PROJECT ANALYSIS AND MANAGEMENT

COURSE CODE MBA 613

UNIT ONE: GENERAL INTRODUCTION

MEANING AND DEFINITION OF PROJECT

A project can be defined as ……..

―……..and endeavour in which human (or machine), material and financial resources are organised in a
novel way, to undertake a unique scope of work, or given specification, within constraints of cost and
time, so as to deliver beneficial change by quantitative and qualitative objectives‖

There are many definitions of a project, some definitions are :

• A project is a temporary endeavor undertaken to create a unique product, service or result

(PMI, 2004).

Features of a project (Distinguishing characteristics of a project)

What are the characteristics of a project which distinguish it from other operations and
activities?
o Has a unique purpose.
o Is temporary.
o Is developed using progressive elaboration.
o Requires resources, often from various areas.
o Should have a primary customer or sponsor.
o The project sponsor usually provides the direction and funding for the project.

o Involves uncertainty.
Uniqueness: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

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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) may be implemented in five geographical
areas.

The objectives of projects and operations are fundamentally different. The purpose of a project is to
attain the objective and close the project. Project ceases when it declared objectives have been attained.
The objective of an ongoing non-projectized operation is normally to sustain the business. Non-project
undertakings adopt a new set of objectives and continue to work.

Project involves objectives: As a general rule the project objective should be SMART – an acronym
for:

Specific– well defined and clear to anyone that has a basic knowledge of the project,

Measurable – how do we know how far away completion is and when it has been achieved?

Action-oriented– indicate what should be done to achieve the objective,

Reliable/achievable – do we have the resources (human, financial, material, information, time) to make
the goal happen? Is the objective achievable with the available resources and time frame, Time-
based – it should identify a definite target date for completion and/or frequencies for specific action
steps that are important for achieving the goal on/within a specific time period

Projects are temporary in nature: The duration of a project is finite; they are not ongoing efforts.
Temporary does not necessarily mean short in duration; many projects last for several years. Temporary
does not generally apply to product or service created by the project. Most projects are undertaken to
create a lasting result.Ex: Grand Renaissance dam will create a result expected to last centuries.

Progressive Elaboration: 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
specificallyas, 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 waterdeemed to be secondary priority to be initiated once the
agriculture component is well under way.

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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.

Examples of projects:
 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

Activity 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‖.
Project classification
1.Project may be broadly classified as:
 Industrial/Commercial projects:For example, establishment of factories, industries, service
rendering enterprises,etc.
 Agricultural projects: For example, establishment of farming, breading, forestry, horticulture,
fishery, etc.
 Infrastructure projects: For example, establishment of roads, airport, schools, health stations,
hospitals,universities, etc.
2. Alternative classification of projects:
a). Basically, three types of project can be identified depending upon how new resources committed to
them relate to existing economic activities:

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  New Investment: Designed to establish a new productive process independent of previous lines of
production. They often include a new organization, financially independent of existing
organization.
 Expansion Projects: Repeating or extending an existing economic activity with the same output,
technology and organization.
 Updating projects: Replacing or changing some elements in an existing activity without a major
change of output. It involves some change in technology but with in the context of an existing
though possibly reformulated organization.
b) Classification by Goals:
 Nature of goods and services produced - quantified and no quantified.
 Type of Consumption - to meet domestic demand and export demand; economic goods and social
goods.
c)Classification by time elapsing between the initial investment and the obtaining of final results -
projects of long and short duration; projects with rapid and low amortization period; etc.
d) Classification with respect to complexity - highly and low complex.
e) Classification with respect to age:
 Green field/grass-root project is a project starting for the first time or starting from scratch,
everything is new.
 Brown field project is a project that exists but shifting its resources toother places or field of
work, starting a new course.
f) Classification based on Time, Cost, and Performance (Quality):
 Normal project is a project not much problem is faced as per time, cost, and performance, i.e.,
completed with the set time, cost, and quality.
 Crash project is a project, for many reasons, completed by a crash program that entails less time,
high cost, and with a compromising quality, i.e., likely quality will decrease.
 Disaster project is a project that is not performing as per the set plan. Therefore, it needs
immediate remedy that entails less time, high cost and likely low quality. It is an opposite of the
normal project..
 Scope-project catering for regional, national or international
 Size (large, medium & small-scale projects)
 Technology (labor intensive, capital, energy)
 Ownership (private, public, joint-venture, cooperative, NGOs)

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Whatever type of project is being analyzed, the effect of using new resources has to be distinguished
from the effect of existing operations. The incremental resource costs have to be identified. Similarly, the
incremental benefits have to be identified. Both incremental costs and benefits have to be valued. For a
new investment the whole of theoutput and the whole of the costs will be incremental; for expansion and
updatingprojects, the effects of the new resources have to be separated form the effects ofexisting
resources.Project costs are generally easier to identify and estimate than project benefits. Costs may be
met directly by a particular institution; benefits are frequently more diverse. A distinction can be drawn
between directly productive and indirectly productive projects.Directlyproductive projects are those
whose immediate costs and benefits accrue to a single organization. However, indirectly productive
projects are those where the benefits derived from new resources do not accrue to the organization
responsible for carrying the costs, for example, infrastructure projects. Whenever possible, theestimated
benefits from indirectly productive projects should be incorporated in the project resource statement
(i.e., a statement used to list project's cost and benefit flowover its project life).
Activity 2
Differentiate between Brown Field and Green Field Projects in brief bygiving live illustration from the
projects around your environment.
Operations and Projects:
Operations are ongoing and repetitive activities conducted by the staff. Some of these include:

 Financial management and control

 Continuous manufacturing
 Product distribution
Projects are temporary and unique, and are performed by teams that have:

 Clearly defined team and individual roles

 Open and effective communication systems
 Visible rewards for good performance, and have constant pressure to improve poor
 performance
Common Characteristics between operations and projects are as follows:

 They are both performed by people

 They are constrained by limited resources
 Both are planned, executed, and controlled
Project Vs program
Project is – a group of activities to produce a Project Purpose in a fixed time frame while a ―program‖ –
a series of projects whose objectives together contribute to a common Overall Objective, at sector,
country or even multi-country level. A program is an assortment of related/associated projects that are
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 managed together to achieve a number of objectives.Programs may also contain elements of ongoing
operations. Since programs comprise multiple projects, they are larger in scope than a single project.

Project Program
Differences

Narrow in scope Wide in scope; can comprise many projects as components.

