Project Appraisal

Chapter 1 .

Introduction
● ‘Project’ stands for a set of activities connected with each other to achieve a specific
objective over a particular period of time i.e., a project is a path chosen to reach a
particular destination touching various milestones on the way
● A project may be transitory in nature or a venture with a certain end in sight

● Appraisal of a project is a comprehensive process which involves detailed scrutiny of its

○ management aspects,
○ product,
○ capacity to be installed,
○ technical feasibility,
○ appraisal of market aspects/commercial viability, and
○ study of environmental and institutional factors followed by
○ financial appraisal
● Project Appraisal analyses the costs and benefits associated with a proposed project to
ensure rational allocation of scarce resources amongst alternative investment options
since available resources are limited and many potential projects may be able to satisfy
identical needs

● Characteristics

Common Features
1. Goal: All the projects have a set of goals to be achieved along with catering to the
specific needs of the customers
 2. Duration: All projects have a definite time period within which the set of goals has to be
achieved/completed. All of them have clear beginning and end points

3. Sole Entity: A particular project constitutes a range of tasks or events built into it

4. Life cycle: Every project has a life cycle as expressed by a period of high growth,
maturity and decline

5. Distinctive: Two projects may have a similar plan yet both of them have a unique
identity of their own. The difference could be in terms of the raw material, location,
appearance, the team members etc. Such small differences go on to provide each
product its unique identity

6. Risk: Risk and uncertainties are an integral part of all the projects. A project may be
immune to some prevalent risks whereas other risks may turn a project unprofitable

Project Appraisal Tools

● Project appraisal is the structured process of assessing the sustainability of a project or
proposal
● It assesses the feasibility of a project before committing resources to it
● Project appraisal is implemented to evaluate the company’s investment in the project
vis-à-vis the benefits drawn from it
 ● The foremost step of the process of project appraisal is the assessment and analysis of
proposals before any commitment of resources is done

Project Appraisal Process

● If the process of appraisal begins from an early stage, then the company will be in a
better position to make a calculated decision regarding the spending capital on the
project
● It will help to make a decision on the expenditure of a project or whether to continue the
project w.r.t. to its economic viability

Stages of Project Appraisal

Stages
1. Identification of the cost and benefits of the project
○ In this process, one has to identify both economic and non-economic (social)
impacts of the project which include short-term as well as long-term impacts

2. Valuation of these impacts

○ Depending upon the sources and reliability of the information and the goal of the
organisation/society
○ Whether a particular effect is calculated as cost or benefit depends upon the
goals pursued by the society or the organisation
Steps
1. Selection of an Idea
○ The first step is the identification of various ideas and selecting the most suitable
idea
○ Informal screening may give weightage to the competency of the individual
members of the team, availability of competitive products/services, capital
expenditure involved, gestation period etc

2. Market Analysis
○ A careful assessment of the existing and potential market i.e., demand and
supply, both domestic and international, for the product and cost structure is
performed
○ Attempt to calculate the market share for the product that can be secured through
an appropriate marketing strategy
○ Study the export potential based on the size of the international market and price
competitiveness of the product after working out a reasonable price for the
product
○ An analysis of the viability of the project in the backdrop of the international
economic scenario particularly the impact of WTO provision helps the promoter
make a well-informed decision

3. Technical Appraisal
○ Examines the location and site of the project thus assessing
■ the vulnerability of the area to natural calamities (past record of
earthquakes, floods, cyclones etc.),
■ evaluation of the locational advantages from raw material/end product
market viewpoint, availability of infrastructural facilities like roads, power,
water hospitals, schools etc.,
■ availability of skilled/unskilled labour, proximity to airport, railway station,
highways etc
○ The technology adopted should be suitable to the project in terms of availability
of technical staff, financial means etc. Adaptation and management of new
technology should be properly dealt

4. Financial Appraisal
○ Involves verification of estimates of different elements of project cost and
projected workings to ascertain whether the project meets critical industry
benchmarks in terms of important financial ratios
○ A careful analysis of the projections of cash flow and balance sheets followed by
sensitivity analysis would help the firm/promoter make an informed decision
regarding the financial viability of the project
○ Work out the Break Even Point (BEP) capacity utilisation so as to determine the
lowest production and sales levels at which the project will cover all its costs
 5. Institutional Appraisal
○ Institutional help and guidance are required for the arrangement of skilled staff,
training of the staff, infrastructure arrangement etc
○ Many times, new entrepreneurs need guidance for setting up the new firm, its
registration, financial arrangements, preparation of project feasibility report and
legal support

6. Socio-Economic Impact Assessment (SEIA)

○ It includes the identification of the direct and indirect impacts of the proposed
industrial activity
○ To minimise the adverse impact and enhance the beneficial impact of the
proposed project and also to find out the mitigation available to manage, reduce
or eliminate the adverse impacts
○ The improvement of the social well-being of the wider community should be
explicitly recognised as an objective of planned interventions and should be an
indicator for any form of assessment

7. Implementation and Monitoring

○ Involves the execution of the project as planned while carefully monitoring the
progress and managing changes
○ The main issues are technology selection risk, timely availability of capital,
implementation of different contracts and sub-contracts etc.
○ This is followed by the application of different monitoring techniques (CPM, PERT
and Gantt Charts)

Project Appraisal Methodology

Project appraisal methodology also provides guidelines for the preparation of a project feasibility
report
1. Planning of the Project
○ A transparent logical plan should be clearly defined and explained with the
project purpose and project results
○ Assumptions and preconditions required for the project implementation should
also be clearly defined

2. Identification of costs and benefits of the project

○ Net benefits associated with a project can be optimised if attempts are made to
achieve the desired goals at the minimum possible costs
○ This implies that the achievement of goals and objectives would depend upon the
goals to be pursued and the availability of resources
○ The most important step for the calculation of the costs and benefits is their
identification itself
 3. Valuation of the costs and benefits
○ Both costs & benefits cannot be considered in isolation
○ It is a function of the project objective, relative factor availability and the
socio-political and cultural environment in the economy
○ The social profitability analysis i.e., the evaluation of the project’s contribution to
the economy, is the primary concern of any loan officer
○ This impact may be in the form of providing employment or on the foreign
exchange reserves etc. or even better living conditions

4. Determine the optimality of proposed actions

○ Optimality too cannot be considered in isolation
○ Any alternative action is considered optimal based on the economic feasibility,
social acceptability, political viability and technical possibility
○ A project is said to be viable only if it can satisfy all the minimum proposed
criteria for the suggested parameters

5. Sustainability
○ For a project to be sustainable, all possible risks and uncertainties need to be
taken into account and laid out in the project feasibility report
○ The outcome of any project cannot be considered in isolation and many internal
and external variables may have an impact on the project's goal
○ Factors such as competitors' approach, govt. guidelines or international
regulations governing the concerned industry are also taken into consideration
before making a final decision regarding the implementation of the project
○ The project feasibility report must be a transparent document containing details
of total benefits/costs to all the stakeholders

Project Life Cycle

● The most appropriate method for observing the sequence of events begins with the
identification of the project itself and concludes with the evaluation

1. Identification
○ Economic, market conditions, technical aspects, social, and at times even
environmental and financial considerations help finalise one project idea out of
multiple alternatives
○ At this stage one final meaningful idea is chosen and the boundaries are clearly
defined
○ Broad outlines of project impacts, risks, scope, vision context, alternatives and
stakeholders are identified
○ The project initiation phase is the most crucial phase in the Project Life Cycle, as
this phase defines the objectives, scope, risk and viability of the project
2. Preparation
○ The mission and vision for the project are developed during this stage
○ Many crucial aspects such as the project schedule, roles of individual team
members, work plans, capacity building, budget, key suppliers and distributors,
and logistics are planned during this stage so as to minimise risk during and after
implementation

3. Appraisal
○ Every aspect of the project idea is subjected to systematic and comprehensive
assessment at this stage
○ This step can be subdivided into three sub-stages viz.
i. Preliminary Study: all the possibilities are examined at this stage
ii. Feasibility Study: The market, technical and financial feasibility of the
project based on the preconditions and assumptions are examined
iii. Detailed report: at this stage when the financer and the borrower agree on
the terms of the loan or credit the project is presented to the banks and
the board of executive directors for approval

4. Implementation
○ The entrepreneur issues contracts through a competitive bidding process that
follows the banks’ procurement guidelines
○ The product/service is commercially built and successfully provided to the
customers
○ Successful implementation requires strong coordination among all the people
and resources associated with the project
○ At this stage, one needs to integrate all the tasks done previously and practically
perform all the activities of the project
○ This is the longest-running phase which involves the active participation of all the
stakeholders associated with the project

5. Monitoring
○ The progress of the project is assessed against the plan at this stage
○ Periodic monitoring is essential to identify any problem areas of the project and
take timely remedial action for the successful continuity of the project
○ Projects are monitored with the help of different monitoring techniques viz., CPM,
PERT and Gantt Charts

6. Evaluation
○ Upon completion, the project is reassessed in terms of its efficiency and
performance
○ This is also the time to review the performance of the project with the initial plan
in the background and comparative assessment vis-à-vis its peers
○ The lessons learnt in the entire process must be listed down as they will be the
guiding force for future venture
● While appraising the project one can ‘drop’ the project idea at any of the following stages

1. Preliminary Study Stage

○ At this stage, a study is carried out to understand any limitations, constraints or
risks with respect to the project implementation
 ○ Any such factor that poses a major impact or threat to the project is dropped at
this stage itself so that it does not create any problem at the execution stage
○ It is always better to drop the project idea at this stage in the project life cycle to
minimize the project cost

2. Project Formulation Stage

○ At this stage final feasibility report is prepared for financing of the project
○ Before dropping the project, one needs to consider if the irritants can be modified
to meet the project goals
○ If this is possible then it is better to modify and continue with the next stage of the
project life cycle to minimize its impact on the project
○ It is estimated that on average the project cost increases by ten times to take the
project to the next stage. Hence, it is critical to review all the feasibilities of the
project carefully as early as possible

3. Project Planning and Implementation

○ For successful implementation and completion of a project, it is critical that its
objectives are aligned with the overall corporate vision and need to be explained
with increasing degrees of detail (resources, time, tasks and ownership)
○ This is the stage where the mobilised project team is ready with planning and
scheduling, work designs, work packages, procurement and final implementation
of the project.

● Project reliability can be assessed at each stage of the project cycle and is expected to
increase with every next stage as the margin of error decreases with every next stage
● The error decreases because the variables become known at this stage
● At the idea and formulation stage - the Project result visibility is zero and hence is based
on projections of reality
● At stage V2 or the implementation stage - part of the project reality is visible. At V2-V3, it
is nearly visible and the remaining is projected
● Hence, the complete reality of the project is realised only at the completion of the project

● It is estimated that on average the project cost increases by ten times to take the project
to the next stage
● Hence, it is critical to review all the feasibilities of the project carefully as early as
possible
 ● The different phases of project investment (cycle)
● The percentage of investment may differ for different projects depending upon the nature
of the project

Project Cycle Management

● It manages the appraisal, planning, implementation and organisation of the project
● The PCM plan is expected to guide all the entities of the project effectively and efficiently
along with their roles
● The following need to remain intact
○ Identification of niche stakeholders,
○ client orientation,
○ ranking of the goals and objectives at each stage of the project cycle,
○ creation of project schedule,
○ identification of short-term and long-term interventions/preconditions and
assumptions.
○ Identification of risk at each stage of the project and identification of deliverables
at each stage of the project along with
○ sustainability of the project
● Each objective must relate horizontally and vertically to get the best results

● The overall planning schedule and responsibility matrix at the macro as well as micro
level
● Parameters for verifying the performance of each entity of the project at each stage of
the project need to be stated
● Assumptions and pre-conditions are also required to be defined
 ● Corrective measures to ensure project sustainability should be included in the Project
design
● Close scrutiny of such measures needs to be undertaken from time to time

Origin of Project Appraisal

● Project appraisal has its origin in the cost-benefit analysis (CBA)

Working of Cost Benefit Analysis

● All the costs and benefits associated with the project are expressed in monetary terms
● Then all the cash flows, both benefits and costs are discounted for the time value of
money
● Finally, all the discounted cash flows of both costs and benefits are expressed on a
common basis in terms of their “net present value.”

