PROJECT ANALYSIS

MODULE 2
Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Ms. Amira Zainab Khanum

Faculty
DOS&R in Business Administration
Tumkur University, Tumkur
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Project??
The Project Management Institute defines a “Project” as a
temporary endeavor undertaken to create a unique product,
service or result
There are a few key things to notice in this definition
The word “temporary ” means project must have a defined
beginning and end
The purpose of a project must be to create a “unique
product, service or result”, this means a project will be
started in order to accomplish a specific goal that is typically
outside the realm of the day to day business operation. This
means , the project team might include people who don’t
usually work together, and require resources that are typically
outside the scope of day to day operations
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Project must have the following components:

Goal
Timeline
Budget
Stakeholders
Project Manager
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Characteristics
It has a start and finish
It creates something new
It starts with an idea
It isn't business as usual
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

What is Project Analysis?

• Project analysis is the process of examine the

aspects of a project in details. This is mainly to
see to it that the project runs as expected and is
also within the predefined budget.
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

THE BENEFITS OF PROJECT ANALYSIS

Determines Feasibility of a Project

Aids in Budgeting
Improves Project Planning and Scheduling
Detects and Mitigates Risks
Expedites the Monitoring and Evaluation of
Projects.
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Facets of Project Analysis

• The important facets of project analysis are:
Market Analysis
Technical Analysis
Financial Analysis
Economic Analysis
Ecological Analysis
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Market and Demand Analysis

It is also known as a documented investigation of a
market that is used to inform a firms planning activities
Market Analysis is concerned primarily with two
questions:
What would be the aggregate demand for the proposed
product/ service in the future?
What would be the market share of the project under
appraisal?
To answer the above questions, the market analyst
requires a wide Variety of information and appropriate
forecasting methods. The kinds of information
required are:
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

• Consumption trends in the past and the present

consumption level.
• Past and present supply position
• Production possibilities and constraints
• Imports and exports
• Structure of competition
• Cost structure
• Elasticity of demand
• Consumer behavior, intentions, motivations,
attitudes, preference and requirements
• Distribution channels and marketing policies in use
• Administrative , technical, and legal constraints
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Technical Analysis
Technical Analysis analysis of the technical and
engineering aspects of a project needs to be done
continually when a project is formulated.
Technical analysis seeks to determine whether the
prerequisites for the successful commissioning of
the Project have been considered and reasonably
good choices have been made with respect to
location, size, process etc.
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

The important questions in technical analysis are:

Whether the preliminary tests and studies have been done or
provided for?
Whether the availability of raw materials, power, and other inputs
has been established?
Whether the selected scale of operation is optimal?
Whether the production process chosen is suitable?
Whether the equipment and machines chosen are appropriate?
Whether the auxiliary equipments and supplementary engineering
works have been provided for?
Whether the provision has been made for the treatment of
effluents?
Whether the proposed layout of the site, buildings, and plant is
sound?
Whether the work schedule have been realistically drawn up?
Whether the technology proposed to be employed is appropriate
from the social point of view?
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Financial Analysis
Financial Analysis seeks to ascertain whether
the proposed project will be financially viable in
the sense of being able to meet the burden of
servicing debt and whether the proposed project
will satisfy the return expectations of those who
provide the capital. The aspects which have to be
looked into while conducting financial analysis are:
Investment outlay and cost of project.
Means of Financing.
Projected Profitability
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Cont…
Break Even Point
Cash flows of the project
Investment worthwhileness judged in terms of
various criteria of merit
Projected financial position
Level of risk
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Key issues in Project Analysis

Market Analysis--- Potential market
Market share

Technical Analysis --- Technical Viability

Sensible Choices

Financial Analysis ---- Risk

Return

Economic Analysis---- Benefits and costs in shadow price

Other impacts
Ecological Analysis-- -Environmental Damage
Restoration measure
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Financial estimates and projections

In this we will discuss the estimates and
projections required for financial appraisal. It
helps in developing projections for three
financial statements, i,e.. Profit and loss
statement , cash flow statement and balance
sheet.
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

1.Cost of Project:

The cost of project represents the total of all items of outlay

associated with a project which are supported by long term
funds. It is the sum of the outlays on the following:
 Land and site development
 Buildings and civil works
 Plant and machinery
 Technical know- how and engineering fees
 Expenses on foreign technicians and training of Indian
technicians abroad
 Miscellaneous expenses
 Preliminary and capital issue expenses
 Pre operative expenses
Margin money for working capital
Initial cash losses
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Resource Planning
According to PMBOK, it’s “determining what resources
(people, equipment, materials, etc.) and what quantities of
each should be used to perform project activities.”

For most creative and service-based companies the

resources are people, so resource planning is a process you
can use to identify team members you need to allocate for
your project, and when you’re going to need them.