Specific and detail Comprehensive and general

More precise and accurate in its objectives and features Broader goal related to sectoral policy

Possible to calculate the costs and returns Difficult to calculate costs and returns

• Have purpose/ objectives

SIMILARITY

• Require input (financial, manpower, material)

• Generate output (goods and/or services)

• Operate over space and time

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

Project planning

Plan is a scheme or method worked out beforehand for the accomplishment of an objective Project
planning is a set of procedures and techniques that can be applied in the process leading up to a decision
whether or not to invest and in the implementing and organizing of the project.

It is necessary to take project planning to issue efficient utilization of the program and to implement the
action program as to the time planned (DEPSA, 1981, 1990). Moreover, project planning has a far-

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reaching effect on economic development and good project planning is needed as a result it requires well-
trained people. Different sectors of project planning need different expertise (Gittenger, 1998).

Project planning is frequently conceived as a series of stages (Chandra, 2006; Gizaw,2003):Identification

of investment possibilities, Preliminary investigation of investment possibilities through a pre-feasibility
study,more detailed investigation and implementation plan through a feasibility study, and decision
process accepting or rejecting the project.

At each stages of project planning process, a decision is required whether to commit planning resources to
the subsequent more detailed stage. Once a project has been accepted further stages involve detailed
design and finance negotiations, construction and commissioning and full operation of the project.
Projects that a nation chooses to implement should be of high priority in the national development
program.

Activity 3;

1. Briefly explain how the road construction in your environment fit to the national development plan, and

2). Discuss how project analysis and planning contributes to the national development.

Project Management

..is the discipline of Planning; Organizing; Securing; and Managing resources to achieve project
goals.PM is the application of knowledge, skills, tools and techniques to project activities to meet project
requirements and objectives. 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

Management in any project is concerned with productivity. This refers to efficiency and effectiveness.
These can be explained as follows:Efficiency: In order to be efficient, management is concerned with
minimizing resource costs.Efficiency is ―doing things right‖.Effectiveness: In order to be effective,
management is concerned with getting activities completed. Effectiveness is ―doing right things‖.
Thus, efficiency is concerned with means and effectiveness with ends. They are interrelated. Itis easier to
be effective if one ignores efficiency. For example, some organizations are reasonably effective, but are
extremely inefficient. They get their jobs done, but at a very high cost.For the management of any project,
it is important not only to get the activities completed (effectiveness), but also to do so as efficiently as
possible. Can organizations be efficient and yet not effective? Yes, by doing wrong things well.

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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
Following are the four major activities that are undertaken by the project managers:
1. Traditional management: This includes decision making, planning, andcontrolling
2. Communication: This refers to exchanging routine information and processingpaperwork.
3. Human Resource Management (HRM): It involves motivating, disciplining,managing conflict,
staffing, and training.
4. Networking: It includes socializing, and interacting with outsiders.
An average manager spends:
• 32% of time in traditional management activities
• 29% in communicating
• 20% in HRM activities
• 19% in networking
Today‘s business environment is moving away from the conventional practices and with this;the role of
the Project Managers is also witnessing rapid changes.
Success for Project Managers:
There are three general preconditions for achieving lasting success as Project Manager. Theseinclude:
• Ability (A)
• Motivation to manage (M)
• Opportunity (O)
Together, they constitute the basic formula for managerial success (S):
S=AxMxO
Core Project Management Competencies
• Business/Organizational competencies
• Management Competencies
• Professional Project Management Competencies
Business / Organizational Competencies
1. Business Literacy
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 • 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 impact on the project

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 • Take responsibility
• Set SMART objectives • Make decisions
• Maintain a positive outlook • 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

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• Undertake continual adjustments with stakeholders in a persuasive manner
• Keep the project on course by taking a integrative win/win orientation in negotiations
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
• Be willing and contented to give more than one will receive
.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
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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
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 • 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
ETHICS FOR PROJECT MANAGEMENT PROFESSION
Ethics refers to the moral principles that govern the actions of an individual or a group;moral judgment
about what we are doing is right or wrong. Is it possible that ethics really is in the mind of the doer? Most
companies have a code of ethics for their employees to read and sign.
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Do they think signing a piece of paper will make those of us with questionable morals magically ethical?
Or is it more like the police telling someone ―anything you say can and will be used against you in the
court of law‖?
CATEGORIES OF ETHICS
According to Cutting (2007), there are four general categories of ethics: How should I act tomorrow based
on these four simple words?
Equality
Individuals should be treated on their own merit. We have come a long way, but unfortunately we can
still find many examples where people aren‘t treated equally. My responsibility is to act professionally
regardless of differences (race, sex, politics, religion, etc.). I don‘t have to agree, disregard, authenticate
or rejoice the differences, but I had better not use it to separate people out for different treatment.
Truth
Watch what we say. There is that sticky place between the ―truth‖ and the ―whole truth‖ that allows for a
lot of wiggle room. The closer we can bring these two together, the more ethical we are.
Honesty
Our conduct toward others should be fair and not deceptive. If I have to engineer a situation to make me
look good, I am probably stretching my honesty credibility.
• What is the motivation behind my action? Is it to make me look better than my rival?
• Do the right thing for the right reason.
Integrity
Uninformed or susceptible people are easy targets. Integrity is not taking advantage of them. It is doing
what I said I would do. It means refraining from calling in sick with an ―eye‖ problem because I
―can‘tsee‖ bothering to go to work today.Ethics can all be boiled down to the Golden Rule: ―Do unto
others as you would have them do unto you.‖ It doesn‘t matter if you can do it without getting caught.
Ethics are a personal thing. I am personally responsible for my ethics and am expected to treat others and
my company properly regardless of how I am treated in return (ICMR, 2007)

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?
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

UNIT 2 : PROJECT CYCLE

Contents After completing this unit, students will be able to:
1. Meaning and Definition of Project Cycle  Understand the meaning and definition of project
2. World Bank Project Cycle cycle.
3. UNIDO Project Cycle  explain the World Bank Project Cycle
 Differentiate World Bank Project Cycle and
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 UNIDO Project Cycle.

INTRODUCTION
Projects usually go through a series of identifiable stages. Authors have described these as the project
cycle. Project cycle is the various stages through which project planning process proceeds from inception
to implementation and then to evaluation. It considers a various separable stages of activity which can be
thought of as constituting a definite sequence in which each stage not only grown out of the preceding
ones, but leads into the subsequent ones.

Definition of project cycle

….is the stage 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.

Project Phases and Life Cycles: Definition

Generally projects are divided into multiple project phases in order to improve management control.

All projects are divided into phases, and all projects, large or small, have a similar life cycle structure.

At a minimum, a project will have a beginning or initiation phase, an intermediate phase or phases, and an
ending phase.The number of phases depends on the project complexity and the industry.All the collective
phases the project progresses through in concert are called the project life cycle.

