recipient

country is given by the increase in welfare that the society in

question would obtain from that additional Unit.

• It is mandatory to measure economic benefits & costs in terms of

efficiency prices while appraising projects from the perspective

of society.
 .

• Shadow Prices are also referred as economic prices,

economic / accounting efficiency prices etc
• Shadow prices can be defined as the value of the
contribution to the country's basic socio-economic
objectives made by any Marginal change in the
availability of commodities (Output) or factor of
production (input).
• Example: A project of power station may increase the
production of electricity which contributes to one of
the socio-economic Objectives of the country.
 Shadow pricing: Basic issues
• Shadow prices reflect the real value of a resource

(input or output) to society as opposed to their

financial or market value.

• Use of shadow prices is considered essential

particularly due to:

Market imperfections, non-market economy, fiscal policy

of the state etc.

 .
• For instance, if the pdn cost of 1 ton of a fertilizer is birr.2000,

though it is supplied to the farmers at a subsidized price of

birr. 1500 only, the point of consideration is whether the cost

of fertilizer should be taken as birr.2000, the actual cost of pdn

or birr.1500, its market price.

• Before we deal with shadow pricing of specific resources,

certain basic concepts and issues must be discussed:

1. Choice of numeraire,

2. Concept of tradability,

3. Sources of shadow prices,

4. Treatment of taxes, and

 1.Choice of Numeraire
• One of the important aspects of shadow pricing is the
determination of the Numeraire.
• It is a unit of account in which the values of
inputs and outputs are to be expressed.
o What unit of currency (domestic or foreign)?
o Current values or constant values?
o With reference to which point – present or future?
Because, "a bird in the hand is worth two in the bush'
o In terms of consumption or investment?
o With reference to which group?
 .

• In general, Numeraire is determined at:

 Domestic currency rather than border price.

 Present value rather than future value.

 Constant price rather than current price

 Consumption use rather than investment use.

• The specification of the UNIDO numeraire in

terms of the above questions is “ net present
consumption in the hands of people at the base
level of consumption in the private sector in
terms of constant price in domestic accounting
 2.Concept of Tradability
• A key issue in shadow pricing is whether a good is tradable or
not.

• For a good that is tradable, the international price is a measure

of its opportunity cost to the country.

Why?
• For a tradable good, it is possible to substitute import for
domestic production and vice versa; similarly it is possible to
substitute export for domestic consumption and vice versa

• Hence the international price, also referred to as the border

price, also represents the ‘real’ value of the good in terms of
economic efficiency
 Non-tradable
• Non-tradable items are those that are not traded internationally. They

include items such as services for which the demander and producer are

in the same location, and commodities that have low value in relation to

either their weight or their volume. In such cases, the transportation

charges prevent producers from profitably exporting their goods.

• Typically, non-tradables include such items as electricity, water supply,

all public services, hotel accommodation, real estate, construction, and

local transportation; goods with very high transportation costs, such as

gravel; and commodities produced to meet special customs or conditions

in a particular country
 3. Sources of Shadow Pricing
.

The UNIDO approach suggests three sources of shadow

pricing, depending on the impact of the project on
national economy
i. Increase or decrease the total consumption in the economy
ii. Decrease or increase production in the economy
iii. Increase or decrease export or import
 ,

If the impact of the project is on -Consumption in the

economy-The basis of shadow pricing is-Consumer
willingness to pay

If the impact of the project is on Production in the

economy –the basis of shadow pricing is -Cost of
production

If the impact of the project is on- International Trade

(Import & Export)-the basis of shadow pricing is -
foreign exchange value
 4.Treatment of Taxes
• When shadow prices are calculated, taxes usually pose
difficulties.

• The general guidelines in the UNIDO approach

with respect to taxes are as follows:
 If the project augments domestic production, taxes

should be excluded.
 If the project consumes existing fixed supply of non-

traded inputs, tax should be included .

 For fully traded goods, taxes should be ignored
 3.Externalities
• An externality, also referred to as an external effect
(either beneficial or harmful), is a special class of
good which has the following characteristics:
 It is not deliberately created by the project sponsor

but is an incidental outcome of legitimate economic

activity
 It is beyond the control of the persons, who are

benefited or affected by it, for better or for worse

 It is not traded in the market place
 .

Beneficial effects
1. An oil company drilling in its own fields may
generate useful information about oil potential
in the neighboring fields.
2. The approach roads built by a company may
improve the transport system in the area.
3. The training programme of a firm may upgrade
the skills of its workers thereby enhancing their
earning power in subsequent employments
 Harmful Effects.
1. A factory may cause environmental pollution by
emitting large volume of smoke and dirt, thereby
exposing people in the neighborhood to health
hazards .

2. The location of an airport in a certain area may raise

noise levels considerably in the neighborhood .

3. A highway may cut a farmer’s holding in two,

separating his grazing land and his cowsheds, thereby
 .

• Since SCBA seeks to consider all costs and benefits, to

whomsoever they may accrue, external effects need to

be taken in to account.

• Although valuation of external effects is difficult as they

are which can be used as a starting point, their values

are estimated by indirect means. For example:

1. The benefit of information provided by the oil field to

neighboring oil fields may be equated with what the

neighboring oil fields would have spent to obtain

such information
 .

2. The value of better transport provided by the

approach roads may be estimated in terms of
increased activities and benefits derived there
from.

3. The cost of pollution may be estimated in terms of the

loss of earnings as a result of damage to health
caused by it and the cost of time spent for
coping with unhygienic surroundings.

4. The benefit from the training programme may be

estimated in terms of the increased earning
 .

The cost of noise may be inferred from the differences

in rent between the noise-affected area and that of
some other area which is comparable except for the
level of noise.

6. The harmful external effect of the highway may be

measured by the consumer willingness to pay for the
output of the farmer which has been reduced due to
the highway.

• The above example serve to emphasise the

difficulties in measuring external effects.

 Stage 3 : Adjustment for the impact of
the project on Savings and investment
The purpose of this stage is to

1.Determine the amount of income gained or lost

because of the project by different income groups (such
as business, government, workers, customers etc)

2.Evaluate the net impact of these gains and losses on

savings
3.Measure the adjustment factor for savings and thus the
adjusted values for savings impact
4. Adjust the impact on savings to the net present value
calculated in stage two.
 .

Evaluation of the Net Impact on Savings

• Net savings Impact of the project = ΣΔYi MPSi

o Here,
o Δ Yi = change in income of group i as a result of the
project
o MPSi= Marginal Propensity to save a group I
o Marginal propensity to save =change in saving/change in income

Calculate save income

MPS ?
200 1000
400 1500
Stage – 4: Income distribution impact
Adjustment for the impact of the project on
Income distribution

• Many government regard redistribution of income in favour

of economically weaker sections or economically backward

regions as a socially desirability objectives.

• Due to practical difficulties in pursuing the objective of

redistribution entirely through the tax, subsidy, and

transfer measures of the government, investment projects

are also considered as investments for income

redistribution and their contribution toward this goals is

considered in their evaluation.

 .

• Distribution Adjustment Factor (Weight) is calculated, and the

impacts of the project on income distribution have been valued by

multiplying the adjustment factor with the particular income of a

group.

• This value will then be added to the net present value re-

calculated in stage three to produce the social net present value of

the project

• This call for suitably weighing the net gain or loss by each group,

measured earlier, to reflect the relative value of income for

different groups and summing them.

• This stage provides a value on the effects of a project on income

distribution between rich and poor and among regions

Stage – 5: Adjustment for Merit and Demerit Goods

A merit goods are whose social value is more than its economic value

• Example :A project to supply clean drinking water to an area is socially

more desirable than a project to set up a brewery which may have a

much better return on in vestment the claim drinking water is merit

good where as the liquor produced by the brewery is a demerit good

The methodology is as follows,

1. Estimate the economic value

2. Estimate the social value

3. The adjustment factor is the difference between the ratio of social

value to economic value & unity, i.e

• Social value/Economic value

 .