● Social Cost Benefit Analysis (SCBA): The main point of difference between SCBA and
CBA is that SCBA considers all the intangible benefits and costs associated with the
project and converts them into monetary value/costs

Cost Benefit Analysis of Private and Public Sector Projects

● The same technique i.e., Discounted Cash Flows and determination of Net Present
Value is followed by projects in both sectors but the assessment, evaluation and decision
process are distinctly different

● Firms in the private sector have the primary objective of maximizing returns to
shareholders and generating a healthy surplus for their growth and expansion
● In contrast, the firms in the public sector have to follow a much more complex evaluation
of their net present value

● Public Sector
○ The objective of CBA in the case of public sector enterprises is to maximize
public welfare
○ Monetary benefits alone take a backseat in such cases

○ Significant Features
i. A consistent approach which can be applied to a wide range of
Government projects. The approach helps in comparing alternate projects
w.r.t. economic welfare and finalising the best project
ii. The discounting techniques are now well understood by all. This helps in
the optimisation of resource utilisation and at times even helps in
curtailing cash outflows
 iii. The concept of economic welfare has developed well as an alternative
technique for the evaluation of public sector projects and is now popularly
considered as a parallel approach to financial analysis of private sector
units

Project Appraisal in India

● Stages
a. Projection of aggregate and macro variables
b. Sectoral projections
c. Identification and appraisal of projects in terms of social benefits and costs

Identification of Investment Opportunites

Industry Analysis Review of Project Profiles

Feasibility Study

Project Identification and Formulation

Generation of Project
Basic Principals of Project Analysis Entrepreneurship

Concept

Theory

Perspective
Chapter 2 .

Introduction
● Market Analysis is the analysis of a market in terms of its attractiveness for investment in
a given business idea

Business Idea
● A relevant and practical idea ensures adequate consumer demand for the product and
early break-even
● The spirit of the entrepreneur plays a great role in the success and failure of the idea

Entrepreneurial Creative Ideathon

● Creative Ideation refers to the process in which ideas are generated creatively whereas
● ECI refers to the indomitable spirit of the entrepreneur which is responsible for selecting
a creative idea that the entrepreneur believes strongly about

Creative Ideation Process

Psychological Needs Gap Analysis
● It is imperative that the startup addresses a ‘real’ need of the consumer
● This can be done through systematic studies of the market or through the natural
observation of the daily lives of others by the entrepreneur
● Need-based market segmentation can be helpful in identifying the requirement of the
new product for customers of different categories

Information Sources
● Data can be obtained through primary surveys of consumers, households and dealers to
find out about the business idea viability from all points of view
● Secondary data on industries can be obtained from the internet and published material
from states' and municipalities’ manufacturing directories
● Demographic data and population trends data which used to be rare earlier, are also
available online today

Comparison and Screening

● Preliminary screening is a process to weed out the ideas where the probability of
success seems to be bleak

● It further attempts to rank the remaining ideas on the basis of their possibility of being
successful
Causes of Failures of New Product Ideas

The Success Mantra

Project Rating Index

● The steps to formulate PRI begin with the identification of different factors essential for
the success of the project
● This is followed by attaching weights to each factor and their rating on a scale
● Finally composite factor score is calculated
Market Feasibility Analysis
● Explore existing and potential future demand for the product as well as the competition
● The market feasibility study is basically the search for identification and quantification of
the market for the present business idea

Steps of Market Feasibility Analysis

Understanding the Market
● A market is basically a space for acts of exchange

● There are numerous factors besides price which have an impact on the demand and
supply of the product and hence the price
● Changes in the taste of the consumer, availability of an alternate product, change in
fashion, change in income of the consumer or even a change in law or macroeconomic
variables lead to a shift
● All these factors are otherwise assumed to be constant for the determination of price

Factors Affecting Demand and Supply

Market Gap Identification

Estimating Market Size

● Market Size: the volume and value of the products or services consumed presently, and
expected future consumption

1. Supply-Side Measures
○ Volume and value are measured from the point of view of production, i.e. how
much is the existing production and the possibilities of producing more as per the
future demand vis-à-vis finding out the cost, availability of the raw material,
labour and technology etc

𝑆𝑚 = 𝐺 + (𝑀 − 𝑋)
Where,
𝑆𝑚: Total Size of the Market from the Supply Side
𝐺: Production of goods at present
𝑀: Present Share of Imports of the Products
𝑋: Present Share of exports from the existing production

2. Demand-Side Measures
○ Market size is derived from studying the behaviour of the consumers in the
market

𝐷𝑚 = 𝑃𝑄𝑁
Where,
𝐷𝑚: Total Size of the Market from the Demand Side
 𝑃: Average Price charged at present
𝑄: Total Quantity purchased by the Consumers in the given period
𝑁: Total Number of Customers

Conduct a Situational Analysis of the Market

● This is an informal investigation exercise to assess the product’s relationship to its
market by using the information which is readily available
● Simply put, it is a SWOT analysis wherein an internal analysis of the project’s strengths
and weaknesses is done and opportunities and threats in the external environment are
analysed
 ● Situational analysis may be used in situations where there is a shortage of time or
budget and the data gathered using informal market analysis may be used to reach a
decision

Perform a Formal Market Study

● A formal market study involves a collection of secondary data and its analysis
● If this is found insufficient, then one proceeds with exploring suitable means to collect
primary data

Secondary Data
● Material published and available with libraries, various departments/divisions of the
government, universities, the central bank of the country, an official statistical data
collection institute of the country

Precautions in Collection of Secondary Data

● The project analyst must check the secondary data for its
○ impartiality,
○ validity, and
○ reliability
Sources of Secondary Data

Primary Data
● Primary data is collected by the analyst with the help of a survey with the purpose of
collecting specific information required for the new product

● Designing a questionnaire
○ Pre-Survey Process
○ Finalise the Sample
○ Sample Selection and Analysis
○ Characterise the present market

Industry Structure
Managing Competition

Forecasting of Market Growth

● When historical data of a product’s demand is plotted against time, the resulting curves
portray distinct characteristics of their growth patterns.
● There are typically three types of growth patterns representing the historical market
demand growth pattern for their products
● A linear projection, however, is not always the most suitable way to model growth
patterns for market variables

● (a): represents a situation where sales of a product move in a steady pattern

● (b): The highly erratic growth pattern indicates the influence of non-recurrent forces in
the market.

● These growth patterns can be further categorised as Seasonal, Trend, Horizontal and
Cyclical
 ● The geographic boundaries of the market area influence the accuracy of the forecast

Market Forecasting Techniques

● The demand forecasting technique of a product is based upon
○ current demand for the product,
○ past market demand growth pattern and
○ other market characteristics like
■ budget available,
■ time required to develop the forecast and
■ the desired accuracy
● The forecast is usually for a period of three to five years into the future

● Statistical forecasts i.e., time series and correlation analysis are frequently used to
provide baseline estimates of future market demand
● These baseline estimates provide a starting point for considering factors which
although not important in the past, may be influential in the future

1. Judgement Forecasts
○ based on intuitive and subjective evaluations
○ not considered appropriate

2. Survey Forecasts
○ based on surveys of individuals who constitute the market
○ Though the forecast technique attempts to take into consideration the opinions of
diverse people connected with the product this is also subject to certain
limitations
○ However, such surveys are always helpful in the identification of causal variables
which provide insight into the market or need to be considered in the correlation
analysis

○ Survey of Buyer Intentions

■ can consume a great deal of time and money
■ is most applicable for industrial products, for consumer durables, and for
new products for which no data is available

○ Sales force opinion

■ the sales forecast for the firm can be made by taking the opinion of the
sales force
 ■ This method is especially appropriate if the product under consideration is
similar to the existing product line of the firm
■ The major limitation to using this technique is that the individual
salesperson tends to be either overly optimistic or pessimistic, depending
on the economy and this necessitates adjustments to his forecast

○ Executive Composite
■ the executive composite gathers individual opinions on which to base an
aggregate forecast
■ The major advantage of this technique is that the opinions of executives
involve broader economic considerations as well as a wider range of
activities

○ Expert Composite
■ A survey of expert opinions is similar to both the sales force composite
and the executive composite
■ it can be made quickly and inexpensively

○ Independent Forecasts Composite

■ The analyst can examine existing forecasts and arrive at a composite
forecast by adjusting these forecasts in terms of his assessment of the
individuals who made them

3. Time Series Forecasts

○ rely on the basic assumption that past growth patterns will continue into the
future
○ Since factors other than time influence demand, the inherent weakness of this
technique is that its usefulness is limited to the immediate future, for example,
one to three years depending on the product

○ Secular Trend Analysis

■ Extrapolation of the market trend can be accomplished using two simple
techniques
1. The market during the next time period is assumed to be equal to
the market during the time period most recently past
2. The rate of change between the last two time periods is figured
and this rate of change is then applied to the most current time
period to obtain a forecast for the future period

■ The mathematical technique of least squares can be used to fit a trend

line to the plotted data points and is preferred as against drawing a
straight line freehand

○ Seasonal and Cyclical Variation

 ■ forecast based on market trend does not include seasonal and cyclical
elements
■ if the forecast interval is annual, the seasonal factor does not need to be
considered
■ The easiest way to calculate a seasonal monthly index is to average all
the figures for a specific month

○ Ratio-to-Moving Average
■ sales for a given month can be compared to a moving average, which
does not contain any seasonal effects because it encompasses a
twelve-month period
■ The ratios for a given month over several years can then be averaged in
order to obtain indexes of seasonal variation which, when applied to the
trend cycle component, yield a forecast that includes the seasonal
element

○ Exponential Smoothing
■ It is a time series technique which can produce efficient and economical
short-range forecasts of up to twelve months
■ With exponential smoothing, the greatest weight or influence is assigned
to the most recent data

4. Correlation Analysis
○ Most objective
○ Correlation analysis determines the degree of relationship between the market,
the dependent variable, and the independent variable, such as personal income,
and indicates to what extent a linear or other equation describes or explains the
relationship between the variables
○ The most common technique used in correlation analysis is a simple line
correlation analysis. Therefore the relationship between the dependent and
independent variables must be linear
Develop the Sales and Marketing Plan

Digital Marketing: The New Frontier

Case Study: Peppertap Shutdown
Running Case
Chapter 3 .