PROJECT LIFE CYCLE

A project life cycle represents the linear progression of a project, from defining the project through
making a plan, executing the work, and closing out the project.There are various models that deal with the
project cycle
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 analysis3.Appraisal 4.Implementation5. Evaluation

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 Project phases
Phases Description
Identification Potential projects suggestions 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

Preparation and The technical, institutional, economic, environmental, and financial issues facing the project studied and addressed —
analysis 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. Project plan developed which can be appraised
Appraisal Critical review or independent appraisal of project plan.
Implementation The project plan is implemented over a specified time period.Monitoring of project performance with a
management information system to enable correction of implementation problems as they arise.
Evaluation Evaluation is a time-bound exercise that attempts to assess the relevance, performance and success of
current or completed projects, systematically and objectively. Evaluation determines to what extent the
intervention has been successful in terms of its impact, effectiveness, sustainability of results, and
contribution to capacity development. Evaluation, more than monitoring, asks fundamental questions on the
how and why of theoverall progress and results of an intervention in order to improve performance and
generate lessons learned
UNIDO Project Cycle: UnitedNations Industrial Development organization
1. The pre investment phase, 2. Investment phase, and

 Project identification  Acquisition phase

 Project preparation  Commissioning phase

 Appraisal & investment decision  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  Environmental impact assessment

 Existing agricultural pattern  Functioning similar project of other countries

 Future demand for goods, increasing population,  Possible linkages with other industries
purchasing power
 Extension by backward and forward linkage
 Exports and import substitution
 Industrial policies
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  General input climate of economy  Export potential

 Expansions to an existing project to have large  Availability and cost of production factors
scale of economy
These opportunity studies can be categorized as area studies, industry studies and resources based studies

b. Pre-feasibility studies/pre-selection:

 To analyze that:

• All possible alternatives examined • Project idea is either attractive for investment or
non-viable
• The project concept justifies detailed analysis
• The environment situation at the site in line with
• A critical area necessitates in-depth national standards
investigation
Support functional studies to convert specific areas such as:

• marketing • Environmental impact assessment

• Raw material and factory supplies • Economics of scale and

• laboratory and Oliphant testing • Equipment selection

• location

C. 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.

d. 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 o Pre-production marketing, including the

the following stages. securing of supplies and setting up the
administration of the firm.
o Establishing the legal, Financial and
organization basis o Recruitment and training of personnel

o Technology acquiring and transfer o Plant commissioning and start- up

o Detailed engineering design and contracting

3. Operating phase

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• 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 costs as well as sales
reviews.

Phase-to-Phase Relationships
There are three basic types of phase – to – phase relationships:

1. A Sequential relationship: where a phase can only start once the previous phase is complete

2. 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 .

3. 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

Development Indicators and their Use

Input Indicators Measure the financial, administrative and regulatory 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 Indicators Measure the immediate and concrete consequences of the 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. The term ‗results indicators‘
Indicators is used as well. E.g.: School enrolment, percentage of girls among the children entering
in first year of primary school
Impact Indicators They measure the long-term consequences of the outcomes. 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 4
By taking an elementary school construction project of your environment Short list the series of activities to be
involved from its project idea generation up to implementation. Classify these activities under:

1. Identification 4. Implementation

2. Preparation and analysis 5. Evaluation

3. Appraisal

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UNIT 3 : PROJECT IDENTIFICATION
CONTENT At the end of this unit, students will be able to:
3.1. Project Idea – meaning  Understand the sources of project ideas.
3.2. Sources of Project Ideas  explain project ideas
3.2.1. Macro sources  Differentiate between macro and micro sources of project ideas.
3.2.2. Micro sources
Project Identification

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 Idea generation or project identification

Preliminary screening or pre feasibility study

Project feasibility or feasibility study

Market & demand Technical Financial Social cost be

Analysis Analysis Analysis Analysis

Detailed project reporter formal approval from spo

Planning, organizing & scheduling of project activiti

Direction & controlling of

activities
Termination of project (commissioning)
This is the conception stage in a project‘s life cycle. At this stage, there are main activities that should
take place.
 Idea conception  problem recognition
 Identification of needs and  Formulation of objectives

Idea conception
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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
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.

Macro sources
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

20
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
ofproducts/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

21
 Threa
t
Of

Competitiv Bu
Supplie
e
r Po
Power Rivalry
Threat
Of

SWOT Analysis for identifying ideas
Strength
 Strong back up and support from
University and Government
Substitution
 Limited product range and product
differentiation
 Poor Management and quality control

 Steady customer base  Insufficient awareness to the technology

application and safety sense is at
primitive stage

Weakness
22
  Lack of certified trained and qualified technician, engineers or other staff
Opportunity Threats
 Government strategic plan to develop  Many competitors in market
North-West province
 Other product substitution
 Tremendous demands on industrial
boilers
SWOT-Analysis is a technique to identify 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

Activity
Generate one project idea, and justify how you obtain it. Describe its features and explain the detail of its
phases.

Unit 4: PROJECT PREPARATION

4.0 INTRODUCTION
If the project is believed to be viable during identification and pre-feasibility studies, it enters into the
feasibility study stage. The feasibility study should provide all data necessary for an investment decision.
Market, technical and institutional feasibility; commercial profitability and social cost benefit analysis
which are prerequisites for an investment project should be defined and critically examined on the basis of
alternative solutions already reviewed in the pre feasibility study. A feasibility study should be prepared
in a scope that it should not omit any essential part. If feasibility study is prepared meaningfully, the
project appraiser cannot complain of the lack of data or imperfect analysis and the decision makers cannot
find anything hidden and missing. The number of dimensions that the project feasibility study should look
in to while formulating the project idea is numerous. This unit however, introduces:

4.1 PROJECT PRE-FEASIBILITY AND FEASIBILITY STUDY

The starting point for preparing any project approved in principle is the pre-feasibility study carried out at
the identification stage. According to Gittenger (1998), pre feasibility study is the assessment of a project
23
whether there is a need for further study (to screen out the bad and the not-so promisingIdeas). The
written culmination of the pre-feasibility exercise is called project identification brief. Project
identification brief identifies the constraints and the means for overcoming them and makes the rough and
ready assessment of the costs and benefits.
4.1. 2. OBJECTIVES OF PRE-FEASIBILITY STUDY
 To examine possible alternatives that are emanated in pre feasibility studies
 To determine whether future analysis is justifiable
 To undertake supporting studies, such as environmental impact, laboratory test, equipment
selection, etc.

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. we want to reach and what are the obstacles in the
way of achieving these targets? Targets or goals have to be as specific as possible. Being more specific
involves such things as:Identifying the target group of beneficiaries and stating what their present incomes are
and what the target level of income is to which it is expected that the project will more the target
beneficiaries;Specifying any improvement in social services necessary to bring thetarget group up to
national standards in terms of basic needs and thequantity and quality of the services provided, etc.
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.
24
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.Acceptability of risk level
6.Technological changes, competition from substitutes, competition from imports, etc.