4. Multiply the economic value by the adjustment factor to

obtain the adjustment

5. Add the adjustment to the PV of the project

Example , Consider a brewery whose present value is Br 10 m

in terms of consumers willing to pay.

It is estimated that the social value of the liquor is no more

than its cost of production ( assumed to be 55%if the market

price)

• Adjustment factor = 55/100 -1=- 0.45

• Adjustment = 10m (-0.45) = -4.5 m

 .
• As liquor is a demerit good, the adjustment is
negative and the NPV of the project is reduced
• To sum UP, the five stage UNIDO method
computes the NPV of the project in terms of its
social costs and benefits & Provide a
methodology to select projects on the basis of
their value to society rather than on their
financial merit alone
 Little-Mirrlees Approach

I.M.D. Little and James A. Mirrlees have developed an

approach to SCBA which is famously known as L-M
approach.

 The core of this approach is that the social cost of

using a resource in developing countries differs
widely from the price paid for it.

• Hence, it requires Shadow Prices to denote the real

value of a resource to society (mentioned earlier).
 Similarities b/n UNIDO & L.M Approach

1.Calculating accounting (shadow) prices particularly for

foreign exchange savings and unskilled labour.

2.Considering the factor of equity (redistribution of

income),

3.Use of DCF analysis

 Difference
UNIDO L.M

Measures costs and benefits in Measures costs and benefits in

terms of domestic currency terms of international
prices(border prices

Measures costs and benefits in Measures costs and benefits in

terms of consumption terms of uncommitted social
The stage-by-stage analysis income
recommended by the UNIDO The L-M approach, however,
approach focuses on efficiency, tends to view these
savings and redistribution considerations together
considerations in different stages.
 .

5.5Project evaluation under

conditions of risk
.
• Future cash flows are estimates of what is expected to happen.

– Not necessarily indicate what will happen in the

future.

The cash flows identified in the analysis and

discounted to their present values have only been our

best estimates of the expected cash flows.

• Under conditions of risk, we do not know before
hand what cash flows will actually result from the
new project.
• We do not know the exact cash flows resulting from

the acceptance of a new project.

 Cont’d

• We do have expectations concerning the outcomes.

• We can formulate the probability distributions

from which the flows will be drawn.

• We can assign probabilities to these outcomes.
• Risk is defined as the potential variability in the

future cash flows.

Risk describes a situation where there is no just one possible outcome but there is a
possibility of occurrence of potential returns

1. SOURCES OF RISK
• There are several sources of risk in a project.

i. Project Specific Risk:

• The earnings and cash flows of the project may be
lower than expected because of an estimation error or due to some other factors
specific to the project like the quality of management
 ii. Competitive Risk:

• The earnings & cash flows of the project may be affected by

unanticipated actions of competitors.
iii. Industry Specific Risk:
• Unexpected technological developments &regulatory changes,
that are specific to the industry to which the project belongs, will
have an impact on the earnings & cash flows of the project.
iv. Market Risk:
• Unanticipated changes in macro economic factors like GDP
growth rate, interest rate, and inflation with varying degrees.
v. International Risk:
• In the case of a foreign project, the earnings and cash flows may be
different than expected due to the exchange rate risk or political risk.
 2. RISK, RETURN, AND NPV

• Financial managers are assumed to be risk averts.

• They do not want to take any risk with projects.
• If they are to take risk, the projects should be those kinds that
are capable of generating higher returns (offsetting the risks
assumed).
• When evaluating risky projects, one important consideration
involves the choice of the required rate of return.
• Given the risk aversion nature of mangers, the required rate of
return of each project is the function of its risk.
• The riskier the project, the higher is the required rate
of return.
• There is a direct relationship between risk & return.
• Selecting the appropriate required rate of return involves
subjective judgments.
 What is Risk Adjusted Net Present Value
(RANPV)?

• It is the sum of the PVs of the expected cash values

discounted at the required rate of return (i.e., at the
risk adjusted required rate of return).
• Serves as a capital budgeting decision criterion
under conditions of risk.
• What does a positive or zero RANPV coefficient
indicate?.
• The project earns at least the risk adjusted required
rate of return Undertaking such a project can increase
the value of the firm as well as shareholders’ wealth.
 Decision rule under the RANPV criterion :

• Accept the risky project if its RANPV is positive or

zero.
• Reject the risky project if its RANPV is negative.
• In general, under conditions of risk:
• The cash flows are not certainly known.
• Probability distributions under different states of

the economy or nature are known.

• The RANPV criterion can be used to make Accept
/reject decisions
 Illustration
• Assume we have a risky project having an economic life of four
years.
• The initial investment requirement for the project is Birr 29,000
and the estimated risk adjusted rate of return applicable to this
project is 10%.
The cash flows and respective probabilities of occurrence under
various states of nature are given below

Year State of the economy Cash flows Probability

Boom 12,000 0.20
1
Average 10,000 0.50
Recession 7,000 0.30
2 Boom 18,000 0.10
Average 15,000 0.50
Recession 13,000 0.40
 Cont’d

3 Boom 15,000 0.30

Average 14,000 0.40

Recession 12,000 0.30

4 Boom 19000 0.30

Average 16,000 0.50

Recession 14,000 0.20

Required:
1. Compute the payback period for this risky
project.
2. What is the RANPV of the project?
3. Calculate the profitability index of the project
 Solution
• First, compute the expected cash flows for each
year
Year 1 (12,000)(0.20)+(10,000)(0.50)+(7,000)(0.30) =Br 9,500
Year 2 (18,000)(0.10)+(15,000)(0.50)+(13,000)(0.40) =Birr 14,500
Year 3 (15,000)(0.30)+(14,000)(0.40)+(12,000)(0.30) =Br 13,700
Year 4 (19,000)(.30)+(16,000)(0.50)+(14,000)(0.20) =Br 16,500

Then, determine cumulative amount of expected cash

flows at each year (to calculate the payback
period).
Year Expected Cash Cumulative Cash Flow
Flows
1 9,500 9,500
2 14,500 24,000
3 13,700 37,700
4 16,500 54,200
 Cont’d

• The payback period for this project is longer than 2

years and shorter than 3 years (see below).

• If the cash flows expected to occur only at the end of a
year, the payback period will be 3 years.
• If the expected cash flows occur uniformly throughout
the year, the payback period will be in between.
PBP =2 yrs + 5,000/13,700* 12 months
=2 yrs and 4 months
 Cont’d

• The Risk Adjusted Net Present Value (RANPV) of the project can be
determined following the steps below:

• Discount the expected cash flows at the risk adjusted discounting

rate of 10%.

• Sum the PVs of (discounted) expected cash flows.

• Deduct the initial investment outlay from the sum of the PVs of the
expected cash flows

RANPV=(9,500)(0.909)+(14,500)(0.8260)+(13,700)(0.751)+(16,500)
(0.683)-29,000

=8635.50 +11,977+10,288.70+11,269.50-29,000

=42,170.70-29,000

=13,170.70
 5.7 PROJECT PROPOSAL FORMULATION
INTRODUCTION

The success of a project is directly related to its success in solving the problem it was designed to

solve.

It is not only a question of doing things right but also doing right things- effectively, efficiently

and economically.

• Project formulation is a systematic and logical way of developing cost-effective solutions to

development problems. Furthermore, it tries to ensure that once the problem is solved, it

remains solved.

• A proposal is a request for financial assistance to implement a project. It is not just a

‘shopping list’ of things you want.

• A proposal must justify each item in the list of things you want, so that, say, a donor

agency can decide if it wants to provide some or all of those things.

• The project proposal must reflect the background work you have already done and should be

logically set out.

• It is not enough to write a letter stating your request. You have to demonstrate the need and
 5.7. 1. COMPONENTS OF A PROJECT PROPOSAL

• Before beginning to write a proposal, keep in mind the following points (Gizaw,

2003):

• Clarify the purpose of your project

• Define the scope of work to focus your funding search

• Determine the broad project goals, and then identify the specific objectives that

define how you will focus the work to accomplish those goals.

• Be aware that there are a number of grant making organizations, and which

• may be most appropriate for (likely to support) your project.