Introduction
● Technology draws heavily on scientific advances and the understanding gained through
research and development. It then leverages this information to improve the
performance, productivity and overall usefulness of products, systems, and services

● Technology strategy is an integral part of business strategy preparations

● Technical analyses of a project are aimed at ensuring that the project has been clearly
spelt out with the correct technical design details (such as size, location, timing, and
technology) and that the required materials have been correctly determined and their
source identified

Technical Appraisal Decision Tool

● The tool aims to assess the feasibility of the project from a technical viewpoint including
its cost-benefit analysis
Project Identification
● aims to identify the most optimal project with a focus on all the broad aspects of the
project viz., market capacity, resources, the technology investment outlay and
information management amongst others
● Under market capacity of the product, need gap analysis is performed. This helps to
identify the requirement of the product in different markets
● It is easy to list out the resources required by the firm for the project in hand
● The present and future requirement of resources in terms of fixed investment,
manufacturing cost and related expenses, start-up cost, maintenance cost can be
estimated
● technology investment outlays & cost involves estimation of the cost of technology to
be used, infrastructure, detailed design cost in terms of the stock room, die-casting, shaft
machinery, receiving & shipping, shaft stock storage, administrative offices etc
● the promoter must give due attention to information management wherein he must
collect information about product design/quality/service, market sales & delivery, capital
availability and availability of labour both skilled as well as professional
Scope and Impact of Technology
● most comprehensive assessment of the project takes place from the technical and
technological viewpoint
● The promoter evaluates the requirement for the new product manufacturing. He explores
the requirement of development of any new technology and whether the same needs to
be developed at the in-house R&D division or acquired from outside
● The specific manufacturing program/plan is rolled out which includes the estimation of
projected production requirements with a time schedule, production methods &
equipment, material handling, methods & equipment, inventory needs, personal
requirements, space requirements and all costs (fixed, manufacturing and start-up)
● The production schedule is a specific manufacturing program which includes
production safety stock & reflect, efforts to operate at a planned constant production
rate. It includes the projected production requirements, with the time schedule.
● Once the promoter is aware of projected production requirements, he must focus on
material, input and inventory requirements. This minute assessment helps in arriving
at an approximate variable cost involved in manufacturing the product
● the promoter must carefully evaluate the requirements for setting up a smooth supply
programme
● The plant must be created in tune with the demand and supply requirements for the
product
 ● This shall also give an idea about the requirement of inputs to fulfil the demand & supply
needs
● The promoter must specify the phasing of activities and expenditure during
construction and prepare a flow chart of all the product information

Product Information
● focusses on analyzing all the features of the product and accordingly help in making an
informed decision about technical feasibility of the product

● The process and design of the product is the sequence of operations, moves and
inspections by which raw material inputs are converted into finished products for the
consumer
● All quality levels needs to be maintained for the product
● service requirements of the product assume great importance
● Promoter must ensure the feasibility of providing effective after-sales service (preferably
at the doorstep depending on the type of product) for the product
Project Schedule

● The organizational set-up must be clearly decided and tasks distributed appropriately
as per the skills of individuals
● A clear physical layout of the factory premises must be finalized so that there are no
ambiguities at the time of implementation
● MoUs or agreements for continuous supply of raw material must be entered into to
ensure that there is no disruption in the raw material flow schedule
● Logistic mapping should be done properly to ensure minimum delays and appropriate
storage arrangements
● The investment outlays for all the above facilities in addition to structure and civil work
and communication layout must be evaluated so as to take an informed decision

Technology Implementation Schedule

● An elaborate process beginning from purchase of technology to finalizing the place for
installation of machine
 ● Once technology and vendor are finalized, promoter needs to finalise the location and
begin work for site development
● The site must be chosen and developed as per the need of the technology so as to
minimize trouble at the implementation stage
● Once the structure is in place, he must plan for his critical period and ensure timely and
sufficient availability of inputs
● This step of technical appraisal concludes with estimation of payment to suppliers,
distributors, salaries to employees and outdoor work and placing of investment

Consideration of Alternatives
● the complete evaluation (judgment) criterion for making the final choice
● the promoter must assess the various alternatives on the basis of function that they shall
be performing
● This shall be followed by technical screening wherein various alternatives would be
evaluated on their working process respectively along with their preconditions which
need to be considered and assessed for the final adoption
● alternatives would be analysed on marketing criterion wherein information is collected
about the number of competitors who are using different alternatives of the technology
● all the alternatives are compared for their acquisition and funding.
● Finally, the various alternatives are gauged for the process used to manage the
respective project
Life Cycle Costs and Benefits of the Project

Risk Analysis of the Adopted Technology

● may include the expected risk description, its impact on the rate of return due to potential
project delays or cost overrun, and steps to control the risk
● Error in designing, the scope of change, inappropriate and inadequate procurement and
complexity are few reasons for a delay in project implementation
● Steps like rigorous project appraisal, setting up of standing committees, computerised
monitoring system, fixation of duties, project coordination between states and centre to
remove bottlenecks can help bring down such delays
Project Cost Benefit Analysis
● make a sum total of project cost which includes the project initiation cost as well as its
annual maintenance cost
● a sum total of all the benefits protruding from the implementation of recommended
technology alternative are calculated
● Once the final project costs and benefits have been calculated, the promoter can
comfortably take a call on technical feasibility of the project

The Lender’s Analysis

Key Aspects of Technology
● The key to achieving technological competitiveness is the commitment of the technical
staff and the managers in this challenging and complex culture

Technology Base
● The managers and technical staff of the company need to assess their own in house
technological assets (research labs, patents, infrastructure), organizational assets
(customer base) and complimentary assets (global customer base). Etc

● Based on the strength of the technological base of the company, the new development
processes w.r.t. products, services and new technology can be adopted

Technology Life Cycle

● The technology life cycle is concerned with the time and cost of developing the
technology, the timeline of recovering cost, and modes of making the technology yield a
profit proportionate to the costs and risks involved
● The Technology Life Cycle may further be protected during its cycle with patents and
trademarks seeking to lengthen the cycle and to maximize the profit from it
● The development of a competitive product or process can have a major effect on the
lifespan of the technology, making it shorter
● The loss of intellectual property rights through litigation or loss of its secret elements (if
any) through leakages also works to reduce a technology’s lifespan

● The s-curve
○ maps growth of revenue or productivity against time
○ derives from an assumption that new products are likely to have “product Life”

○ The first stage is the new invention period, also known as the embryonic stage.
The new invention period is characterized by a period of slow initial growth.
○ The second stage is the technology improvement period, also known as the
growth stage. The technology improvement period is characterized by rapid and
sustained growth
○ The third stage is the mature-technology period. The technology becomes
vulnerable to substitution or obsolescence when a new or better-performing
technology emerges
○ The decline (or decay phase), of reducing profits and utility of the technology
● Technology Life Cycle and Market growth
○ A very strong and dynamic relationship exists between technological innovation
and the marketplace
○ It is only when technological developments find an appropriate market that
scientific research pays off and the development cost is reimbursed in economic
or social terms

● Technology Development Phase or Embryonic Stage

○ period in which scientists and engineers spend significant amounts of effort and
money to create the technology, develop prototypes and test the new technology
○ The goal of any R&D manager should be to minimise this time period since it is
very expensive and does not produce revenue
○ This progress is characterized by slow initial growth during the launching period

● Growth Phase
○ the technology penetration into the market depends on the rate of innovation and
the market needs for the new technology
○ The growth rate slows down as the technology approaches its maturity
○ Companies that continue to use the old technology in this phase will be faced
with a shrinking market share and a fall in revenues

● Technology Obsolescence Phase

○ the technology has little or no market value
 ○ the firm has the option to adopt or invest in latest technology, out for technology
tie-ups and revive the firm or close down due to lack of demand for the product
manufactured using obsolete technology

● Portfolio of Technologies
○ An organization is generally required to manage a portfolio of technologies
○ The technologies within the portfolio are inter-related and influence each other

○ Key Technologies
■ These technologies provide competitive advantage
■ They may permit the producer to embed differentiating features or
functions in the product or to attain greater efficiencies in the production
process

○ Pacing Technologies
■ These technologies could become tomorrow’s key technologies
■ Not every participant in an industry can afford to invest in pacing
technologies
■ this is typically what differentiates the leaders (who do) from the followers
(who do not)

○ Base Technologies
■ These are technologies that a firm must master to be an effective
competitor in its chosen product-market mix
■ They are necessary, but not sufficient, to achieve competitive advantage
 ● In the early phase of growth stage of the technology life cycle, the new technology helps
to expand the market size for the product or service offered. The technology becomes a
pacing technology in that it has the potential to change the basis of the competition
● Technology in this phase of the growth stage is known as a key technology, and a
company should increase its capabilities in this area to compete
● When the technology reaches a stage of maturity and the rate of innovation declines, it
becomes a commodity, available to all competitors. Technologies in this category are
also recognised as base technologies
● Mature technology is continuously threatened by the substitution of newer technology

Technology Tie-Ups & Diffusion

● In order to exploit its complete potential, enterprises must explore both internal and
external sources of technology
● Diffusion is the process by which an innovation is communicated, over time, through
certain channels to other members or a social system
 ● The diffusion takes the shape of a bell curve in terms of number of adopters over the
passage of time
● It takes the shape of S-curve or Logistic curve in terms of the cumulative number of
adopters over the passage of time i.e. technology and innovations get diffused from
innovators to followers to laggards
● The trend of the percentage of organizations that adopt new technology and innovations
over a period of time-in cumulative terms - takes the shape of S- Curve; also called
Logistic Curve

● Categories of Participants
○ Innovators: who tend to be experimentalists and are interested in the technology
itself
○ Early Adopters: who are technically sophisticated and are interested in using
the technology for solving professional and academic problems
○ Early Majority: who constitute the first part of the mainstream, bringing the new
technology into common use
○ Late Majority: who are less comfortable with the technology and may be
skeptical about its benefits; and
○ Laggards: who are resistant to the new technology and may be critical of its use
by others

● Product diffusion takes the shape of bell curve in terms of number of adopters over the
passage of time and takes the shape of S-curve (Exhibit 3.20) in terms of cumulative
number of adopters
○ Initial/Innovative Stage: leadership strategy (Innovators to Early Majority)
○ Consolidation Stage (Late Majority)
○ Mature Technology Stage (laggards)

Management of Technology and Business

● Management of Technology is a set of management disciplines that allows
organizations to manage their technological fundamentals to create competitive
advantage
● Typical concepts used in technology management are
a. Technology strategy (a logic or role of technology in organization),
b. Technology forecasting (identification of possible relevant technologies for the
organization, possibly through technology scouting),
c. Technology roadmap (mapping technologies to business and market needs),
d. Technology project portfolio (a set of projects under development), and
e. Technology portfolio (a set of technologies in use)
● Therefore, the technology management is the management of integrated planning,
design, optimization, operation and control of products, processes and services
● The process of acquiring new technology starts with the identification of all the vital
details, selection amongst the alternatives available and finally the acquisition of
technology

● The businesses which have succeeded and will succeed will be those that use
technology for an edge in the production, marketing and responsiveness to the customer
needs
● The R&D staff must be considered as an integral part of the whole business team and
they should work together as partners to fulfil the common objective as maximization of
the benefit of the business
● Firms should formulate an integrated business and technology strategy that takes into
account the synergies amongst the different projects across the firm for achieving
supremacy over their peers

● For development of the product, it is essential to develop a cost-effective process within

the boundaries of existing infrastructure. With the help of engineering, an appropriate
process can be developed which would lead to the manufacturing of products. However,
these functions would be most effective if they operated as a continuum, rather than in
isolation

● Successful management of technology requires integration of several basic components

a. An appropriate technology framework must be adopted
b. The strategic role and importance of technology must be pre-decided
 c. Ensure that business & technology strategies are mutually supportive
d. Appropriate technology support must be provided to existing businesses
e. A sustenance structure must be provided to all the technology initiatives
f. Existing technology gaps must be filled
g. Long-term interest of the firm must be taken care of
h. Opportunities and threats from the new technology

● Internal technology leveraging is achieved by

a. Recognizing important and emerging technologies
b. Mastering Technology
c. Realignment of technology management, new strategies, processes, resources,
tactics
d. Effective in house R&D