4.2. Project Preparation (feasibility Study)

Once the preliminary appraisalfor 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 literallymeans whether some idea
willwork 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.

Feasibility may include :

 Technical Feasibility  Economic Feasibility:  Cultural Feasibility:

Safety Feasibility: Market Feasibility: Social Feasibility

 Managerial  Financial Feasibility

Feasibility: Environmental
Political Feasibility: Feasibility: Etc.
25
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 3. Financial and Economic Analysis

2. Technical analysis 4. Social cost benefit analysis (SCBA)

4.2.1. MARKET AND DEMAND ANALYSIS

Market Analysis and Market Concept

The objective of an investment project is benefit from utilization of resources and satisfying the market
demand in a society. This market analysis is an important key in determining the magnitude of
investment, location, technology requirement, production program, etc. The market analysis (the concept
of marketing) is the orientation of management with regard to their business decisions that is market
makes all participants in an organization to orient their thinking towards the market.
Theconceptincorporates number of things such as marketing system, marketing tools, etc, but themost
important of all is market involves interaction between consumer and producer,and marketing involves
the study of the interactions (relationships) between the twoparties and the interaction is what we call it
market system.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
2006 700 340 360
2007 900 400 500
………………..
……………….
2010 1200 950 250

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 (orthe four P's) are:
1. Product
 Product mix  Quality
26
 Design Service
Packaging
2. Promotion
 Advertising  Sales promotion
 Public relations  Brand policy
 Personal sale

3. Price
 Positioning of quality and price  Rebates (discount) and terms of sale
 High  Financing Conditions

4. Place Place
 Channels of distribution  Transport
 Distribution density
 Lead time and stock
BMarket 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
Data Assessment Organization
Assessment of targeted market and structure of the targeted market:
For example, if you study cement industry, your target market is construction area.Determining the
targeted market is not enough. The market analyst should assess the market structure; degree of
competitive behavior of a firm and competitive behavior of a firm's environment; custom of a society:
What outlook does the society have for the product? And pattern of employment: What is the pattern of

27
employment? Is it subsistence agriculture? We have to study the income group of the market. Obviously
you cannot set up a can manufacturing plant in a country where 85% of the populationis on subsistence
income level.In general, market structure refers to the competitor structure, customer structure,custom and
employment, means of competition (the 4 P's), structure of distribution(channels of distribution), etc.
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 andadult 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 willrespond 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 often will they buy? What will be their average purchase?

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 needto 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 bepart 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%

28
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  Inflation and Demography
 Social and economic policies  Politics and Laws
 Customs and habits  Development of domestic and international
 Ecology and environmental protection plans 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  4 P's (Product, Place,
 Differentiation  Promotion, and Price
 Marketing Targeting
 Product market relations strategy:
 Market Penetration  Diversification
 Market development  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.
H. Demand Forecasting
After gathering information about various aspects of the market and demand, an attempt may be made to
estimate future demand. A wide range of forecasting methods is available to the market analyst:
i. Qualitative Methods:Jury of executive Method&Delphi Method
ii. Time Series Projection Methods

29
I .Qualitative method :These methods rely on the judgment of experts to translate qualitative
information into quantitative estimates. The important methods are:
a) . 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
o It is an expeditious method for developing a demand forecast
o 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
o It has immense appeal to managers who tend to prefer their judgment to mechanistic forecasting
procedures.
The disadvantages of this method are:
o The biases underlying subjective estimates cannot be unearthed easily.
o The reliability of this technique is questionable
b). 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 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
ii. Time Series Projection Methods:In feasibility study current demand is determined and the future
potential demand will be forecasted with the help of different techniques. These techniques of demand
projection are:
30
  Trend projection  Moving Average Method
 Exponential smoothing method  Consumption Coefficient

Trend projection
Trend analysis assumes that demand is dependent on time, i.e. demand is a function of time: D=f (t),
where time is an independent variable.
Let us consider the time series for bicycle sales of a particular manufacturer over the past 10 years as
shown below. Note that 21,600 bicycles were sold in year 1, 22,900 were sold in year 2. In year 10
:31,400 bicycles were sold.
Year (t) Sales (1000s)
2000 21.6
2001 22.9
2002 25.5
2003 21.9
2004 23.9
2005 27.5
2006 31.5
2007 29.7
2008 28.6
2009 31.4

The estimated regression equation describing a straight line relationship between an independent variable
and dependent variable y was written: y=a+ bx
This involvesdetermining 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+ b1tWhere Tt =Trend values of time series in period t.
a =intercept of the trend line of the relationship
b1 = slope of the relationship
t = time variable
Computing the slope b1 and intercept a

b1 = ∑t Yt – (∑t ∑yt)/n a =Ý-b1t

∑t2–(∑t)2 /n
Where
Yt= demand in time t
31
n= number of observation
t = mean of t: that is ∑t/n
Ý= Mean of Y, that is Ý=∑Y/nNow we can compute b1 and a as follows.

Year (t) t Yt tYt T2

2000 1 21.6 21.6 1
2001 2 22.9 45.8 4
2002 3 25.5 76.5 9
2003 4 21.9 87.6 16
2004 5 23.9 119.5 25
2005 6 27.5 165 36
2006 7 31.5 220.5 49
2007 8 29.7 237.6 64
2008 9 28.6 257.4 81
2009 10 31.4 314 100
Total ∑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
Exercise
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 revenue for year 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)
32
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.
t Data Forecast Error (et=st-Ft) Forecast for t +1
(St) (Ft)
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

Exercise
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.
(Temu this exercise will come to urexam )
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