• Identify the requirements of the grant-making agency, and be certain that your

project fulfils them.

• Make certain that the resources you seek can be obtained from the grant making

organization that you contact

• Understand what is expected of you from the grant-making agency in exchange

 5.7.2. project proposal elements
1. PROPOSAL TITLE

• In choosing your proposal title, keep interest of your reader in mind. Make it

• persuasive, positive and one that will capture attention.

2. COVER LETTER

• The cover letter is important because it is the first piece of information about your

• proposal read by a funder. In writing the cover letter, you should:

• Quickly gain the reader attention

• Show why the particular agency should be interested in your proposal

• Convey the importance and urgency of your project

• Keep it short

• Make it look good

3. EXECUTIVE SUMMARY

• This section clearly and concisely summarizes the request. It should provide the reader

• with a framework that will help the funder visualize the project.
 .

4. ORGANIZATION INFORMATION/INTRODUCTION
• This part of the proposal describes the organization that seeks funding.
• It briefly summarizes the organization's history, mission, clients and track record
of achievement.
• It should also include current programs undergoing by the organization.
• If there are many or complex programs run by the organization, an organization
chart or other attachment that explain them could be added.
• Some background information about the location, how the organization is
managed and does work and other details that build the credibility of the
organization should be included in this part of the proposal, i.e. evaluation of your
program, letters of support and referring agents.
5. BACKGROUND /PROJECT CONTEXT
• This part of the project proposal gives some background information on the place
where the project is going to be located.
It could include the geographic and climatic information, political and administrative
scenario and socio-economic status, etc.
 6. PROBLEM/ NEED STATEMENT
• The problem/need statement or situation description is a key step in grant

proposal writing.

• It is where you convince the funder that the issue you want to tackle is

important and shows that your organization is an expert on the issue.

• In developing problem/ need statement:

• State the problem/need using facts and figures

• Use statistics that are clear and support your argument

• If possible use research and comparative statistics

• Don't assume the funder knows much about your subject area.

• Describe why this need/situation is important

• Describe your issue in as local a context as possible or organization focus.

 7. PROJECT GOALS AND OBJECTIVES
• The goal and objectives are the outcomes of the planned project and they answer the

question, “how would the situation look if it were changed?”

• A goal is a broad statement of the ultimate result of the change being undertaken.

• A result that is sometimes unreachable in the short term. Goals are often written for the

organization as part of a long-range planning process.

• An objective is a measurable, time-specific result that the organization expects to

accomplish as part of the grant. It is much more narrowly defined than a goal.

Like the goal, the objective is tied to the need statement.

• Good objective also answer the following five questions:

* When …… Time

* Where……. Plan of Action

* Who……. Client

* What …… Expected Outcome

* How much ……. Percentage problem is reduced

 8. PROJECT OUTPUTS
• Outputs are the results of project
activities (services made available,
infrastructure built, financial products,
human resources trained, etc) intended
to achieve the immediate objectives.
• Outputs are tangible and visible.
 9. ACTIVITIES
• Activities are the action taken to produce the outputs..

• Activities take place over time and are coordinated to

be complete by the date required

In the description of the output.

They are often expressed in the form of bar charts.

A planning calendar (possibly visualized) indicating the

beginning of each of the projects activities, their

sequencing and duration has to be included in most

project documents.
 10. INPUTS
• Inputs are the financial (budgets: specify if self-financed or externally- financed),

• martial (equipment, logistics) and human resources (project team, partner organization)

necessary for caring out the activities.

• It is necessary to indicate who is providing the inputs. Some donors require separate budgets

for each source of input.

• If the project is to be" sustainable ", capable of carrying on after the completion date of the

project, then the identification of key local resources is likely to be crucial to the

achievement of sustainability.

• Similarly, if the ultimate beneficiaries are, or include women and children, then making

provision for their involvement is an essential input.

• Make input requirements as detailed as possible and justify any specific requirements to

avoid, for example, unsatisfactory substitutions of equipment at a later stage.

• Use your imagination and make reasonable guess estimates rather than leave blanks.

• At least any one reviewing your document will have some idea of what you had in mind.

• A project proposal should be self-sufficient; there can be no guarantee that it will be

discussed with you before a decision is taken.

 11. ORGANIZATION AND ADMINISTRATION

• The project's internal organization as well as its

relations to partner organizations has to be
expressed in hierarchical and operational terms.
Are the collaborations with institutions or
individuals, permanent or occasional, contractual
or informal?
• Indicate where the project is located: headquarters
and/or decentralized units.
 12. MONITORING AND EVALUATION
• A proposal must include a plan for determining the degree to which

objectives are met and methods are followed.

• This section is extremely important as funder pay particular

attention to monitoring and evaluation methods since they need help

to determine whether a proposed project represents an intelligent

investment for them.

Depending on the size of the project, monitoring and evaluation could

include the following information:

• Who should monitor and evaluate?

• What to monitor and to evaluate?

• How to monitor and evaluate? And

 13. PHASE OUT STRATEGY AND SUSTAINABILITY

• Local institutions or communities who will takeover the

project have to be identified and indicated.

• Furthermore, if you continue this project in the future, how

will it be supported?

• This is a difficult question to answer effectively. Most funders

don't want to support the same set of project forever.

• What the funder really wants to see is that you

have a long-term vision and funding plan for the project.

This is important not only for the funder but the success of the
project of the organization.
 14. PROJECT BUDGET
• Budgets are cost projections, a window into how projects will be implemented

and managed.

• Well-planned budgets reflect carefully thought out projects. Attach a one or

two-page budget showing expected expenses and income for the project.

• Expenses:

• Personnel expenses

• Direct Project expenses

• Administrative or overhead expenses

• Income:

• Earned income

• Contributing income (cash and in kind)

 5.7.3. FINAL PROPOSAL CHECKLIST (Gizaw, 2003)
• Determine which project ideas have the best chance of being funded.
• Prepare the proposal components by stating the need or problem being

addressed, the objectives and methods to meet the need, how the
project will

be evaluated and funded in the future, and the budget.

• Prepare the final proposal components: the introduction, summary, and
cover

letter.
• Determine those features in the project that may set it apart from others
and will

appeal to the funder. Make sure those features are highlighted for the
funder.
• Include the appendices requested by the funder.
 VI - PROJECT FINANCING

• A Project finance is the process of required funds for

a capital investment proposal
Source of Finance
Source of Finance

Equity Capital Debt

E.g. Equity share or E.g. Debenture/bonds and
ordinary share term loans
 New Terms
• Share : represent ownership securities

• The person who purchases shares is shareholders

• Shareholders receives against their investment is dividend.

• Debenture ; represent creditor ship securities

• Debenture holders receive interest and principal

payment.
• Preference shares represent hybrid securities , The term
hybrid means dual thus, preference shareholders possess
dual characteristics.
 Share Capital

Share Capital: equity capital and preference

capital.
 Equity capital represents the contribution made by
the owners of business, the equity shareholders
 Preference capital represents the contribution
made by preference shareholders and the dividend
paid on it is generally fixed.
 Equity Capital
• Equity capital represents ownership capital as equity shareholders collectively

own the company.

• They enjoy the rewards and bear the risks of ownership. However, their

liability, is limited to their capital contributions.

• An equity shareholder has to undertake both profits and losses of the firm.

Their liability is limited to their contribution to equity capital.

Basic differences between equity and debt (loan)

Equity

• Equity shareholders have a residual claim on the income & the wealth of the

firm.

• Dividend paid to equity shareholders is not a tax deductible payment.

• Equity ordinarily has an indefinite life.

 Debt (Loan)
• Creditors (suppliers of debt) have a fixed claim
in the form of interest & principal payment

• Interest paid to creditors is a tax deductible

payment.

• Debt has a fixed maturity.