● Types of R&D programs

a. Incremental Research and Development
■ well-defined commercial objectives
■ The likelihood of technical success is relatively high
■ Modifying temperature and pressure settings to improve yields of a
chemical process is an example
■ Most technologies used in these programs are key technologies; the
remainder are base technologies

b. Radical Research
■ take bold steps forward in applying particular, often pacing, technologies
■ New technology may be brought to bear in a product: for example, a
grammar-correcting routine in word-processing software
■ Established technology may be used in a radically different way: plastic
extrusion technology used to manufacture “conventional” lead pencils

c. Fundamental Research
■ Designed to build a new dimension of competence or to investigate the
potential usefulness of an area of scientific knowledge e.g., the
development of ceramic materials suitable for high-temperature
applications
■ Such programs must pass two important screens
● Relevancy to the company’s product and market strategy
● The most effective way to acquire the potential technology

● Any external technology partnership should be an advantage for the business as a

whole
● External Technology can be acquired with
a. licensing & technological acquisition or Collaboration
b. opportunities from Joint ventures (Strategic Alliance) and research institutions
 c. Maintain and strengthen own technology

● A sound portfolio strategy must

a. Maintain and strengthen-own core technology
b. New technology bought from outside must be compatible with in-house
infrastructure, skill availability and maintenance of technology and
c. Review alternatives & encourage researchers' collaborative work

● Such decisions should be based on a strong technology intelligence system w.r.t.

information on
a. Internal & external synergy w.r.t. corporate culture
b. mechanization for communication reporting,
c. conflict-resolving industry i.e., the decision to have cooperation from alliance or
go for competition
d. Customers requirement
e. Internal competence to use new technology. It should not be a threat to internal
budget or capability and
f. Alliance technology performance
Chapter 4 .

Financial Feasibility Analysis

In all instances, one stage of the financial analysis that must be completed is to assemble the
market and technical data into the necessary proforma statements

Objective
● Financial information may be used to generate interest of potential investors
● For an entrepreneur or a loan appraisal team from a lending institution, the objective of
the feasibility analysis is also to indicate whether or not the project is worthwhile

Sales Revenue and Expenses

● The sales plan is an output of the market analysis and provides information necessary
for constructing the financial statements. It includes an estimate of sales revenue,
promotion and advertising costs and selling and distribution expenses
Administration Expenses
● This includes
○ Salaries of the Management and Secretarial staff
○ Telephone, Courier and Internet charges
○ Travel and Entertainment
○ Office Supplies and Stationery
○ Taxes and Insurance
○ Depreciation of the Office Equipment

Total Project Cost

● It is basically a sum total of expenditure incurred on sales, manufacturing, general and
administrative plan

Venture Initiation Cost

● Every entrepreneur conducts initial research about the viability of the product and
project. Expenditure incurred on performing this research and the process of registration
and formation of the company is termed Venture Initiation costs
● This includes
○ Costs of forming/registration of the company
○ Initial marketing Study
○ Legal charges and Patents
○ Research & technical analysis
○ Consultants’ & Liaison Fees
○ Expenses of obtaining financing

● Project Cost Summary: The project cost summary forms the base of the financial plan
and loan request, hence it is extremely important

Prepare Proforma Income Statement

● The proforma income statement attempts to forecast business operations over a specific
time interval by means of the profit equation:
𝐴𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐺𝑟𝑜𝑠𝑠 𝑠𝑎𝑙𝑒𝑠 − 𝑟𝑒𝑡𝑢𝑟𝑛𝑠 𝑎𝑛𝑑 𝑎𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒𝑠 − 𝐶𝑂𝐺𝑆 − 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔
𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 + 𝑜𝑡ℎ𝑒𝑟 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 − 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥𝑒𝑠
 ● It is an indicator of the margin that will be generated by the business and whether it
would be sufficient for not just repayment of debt but also for expansion of the business
and payment of dividends to the owners

Cash Flow Statement

● The Cash flow statement reflects the movement of cash into and out of the business
● A cash flow budget is useful to
○ determine the amount of cash needed to start the enterprise
○ plan for timing of loan funds and
○ ensure that, if projected cash flows are met, cash will be available to meet
payments as they come due

Proforma Balance Sheet

● Balance sheet is like a snapshot of the financial position of a company at a specified
time, usually calculated after every quarter, six months or one year
● The balance sheet is a good indicator of the status of a firm at a particular point in time
● In essence, the balance sheet reflects all the assets of the business, along with interests
of creditors and owners in these assets. It represents the value of a firm on a given date

Evaluate Project Feasibility

● Besides investment, one must also look into the operations and financing of the project
● A detailed projection of the entire operations of the project must also be done at least for
a period of next five years
● The financial feasibility analysis is followed by sensitivity analysis
● Sensitivity Analysis is performed to analyse the impact of change in essential variables
viz., sales, revenue, and operating cost on the final cash flows and profitability of the
project
● Based on the inputs of sensitivity analysis, the analyst may conduct risk analysis of the
project

Investment Decision Criteria

● Investment decision criteria helps in making the best choice amongst various
alternatives where one option may even suggest to simply rent the premises owned by
the promoter or not to go ahead with any project

Investment Decision Techniques

● Factors responsible for creating ambiguity in an investment decision
○ Variation in Life Span of the project
○ Difference in accrual of cost and benefits at different points of time
○ Applicability of resources in alternative industries
○ Present Consumption preferred over future consumption
 ○ Difference in individual and society’s perception about costs and benefits
associated with the project

Non-Discounting Techniques
● The emphasis has been on simplicity, ease of calculation, time period required for capital
recovery, the speed with which we get returns per unit of Investment
● A common disadvantage in the two of three methods discussed is the non-cognizance of
present consumption over future consumption or the premium placed on the present
consumption over the future

● Inter-relationship b/w the 3

○ if we put a heavy premium on the present, future benefits would look very small
and the converse is true if less premium is placed on the present
○ While NPV gives an absolute measure of benefits, i.e., so many rupees, BCR
gives a measure of benefits per rupee of investment. BCR therefore is a relatively
better measure of the acceptability of the project compared to NPV. However,
there is a direct relationship between NPV and BCR and vice versa and both are
inversely related to the rate of discount
○ IRR is considered independently of one’s preference for the present over the
future

Payback Period
● The technique focuses on the time period (months/years) taken to recover the initial
capital invested
● In the case of mutually exclusive projects, the project which takes the least time period
for recovery of initial capital is preferred

● Decision Criteria: Pay Back period as an investment criterion would give a ranking of
project on the basis of how quickly investment cost can be recovered
 ● Advantages
○ Easy and simple method to evaluate small projects with a similar life span
○ Considers only the cash flows till the recovery of capital rather than accounting
profits

● Disadvantages
○ Does not give any consideration to cash flows generated after the payback
period. Hence, the method does not focus on wealth maximization by looking at
the returns generated through the project’s life span
○ The method does not consider the time value of money and cash flows are
simply added to each other

Discounted Pay Back Period

● This method discounts all the cash flows as and when they appear in the firm’s accounts

● Advantages
○ It is easy to calculate
○ It includes the benefit of time value of money

● Disadvantages
○ It ignores the cash flows after the recovery of Principal

Accounting Rate of Return

● In a marked shift from emphasis on the quick recovery of investment, this criterion
focuses on returns in the form of average after-tax profit
● ARR is calculated by dividing the average returns by average investment
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑐𝑜𝑚𝑒
𝐴𝑅𝑅 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

● Decision Criteria: Usually the promoters/lenders decide upon an appropriate cut off
level of ARR. All the projects with an ARR level more than the cut-off are accepted for
investment by the promoters

● Advantages
○ It is easy to calculate
○ It is simple to understand

● Disadvantages
○ The process ignores cash flow generated by the project
○ This technique does not consider Time Value of Money
Discounted Cash Flow Methods
● They bring down all the cash flows to a common time period, i.e., all costs and benefits
are now compared on a uniform basis to arrive at the investment decisions
● These methods take record of the timing of the cash flows and appropriately discount
them so as to bring them to a common time frame i.e., present time period

Net Present Value

● It overcomes both shortcomings of the non-discounting methods viz., consideration of
the time value of money and considers all the cash flows throughout the life span of the
project

● Decision Criteria: If NPV is higher than zero, then investment in the project is
worthwhile

● Advantages
○ Considers Time Value of Money
○ Evaluation includes all the cash flows during the life span of the project
○ The discounting process reduces all the cash flows to their present value making
them equivalent to the current payment. This makes them eligible for addition,
hence NPV of projects can be added

● Disadvantages
○ Any wrong assumption or discrepancy in the cash flow would affect the entire
valuation
○ At times, NPV is not considered suitable for projects with dissimilar life, dissimilar
initial investment and similar constraints
○ NPV gives result in terms of absolute value which may not be able to indicate
with return on Investment

Cost-Benefit Ratio / Profitability Index

● It is calculated by dividing present value of benefit calculated at required rate of return by
the present value of cost
 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤𝑠 (𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠)
𝐵𝐶𝑅 = 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐶𝑎𝑠ℎ 𝑂𝑢𝑡𝑓𝑙𝑜𝑤𝑠 (𝐶𝑜𝑠𝑡𝑠)

● Decision Criteria
○ The project is considered to be financially feasible if BCR is greater than one.
The evaluator is indifferent in case the ratio is equal to one and the project is
rejected if the value of the ratio is less than one
○ In the selection of a project from various alternative projects, select that project
whose BCR is the highest when projects are arranged in descending order of
BCR

○ Once an appropriate discount rate is provided, the BCR is a better guide for
investment decision compared to the NPV criterion

● Advantages
○ Considers Time Value of Money
○ Includes all the cash flows over the entire life span of the project

● Disadvantages
○ Choice of Discount rate - This is also required for the NPV criterion
○ BCR discriminates against projects with high gross returns and operating costs
○ Inclusion or exclusion of certain costs in the calculation of BCR

● NPV vs BCR
○ As long as we are concerned with a single project or two or more projects whose
costs are the same, the NPV criterion is adequate but in a situation of more than
one project with different costs, NPV as an absolute measure fails to provide a
correct choice
○ In the case of more than one project, which has different costs, a relative
measure of the worthwhileness of the projects is provided by the BCR

Internal Rate of Return

● IRR finds out a rate of return which equates financial inflows with financial outflows
● In other words, it is the rate at which NPV = 0 or BCR = 1

𝑛
*
𝑟 = ∑ ( 𝐶𝐹𝑡

𝑡=1 (1+𝐼𝑅𝑅)
𝑡 )
− 𝐶𝐹0

𝑁𝑃𝑉 𝑎𝑡 𝑙𝑜𝑤𝑒𝑟 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒

𝐼𝑅𝑅 = 𝐿𝑜𝑤𝑒𝑟 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒 + 𝑑𝑖𝑓𝑓 𝑏/𝑤 ℎ𝑖𝑔ℎ𝑒𝑟 𝑎𝑛𝑑 𝑙𝑜𝑤𝑒𝑟 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒 * 𝐴𝑏𝑠 𝑑𝑖𝑓𝑓 𝑏/𝑤 𝑁𝑃𝑉 𝑎𝑡 2 𝑑𝑖𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒𝑠

● Decision Critieria: IRR on its own does not provide a criterion for selection of projects, it
needs some other variable, i.e., the cost of capital, market rate of interest, or the social
rate of discount for comparison to arrive at the decision
 ○ The project is considered feasible if IRR (r*) is greater than indicator rate (cost of
capital, market rate of interest, social discount rate, social opportunity cost etc.)
r* > r-
○ In a situation of choice amongst more than one project, a ranking of projects is
performed in descending order of values of IRR (r*), We choose that set of
projects for which r* is greater than or equal to r, subject to available investment
funds