33
t Data Forecast
St(Sales) Ft
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 F13=(31.9+34.3+35.2+36)/4
10 34.3 32.5
11 35.2 32.9
12 36 33.3
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.
34
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
assess the impact on the size of demand for unfavorable and favorable variations of the determining
factors from their most likely levels.
4.2.2 RAW MATERIALS AND SUPPLIES STUDY
There is technical relationship between input and output; the amount of inputdetermines the output
amount. Conversely, you have determined the product type and capacity. The next step to produce as per
the above step is what input to use.The raw materials and supplies study consists of thorough analysis on
what type ofinput? Where to find? How much it costs? Etc. Thus, the following approaches areoften used
to study raw materials and supplies.
A. Classification of Raw Materials and Supplies
1. Raw Materials (Unprocessed and Semi-processed):
 Agricultural product  Mining
 Livestock and Forest products  Quarrying, Etc.
 Marine products and Fishery
2. Processed and Industrial Materials and Components
3. Factory Supplies:
 Electricity, Fuel, Water, etc  Recycled waste
4. Spare parts
5. Supplies for Social and external needs, etc.
Categories of Project Supplies:
1. Factory Supplies: This can be categorized into three:
i. Auxiliary Materials: Such as chemicals, packaging materials, paints,etc.
ii. Utilities: Such as energy, fuel, water, etc.
iii. Other supplies such as compressed air.
2. Spare Parts: This can be categorized into two as longer and shorter lifetime.
3. Social Supplies and External Needs: This is characterized mainly for projects that are located in rural
areas; roads, medical services, and other infrastructure facilities should be identified.
Factors affecting project input requirements
1. Socio-Economic Factors
This refers to the social and cultural background of the society where the project is planned to be located.
For example, meat factory should not be opened where meat is not eaten.
2. Commercial and Financial (Business) Factors
The Project input requirement depends on the type of raw materials used, productivity of workers, market
demands for a given product, product mix, availability of fund, etc.
3. Technical Factors
The project input requirement depends on the type of the industry, technology and production process,
machinery and equipment, project life, etc.
35
B. Specification Requirement
This involves in,
1. Measurement and specification of the required raw materials and supplies, such as heat, moisture,
weight, size, color, etc.
2. Identifying project characteristics.
C. Availability and Supply
This involves in deep study about the availability and supply of the raw materials and supplies. It can be
available from local and/or foreign suppliers.
1. Local Category
 Source - Where to find?
 Transport - What means of transport to use?
 Quantity - How reliable is the availability?
 Certainty / Uncertainty
2. Import Category
Source Quantity
Transport Certainty / Uncertainty
3. Input alternatives: It involves in searching for input substitution other than the main raw material and
supply.
Source Quantity
Transport Certainty / Uncertainty
D. Supply Marketing and Supply Program Strategy
1. Supply Marketing
Cost minimization strategy Supplier relations
Risk minimization strategy
 Do we have to stick to only one supplier or more?
 What is the supplier's profile?
 What is the bargaining power of each supplier? Etc.

2. Supply Programming
 Volume of raw materials and supplies  Storage, etc
 Agreements and regulations
E. Cost of Raw Materials and Supplies
It involves in determining: Overhead cost
 The total cost:
Raw material cost  Unit cost
Decision:
After the raw materials and supplies study, the analyst should decide on the abundance of the supply of
raw materials and supplies.
Activity:Assume that W/t Senbetu wants to construct a ―Hole Bricks Factory‖ in your environment. She
is requesting your unreserved project expertise. Thus, you are required to make a brief raw materials and
supplies analysis and give her your expert opinion.

36
4.2.3. LOCATION, SITE, AND ENVIRONMENT
The location of the project is highly affected by the nature of the project itself. Projectscan be categorized
under three forms of locations.
1. Rooted Projects are projects rooted at certain area (proximity to an input) because it is better to
transport end products (outputs) than raw materials for the cost involved in transporting raw materials is
greater than the cost incurred to transport end products. For example, Cement industry should be located
where limestone is located).
2. Tied Projects are projects that are tied to the market (proximity to the market) because the
transportation of the final product is uneconomical. For example, Beverage industry, Ceramic projects, etc
should be located near to the market.
3. Foot Loose Projects are projects that can be located anywhere. They are neither tied to the market nor
rooted to the raw materials. For example, candy industry. The site, location, and environmental studies
comprise the following:
A. Location Analysis (Location Selection)
Location studies must be carried out over wider geographical area. The strategic orientation of choice of
location includes:
1. Proximity to market and raw materials
For example, gold mining and cement factory are usually projected at the raw material site.
2. Natural Environment Assessment
 Climate conditions (temperatures, rainfall, hurricane, dust, wind, etc).
 Effect on agriculture, industry, transport, construction, management, etc.

 Ecological requirement, such as avoiding contaminating water smoke

Environmental Impact Assessment

It aims at ensuring the development projects are environmentally sound. Thus, it involves in:

Assessment of environmental consequences of the newly planned or existing project and of any related
activities. The assessment is based on legal regulations and emission standards and guidelines established
inthe country (region) of plant location. Assessment of environmental conflicts that is potential conflicts
with existing and future neighboring industries, urban settlements should becritically assessed for its
consequences are closedown, compensation,purification, etc.

37
Phases and Structure of Environmental Impact Assessment

 Preliminary environmental impact assessment:

 Use checklist to check which impact need to be analyzed.
 Detailed analysis, site visit (in depth study)
 Preparation of environmental impact statements
Socio - Economic Policies: It involves in the study of,
 Government regulations and restrictions
 Local government policies: that is concessions, incentives, restrictions, fiscaland legal
regulations, procedures, utility supplies, building regulations, taxes,etc.
Infrastructure Conditions: It studies,

 Technical infrastructure
 Transport and communication
 Social infrastructure (Police, Court, etc)
 Factory supplies (electricity, water, fuel, etc)
 Availability of human resources
 Infrastructure services (construction, erection, garages, etc)
Effluent and Waste Disposal: It studies,

 Gaseous effluent such as smoke

 Noise, heat, vibration
 Liquid or solid effluent
Decision: In line with the location analysis criteria, select the location that best fitsamong alternatives.

B. Site Selection

During site selection, the following requirements and conditions should be assessed:

 Site requirements such as ground condition, soil condition, site preparationand development, etc.
 Construction requirement such as requirements by the municipality.
 Land conditions that are infrastructure, such as an out let to the main road.
 Effluent and waste disposal
 Human resources
 Social infrastructures such as school, hospital, market, police, court, etc.
 Socio - economic condition that is society may resist certain areas not to beused for project location.
 Strategic aspects: Project site analysis should give certain allowance forproject expansion.
 Cost of land: Land can be acquired through purchase, lease or concession, which depends on the law
of the land. The analyst should select land with optimal cost.
Decision: Based on the site selection requirements, select the site, which best fits.
38
C. Cost Estimates
 The major costs with regard to location and site selections are:
 Cost of mitigating the environmental problems, that is cost of devices to mitigate
 Cost of land
 Transport such as cost of transporting output and raw materials to the market and the plant
respectively, items for construction purpose.

 Others such as housing costs and benefit packages for employees, etc.
Activity:

W/o Eshet’s Soap Factory above is planning to make a brief location and site analysis. Thus, you are requested to
give her your expertopinion.