• Debt investors play a passive role-of course

they impose certain restrictions on the way the
firm is run to protect their interest
 ,

• Term loan: represents secured borrowing which a very important

source for financing new projects as well as the expansion,
modernization, and renovation schemes of existing firms.
• Debenture capital: instruments for raising debt capital.
Convertible debentures which are convertible, wholly or partly, into equity
share.
Non convertible debentures are straight debt instrument. Typically, they
carry a fixed rate of interest and have a maturity period of 5 to 9 years.
 Incentive source: the government and its agencies may provide
financial support
 Miscellaneous sources: a small portion of the project finance may come
from miscellaneous sources like unsecured loans, and leasing
 Key factors in determining the debt-equity ratio

• The key factors in determining the debt-equity ratio for a project are:

• Cost Nature of the assets

• Business risks Norms of lenders

• Control considerations Market conditions

Cost

Lenders require a lower rate of return compared to equity shareholders.

This advantage gets magnified when the firm pays taxes, because the

interest on debt is a tax deductible payment, however, is accompanied

by a higher degree of risk.

Debt is a cheaper but riskier source of finance, whereas equity is costlier

but safer source of finance.

 Nature of the Asset

• The nature of a firm’s assets has an important bearing

on its capital structure.

• If the assets are primarily tangible (plant, machinery &

buildings) and have a liquid resale secondary market,

debt finance is used more.

• If assets are primarily intangible (brands, and technical

know how) debt finance is used less.

• Lenders are more willing to lend against tangible

assets and less inclined to lend against tangible assets

 .
Business Risk

Business risk refers to the variability of earning power. It is influenced by:

• Demand variability: other things being equal, the higher the variability

of the demand for the products manufactured by the firm, the higher is

its business risk.

• Price variability: A project which is exposed to a higher degree of

volatility for the prices of its products is, characterized by a higher

degree of business risk in comparison with similar firms which are

exposed to a lesser degree of volatility for the prices of their products

• Proportion of fixed operating costs: if fixed costs represent a

substantial proportion of total cost, other things being equal, business

risk is likely to be high. That is because when fixed costs are high PBIT is

more sensitive to variations in demand

 Total debt equity ratio

• As a general rule, there should be a mix of debt and equity

• Total debt to Net worth of 1:1 is considered satisfactory, although there is no rule

of thumb.

• In some businesses, a high ratio 2:1 or even more may be considered satisfactory,

say, for example in the case of contractor’s business. It all depends upon the financial

policy of the firm and nature of business.

• Generally speaking, the long-term creditors welcome a low ratio as owners’ funds provide

the necessary cushion to them, in the event of liquidation.

• It is a better approach to compare the DE ratio of the firm with that of the industry to

which it belongs to for proper comparison.

• Every industry has its own peculiar characteristics relating to capital requirements.

• For example, in case of basic and heavy industries, the DE ratio is always higher compared

to manufacturing concerns.

• Total debt ratio = Total Debt / Total asset(debt +equity)

 Advantages of Equity Capital
• In case of shortage of cash, a firm is not compelled to pay
dividends. There is no legal prohibition against skipping equity
dividends.
• It is not necessary for a firm to redeem equity capital, as it has no
maturity date.
• Equity capital adds to the credit worthiness of the company as a
result of its flexible previsions. The ability of a firm to raise debt
finance on favorable terms is directly proportional to the size of
its equity base.
Disadvantages of Equity Capital
• Both, the cost of raising equity capital & the returns demanded by
equity investors, are very high.
• The control of the existing owners of the firms is weakened by
the sale of equity shares to outsiders.
 Checklist
• When should a project use more equity and when should a
project use more debt. Here is a checklist.
Use more Equity when
• The tax rate applicable is negligible .Business risk exposure is high
• Dilution of control is not an important issue
• The assets of the project are mostly intangible
• The project has many valuable growth options
• Use more Debt when
• The tax rate applicable is high , Business risk exposure is low
• Dilution of control is an issue
• The assets of the projects are mostly tangible
• The project has few growth options
 Advantage & Disadvantages of Debt Financing

Advantage

• Interest on debt is a tax-deductible expense, whereas equity dividends are

paid out of profit after tax.

• Debt holders do not partake in the value created by the company as

payments to them are limited to interest & principal.

• Issue costs of debt are significantly lower than those on equity capital.

Disadvantages

• Debt financing entails fixed interest and principal repayment obligations.

Failure to meet these commitments can cause a great deal of financial

embarrassment & even lead to bankruptcy.

• Debt contracts impose restrictions that limit the borrowing firm’s financial

and operating flexibility. This restriction may impair the borrowing firm’s
 Leasing Finance
• Leasing is a supplementary form of debt finance.

• Lease represents a contractual agreement whereby the lessee

grants the lessee the right to use an asset in return for periodic

lease rental payments.

• A lease agreement is a contract between two parties, the

lessor (owner) and the lessee (user).

• While leasing of land buildings, and animals has been known from

times immemorial, the leasing of industrial equipments is a

relatively recent phenomenon.

• A finance lease or capital lease is essentially a form of borrowing.

 Its salient features are:
.

• It is an immediate term to a long term non-cancellable arrangement.

• During the initial lease period, referred to as the primary lease period,

which is usually three years, five years or eight years, the lease can’t be

cancelled.

• The lease is more or less fully amortized during the primary lease period.

• This means that during this period, the lesser recovers, through the lease

rentals, his investment in the equipment along with an acceptable rate of

return.

• The lease is responsible for maintenance, insurance, and taxes.

• An operating lease can be defined as any lease other then a finance lease
 6.2 Cost of Capital-overview

Cost of Capital - The return the firm’s investors could expect to earn

if they invested in securities with comparable degrees of risk

• It is the average rate of return required by the investors who

provide capital to the company.

• It is the company’s cost of capital that is used as the discount rate

in the investment appraisal process.

• It is used for evaluating investment projects ,for determining the

capital structure, for assess in leasing proposals ,for setting the

rates that regulated organizations.

• Most firms raise capital with a combination of debt, equity, and

hybrid securities
 .

• The minimum return expected from the project

is its cost of capital.
• The minimum return expected by the investors
depends upon their risk perception as well as risk-
return characteristics of the firm.
• It is a cut off rate. If the return is above or equal to
the cut-off rate, then only investment is made. If the
return is below the cut-off rate, no investment is
made.
To achieve the objective of wealth maximization, the
 Cost of Debt
• The company has to spend a certain amount on debt
capital also in the form of interest payment and
principal repayment . This is known as cost of debt.

Debt Issued at Par

• Debt issued at par means, debt is issued at the face
value of the debt.
• It may be calculated with the help of the following
formula

• After-tax cost of debt =rd(1−t)R

• Where,
• rd= Cost of debt capital
• t = Tax rate
• R = Debenture interest rate
 If Debt Issued at Premium or Discount

• If the debt is issued at premium or discount,

the cost of debt is calculated with the help of
the following formula

i
rd = /Np(1-t)

Where,
Rd = Cost of debt capital
i = Annual interest payable
Np = Net proceeds of debenture
t = Tax rate
 .
• A Company issues Br 100,000, 8%
debentures at par. The tax rate applicable
to the company is 50%. Compute the cost
of debt capital
• 8,000/100,000 * (1-0.5)

• 8,000/100,000 *0.5

• rd = 4%
 Cost of Equity

Equity finance may be obtained in two ways:

Retention of earnings & issue of additional equity

Cost of issuing equity, administrative cost, agency

cost, dividend distribution cost, & other related

costs constitute the cost of equity.