● IRR will itself depend upon:

○ cost and benefits of the project over a period of time
○ capital investment costs and operating costs of the project over a period of time ;
and
○ life time of the project
These factors may not be the same for different projects, and therefore, IRR as a
criterion of project selection cannot be called a final word on the subject

● Advantages
○ It considers Time Value of Money
○ Evaluation is based upon cash flows generated throughout the life span of the
project
○ Consistent with the concept of wealth maximization of shareholders. When IRR is
greater than the discount rate, the wealth of stakeholders is enhanced and vice
versa

● Disadvantages
○ Possibility of getting multiple IRRs which makes evaluation difficult
○ IRR being a rate, is not additive in nature like NPV
Financial Statement Analysis
● Management is interested to know about the overall performance of the company while
● creditors are concerned about liquidity situation of the firm
● Investors are primarily concerned with profitability of the enterprise

● A ratio based on estimates for a new project, when compared with the same ratio for a
similar business already in operation, may furnish a means to decide whether the
proposed project will be financially competitive
Liquidity Ratio

Profitability Ratio
● One recognized weakness of ROE as a performance measure lies in the fact that a
disproportionate level of company debt results in a smaller base amount of equity, thus
producing a higher ROE value off even a very modest amount of net income
● ROE considers profits generated on shareholders’ equity, but ROCE is the primary
measure of how efficiently a company utilizes all available capital to generate additional
profits
Indebtedness Ratios
Activity Ratio

Lenders’ Perspective
● Critical Ratios
○ Debt Service Coverage Ratio: It is desirable to have a DSCR of 1.5:1 over the
repayment period of the project not exceeding 10 years
○ Break even point and Cash Break even point: In general, these ratios should
be in line with the respective industry and, as a thumb rule the lower these ratios
are, the better
○ Internal Rate of Return: While, conventionally, an IRR of 15% has been
considered the minimum required. Further, the rate of 15% may not be
sustainable in the context of today’s low interest rate regime and, as a matter of
fact, it would be desirable to take a project as viable with a certain margin over
the cost of capital. It may be desirable to have IRR i.e. 350 bps over the Cost of
Capital
○ Debt Equity Ratio and Current Ratio would need to be in line with stipulations
of the Project Finance Scheme and are, at present, expected to be not more than
1.5:1 (not more than 3:1 for infrastructure projects) and not less than 1.33: 1
respectively
○ Fixed Asset Coverage Ratio is expected to be at least 2:1
Financing Options
● Various options available to promoters for financing their projects

Direct FInance Scheme

● Direct financial assistance is provided under schemes of
○ Project Finance
○ Non-Project Finance assistance
○ Working Capital finance

Lender’s Assistance for different types of Projects

● Under the scheme of assistance for Project Finance, assistance is provided for new
grassroots projects as also for expansion, diversification and modernization
requirements of existing projects
● In essence, a loan proposal would be covered under this scheme when requirements of
funds are structured to meet all aspects of a project cost including cost of land, site
development, plant & machinery, technology arrangements, miscellaneous fixed assets,
preoperative/preliminary expenses as also margin money for working capital
● Acceptability of the loan proposal, in such a case, would depend upon technical
feasibility and financial viability of the project as assessed in its totality on standalone
basis

Form of Assistance
● Assistance could be fund based in the form of
○ Loans (Foreign Currency loans or Rupee loans) which, in turn, could be
short-term or long term
○ Subscription to equity, preference shares and debentures
● Non-fund Assistance could also be provided in the form of Guarantees, Underwriting and
LCs wherever required

● Short term assistance is provided for a period upto 12-18 months under Treasury
Product Scheme. This assistance is more in the nature of placement of excess funds
and is extended to only “AA” or “AAA” clients whose ability to meet their repayment
commitments is not in doubt
● Assistance under project finance scheme is provided for longer periods, usually not more
than 10 years tenure (upto 5½ years for non-project finance) depending on debt
servicing capacity of the project/client and availability of tax concessions
Chapter 5 .

Economic Analysis of a Project

● Measure of the costs and benefits of a project to the society
● SCBA would take into account both efficient allocation of resources as well as socially
desirable distribution of income

● Objectives
a. To provide all kinds of information, i.e., economic, social, political, technical,
tangible, intangible, etc
b. To provide information for planning, designing, possible constraints and
implementation of the project

Social Cost Benefit Analysis

● SCBA is essentially an approach for providing a rational framework for project choice
using national objectives and values
Rationale
● The rationale behind SCBA may be the selection of those projects which can fulfil the
national objectives as well as compatible with the available resources
● Private - Maximise Corporate Profitability
Public - Maximise Social Welfare

● Reasons for divergence of social evaluation with the private calculations

a. Distorted Market Price
■ Market price do not reflect the real scarcity or use value of the input and
output concerned
■ SCBA uses the shadow prices which takes into account true scarcity as
well as abundance for use and non-use values

■ Reasons for Distortion

1. Imperfection in the Goods Markets: where marginal cost of the
product is not the same with the price
2. Imperfection in Factor Market: The industrial wage rates are
much more than the true opportunity cost of labour drawn from the
agricultural sector leading to underemployment of labour; capital
market price is normally lower than social cost of capital especially
where capital is subsidised
3. Overvalued or Undervalued Foreign Exchange: Overvalued
foreign exchange rate typically misdirects allocation of resources
towards imports by under valuing their costs; Similarly an under
valued foreign exchange may also misallocate resources
4. Government Policies: Taxes, subsidies, tariffs and other price
controls (rationing) distort the free market price

b. Absence of Market
■ Market price may be absent altogether i.e., the project may involve costs
& benefits that cannot be valued

■ Cases
1. Public Goods: Prices cannot be attached to such goods being
the non-excludable & non-rival consumption nature of such goods
2. Intangibles: This refers to the evaluation of time & human life
3. Externalities: The market prices do not include costs of negative
externalities or benefit of positive externalities
4. Importance of Savings: In SCBA, more weightage is placed on
savings at the time of calculation of costs and benefits of the
project
5. Concern for Redistribution of Income: Benefits going to the
poorer section of the society are given more weightage at the time
 of installation of new projects in Public sector; Also due
consideration is given for regional dispersion of the new projects
6. Merit Goods: Projects like adult education programme, opening
schools and health centres in the remote areas, infrastructural
projects are part of the consideration for creating merit goods for
citizens of the society

● Role of Government
a. Allocative role: Government intervenes in the allocative function of the market
and thus corrects the market failure for introducing policies that could
compensate its effects.
b. Distributive role: Market might fail to provide fair and just distribution of income
and welfare. Government would therefore intervene and bring in distribution of
income into line in a rational manner
c. Stabilisation role: Economies periodically suffer from inflation, unemployment,
lack of real growth, balance of payment problem etc. With the help of monetary
and fiscal policies, government can stabilise the different parameters of the
economy
d. Regulatory Role: Government prepares different rules and regulations for
contracts, trading and exchanges of different categories. Government also
administers the general system of law and justice which regulates individual
behaviour

Direct and Indirect Cost and Benefits

● There is also a class of costs and benefits which are imposed upon others during the
construction and operation of the project and for which nothing is paid or received
● These are external costs and benefits e.g., technological externalities, pecuniary
externalities (distributional effects of the projects), environmental externalities, secondary
benefits and intangibles etc

● An evaluator while appraising the project must take into consideration the following steps
a. Identify all parties affected by the project i.e., producers, consumers and
others (identify all direct and indirect impacts)
b. All cost and benefits must be measured in relation to the next best alternative

■ The existence value is defined in a different way i.e., pure existence

(Inherent values-duty to preserve nature), altruistic (desire to preserve for
 future generations also) and vicarious existence (enjoy environment like
that of Himalayas by thinking without using it)
c. There are certain valuation principles on the basis of which the valuation of
project impacts can be calculated. The principle takes into account the
willingness of the consumer to pay the price for the given quantity of goods

Shadow Price
● Reflect the real cost/opportunity cost/benefits of the input/outputs to the society
● Since these real values represent what the economy would lose or gain in the absence
of the project, they fall into general concept of ‘opportunity costs’
● The rationale of using shadow prices is the efficient use of available resources which
have alternative uses

● Shadow price can be calculated on the basis of consumer willingness to pay

● Shadow price can be defined as the increase in social welfare function resulting from
any marginal change in the availability of commodities or factors of production

● Factors for calculating shadow price(/accounting price)

a. Goals of the society
b. The ability of the government to control the economy
c. Market imperfections

● Once the valuation of costs-benefits has been performed in terms of shadow prices, the
NPV calculation may be evaluated once again to test the validity of a public project

● General principles of SCBA

a. Resources employed in a public project must be valued in terms of their
opportunity costs, i.e., the cost in terms of the opportunity foregone
b. Output should be valued in terms of the utility derived from them e.g., “willingness
to pay” could be a measure of such utility; When an output is replacing an
alternative supply viz., import substitution then it should be calculated at the
value of the resources released

● Shadow prices for Goods

a. The guiding principle of shadow prices of goods needs to be the equilibrium point
of price and marginal cost
b. Increased Production - Marginal Cost
Existing Porduction - Market Cost
Both - Weighted average

● Shadow Prices of Non-Market Goods

a. Valuation of non-market goods should resemble that of market goods i.e., in
terms of the marginal utility derived from them
 b. Indirect Benefit - Time saved (post tax wage per hour)
Direct Benefit - Increase in consumption

● Shadow prices of Factors

a. Labour
■ The shadow wage rate calculation will depend on the type of labour and
the type of project where he is employed
■ When an unskilled worker is drawn from a perfect labour market, the
market wage exceeds the foregone marginal product; The shadow wage
rate would be equal to foregone marginal product at accounting price, the
net social cost of increased consumption and the social cost of decrease
in leisure
■ The component of SWR will depend on the policy of government towards
private consumption, social consumption and distributional effects of
income generation
■ Assumptions
● Govt does not regard increases efforts as social cost
● Govt does not influence the existing distribution of income
● Public and private consumption is of equal value
● Output foregone equals marginal product of labour
● Market Price of output foregone reflects the social value of output

1
𝑆𝑊𝑅 = 𝑐' − 𝑠
(𝑐 − 𝑚)
Where,
SWR: Shadow Wage Rate
c’: Additional resource devoted to consumption
1
𝑠
: Value of a unit of committed resource
c: consumption of wage earner
m: Marginal product of wage earner

■ The standard neoclassical approach is to price the labour at marginal

productivity of labour (MPL) but social evaluation must take into account
the social opportunity cost of labour also
■ Usually, the wage will need an upward adjustment to reflect the
inducement premium (of shifting) higher cost of living in urban areas and
additional infrastructure provided by Government for the increased
employment
■ Downward adjustment would be required if the Government views
employment as a desirable objective in itself

b. Capital
■ The shadow interest rate reflects the social opportunity Cost of Capital
■ Financing options
 ● Tax private consumption: cost is the present consumption
foregone
● Raise from capital market: cost is the future consumption foregone

Θρ
𝑆𝑂𝐶 𝑜𝑓 𝑅𝑠 1 = 𝑟
+ (1 − θ)
Where
θ: Fall in private investment
ρ: Rate of return on private investment
r: discount rate
1 − θ: Fall in present consumption