4.2.4 PRODUCTION PROGRAM AND PLANT CAPACITY

The scope of an investment is defined by corporate or project objectives and strategiesdetermined by the
potential investors taking in to account the overall business environment and marketing concepts as well
as the available project inputs or resources.
It is the task of engineering to design the function and physical lay out for the industrialplant necessary to
produce the defined output, determine the corresponding expenditure (investment and operational costs)
to be achieved under the technical, political, social and environmental constraints.The production program
and plant capacity study involves in:
A. Determination of Production Program
Production program implies how you intend to produce the selected product. There are often four factors
to determine production program:
1. Market requirement and marketing concept that is the range and volume of products to be produced
depends primarily on the market requirements and the proposed marketing strategies, i.e., sales program.
2. Input requirement that is the need and availabilities of raw materials and supplies.
3. Technology that is the technology and knowhow to be utilized in theproject.
4. Time frame that is the net working days per year, number of working hoursper day, umber of shifts and
the capacity build up.Plant capacity implies the volume of output that can be produced during a given
period of time. There are two levels of plant capacity:
1. Feasible (Normal) Capacity

39
It is the achievable under normal working conditions taking in to account normal stock, down time,
holidays, maintenance, tool changes, and management system apply, etc, which is taking in to account all
real world problems and constraints.
Maximum (Nominal or Designed) Capacity
Designed capacity assumes technically feasible condition without taking in toconsideration any real world
problems and constraints like machine break down.
Factors that influence the capacity of a plant
�Economies of scale
� Minimum economic size and equipment constraint (hard ware technology)
� Resource and Input constraint
� Performance of staff and labor (soft ware technology, i.e., the skill, etc)
4.2.4. TECHNOLOGY AND ENGINEERING STUDY
Technology and engineering study covers:
A. Production program and plant capacity F. Civil engineering works
B. Technology choice G. Maintenance and Replacement
C. Technology acquisition and transfer Requirement
D. Plant lay out and basic engineering H. Estimate of investment costs.
E. Machinery and equipment selection
A. Production Program and Plant Capacity
The production program and plant capacity study was briefly discussed
To remind you, the following factors should be considered in determining production program:
 Market requirement and marker concept - Feasible normal capacity
 Input requirement - Nominal (maximum or design)
 Technology (software and hardware) capacity

 Plant capacity:

B. Technology Choice
Technology selection should be based on a detailed consideration and evaluation of technological
alternatives (e.g., Japan, German, America, etc) and the selection of themost suitable alternative in
relation to the project or investment strategy chosen and tosocio-economic and ecological conditions,
which is the appropriate technology whichuses the abundant supply factor input in the country. For
example, in labourabundant country, appropriate technology is the technology that is labour intensive.

40
Factors and Functions Considered in Technology Selection
1. Ecological and environmental impact (possible hazards due to the technology)
2. Ecological orientation of the preliminary lay out
3. Assessment of technology required:
Steps:
i) Problem definition
ii) Technology description and project lay out:
 Functions layout  Utility line, i.e., electricity, etc
 Characteristics of technology  Extension and expansion -Etc
 Materials flow diagram
iii) Technology market and alternatives (sources of technologies, alternatives and their cost):
 Assessment of availability
 Technology forecast (i.e., obsolescence)
 Socio-economic impact
 Environment impact, Etc.
C. Technology Acquisition and Transfer
How to acquire those technologies? The analyst should consider the following factors:
1. Industrial property right (patent and franchise)
2. Means of technology acquisition:
o Licensing
o Purchase of technology
o Participation of the license holder in joint venture
3. Contract terms and conditions (warrants and guarantees)
4. Cost of technology
D. Plant Lay-Out and Basic Engineering
Plant layout and basic engineering study requires:
1. Detailed plant lay out
2. Basic engineering
3. Detailed charts and drawings:
Functional layout (principal structure and buildings, majorequipment, roads, utility etc)
 Location of main production units (such as loading areas, out lets)
 Material flow diagrams
41
  Production line diagrams (stages of production)
E. Machinery and Equipment Selection
The selection of technology and equipment are interdependent. The requirements of machinery and
equipment should be identified in the feasibility study on the basis ofplant capacity and the selected
production technology. The selection of machinery andequipment should take in to account:
 Relationship with other study components (market, technology, plant capacity, etc)
 Level of automation (labour or capital intensive)
 Categories of equipment and cost:
o Production equipments
o Auxiliary equipments (not directly used in the production process such as laboratory and
workshop)
o Import/export, etc.
 Limitations and constraints (such as electricity, manpower, etc)

 Tenders and bids

F. Civil Engineering Works

The feasibility study should provide plans and estimates for the civil works related to the project. It considers:

 Site preparation and development  Commission and effluent discharge

 Factory and other buildings  Fencing and security
 Civil engineering works relating to utilities  Other facilities and requirements of the plant
 Transport (inside and outlet)
G. Maintenance and Replacement Requirement

Maintenance and replacement requirement is basically related to the building andmachineries and equipments. It
covers:

 Establish ages (life span of each of the building, machinery and equipment)
 Major overhaul schedule of building, machinery and equipment.
 Preventive maintenance
 Spare parts
 How to maintain? There are two ways:
1. Own workshop: Own workshop maintenance requires acquisition of tools,equipment, trained manpower, etc for
maintenance.2. Outside workshop services: But, are they knowledgeable enough? Etc.

H. Estimate of Investment Cost

42
 Investments are categorized as working capital and fixed capital. Here we are talkingabout fixed investments that
can be identified by the technology and engineering study.Usually fixed investment comprises:

 Cost of machinery and equipment (cost of machinery and equipment,

 Cost of auxiliaries, cost of devices, transport, insurance, installation,etc).
 Cost of building mostly determined by using bill of quantity (list of all materials needed or required to
build a building) or standard measures that is Cost/m2.
 During project preparation, there are a number of techniques to estimate investment costs. These are:
1. Rule of Thumb Method

It is based on experience. There should be certain statistical readings to determine the components. Basically,
machinery and equipments are said to be 50% of the investment costs or main plant is said to be 30% of the total
costs. This is lazy man exercise method.

 Problems: Percentage can vary from project to project.

 For certain projects, civil work requirement may be low or vice versa.
 This method is recommended only if there is no information on prices of machineries,equipments, etc.


4.2.5. ORGANIZATION AND HUMAN RESOURCES

A. Organization

Organizational study deals with the development and design of the organization needed to manage and control
the entire operation of the organization (establishment). Design of the organizational structure depends on
the strategies of the organization.Organization is the means by which the operational functions and
activities of the enterprise are structured and assigned to organizational units represented by managerial
staff, supervisors, and work force with the objectives of coordinating and controlling the performance of
the enterprise and the achievement of its business targets.Operational enterprises under take various
interrelated activities (management aspect,financial aspect, commercial activities, safety of workers, etc).
Therefore, plant organization tries to show how these interrelated activities are effected in the productive
activities and it also shows the commanding chain (organizational chart) andhow the chains are delegated
in the enterprise. Thus, plant organization must show theoptional coordination and control of the
enterprise and cost aspects (direct and indirectcosts).The following significant steps must be used in
designing the organizational structures:

1. State goals and objectives of the organization.

43
2. Identify the necessary functions to achieve the goal.