• There are two major methods for determining the

cost of equity

 Dividend growth model


 The SML Approach

Many financial managers prefer the capital asset pricing model

(CAPM) - or security market line (SML) - approach for estimating

the cost of equity

According to SML , the required return on a company’s equity is :

rE =Rf +ßE (E(RM)-Rf)

rE=required return on the equity of the company

Rf =risk –free rate ,

ße =beta of the equity of company,

E(RM) =expected return on the market portfolio

 Illustration of SML
• Let us assume that Rf=10% and E(Rm)=18%

• The required return on equity stocks of

companies with different betas is given as

flows

• Beta Required return =Rf+ße E(RM)-(Rf)

• 0.5 10 +0.5 (18-10)= 14%

• 1.0 10+1.0 (18-10) =18%

• 1.5 10+ 1.5 (18-10) =22%

 The Dividend Growth Model Approach
• Estimating the cost of equity: the dividend growth
model approach
• The model assumes for simplicity that dividends will
grow at a constant rate g
• E(Ri)= D1 +g
• Pi

E(Ri) = the expected return on share i given its risk

D1 =Dividend expected in year 1 on share i
Pi = current price of share i
g = expected constant annual growth rate of share i’s dividends
g= (retention rate)(return on equity ).
For example, if the forecasted retention rate and return on equity
are 0.60 and 15% ,the expected growth rate is =(.60)
(15%)=9%
 Example: Estimating the Dividend Growth
Rate
Year Dividend Dollar Change Percentage Change

1990 $4.00 - -
1991 4.40 $0.40 10.00%
1992 4.75 0.35 7.95
1993 5.25 0.50 10.53
1994 5.65 0.40 7.62

Average Growth Rate

(10.00 + 7.95 + 10.53 + 7.62)/4 = 9.025%
 Average Cost of Capital

• A company’s cost of capital is the weighted average cost of various sources of

finance used by it ,viz. equity ,preference, and debt.

• Equity capital represents the contribution made by owners of the business, who

enjoy the rewards and bear risk, but not carried fixed dividend rate

• Preference capital represent the contribution made by reference shareholders

and dividend paid is fixed

• Suppose that a company uses equity, preference, and debt in the following

proportion : 50,10, and 40.

• If the component costs of equity , preference, and debt are 16%,12% and 8 %

respectively, the weighted average cost of capital (WACC)will be:

• WACC=(Proportion of equity) (cost of equity)+(proportion of preference )( cost of

preference ) +(proportion of debt ) (cost of debt )

=(0.5)(16) +(0.10) (12) +(0.4 )(8)=12.4%

 Weighted Average Cost of Capital (WACC)
• WACC weights the cost of equity and the cost of debt by
the percentage of each used in a firm’s capital structure
• WCC is:
• Ro = D *rd(1-T) + E *Re
• (D+E) (D+E)

• Where
• Ro =WACC
• D = Total debt
• E = Shareholders’ equity
• rd = cost of debt
• Re = cost of equity
• T = Corporate tax rate
 .

• A firm’s overall cost of capital must reflect

the required return on the firm’s assets as a
whole

• If a firm uses both debt and equity financing,

the cost of capital must include the cost of
each, weighted to proportion of each (debt
and equity) in the firm’s capital structure
 .

• WACC will reflect what a firm needs to earn on a new

investment.

• But the new investment should also reflect a risk level

similar to the firm’s Beta used to calculate the firm’s R E

• A firm’s overall cost of capital must reflect the required

return on the firm’s assets as a whole

• If a firm uses both debt and equity financing, the cost of

capital must include the cost of each, weighted to
proportion of each (debt and equity) in the firm’s capital
structure

• This is called the Weighted Average Cost of Capital (WACC

 6.3 Financing Institutions

Definition

• A financial institution is an institution which collects funds

from the public and places them in financial assets ,such

as deposits , loans, and bonds rather than tangible

property.

Financial institutions (also called financial

intermediaries) facilitate flows of funds from savers to

borrowers

• Financial institutions permit the flow of funds between

borrowers and lenders by facilitating financial transactions

 Categories of financial institutions

1. Institutions may be categorized by differences in the

sources and uses of funds

1. Depository financial institutions

2. Investment banks
3. Contractual savings institutions
4. Finance companies
 Depository financial institutions

• Attract savings from depositors and

investors to provide loan facilities to
borrowers
– Commercial banks
– Building societies
– Credit unions
 Investment banks

• Mainly provide off-balance-sheet (OBS)

transactions to corporations and

government
– Advice on mergers and acquisitions, portfolio
restructuring, finance and risk management

• Provide some funding

 Contractual savings institutions

• The liabilities of these institutions are

contracts that specify, in return for
periodic payments to the institution,
the institution will make payments to
the contract holders if a specified
event occurs
– Life and general insurance ccompanies
 Finance companies

• Funds are raised by issuing financial

securities direct into money markets
and capital markets
• Funds are used to make loans to
ultimate borrowers
 .

• Development banks are specialized public and private

financial intermediaries that provide medium- and long-

term credit for development projects
• Microfinance institutions (MFIs)
– Microfinance provides financial services to people otherwise with no
access or only with very unfavorable terms.

– Includes microcredit, microsavings, and microinsurance

– Primary focus: very small loans for microenterprises

– Microcredit often uses group lending schemes (joint liability)

– Provides “collateral of peer pressure” to jointly repay

– An alternative without joint liability: “dynamic incentives,” in which loan

sizes steadily increase when loans are repaid

– Other alternatives to joint liability

 Project work (30%)
• Suppose you need to launch a new project and while you are identifying projects you generate five

project ideas. Select one project idea among the alternatives.

Required procedures

Phase one : project identification and preliminary screening phase

1. Explain how you obtain these project ideas and list down the alternatives

2. Select two projects using project rating index.

Phase two : Feasibility study

Select one prominent project by Undertake a thoroughly feasibility study based on :

 Market and demand analysis (Conduct survey, use different methods of demand forecasting)

 Technical analysis(Raw materials, location and site, environmental impact, production program,

technology and HR

 Financial analysis (cost of project, financial appraisal)

 SCBA (UNIDO and L.M approach

 Risk analysis

Phase three : Identifying source of finance for the selected project

4. Indicate your source of finance for the project and show the Debt equity ratio.
CHAPTER V11 – PROJECT IMPLEMENTATION PLAN , ORGANIZING , MONITORING , EVLAUATION& REPORTING

7.1. Project planning

 Project planning can be defined as preparing a predetermined flow of

action within a pre-assumed environment

 Project planning need is much greater for project work than for

normal operations.

• Project planning provides a basis for organizing the work on the project

and allocating responsibilities to individuals.

• It is a means of communication and coordination between all those

involved in the project.

• It induces people to look ahead.

• It instills a sense of urgency and time consciousness.

 .
• A comprehensive project planning covers
the following areas (Chandra, 2006; I 2007;
Pearce and Robinson, 2001):
a) Planning the project work- the activities relating to the
project must be spelt out in detail. They should be properly
scheduled and sequenced.
b) Planning the manpower and organization- the manpower
required for the project must be estimated and the
responsibility for carrying out the project work must be
allocated.
c) Planning the money- the expenditure of money in a time-
phased manner
must be budgeted.
d) Planning the information system- the information
required for monitoring the project must be defined.
 6.2. Project objectives and policies
• The focus in the process of project planning is on giving

answers to questions like who does, what, and when.

• The objectives & policies guiding the project planning

exercise must be articulated before doing such operational

planning.

• Primarily, the following questions should be adequately

answered:

– What are the technical & performance objectives?

– What are the time & cost goals?

– To what extent should the work be given to outside contractors?
– How many contractors should be employed?
– What should be the terms of contract?
 .

• Well-defined objectives & policies serve as the

framework for the decisions to be made by the

project manager (PM).

– The PM has to seek a compromise between the

conflicting goals of technical performance, cost

standards, and time targets throughout the life

of the project.

– A clear articulation of the priorities of management

will enable the project manager to take expeditious

 7.3. Work breakdown structure (wbs)

• WBS is an important concept that the project analyst needs

to comprehend as well as use in the process of implementation

planning.

• Represents a systematic & logical approach of breaking down

the project as a whole into its component parts.

– WBS is constructed by dividing the project into its major parts.

– Each of these major parts are further divided into sub-parts.

– The process will continue until a breakdown is done in terms of

manageable units of work for which responsibility can be

defined.
 Work breakdown structure (WBS) enhances :

– Effectiveness of planning by dividing the work into manageable

elements that can be planned, budgeted, and controlled.

– Assignment of responsibility for work elements to project

personnel & outside agencies.

– Development of control & information system.

• The project organization formally represents how the project

personnel & outside agencies are going to work.

– WBS defines works to be done in a detailed manner.