■ On the benefits side, such public investment may lead to more

consumption or more saving and capital should be employed till Marginal
Benefits are equal to Marginal Costs

c. Foreign Exchange
■ Governments impose tariffs on imports that drive a wedge between the
free market price of foreign exchange and the new price
■ Governments often maintain overvalued domestic currency through
artificially low exchange rates
■ This leads to excess demand for foreign exchange and creates either
premium or shortage of foreign exchange

■ Shadow exchange rate is generally explained as conversion factors

applied for the official exchange rate (OER)

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 𝑎𝑛𝑑 𝑖𝑚𝑝𝑜𝑟𝑡𝑠 𝑎𝑡 𝑙𝑎𝑛𝑑 𝑜𝑟 𝑏𝑜𝑟𝑑𝑒𝑟 𝑝𝑟𝑖𝑐𝑒

𝑆𝐸𝑅 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑙𝑙 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 𝑎𝑛𝑑 𝑖𝑚𝑝𝑜𝑟𝑡𝑠 𝑎𝑡 𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑝𝑟𝑖𝑐𝑒

■ SER is nothing but the opportunity cost of the exchange rate i.e., SER =
OER

Efficiency and Equity in Project Appraisal

● To ensure efficiency and equity, must determine:
○ Benefits going to different social groups
○ Costs and benefits of projects to be borne or distributed between groups
○ While measuring the aggregate value of the project, impacts on low income
group should be given greater weights
○ Use of utility weights is the most contentious issue as they need additional
requisite data or information on distribution of impacts
● Importance of National Parameters
○ Each project will affect employment and wage payments
○ The set of national parameters is, thus, not merely concerned with value
judgments and national objectives, but also with systematic information on facts
that are relevant to all (or many) project-selection exercises

● Importance of Equity
○ In developing countries, where resources are limited, new projects cannot be
selected only on the basis of efficiency. Equity is equally important
○ However, efficiency and equity explains the choice between present and future
consumption
○ Therefore, project selection must take into account distribution of project benefits
○ The shadow pricing pre-supposes a well-defined social welfare function,
expressed as a mathematical statement of country’s objective

● Social Welfare Function

○ There is a multiplicity of objectives i.e., better health services, employment
generation, efficient agriculture etc. All objectives fundamentally relate to
distribution of consumption over time and at a point of time
○ Consumption has two aspects i.e., inter-temporal and interpersonal distribution.
This forms the basis of welfare function
○ It shows the crucial trade-off between growth (transformation of present
consumption into future consumption) and the redistribution of present
consumption (transfer of consumption from the rich to the poor)

● Constraint
○ All economies are confronted by basic constraints on availability of resources and
possibilities of their technological transformation
○ There is also divergence between market prices and economic values
○ To rationalise these, economists advocate use of shadow prices
○ Less developed countries have other constraints such as administrative costs or
political pressures. Under these circumstances, government may wish to use
project selection as an alternative additional method of increasing public income
or of redistribution of incomes

● Rationale of Distribution Weights

○ Normally, project selection should aim to maximise income and allow the fiscal
system to redistribute it in desirable fashion
○ But due to various constraints such as administrative cost, political pressures
etc., the general fiscal system of most developing countries cannot possibly
reallocate the benefits and cost of the projects
○ The financial benefits in the project accrue either to the public sector or to the
private sector and within the private sector, they will either benefit to the rich or to
the poor
○ The public sector is primarily concerned with increase in real resources, whereas
private sector derives its utility from consumption possibilities as determined by
market prices

𝑆 = (𝐸 − 𝐶𝐵) + 𝐶𝑤

Social Benefit = Increase in real resources in public sector + Social welfare from
increased net private sector consumption
E: Public Income
C: Consumption
B: Adjustment Factor
W: Ratio of marginal increase in availability of consumption to the particular
group to marginal increase in the availability of real resources to the public sector

𝑆 = 𝐸 − 𝐶(𝐵 − 𝑊)
Net social Benefit = (Net efficiency Benefits) - (Net Social Cost of increased
private sector consumption)

○ In the economic analysis of the project, it is useful to indicate the projects’ worth
at market prices, at efficiency price and social price
■ The first evaluation relates to financial analysis of projects
■ The second will be similar to that traditionally used by banks & other
agencies; i.e., all incomes will be considered equally valuable. It means
there will be no premium on public income or investment and the discount
rate will be opportunity cost of capital. The evaluation at efficiency prices
corrects for the distortions in product and factor markets but does not
assume any constraint on government’s ability to redistribute income or to
investment
■ The third evaluation will include project’s distributional impact if it is
thought that the economy does suffer from a fiscal constraint
UNIDO Approach
● The UNIDO approach basically explains the calculation of the costs and benefits of the
new project in terms of economic prices i.e. at shadow prices

● Numeraire
○ The costs and benefits of the project need to be calculated in terms of which unit
of currency i.e. at constant or current prices
○ The very first stage of the calculation of shadow prices is the selection of
Numeraire
○ The net benefits of the project are calculated in terms of the net contribution that
project generates to “aggregate consumption over time”
○ Therefore, increase in aggregate consumption is the numeraire or parameter &
all items of the project are to be valued in terms of aggregate consumption and at
constant price

● Consumption Benefits
○ The next step is the measurement of these increased consumption benefits
○ Measure of net present consumption benefits in terms of market prices
 ○ In the beginning, output and cost are estimated at market prices assuming that
market prices are sufficiently representing the social opportunity cost
■ Output is defined as goods & services that would not have been available
in the absence of the project
■ Costs are defined as maximum alternative benefits foregone
○ Since the net benefit is the value of output minus cost of goods and services
produced, it requires calculation of the values of goods & services produced and
cost incurred in this process

● Input and Output

○ The case when market prices sufficiently reflect the real value of the resources to
the increase in aggregate consumption objective
○ If not, adopt the principle of willingness to pay which can be used for valuation of
both output and inputs
○ If the output is a consumer goods and adding to the total supply, then the
consumer’s willingness to pay for this additional supply is the value i.e.
■ if the impact of the project is on increase in the production of consumer
goods, then the calculation of shadow prices would be based on
consumer’s willingness to pay
■ If the consumption of an input in a project results a decline in the input
(production) available elsewhere by an equal amount, then the market
price of this input is the basis of the measure of shadow price of this
production

○ Another concept which frequently represents the economic efficiency of imported

and exported items and of the factors of production. In both the cases, the border
price or international price would indicate the real value
○ The imports are measured at c.i.f. (cost of insurance & freight) and exports at
f.o.b. (free on board).

○ Classification of Goods
■ Traded Goods: The goods which are actually exported & imported
between home country and the rest of the world
■ Tradable Goods: The goods which can be exported and imported but are
not exported and imported due to certain tariff policy following by the
home country or rest of the world
■ Non-Traded Goods: Goods which cannot be exported or imported e.g.
transport, water, roads and electricity etc

○ Fully Traded Items

■ if the tradable items are imported or exported, these come into the
category of fully traded items
 ■ For fully traded goods, both for final output or inputs, the shadow price is
the international price i.e. imported items at c.i.f. and exported items at
f.o.b

○ Non Tradable Items

■ For the non-tradable items, it is the process of adjusting market prices of
specific resources wherever these prices are not representing the real
contribution of the resources to the aggregate consumption objective
■ The general principal of the ‘willingness to pay’ is applied to value both
inputs or output
● If the project results in the increase in the supply of consumption
goods, then the value of this increased consumptions is the
consumers’ willingness to pay
● In case, the new project uses the inputs in a quantity that reduces
the supply of inputs to other projects then the economic value will
be the willingness to pay by the other project for this input

○ Foreign Exchange
■ These are valued at the opportunity costs calculated as per the criterion
of willingness to pay
■ The value of foreign exchange used as inputs in the project and produced
items which are exported by the project should be estimated by adjusting
the foreign exchange premium i.e., the value of foreign exchange must
properly represent the shadow price of foreign exchange both on the input
and output side.

○ Labour
■ Labour is also valued at shadow price because market wage rates do not
correctly show the right value of labour
■ The shadow price of employed labour may be measured in terms of what
wages he has been earning or what other employers are willing to pay
■ However, for an unemployed worker the shadow price of labour takes into
account the wages to be paid, value to his leisure time which he is
foregoing, increased consumption, cost of training, rehabilitation cost,
transport cost etc

○ Capital
■ The Shadow price of capital is the net present value of the aggregate
consumption added directly or indirectly from a unit of marginal
investment
■ Shadow price of capital also depends on the capital productions & the
social rate of discount at which returns are calculated into present value
of capital
 ■ If the investment is drawn from the alternative projects, the income would
have earned from the second best alternative is the opportunity cost of
capital
■ In the final approximation, the impact of the project on savings, (its value)
income redistribution (tax, subsidies, project installation in backward area
production of merit goods etc.), are also to be valued

○ Net Benefits
■ Divide the total costs and benefits according to groups of gainers & losers
■ Three groups of gainers & losers have been differentiated as government,
workers and the private business sector
■ The net benefits appropriating to these three groups are further divided
into the ratio that is going for consumption and saving by each of the
three groups
■ The shadow price of the proportion going to consumption is measured by
the consumption rate of interest
■ Similarly, the amount going for saving is calculated at the shadow price of
investment or at the investment rate of interest
■ Finally, the policy maker decides the distribution of weights for groups of
gainers along with the attachment of other weights for different ranges of
value parameters

Little Mirrlees Approach

● Suggested the need for the usage of shadow prices instead of market prices in the
economic appraisal of any industrial project

● World prices represent the actual trading opportunities of the country i.e. country should
either produce at home or import the goods
● This is the basic innovation point of L-M approach to the usage of world prices for all
categories of goods, for fully traded, tradable and even for non- tradable items which
cannot be imported or exported (electricity, labour, local transport etc.)
○ To avoid distortions which creep into the calculations
○ To measure all values in common currency

● In the calculation of cost & benefits of a project, all prices need to be taken from a
common source which helps to provide the more realistic values of all the items

● Numeraire
○ Emphasized the calculation of costs and benefits of the project in terms of
uncommitted social income i.e. project cash flow in terms of savings (Investment)
○ Therefore, uncommitted social/public income is the numeraire in the L-M
approach
● Problems for World Prices
○ Have to assume that there are worldwide trading opportunities i.e. imports &
exports operate under conditions of free movement of goods & services and at
free exchange rate
○ Also there is no restriction/protection on trade or quota

○ There can be difference in the quality of products in the whole range of imported
items. There can be wide range of prices for same imported good. Similarly,
these variations can be there for home produce items for export
○ We never find free trade conditions. There are restrictions, quotas and bilateral
agreements etc. for traded items. Magnitude of transport cost, packaging costs,
maintenance costs also differ

● Traded Goods
○ The shadow price of all the imported items of the traded goods are valued at c.i.f.
(cost of insurance & fright) or at landed border price at the shadow exchange rate
○ Similarly shadow value of the exported items are calculated at f.o.b. (free on
board)
○ It is assumed that world supply is infinitely elastic and therefore the domestic
price and production remain unchanged

● Tradable Goods
○ Those items which are traded due to the change in suitable trade policy, are
treated as fully traded goods i.e. imports at c.i.f. and exports at f.o.b
○ Otherwise treat them as non-traded items

● Non-Traded Goods
○ Suggested the break-up of non-traded goods into various components and the
use the landed border price for each component
○ For example, the calculation of cost of production of roads, one has to first break
down the cost of charcoal, labour, cement and other material to be used in the
construction of road. Then convert this domestic cost into landed border price to
reach at the world price of roads

● Labour
○ One has to calculate the increased consumption of labour due to higher income
apart from the cost of rehabilitation, training, transport and other over head cost
due to settlement in the urban area at world prices

● Standard Conversion Factor

○ For certain non-traded items, it is not possible to convert them into traded goods.
○ For such cases, L M has suggested the use of common conversion factor to
reflect the cost of non-traded items
○ Standard conversion factor is the conversion of domestic prices into landed
border prices or the valuation of domestic prices in terms of foreign exchange

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑙𝑙 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 & 𝑖𝑚𝑝𝑜𝑟𝑡𝑠 𝑎𝑡 𝑙𝑎𝑛𝑑𝑒𝑑 𝑏𝑜𝑟𝑑𝑒𝑟 𝑝𝑟𝑖𝑐𝑒𝑠

𝑆ℎ𝑎𝑑𝑜𝑤 𝐸𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑅𝑎𝑡𝑒 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑙𝑙 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 & 𝑖𝑚𝑝𝑜𝑟𝑡𝑠 𝑎𝑡 𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑝𝑟𝑖𝑐𝑒𝑠

𝑆ℎ𝑎𝑑𝑜𝑤 𝐸𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑅𝑎𝑡𝑒

𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝐹𝑎𝑐𝑡𝑜𝑟 = 𝑂𝑓𝑓𝑖𝑐𝑖𝑎𝑙 𝐸𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑅𝑎𝑡𝑒
Chapter 6 .