3. Group the functions which are related and that could be performed by aresponsible individual.

4. Design the structure taking in to account the level and span of control.

5.Analyze and describe the key jobs (job description)

6. Work out qualification requirement and prepare recruiting and training program for staffing.

Organizational Description vs. Job Description

Organizational description involves in describing each functions such as describingthe finance function, i.e.,
stating the various activities to be performed by the financefunction. Job description involves in describing, in
black and white, the activities to be performed by each worker (employee).

B. Human Resource (Manpower) Requirement

Human resource requirement means determination of human resource requirement andcost for the project. It
depends on the functions to be performed and organizationalstructure and considers:

 Skill mix
 Levels of skill particularly in the area of top management
 Number of workers in the given organizational function, such as number ofworkers in the finance
function.Human resource requirement has two aspects that is the requirement at:
1. The project implementation stage
2. The project operation stage
Manpower needed at the implementation stage may not be needed at the operationallevel of the project.
Thus, such categorizations enable us to determine the types of tradeoffbetween implementation and
operational staff.Classification of Human Power includes:
� Skilled and unskilledManagement, supervisory, and workforce.
Manpower Requirement
The man power requirement at differet stages that is the manpower requirementduring implementation
and operation stage should be defined
Recruitment and Training
The feasibility study should analyze and assess the general availability of human resource required and
describe briefly the background situation focusing on employment, progress of economic development,

44
urbanization, etc. Recruitment policies and methods should also be assessed, and the methods and means
of retaining key personnel for long period, probable terms of employment, and possible fringe
benefits to employees and their families should be identified. Timing is an important aspect of recruiting
manpower. The general manager and other key supervisors may be recruited at the time of operation. But,
there is a problem that they don't know the process of the project. So, these people should be recruited at
the time of project implementation stage because they are going to be acquainted with the process and it
will result in a good management of the project
Training is needed in a project. The following steps should be followed in the training plan:
 Analyze personnel characteristics and conditions
 Analyze training requirement
 Workout:
 The date (time) of training
 The number of trainees
 The category and places of training
 Give formal training
 Have on the job training
 Continuously update the employees.
Cost Estimates for Human Resource Requirement
It usually comprises:
 Salary and wages
 Payroll costs
 Fringe benefits
 Overhead costs (include factory supplies, maintenance costs, office supplies,utilities,
communication, rents, insurance, taxes, depreciation, interest, etc)

 Recruitment and training costs


Activity:
Assuming W/t Senbetu‘s Hole Bricks Factory, make a brief human resource analysis and give her your
expert opinion.
STRUCTURES AND CIVIL WORKS
It is divided in to:
1) Site preparation and development
2) Buildings and structures
3) Outdoor works
A. Site Preparation and Development
 Grading and leveling the site
 Demolition and removal of existing structures
 Relocation of existing pipelines, cables, roads, power line, etc

45
  Reclamation of swamps and draining and removal of standing water
 Connection of the site to the public utilities net work, etc
B. Buildings and Structures
 Factory or process buildings
 Ancillary buildings required for stores, warehouses, laboratories, maintenance service, utility
supply centers, etc
 Administrative buildings
 Staff welfare buildings, cafeteria, medical service buildings
 Residential buildings
C. Outdoors Works
 Supply and distribution of utilities
 Handling and treatment of emission, wastages, and effluents.
 Outdoor lighting
 Landscaping
 Enclosure and supervision (boundary wall, fencing, barriers, gates, doors, security posts, etc)
Activity

Assuming W/o Eshet‘s Soap Factory, discuss in brief on theconsiderations she has to account in
structures and civil works.

PROJECT CHARTS AND LAYOUTS

This defines the scope of the project and provides the basis for detailed project engineering and estimation
of investment and production cost. Following are the major types of project charts and layouts:
A. General Functional Layout
 It shows the general relationship between equipments, buildings, and civilworks
 Its primary consideration is to facilitate smooth and economical movementof raw materials, work
in process, and finished goods. This means that:
 The layout should seek to allow traffic flow in one direction, with aminimum of crossing
 Godowns (warehouses), workshops, and other services must be functionally situated with respect
to the main factory buildings.
B. Material Flow Diagram: It shows the flow of materials, utilities, intermediate products, final
products, byproducts,and emissions.
C. Production Line Diagram: It shows how the production would progress along with the key
information for main equipments.
D. Transport Layout: It shows the distances and means of transport outside the production line.

46
E. Utility Consumption Layout: It shows the principal consumption points of utilities and their required
quantities and qualities.
F. Communication Layout: It shows how the various parts of the project will be connected with
telephone, telex, intercom, etc.
G. Organizational Layout: It shows the organizational setup of the project along with information on
personnel required for various departments and their interrelationship.
H. Plant Layout:It is concerned with the physical layout of the factory. It considers:
o Consistency with production technology
o Smooth flow of goods from one stage to another
o Proper utilization of space
o Scope of expansion
o Minimization of production costs
o Safety of personnel
o
4.2.6. Financial and Economic Analysis
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.
 Startup costs
 Means of financing
 Projected profitability
 Cash flow of the project
 Investment worthiness- using criteria
 Projected financial position

47
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.
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.

48
  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
 Insurance costs 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
require
 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

49
Net working capital is defined to embrace current assets (the sum of inventories, marketable securities,
prepaid items, accounts receivable and cash)minuscurrent 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.
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:
o Materials predominantly variable costs such as raw materials factory supplies and spare parts.
o Labor (production personnel) fixed or variables costs depending on type of labor and cost
elements)
o 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
50
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).
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

51
 investments as required, for marketing and distribution (for example delivery trucks), depreciation
charges are to be included in the computation of total marketing costs
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
 Corporate (income taxes)
Operational cash inflows

o Revenues from selling of fixed assets

o Recovery of salvage value (end of project)
o Revenues from decrease of net working Capital
o Sales revenues
o 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 equal sum available in the future
Activity:
Assuming W/oEshet‘s Soap Factory, define its organizationalobjectives and design its organization
structure. Besides, define the functions of each functional department in the organization structure.