• To assign responsibility for tasks, WBS has to be integrated

with the project’s organization structure

 7.4 The process of project planning

The project plan includes:

1. Environmental analysis (Internal , External & Competitive

environment)

2. The objectives & scope are defined

3. Develop project plan ( outlining the activities, tasks, & timeframe)

4. Develop resource plan

Types of resources ( labor, equipment & materials)

Total quantities of each resource type

Roles , responsibilities & skill-sets of all human resources

Items, & Specifications of all equipment resource

Items & quantities of material resource

 5. Developing Financial plan

• A financial plan is prepared to identify the quantity of money required for each stage in the

project the total cost of labor ,equipment & materials is quantified and an expense

schedule is defined which provides the project manager with an understanding of the

forecast spending vs. the actual spending throughout the project

6. Develop quality plan

• Meeting the quality expectation of the customer is critical to the success of the

project .To ensure that the quality expectations are clearly defined and can reasonably be

achieved, a quality plan documented the quality plan Defines what quality means in terms

of this project

• Lists clear & unambiguous quality targets for each deliverable. Each quality target provides

a set of criteria & standards which must be achieved to meet the expectation of the

customer

• Outlines a plan of activities which will assure the customer that the quality targets will be

met (i.e. a quality assurance plan )

• Identifies the techniques used to control the actual level of quality of each deliverable as it
 7. Develop risk plan

• The foreseeable project risks are then documented with

in a risk plan and a set of action to be taken formulated
to both prevent each risk from occurring & reduce the
impact of the risk should it eventuate, developing a clear
risk plan is an important activity within the planning
phase as it is necessary to mitigate all critical project
risk prior to entering the execution phase of the project
• Avoid, walk away from the cliff

• Mitigate

• Transfer

• Accept
 8. Develop communication plan

• The communication plan identifies the types of information to be distributed, the

methods of distributing information to the stakeholders, the frequency of

distributing & responsibility of each person in the project team for distributing

information regularly to stakeholders

9. Develop procurement plan

• The procurement plan provides a detailed description of the products ( i.e goods

& services) to be procured from suppliers

10. Monitoring ,controlling ,evaluation & repoting

• Monitoring is collection, recording, and reporting of information
• Control uses monitored information to align actual performance with the
plan

• Monitoring is a continuous process that aims primarily to provide

project management and give the main stakeholders early

indications of progress or lack of progress towards achieving

 .

Purpose of control
Purpose is to correct errors, not punish the guilty
Be careful not emphasize short-run results at the
expense of long-run objectives

Evaluation is a time-bound exercise that attempts to assess the

relevance, performance and success of current or completed
projects, systematically and objectives.

• A project evaluation appraises the progress and performance

relative to the project’s initial or revised plan.
• Also appraises project against goals and objectives set for it
during selection process.
• Projects should be evaluated at a number of crucial points.

• Purpose is to improve process of carrying out project.

 .
• Evaluation Criteria
• Original criteria for selecting and funding project
• Success to date
• Business/Direct Success
• Future Potential
• Contribution to Organization’s Goals
• Contribution to Team Member Objectives
Measurement
• Measuring performance against planned budgets and schedules
straightforward

11. Project closing plan

• A project , like any other event, must have a full stop.
The end of a project can be planned.
 Elements of Project
• Overview
Planning(alternatives)
– brief description of project
– deliverables
– milestones
– expected profitability and competitive impact
• Objectives
– detailed description of project’s deliverables
• project mission statement
• General approach
– technical and managerial approaches
– relationship to other projects
– deviations from standard practices
• Contractual aspects
– agreements with clients and third parties
– reporting requirements
– technical specifications
– project review dates
 Cont’d
• Evaluation methods
– evaluation procedures and standards
– procedures for monitoring, collecting, and storing
data on project performance
• Potential problems
 list of likely potential problems
 7.5. Tools of implementing plan

• Effective & balanced timing of the delivery of various

input requirements must be established by accurate

project scheduling.

• There are different tools used for implementation

planning (scheduling).

• Commonly used tools of planning/scheduling:

– Bar Chart

– Network Techniques
 1. Bar chart/Gantt chart
• The oldest formal planning tool: simple but popular.
• It is also called the multiple activity chart.

– Divides project implementation into time phased activities & shows the
duration of each activity.

– A pictorial device in which the activities are represented by horizontal

bars on the time axis.
• The Bar Chart exhibits the following features:

– The left-hand end of the bar shows the beginning time and the right-hand
end the ending time.

– Length of the bar indicates duration of the activity.

– Manpower required for the activity is shown by a number on the bar

 Bar chart/Gantt chart
Activities Manpower Time in weeks from the starting of a project
required 10 20 30 40 50 60 70 80

Company 3
formation
Financial 2
planning
Organization 5
al build up
Technology 4
acquisition &
transfer
Acquisition 2
of land
 .
• The implementation plans (or schedule) normally
prepared in 3 steps:

1. Determine the logical sequence of events in implementation.

2. Analyze how specific tasks are to be undertaken.

3. Analyze the work content of each sub-task to determine how much time it takes

to complete individual sub-tasks.

The description of each task should include the following items:

 Work to be done
 Resources needed
 Time required to complete the task
 Responsibility for the task
 Information inputs required for the task
 Results to be produced
 .

• Advantages of the Bar Chart:

– It is simple to understand

– It can be used to show progress

– It can be used for manpower planning

• The bar chart suffers from some disadvantages, which limits its

usefulness

• It cannot show the interrelationships among activities on large

(and complex) projects.

– There may be a physical limit to the size of the bar chart (this may

limit the size of the project that can be planned with this

technique).
 2. Network techniques

• More sophisticated than the traditional bar chart.

• Represent the activities, events, and their
interrelationships by a network diagram.

 Network diagram is also called an arrow diagram.

The two common types are:

1. Critical path method (CPM)

2. Program Evaluation and Review

Technique (PERT)
1. Critical path method (CPM)

 CPM is used where the project term

regards the time estimates for task

completion as being very sound.
 Deterministic task times

 Activity-on-node network

construction
 Repetitive nature of jobs
Program evaluation and Review Technique
(PERT)

 PERT makes an attempt to apply rational

scheduling techniques to complex project.
 Multiple task time estimates (pessimistic,
most likely and optimistic
 Activity-on-arrow network construction
 Non-repetitive jobs (R & D work)
 .

 Use of nodes and arrows

Arrows  An arrow leads from tail to head directionally

 Indicate ACTIVITY, a time consuming effort that is required to

perform a part of the work.

Nodes  A node is represented by a circle

- Indicate EVENT, a point in time where one or more activities start

and/or finish.
• Activity
– A task or a certain amount of work required in the project

– Requires time to complete

– Represented by an arrow

• Dummy Activity
– Indicates only precedence relationships

– Does not require any time or effort

 CPM calculation
• Path
– A connected sequence of activities leading from
the starting event to the ending event

• Critical Path
– The longest path (time); determines the project
duration

• Critical Activities
– All of the activities that make up the critical
path
 Project Network for House

• 3
• Lay • Dumm
foundatio y
n
• 2 • 0 • Build • Finis
house h
• 3 • 1 work
• 1 • 2 • 4 •
• 6 •
• 7
3 1
• Design • Order
house and and • 1 • 1
obtain receive • Select • Select
financing material paint carpet
s
• 5
 Example- A simple network
• List of four activities for developing a
simple product:

Activity Description Immediate

predecessors
A Buy Plastic Body -
B Design Component -
C Make Component B
D Assemble product A,C
 Sequence of activities
• Project can start work on activities A and B
anytime, since neither of these activities depends
upon the completion of prior activities.
• Activity C cannot be started until activity B has
been completed
• Activity D cannot be started until both activities A
and C have been completed.
• The graphical representation (next slide) is referred
to as the PERT/CPM network
 Network of Four Activities
Network of Four Activities
. Arcs indicate project activities

A D
1 3 4

B C

Nodes correspond to the

beginning and ending of
activities

417
 .

• Develop
. the network for a project with following
activities and immediate predecessors:
Activity Immediate
predecessors
A -
B -
C B
D A, C
E C
F C
G D,E,F
 .

• .