Environment Analysis
● The main objective of any developing economy is to maximize the social welfare and
provide the required goods and services to its citizens
● Environment analysis of a new project idea has the capacity to inform about the
bio-physical and social impacts of this activity

● Natural Environment provides three functions to the human economy

○ Sources of raw material
○ Assimilation of waste
○ Ecosystem services
■ Provisioning Service (different type of raw material and resources
obtained from ecosystems)
■ Regulatory Service (benefits obtained from the regulation of different
eco-system processes e.g. climate regulation)
■ Supporting Service (services necessary for production of all other
services, eg. soil formation)
■ Cultural Service (non-material services i.e. recreation and cultural
services e.g. eco tourism & recreation)

Environment Impact Assessment

● EIA is the process of identifying and evaluating the information on the environment
impacts of a proposed project
● It is the assessment to find out the environmental consequences of any developmental
proposal
● The main objective of EIA is to evaluate the efficiency with which natural resources need
to be utilized and ultimately protect the productivity & capacity of the eco-system

● The EIA process includes the identification, evaluation, prediction and explanation of the
information and also suggestion of the alternative steps

● Principles
○ Full information available at every stage of the project
○ Environmental focus approach
○ Preventive and precautionary measures approach rather than based on
mitigation measures
○ Public participation approach
○ Open communication
○ Internalization of environmental issues
○ Recognition of polluter pay principle
● Sustainable Development: “Development that meets the needs of the present without
compromising the ability of future generations to meet their needs and aspirations”
● EIA is considered a safe benchmark for sustainable development

● Main objective of environmental and economic policies should be

○ Changing the meaning and quality of economic growth
○ Meeting the essential basic needs
○ Ensuring a sustainable level of population
○ Conserving & enhancing the resource base
○ Reorienting technology & managing risk
○ Making Environment an integral part of each & every economic policy
○ Meeting the need of society at every stage

● One has to find out the net impact of the project by comparing the status of development
with and without the project
EIA and Project Life Cycle
● EIA process is compatible with project life cycle

● Although the EIA processes and practices vary from sector to sector and country to
country but the basic guidelines are quite similar
Environment Impact Statement
● It is a document required by the National Environmental Policy Act (NEPA) for certain
actions “Significantly affecting the quality of the human environment”
● “Environment” here is defined as the natural and physical environment and the
relationship of people with that environment

● EIS is a document that explains the impact on environment as a result of a proposed

action
● It also mentions the impacts of different alternatives and the measures to mitigate them
● The statement also mentions both direct and indirect impacts that could potentially
damage the environment EIS consists of a systematic analysis of the proposed
development in relation to the existing environment
● The information on impact should include all direct, indirect, secondary short term, long
term, temporary, permanent, positive and negative implications
● EIA is prepared for the project to estimate the environment impact at every stage of the
project
● Preparation of EIS helps in avoiding adverse impacts on environment
● EIS improves the reporting, auditing and monitoring process

● Documentation of EIS
a. Preamble
b. Details of the project
c. General information
Chapter 7 .

Environmental and Social Impact Assessment

● Every project leaves its imprint on both environment and society; A detailed analysis of
such implications using appropriate data, tools and techniques is called Impact Analysis
● A study of impact only on the environment is called environmental impact analysis (EIA),
on the society and economy is called social impact analysis (SIA)

● It includes the processes of analysing, monitoring and managing the intended and
unintended social consequences, both positive and negative, of planned interventions
(policies, programs, plans, projects) and any social change processes invoked by those
interventions

● Goals
○ To drive improvements that increase the value of programs to the people they
serve
○ Helps organizations to plan better, implement more effectively, and successfully
bring initiatives to scale
○ Facilitates accountability, supports stakeholder communication, and helps guide
the allocation of scarce resource

● The main reason for the slow rise in status of SIA compared to EIA can be attributed to
○ continuing uncertainties and ambiguities over its legal status,
○ the existence of a wide diversity of methodologies,
○ inadequate data availability, and
○ lack of expertise

● An integrated approach which covers both social and biophysical issues. Such an
integrated approach is labelled Environmental and Social Impact Assessment (ESIA)
● EIA with a broader definition (generally adopted in developing countries) closely
represents ESIA
● Impacts

● Categories of Impacts
○ Lifestyle impacts: on the way people behave and relate to family, friends and
cohorts on a day-to-day basis
○ Cultural impacts: on shared customs, obligations, values, language, religious
belief and other elements which make a social or ethnic group distinct
○ Community impacts: on infrastructure, services, voluntary organisations,
activity networks and cohesion
○ Amenity/quality of life impacts: on sense of place, aesthetics and heritage,
perception of belonging, security and livability, and aspirations for the future
○ Health impacts: on mental, physical and social well being, although these
aspects are also the subject of health impact assessment
Chapter 8 .

Uncertainty Analysis
● The entire project feasibility analysis is based upon certain assumptions w.r.t. various
characteristics of the project
● Analysts take into view certain macroeconomic, industry and company specific
information and accordingly allocate certain values to key variables
● However, uncertainty is a key aspect of the entire analysis

Break Even Analysis

● It enables the analyst to examine the impact of changes in different variables like cost,
production volume, and price on the profits
● The break-even analysis determines minimum levels of various variables below which
the project cannot be kept operational
● The break - even point is defined as the point where total revenue equals the variable
costs plus the fixed costs
● It is also known by an alternative title of ‘Cost Volume-Profit Analysis’

𝑃𝑄 = 𝐹 + 𝑉𝑄

Where,
𝑃: price per unit
𝑄: volume of production in units
𝐹: fixed cost
 𝑉: Variable costs per unit

● The primary motive behind performing Break-Even Analysis is to determine volume of

sales at which a company makes neither profit nor loss

● Safety Margins: reflect the percentage upto which the value of variable can change
keeping the company profitable

𝑀𝑎𝑟𝑘𝑒𝑡 𝐷𝑒𝑚𝑎𝑛𝑑−𝐵𝑟𝑒𝑎𝑘 𝐸𝑣𝑒𝑛 𝐷𝑒𝑚𝑎𝑛𝑑

𝑆𝑎𝑓𝑒𝑡𝑦 𝑀𝑎𝑟𝑔𝑖𝑛 𝑓𝑜𝑟 𝐷𝑒𝑚𝑎𝑛𝑑 % = 𝑀𝑎𝑟𝑘𝑒𝑡 𝐷𝑒𝑚𝑎𝑛𝑑
* 100
𝑆𝑎𝑙𝑒𝑠 𝑃𝑟𝑖𝑐𝑒−𝐵𝑟𝑒𝑎𝑘 𝐸𝑣𝑒𝑛 𝑃𝑟𝑖𝑐𝑒
𝑆𝑎𝑓𝑒𝑡𝑦 𝑀𝑎𝑟𝑔𝑖𝑛 𝑓𝑜𝑟 𝑝𝑟𝑖𝑐𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 %= 𝑆𝑎𝑙𝑒𝑠 𝑃𝑟𝑖𝑐𝑒
* 100

● Assumptions
a. Both Revenue and Cost functions are linear
b. Costs can be classified into Fixed and Variable categorie
c. Prices of output and input remain unaltered
d. Productivity of factors of production will remain the same
e. The state of technology and the process of production will not undergo any
significant change
f. There will be no significant change in the level of inventory
g. The company manufactures a single product; in the case of a multiproduct
company, the sales - mix of products remains unaltered
 ● Merits
a. The Break even analysis is simple to perform and creates a very livid visual
impact when it is presented graphically
b. It can be easily understood and interpretations can be drawn comfortably out of
the same

● Limitations
a. The cost, volume and price changes are analysed separately, although in reality
these variables are inter-related
b. Another simplifying assumption in breakeven analysis is that the variable cost per
unit remains the same over a large range of production, and this is seldom true
c. It is a static concept whose usefulness is confined to the short run

Senstivity Analysis
● Sensitivity Analysis helps in identification of critical variables that have the maximum
impact on the costs and benefits of a project

● Sensitivity analysis tries to evaluate the impact of any unforeseen unfavourable change
in value of estimated variables on the profitability (NPV/IRR) of the project

● Purpose
a. Identify the key variables which have an impact on cost and benefit of the project
b. Investigate the impact of likely unfavourable changes in these key variables
c. Assess whether project feasibility would be affected by these changes
d. Explore actions that could mitigate possible adverse effects on the project
 ● Process
a. Identify all the uncertain variable
b. Change these variables one at a time, holding the remaining variables constant
at their best estimated value
c. Observe the direction and impact of these variables on costs and benefits
d. Rank the variables in decreasing order of the impact of change (Maximum
adverse impact to be ranked 1)

● Merits
a. It provides an exact figure of the impact on profitability of the project as a result of
variation in a given change in an input variable under the condition of ‘ceteris
paribus’
b. It provides useful insights into the relative riskiness of projects and is an
indispensable method for risk determination
c. It is easy and simple to use. One can apply on all possible variables and find out
the variables which are most sensitive to change

● Limitations
a. Sensitivity Analysis studies the impact of change in one variable at a time.
However, in reality various variables are interdependent and interlinked in a
project
b. The sensitivity analysis shows the impact of change in one variable on the
NPV/IRR but does not explore the perspective of probability of the event
c. In spite of meticulous application of sensitivity analysis, a project may face an
uncertainty which may not be comprehended at the time of the project appraisal
stage

Risk Analysis
● Risk analysis is concerned with identifying the risks associated with a project and
incorporating them, in a quantitative manner, into the measure of a project’s results
● Risk refers to the situation in which a probability distribution can be established for the
project. It represents the discrepancy between what is expected and what has happened

● The main difference between risk analysis and sensitivity analysis is that the risk
analysis provides an indication of the likelihood that an event, such as a change in
product price, will take place, where as sensitivity analysis only specifies the
consequences of such an event

● Expected Value: Expected value is considered as a type of weighted average or long

run average

𝑛
𝐹𝑡 = ∑ 𝐹𝑥𝑃𝑥
𝑥=1
 ● Range: This is the simplest measure of risk. The range of a distribution is the difference
between the highest value and the lowest value

● Standard Deviation: This is a more formalised measure of risk, which can be used to
measure the dispersion of the probability distribution of expected cash flow. The smaller
the standard deviation - the lower the risk of the project