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
52
 5. Human Resource and organization

4.2.7. 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)
6. Break – even analysis (BEA)
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 Where; Ct = cash flow at the end of period t

Ct
NPV    Io K = required rate of return
t 1 (1  K ) t n = useful life of project
Io = initial cost of project
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

53
  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. payment disc.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 10% Discounted cash flow

0 100,000

1 40,000 0.9091

2 10,000 0.8264

3 20,000 0.7513

54
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

2 3000 0.8264 2479.20

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 Disadvantages of NPV

 Considers time value of money  Gives absolute values which cannot be used to
compare project of different sizes
 Gives a decision criteria
 There is difficulty in selecting the discount
 Recognizes uncertainty of cash flow by
rate to use
discounting
 It does not show the exact profitability of the
 Uses all project cash flows
project

b) Internal Rate of Return (IRR)

55
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 45,000

,000

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

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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 Disadvantages of IRR

 Can be used to compare projects of different sizes o Some project have multiple IRRs if their NPV
profile crosses the x-axis more than once (project
 Considers time value of money cash flow signs change several time)

 Indicates the exact profitability of the project o Assumes re-investment of cash flows occurs at
project‘s IRR which could be exorbitantly high
 Uses project cash flows
o Doesn‘t provide a decision criteria

o Not conclusive for mutually exclusive projects

Benefit cost ratio (BCR), Profitability Index (PI) , present value index (PVI), benefit-cost ratio

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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 PVIF (9%) PV

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  Gives a decision criteria

 Recognized time value of money Disadvantages of PI
 Compares projects of different  Does not indicate the risk
sizes
Average Rate of Return
Average Net Income
The average accounting return (AAA) is given by the following.. AAR 
Average Investent
The procedure of the AAR method is to accept the project if AAR is greater than a target return. Although this
procedure has several problems (which will be described later), this method provides a percentage return of the
investment. Thus, this method provides an easy-to-understand decision rule.

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Average Accounting Return Rule Example

Consider a company that is evaluating whether to buy a new store in a new mall. The purchase price is
$500,000. We will assume that the store has an estimated life of 5 years. We assume that the store will
worth nothing at the end of the lifetime. Excel Sheet ―Average accounting return example‖ shows the
estimated cash revenue and expenses for each of the 5 periods. Use straight line depreciation

Table 1 Year 1 Year 2 Year 3 Year 4 Year 5

Revenue 433,333 450,000 266,667 200,000 133,333

Expense 200,000 150,000 100,000 100,000 100,000

Before tax Cash flow 233,333 300,000 166,667 100,000 33,333

Depreciation 100,000 100,000 100,000 100,000 100,000

Earning before tax 133,333 200,000 66,667 0 -66,667

Tax 33,333 50,000 16,667 0 -16,667

Net Income 100,000 150,000 50,000 0 -50,000

Then, the average net income is given by

Average Net Income =(100,000+150,000+50,000+0-50,000)/5=50,000 $50,000

AAR   10%
Thus, the average accounting return of this example is given by $500,000

If the company has a target average accounting return smaller than 10% (say 8%), the project will be accepted. If
the company had a target AAR greater than 10%, the project will be rejected

Problems with Average Accounting Return

AAR uses accounting number. Since the decision to depreciate or expense a certain item depends on accountant
judgment, the computed AAR is influenced by accountant judgment. Minimum acceptance criteria are set
arbitrarily by management.AAR does not take into account the time value of money.

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

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 20,000  10,000  30,000
Average_ profits   20,000
3
20,000
Average investment = ½ (90,000 +0) = 45,000 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

Payback period (PBP)

a) 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

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

 214.91 
2   2.95 years
 225.40 
 245.19 
4   4.79 years
 310.46 

The management should undertake project A since it has a lower pay bock period

Advantages of pay back method  Does not use all project cash
flows
 Considers time value of money
 Does not consider the
 Useful in assessing risk and performance of the project after
liquidity of the project the payback period
Disadvantages of pay back method

Break – even analysis (BEA)

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Pay back for A

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 ?

Total fixed cost(Br 40,000) = Number of units sold to break-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?
Using NPV? Using Payback period? Using profitability Index?

4.2.8. ENVIRONMENTAL ANALYSIS

The effects of actions that are not accounted for in the normal market transactions need to be
considered explicitly in the decision-making processes on projects. These effects are to be
identified, assessed, and evaluated against the economic advantages arising out of a given action.
In this context, the environmental impact assessment/appraisal is considered to be one of the
major project decision processes because it gives an opportunity to man to consider the effects of
his/her actions on the environment. Economic development is the result of the interaction
between natural resources and

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Technology supported by and designed for people. People are the centre for development. It is
rightly said that all human activity, be it economic, social or anything else, is essentially directed
at satisfying ―needs‖ and ―wants‖ of man through ―altering‖ and ―using‖ environmental
resources. The basic premise behind the Environmental Impact Assessment (EIA) is that no one
has any right to use the precious environmental resources resulting in greater loss than gain to
society. From this, it follows that the aim of EIA is to seek ways by which the project can
proceed without any irreparable losses to environment and minimum losses if any, so that the net
effect will be a desirable gain. An Environmental Impact Analysis (EIA), therefore, is a study of
the probable changes in the various socioeconomic and biophysicalattributes of the environment,
which result from a proposed project action. Development project has two dimensions:
�The intended objectives/purpose – they are also called stated goals/benefits and
�The unintended consequence, also called externalities or social costs which are unplanned,
unwanted, and unanticipated.
Environmental impact assessment thus studies the unintended consequence of a project.Its
purpose is to identify, examine, asses, and evaluate the likely and probable impacts of a proposed
development project on environment and, thereby, to work out the remedial action plans to
minimize the incidence of adverse impact. It is not antidevelopment nor is it against the projects.
Its goal is development without damage or
least damage.

Stresses on Environment
There are four types of different stresses or pressures that are being continuously inflicted on
environment. These are:
Eutrophic Stress
It refers to the release of various kinds of wastes into the river and other water bodies and their
consequent drying.
Exploitative Stress
It refers to the exploitation of natural resources endowment for production and consumption
purposes through agriculture, industry, extraction, fishing etc. It is important to note that the rate
of exploitation has a relevance to the nature‘s capacity to reproduce.
Disruptive Stress

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It refers to the physical alterations in nature resulting from such activities like forest clearance,
highways, railways, factory buildings and so on. These physical changes disturb the
environmental and ecological balance.
Chemical and Industrial Stress
It results mainly from the developments in ―science and technology‖ and their applied fields like
industry, warfare and agriculture. This comprises mainly the pollutants and effluents of all types,
radiation etc. Strategies to meet these threats to natural environment through pollution,
destruction and over-use can be: preventive or b regulatory. It is in this context that the
environmental appraisal of projects is gaining significance with a hope of achieving sustainable
development in harmony with environment.
It is better to consider the environmental consequences during the project planning and design
stage itself so as to avoid higher costs of future remedial actions by prudent planning and early
preventive measures

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