Network of Seven Activities

A D
1 3 4 G
7
E
dummy
B

C 5 F

2 6
 .

• Dummy activity is used to identify

precedence relationships correctly and
to eliminate possible confusion of two
or more activities having the same
starting and ending nodes.
• Dummy activities have no resources
(time, labor, machinery, etc) – purpose
is to PRESERVE LOGIC of the network
 .
Scheduling with activity time

• Activity
. Immediate
Completion
predecessors Time
(week)
A - 5
B - 6
C A 4
D A 3
E A 1
F E 4
G D,F 14
H B,C 12
I
This information G,Htime required to complete
indicates that the total 2
activities is 51 weeks. However, we can seeTotal ……
from the 51that
network
several of the activities can be conducted simultaneously (A and B, for
example).
 .
Earliest start & earliest finish time

• We are interested in the longest path through the network, i.e.,

the critical path.

• Starting at the network’s origin (node 1) and using a starting

time of 0, we compute an earliest start (ES) and earliest finish
(EF) time for each activity in the network.

• The expression EF = ES + t can be used to find the earliest

finish time for a given activity.

• Eg: For activity A, ES = 0 and t = 5; thus the earliest finish

time for activity A is

• EF = 0 + 5 = 5

• Arc with ES & EF time

 .

• .

EF = earliest finish
time
ES = earliest start
time
Activity

2
[ 0,5]
A
5
1
t = expected activity
time
 .

• .
Network with ES & EF time
D[5,8]
2 5
3
E[ 1 0]
,

G[1 4
5,6 6
F[
]

1 ]
5 ,5

0, 2
1
7
0
A[

26]

4
C[5,9]

4 4,

]
2
4

I[
2
1 6
B[0
,6 [ 9,21]
6 ] H
12
3
Earliest start time rule: ES for an activity leaving a particular node
is equal to the largest of EF for all activities entering the node.
• . .
Activity, duration, ES, EF, LS, LF

EF = earliest finish
time
ES = earliest start
time
Activity

3
[ 5,9 ]
C
[ 8 ,12]
4
2
LF = latest finish
LS = latest start time
time
 Latest start & latest finish time
• To find the critical path we need a backward pass

calculation.

• Starting at the completion point (node 7) and using a

latest finish time (LF) of 26 for activity I, we trace back

through the network computing a latest start (LS) and

latest finish time for each activity

• The expression LS = LF – t can be used to calculate latest

start time for each activity. For example, for activity I, LF =

26 and t = 2, thus the latest start time for activity I is

• LS = 26
 Network with LS & LF time

• . D[5,8]
2 5
3[7,10]
0]

G[1 10,24
E[ 1

14[
1[5 5,6] [ 6, 10]

0, 2 ]
F 6,
5[ 0,5]

,6]
4[ 7
5]

4]
A[
0,

4 2 4,26]
C[5,9]

I [
4[8,12]

4 , 2 6]
2[2
1 6
B[0 , 2 1] ]
9 4
6[6 ,6] H[ 12,2
, 12 [
] 12
3

Latest finish time rule: The LF for an activity entering a

particular node is equal to the smallest of the latest start
times for all activities leaving the node.
 .

• Network techniques are superior tools for

implementation planning.
– More complicated than the traditional bar chart
 Advantages of Network Techniques
• They can effectively handle interrelationships among project

activities.

– They identify the activities that are critical to the completion of the

project on time.

– Indicate the float (spare time) for other activities.

– They can handle very large & complex projects.

– They can be easily computerized & updated.

• Network techniques still suffer from several drawbacks…

Limitations

– Not easily understood by the project personnel.

– They do not define an operational schedule that tells who does,

what, and when.

 Forms of project organization
There are different forms of organization.

1. Line & staff organization

2. Divisional organization

3. Matrix organization

• Which form of organization is suitable for project

management?

– There is consensus regarding the fact that the traditional (line &

staff) form of organization is not suitable for project

management.

– The divisional organization is a very strong form of project

organization.
 .

• The reason rests on the nature of projects.

– A project is a non-routine, non-repetitive undertaking often

plagued with many uncertainties.

– The relationships in a project setting are dynamic,

temporary, and flexible.

– A project requires a coordination of the efforts of persons

drawn from different functional areas in the organization

as well as contributions of external agencies.

Project management calls for a different form of organization,

sharper tools of planning & control, and improved means of

coping with human problems.

 The traditional form of Organization

• The traditional form of Organization characterized by a

continuous flow of repetitive work, with each department

attending to its specific functions, is not suitable for project work for

the following reasons:

• It has no means of integrating different departments at levels below

the top management and It does not facilitate effective

communication, coordination, and control when several functional

departments, with different professional backgrounds and

orientations are involved in project work under time and cost

pressures, which often call for overlap, at least partial, of

development, design, procurement, construction, and commissioning

 .

• Hence there is a need for entrusting an individual (or

group) with the responsibility for integrating the
activities and functions of various departments and
external organizations involved in the project work.
Such an individual may be called the project
manager or project coordinator.
• Depending on the authority that is given to the
project manager/coordinator, the project organization
may take one of the following three forms
 a) Line and Staff Organization
• A person is appointed with the primary responsibility of coordinating the work of

the people in the functional departments. He/she acts in a staff position to

facilitate the coordination of line management in functional departments.

• The project coordinator does not have authority and direct responsibility of line

management. He/she serves as a focal point for receiving project related

information and seeks to promote the cause of the project by rendering advice,

sharing information, and providing assistance.

He may gently coax line executives to strive for the fulfillment of project goals.

Deprived of formal organizational authority, he/she may find it difficult to exert

leadership and feel unsure of his role.

This type of organization is usually not suitable for large projects. However, it is

conducive to an efficient use of resources but is not suitable for an

effective realization of project objectives

 b) Divisional Organization
• A separate division is set up to implement the project. Headed by the

project manager, this division has its complement of personnel over whom

the project manager has full line authority. It implies the creation of a

separate goal oriented division of the company, with its own functional

departments.

• While the project manager still has the problem of coordinating the

inputs of other organizations involved in the project, he/she has total

formal control over the division he/she heads.

• However, it is suitable for an effective realization of project

objectives but is not conducive to an efficient use of resources.

 c) Matrix Organization
• It seeks to achieve the twin objectives of efficient resource

utilization and effective realization of project objectives, at the

cost of greater organizational complexity.

• The project manager integrates the contributions of personnel in

various functional departments toward the realization of project

objectives.

The personnel working on the project have a responsibility to their

functional superior as well as to the project manager.

It seems to be a better vehicle for the simultaneous pursuit of the

twin objectives, i.e., efficient utilization of resources and effective

attainment of project objectives.

 7.7 . Human aspect of project management
• A satisfactory human relations system is essential for the successful execution of

a project.

• Without such a system, the other systems of project management (whatsoever

sound they may be) are not likely to work well.

– Technical problems can often be solved with additional investment of resources.

– People’s problems may not be adequately solved in the short span of the project

life.

• To achieve satisfactory human relations in the project setting, the PM

must successfully handle problems & challenges relating to:

• Authority

• Orientation

• Motivation

• Group Functioning
 Authority
• The activities of the project manager cut across functional lines of
command (functional organization).

– The PM lacks the desired formal authority over project-related personnel.

– Yet has to coordinate the efforts of various functional groups (within the
organization) & outside agencies The PM often has formal control
emanating from contracts & agreements over the outside agencies
involved in the project.

– He has to control with split authority & dual subordination in his own organization,
however.
• As the PM works largely with professionals & supervisory personnel, the basis of
the authority would be different from that found in simple superiorsubordinate
relationships.
• For exercising leadership & influence over professional people, the PM has to:
– Explain the logic & rationale for the project activities.
 .

• Show receptivity to the suggestions made by others.

– Avoid unilateral imposition of decisions.

– Avoid dogmatic postures.

– Search for areas of agreement which can be the basis of

acceptable solutions.

• The project manager's effective authority would

stem from his/her:

– Ability to develop a rapport (or relationship) with the project

personnel.