𝑛
2
σ= ∑ (𝐹𝑥 − 𝐹𝑡) 𝑃𝑥
𝑥=1

2
● Variance: σ

● Coefficient of Variation: a standardised risk measure computed by dividing the

standard deviation of a probability distribution by its expected value because Standard
Deviation provides misleading results when one compares the risk of two mutually
exclusive projects with largely varying sizes

σ 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛
𝐶𝑉 = 𝐹𝑡
= 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑉𝑎𝑙𝑢𝑒

Risk Analysis using Simulation Models

● Simulation is the fastest and the easiest operation of the entire analysis. This approach
is usually named as Monte Carlo simulation
● The use of computer allows the consideration of many variables along with their
probability distribution

● Process
a. Determine the probability of distribution for each of the key variables
b. A random number generating mechanism associated with the probability
distributions is used to produce varieties
c. When a random value is generated for all the critical vales, a set of cash flows is
calculated
d. NPV of the project is calculated
e. This is repeated many times and thus a frequency/probability distribution can be
derived

● Method for obtaining probability distribution

a. Potrait Method
■ Standard statistical distributions (normal, chi-square etc.) are imposed on
the observed distribution of a variable, and that standard distribution is
then chosen which appears to fit best the observed distribution
 ■ The advantage of the portrait method is that it can be applied when
information on the concerned variable is particularly scarce but on the
other hand the technician tends to accept any smooth distribution

b. Building Block Approach

■ Leads to step rectangular distributions
■ The project evaluator designs a probability distribution based on discrete
intervals within the available range of values for the variable
■ To each interval he assigns a probability level, until he arrives at a
sufficient number of intervals with assigned probabilities
■ The freedom to choose the number of intervals and their discreteness
(which the portrait method lacks) should enable the evaluator to sharpen
his judgment on the probability distribution

● Popular Probability Distribution

a. Step Rectangular Distribution: The expert decides the range of values.
Subsequently, he divides the entire range into few intervals and then allocates a
possible probability value to these intervals
b. Discrete Distribution: The discrete distribution is very similar to the step
rectangular distribution. The main difference between the two is that in case of
discrete, the probability values are not assigned to a range but to a particular
value only

c. Uniform Distribution: This distribution is just the opposite of the step

rectangular distribution. This distribution is used when the expert is unable to
decide different intervals within the range. He allocates uniform probability to the
entire range and none to any values above or below the same

d. Trapezoidal Distribution: takes note of this normal variation around the best
estimate of the variable and represents the range within which the variable is
most likely expected to fall in. Within the inner range, all values have the same
probability, they decrease outside the range; This distribution fits a large class of
subjective judgments

e. Triangular Distribution: This distribution is a particular case of the trapezoidal

distribution. It reflects the fact that one is tempted to assign a value close to the
extreme of a range a lower probability than to a value close to the best estimate
 ● Process (continued)
a. a computer can be used to generate random values for each variable and to
compute the rate of return or the net present value

● Merits
a. The probability distribution of the rate of return for the project summarises the risk

● Limitations
a. This result of the simulation, however, does not, provide any indication as to
whether or not the project is suitable

Risk Analysis using Decision Trees

● Decision Trees Analysis offers a systematic framework for analysing a sequence of
interrelated decisions which may have to be made over time for project selection

● Process
a. Break the project into clearly defined stages
b. List all possible outcomes at each stage and Specify the probability of each
outcome at each stage based on information available
c. Specify the impact of each outcome on the expected cash flows from the project
 ● Merits
a. The visual representation of the Decision Tree analysis makes it easy to
understand, represent and make appropriate choice
b. The output of the decision tree can be easily interpreted
c. It is a simple tool to evaluate an investment decision where the available options
are few and the outcomes are limited
d. Decision trees can be used in conjunction with other project management tools

● Limitations
a. If there are multiple decisions involved in the process, the expected NPV shall be
cumbersome to calculate and less accurate
b. One cannot take a conclusive decision on going ahead with the project with only
decision tree analysis

Monitoring and Control of Investment Project

Critical Path Method (CPM)

● This technique relates cost to time and how to complete the project with the lowest
possible cost
● CPM models the activities and events of a project as a network
● Activities are depicted as nodes on the network and events that signify the beginning or
ending of activities are depicted as arcs or lines between the nodes

● Steps
a. All the individual activities must be listed out at the micro level
b. Specify the sequence/interrelationships of all the activities listed in Step 1
 c. Frame the CPM network diagram clearly depicting the sequence of activities
d. Estimate the completion time for each activity so as to identify the total time
required
e. Identify the critical path (longest path through the network)
f. The CPM diagram must be updated on a regular basis as per the requirement of
the project

● Parameters to determine the critical path

a. Earliest Start Time (EST): the earliest time at which the activity can start given
that its precedent activities must be completed first
b. Earliest Finish Time (EFT): equal to the earliest start time for the activity plus
the time required to complete the activity
c. Latest Finish Time (LFT): the latest time at which the activity can be completed
without delaying the project
d. Latest Start Time (LST): equal to the latest finish time minus the time required
to complete the activity

● The slack time for an activity is the time between its earliest and latest start time, or
between its earliest and latest finish time
a. Slack is the amount of time that an activity can be delayed past its earliest start
or earliest finish without delaying the project

● The critical path is the path through the project network in which none of the activities
have slack, that is, the path for which ES=LS and EF=LF for all activities in the path

● Advantages
a. Provides a graphical view of the project
b. Clearly depicts the interrelationships amongst the various steps of the project
c. Predicts the total time required for completion of the entire project
d. Reflects the activities which are critical for maintaining the project schedule
The Program Evaluation and Review Technique (PERT)
● The technique is a network model that allows for randomness in activity completion
times
● PERT uses three time estimates
a. optimistic (least time taken to complete the activity),
b. pessimistic (longest time taken to finish the activity) and
c. most likely (time that is expected to occur most often if activity is frequently
repeated)

● Evaluation of these three time estimates help in establishing the probability of completing
a project within a specified time and take calculated risk before commencing a project
● It has the potential to reduce both the time and cost required to complete a project

● Steps
a. Identify the specific activities and milestones
b. Determine the interdependencies and proper sequence of the activities
c. Frame a network diagram specifying the above activities
d. Evaluate the three time estimates required for each activity
e. Determine the critical path
f. Update the PERT chart on a regular basis during the course of the project

● Advantages
a. Expected project completion time
b. Probability of completion before a specified date
c. The critical path activities that directly impact the completion time
d. The activities that have slack time and that can lend resources to critical path
activities
e. Activity starts and end dates

PERT CPM

Probabilistic in nature Deterministic in Nature

Useful for new non-repetitive projects Useful for repetitive, standardised projects

Focuses on accurate time estimates Focuses on time-cost trade-off

Variation in project time is an inherent part of Additional resources can be used to reduce
PERT time

Event oriented analysis (start-finish nodes) Activity Oriented Analysis

Chapter 9
Chapter 11 .

Financing Options for a New Venture

● New ventures have been provided financial support majorly by Venture Capital Funds,
Private Equity investors, Angel Investors, High Networth Individuals (HNIs), incubators,
accelerators, seed funds and at times by the government

● Types of Funding
a. Equity Based Funding
b. Debt based Funding
c. Unconventional

● Equity Based Funding Options

a. Venture Capitalist/Private Equity
■ also known as risk capital primarily due to the amount of risk involved in
such transactions
■ often the first large and most suitable funding option for a startup with
large up-front capital requirement
■ firms usually invest with a long term horizon in expectation of a capital
gain of the equity stake in the venture
■ Another distinguishing feature of venture capital investment is their
participation in the management of the company and timely guidance and
support for growth of the organisation
 ■ Process
● Entrepreneur must approach the venture capitalist with a detailed
business plan complete with vital details
● The venture capital fund (VCF) performs due diligence of the
proposal satisfying themselves about the feasibility of the proposal
● the legal documentation is done and funding process is finalised.
● The most preferred instruments used for funding by the venture
capitalists are compulsory convertible preference shares and
compulsory convertible debentures

■ Types of VC Funding: early stage financing, expansion financing and

acquisition/buyout financing

■ VC vs PE
● usually Private equity firms do control investing and acquire a
majority stake whereas VCs only acquire minority stakes
● PE firms usually acquire mature companies while VCs invest in
early stage companies which have the potential to make big profits
quickly

b. Angel Investors
■ usually individuals who may be retired entrepreneurs, industry executives
or a group of industry professionals who are willing to fund the venture in
return for an equity stake
■ Usually, Angel investors provide funding at the seed stage, but they don’t
like to invest until the business owner has shown initiative by placing his
or her own capital at risk
■ An investee company has to be within 3 years of its incorporation, not
listed on the floor of a stock exchange, and should have a turnover of less
than INR 250 million and not be promoted by or related to an industrial
group
■ The deal size is required to be between INR 5 million and INR 50 million.
Separately, it is required that an investment shall be held for a period of at
least 3 years

c. High Net-Worth Individuals

■ those who have ample financial resources to sponsor a startup
■ mainly invest in those businesses which are having the highest calibre
level to sustain in the market and generate good revenue streams in short
span of time
■ The first advantage of this type of funding that one can design a
customised investment based business plan which may provide an edge.
■ Lastly, the high net-worth individuals may charge the lower fees
 d. Initial Public Offering (IPO)
■ During the IPO, the Company raises funds by offering and issuing equity
shares to the public
■ existing capital investment will make the existing shareholdings more
valuable in absolute terms
■ Various parties such as investment bankers, underwriters and lawyers
need to be engaged as part of procedure of IPO

● Debt Financing
a. Loan from Banks and NBFCs
■ help finance the purchase of inventory and equipment, besides securing
operating capital and funds for expansion
■ banks do not seek ownership in your venture
■ Not only do you pay interest on loan but it also has to be done on time
irrespective of how your business is faring
■ They require substantial collateral and a good track record, besides the
fulfilment of other terms and conditions and a lot of documentation

b. External Commercial Borrowings

■ in the form of bank loans, buyers’ credit, suppliers’ credit, securitized
instruments can also be availed from non-resident lenders to fund the
business requirement of a company
■ Access: Automatic Route and Approval Route, depending upon the
category of eligible borrower and recognized lender, amount of ECB
availed, average maturity period and other applicable factor
■ It cannot be used for (a) on lending or investment in capital market; (b)
acquiring a company in India; (c) real estate sector etc

c. CGTMSE Loans
■ Under the Credit Guarantee Trust for Micro and Small Enterprises
scheme, one can get loans of up to 1 crore without collateral or surety
■ Any new and existing micro and small enterprise can take the loan under
the scheme from all scheduled commercial banks and specified Regional
Rural Banks, which have signed an agreement with the Credit Guarantee
Trust

● Unconventional Modes of Financing Options

a. Crowd Funding
■ recent phenomena being practiced for providing seed funding through
small amounts collected from a large number of people (crowd), usually
through the Internet
■ Wishberry in and Catapoolt are a few among many such forums
operating/present in India
b. Incubators
■ These set-ups precede the seed funding stage and help the entrepreneur
develop a business idea or make a prototype by providing resources and
services in exchange for an equity stake ranging from 2-10%
■ Incubators offer office space, administrative support, legal compliances,
management training, mentoring and access to industry experts as well
as funding through angel investors or VCs
Paper Pattern
1. Numericals
a. Payback Period, NPV, and IRR (all 3)
b. Management Accounting + Sensitivity analysis

2. Project and market Feasibility Testing

a. Memorise the steps n on the spot

3. Technical/Social/Environmental Analysis
a. Format of all
b. Advantages n Disadvantages of all
c. Key aspects of all

4. Short Notes
a. Project (appraisal) in India
b. Approaches/Methods (UNIDO, LM, PERT)
c. Analysis steps