– Skill in resolving conflicts among various people working on

the project
 7.8 Prerequisites for successful implementation

• Time & cost over-runs of projects are very common in

developing countries (particularly in the public sector).

• Due to such time & cost overruns:

– Projects tend to become uneconomical.

– Resources not available to support other projects.

– Economic development adversely affected.

• What can be done to minimize time & cost overruns and improve the

prospects of the successful completion of projects?

1. Adequate formulation
2. Sound project organization Proper implementation planning
3. Advance action
4. Timely availability of funds
5. Careful equipment tendering and procurement
6. Better contract management
7. Effective monitoring
 1. Adequate Formulation
• Project formulation is often deficient because of
one or more of the following shortcomings:
– Superficial field investigation
– Hurried assessment of input requirements
• Slipshod (careless) methods used for estimating costs &benefits
– Omission of project linkages
– Flawed judgments because of lack of experience & expertise
– Undue hurry to get started
– Deliberate over-estimation of benefits and underestimation of
costs, etc
• Care must be taken to avoid these deficiencies.
– Ensure that the formulation and appraisal of the project is thorough, adequate,
and meaningful
 2. Sound Project Organization
• A sound organization is critical for successfully

implementing a project.

• The following are the characteristics of a sound project

organization:

1. It is led by a competent leader who is accountable for the

project performance.

2. The authority of the project leader & his team is

commensurate with their responsibility.

3. Adequate attention paid to the human side of the project.

4. Systems & methods are clearly defined.

 3. Proper Implementation Planning
Prepare detailed implementation planning before commencing the

actual implementation.

I. Develop a comprehensive time plan for various activities like

land acquisition, tender evaluation, recruitment of personnel,

construction of buildings, erection of plant, arrangement for utilities,

trial production run, etc.

II. Estimate meticulously the resource requirements

III. (manpower, materials, money, etc) for each period to realize the

time plan.

IV. Define properly the inter-linkages between various activities of

the project.

V. Specify cost standards

 4. Advance Action:
• When the project appears prima facie viable/desirable,

• initiate advance action in the following areas:

 Acquisition of land

 Securing essential clearances

 Identifying technical collaborators/consultants

 Arranging for infrastructure facilities

 Preliminary design & engineering

 Calling of tenders
 5. Timely Availability of Funds:
• Adequate funds must be made available once a project is approved to

meet its requirements as per the implementation plan.

– Desirable to have funds even before the final approval to initiate advance action.

– Piecemeal, ad-hoc, and niggardly (ungenerous) allocation, with undue rigidities, can

impair the manoeuvrability of the project team.

• Firms having a comfortable liquidity position generally are able to

implement projects expeditiously & economically b/c such firms:

– Can initiate advance actions vigorously

– Negotiate with suppliers & contractors aggressively Organize input supplies quickly

– Take advantages of opportunities to effect-economies

– Support suppliers in resolving their problems

• These contribute to the successful completion of projects and sustain the

morale of project-related personnel at a high level

 6. Judicious Equipment Tendering and
Procurement

• To minimize time over-runs, it may appear that a turnkey

contract has obvious advantages.

– Such contracts are likely to be bagged (taken) by foreign

suppliers when global tenders are floated.

Questions:
– How much should we depend on foreign suppliers?
– How much should we rely on indigenous suppliers?

• Over-dependence on foreign suppliers:

– Seems advantageous from time & cost perspectives.
– May result considerable outflow of foreign exchange.
– Inadequate incentive for the development of indigenous
technology & capacity.
 .
• Over-reliance on indigenous suppliers:

• May mean delay & higher uncertainty about the technical

performance of the project.

• A judicious balance must be sought that:

– Moderates the outflow of foreign exchange, and

– Provides reasonable impulse (or fillip) to the development of

indigenous technology.

• The number of contract packages should be kept to a

minimum in order to ensure effective coordination

 7. Better (Proper) Contract management
• This is also critical to successful implementation.

– Reason: a substantial portion of a project is typically executed through

contracts.

• The competence & capability of all the contractors must be ensured.

One weak-link can jeopardize the timely

• Proper discipline must be inculcated among contractors & suppliers by

insisting that they should develop realistic & detailed resource and time

plans which are congruent with the project plan.

– Penalties must be imposed for failure to meet contractual obligations.

– Incentives may be offered for good performance.

• Help should be extended to contractors & suppliers when they have

genuine problems.

– Contractors & suppliers should be regarded as partners in a common pursuit

 8. Effective Monitoring
• A system of monitoring must be established to follow-up the progress

of the project which helps in:

– Anticipating deviations from implementation plan

– Analyzing emerging problems

– Taking corrective action

Considerations when developing monitoring system:

– It should focus sharply on the critical aspects of project implementation It must lay

more emphasis on physical milestones and not on financial targets.

– It must be kept relatively simple.

• May lead to redundant paper work & diversion of resources if the system is

overcomplicated.

• Monitoring may be viewed as an end in itself rather than as a means to

implement the project successfully

 .

Project plan failures are mostly caused by

(Choudhury, 1988; Joy, 1994):

• Lack of integration in both planning and

implementation efforts,
• Absence of commitment on the part of people
engaged on implementation, and
• Non-involvement by the top management and
administrative ministries in the monitoring of projects
and in trouble-shooting
 .

• To attain success requires planning, implementing, and controlling the

project through integration, commitment, and involvement. The

ultimate objective of planning is timely and economical

implementation.

• Planning is the formation of a detailed scheme for proper

arrangement of the necessary action steps and means for achieving

the project objectives. The planning exercise should be guided initially

by the overall time schedule and cost estimate given in the Detailed

Project Report (DPR).

• In the planning stage, the project is broken-down in to many

manageable elements, fixed in to a time frame with in the overall time

schedule, with an allotment of resources with in the overall project cost,

and released for execution

 .

• An achievable realistic plan fitting in with the overall

project time and project cost is the essential requirement
for a project’s success. Performance guidelines and a
controlling system to evaluate and modify the
performance as required shall form part of the plan.

• Between (i) the formulations of preliminary plan in the

DPR stage and (ii) the finalization of plan for
implementation, the plan has to be subjected to
‘iterations’ for a possible reformation of the preliminary
plan
 Reporting
• Reports
– Project Status Reports
– Time/Cost Reports
– Variance Reports

• Not all stakeholders need to receive same

information
• Relationship between project’s information
system and overall organization’s information
system
 Summary of the project cycle
Phas Project Situation analysis
e 1: identification Identification and idea generation
Preliminary screening
Phase Project Feasibility study
2: formulation Project implementation planning
and
preparation

Phase Project Project implementation to achieve

3: implementation projects
objectives/results
Project sustainability ascertained
Monitoring and reporting
Risk assessment and management
Phase Evaluation Mid-course evaluation for amendments
4: and improvements
End of the project evaluation
Generation of lessons learned
 The Project Final Report
• Project Performance
– what was achieved and reasons for resulting
performance
• Administrative Performance
– review of how well administrative practices worked
• Organizational Structure
– identify modifications to help future projects
• Project Management Techniques
– recommendations for improvements in future projects
 PROEJCT TERMINATION

• When to terminate a project

• When
– the degree to which the project has met its goals

– the degree to which the project qualifies against a set of factors associated with success or

failure

• Types of project termination

1. Project Extinction

– project activity suddenly stops

– either successfully completed or high expectation for failure

2. Termination-By-Addition

– becomes a new formal part of organization

3. Termination-By-Integration

– becomes standard part of operating systems

 Project work

• Suppose your project feasibility study has got acceptance for implementation . However ,you have to
develop a project detail plan for execution , thus develop a project plan based on the procedures
below.
1.Introduction of the project plan
2. Situational Analysis
3. objectives & Motto
4. planning
• Project activity plan
•Resource plan
•Financial plan
•Quality plan
•Risk plan
•Communication plan
•Procurement plan
5. Monitoring & evaluation system
6. Closing the project plan
7. Prepare action plans In the preparation phase ,In execution phase and In the closing phase.

“ If you don’t plan for the project, you are planning for failure

•
•
•
•
•
 .

Thank
you