Resource allocation helps you to choose the best available

resources for your projects and manage them throughout
the work, so you can avoid under or overutilization  of your
employees. Sadly, not all project managers use it to their
advantage.
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Cont..
• In order to better explain how to plan resources
at your organization, let’s discuss
about prerequisites you need to prepare
upfront, techniques to plan resources for a
project and tools that will make it way easier.
1. Prerequisites
work breakdown structure (WBS),
estimated duration
find employees with skills
use historical data
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Cont…
2. Techniques
Expert judgment.
alternatives identification.
Bottom-up estimating.
3. Tools
4. Resolving planning conflicts
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Means of Finance
To meet the cost of the project following means
of finance are available
Share capital
Term loans
Debenture capital
Deferred credit
Incentive sources
Miscellaneous sources
Projected cash flows
Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

The cash flow statement shows the movement of

cash into and out of the firm and its net impact
on the cash balance within the firm.
The format for preparing the cash flow
statement, which is really a cash flow budget.
Shown in the fig.1 while this format calls for
preparing the cash flow statement on a half
yearly basis for the construction period and on
an annual basis for the operating period(for ten
years) for managerial purposes.
This would facilitate better financial planning,
project evaluation, and fund control.
Cash flow statement fig. 1 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Sources of funds:
1. Share issue
2. Profit before taxation with interest added back
3. Depreciation provision for the year
4. Development rebate reserve
5. Increase in secured medium and long borrowings
for the project
6. Other medium/ long term loans
7. Increase in unsecured loans and deposits
8. Increase in bank borrowings for working capital
9. Increase in liabilities for deferred
payment(including interest) to machinery
suppliers
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

10 Sale of fixed assets

11 Sale of investments
12 Other income (indicate details)
Total (A)
Disposition of funds
1. Capital expenditure for the project
2. Other normal capital expenditure
3. Increase in working capital
4. Decrease in secured medium and long term
borrowings
--All India institutions
-- SFCs
-- Banks
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

5. Decrease in unsecured loans and deposits

6. Decrease in bank borrowings for working capital
7. Decrease in liabilities for deferred
payments(including interest ) to machinery
suppliers
8. Increase in investment in other companies
9. Interest on term loans
10. Interest on bank borrowings for working capital
11. Taxation
12. Dividends
-Equity
- Preference
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

13. Other expenditure (including details)

Total (B)
- Opening balance of cash in hand and at
bank
- Net surplus/ deficit(A-B)
-Closing balance of cash in hand and at bank
• Working capital here is defined as:
(Current assets other than cash)-(Current
liabilities other than bank borrowings)
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Problems
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Solution
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

WACC (Weighted Average Cost of

Capital)
It is also known as the ‘Composite Cost of
Capital’, ‘Overall cost of capital’, or
‘Average Cost of Capital’.

 It is the minimum rate of interest generated

from a project to meet the expectations of the
investors.
 It is defined as the tool of weighted average cost
of individual sources of financing.
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Calculation of WACC involves

following steps
1. ‘Specific Cost ’ of each source of finance is
calculated individually.
2. Weighted is assigned to each ‘Specific Cost ’ in
the ratio of their share in the total cost.
3. Then the Weighted average cost of individual
sources is
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Flotation Cost
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Cont…
It includes audit fees, legal fees, accounting fees, investment
bank’s share out of the issuance and the fees to list the stocks
on the stock exchange that needs to be paid to the exchange.
It is expressed as a percentage of the issue price since the
capital that is raised after the sale of the new stocks will be
after the deduction of the flotation cost.
It is evident that due to this cost that is involved in the issuance
of the new stocks, the final price of the new stocks is reduced
and ultimately results in a lowered amount of capital that can
be raised.
The cost involved in the issuance of debt securities or 
preferred stocks is often less than issuing common stocks.
The average range of flotation costs for issuing common stocks
falls anywhere between a minimum of 2% to a maximum of
8%.
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Cost of Capital and Flotation Cost Formulas

Following are the components of Flotation Cost
and its impact on the cost of capital
#1 – Inclusion of Flotation Costs into the
Cost of Capital
• This approach includes flotation costs into the
cost of capital. Cost of capital consists of the cost
of debt and equity. Hence, raising capital via
debt or issuance of new stocks would affect the
cost of capital.
• The below formula can be used to find the Cost
of Equity of the organization:
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Cont…
[When Flotation Cost is given as per-share
basis]
Cost of Equity = (D1/P0)+ g

Where,
D1 is the Dividend per share after a year
P0 is the current price of the shares being traded in the
market
g is the Growth rate of dividend over the years
The issuance of new stocks will result in an increase in the
cost of equity. The current price of the share will need to be
adjusted to accommodate the flotation cost. This can be
represented by the below formula:
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Cont…
[When Flotation Cost is given as a percentage]
Cost of Equity = (D1/ P0 [1-F]) + g

Where,
D1 is the Dividend per share after a year
P0 is the current price of the shares being traded in the
market
g is the Growth rate of dividend over the years
F is the percentage of flotation cost
Problems Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

1. In 2018, ABC Inc issues common stock in the

market to raise $500 million. The current price
of a stock in the market is $20. The investment
banker’s fees would be 6% of the raised capital.
ABC Inc pays a dividend of $2 per share in 2019
and an increase of 12% is expected in 2020.
Soln: The calculation for the Cost of New Equity
are:
Cont…
Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

The calculation for the Cost of Existing Equity are:

Hence the flotation cost will be:

Cost of New Equity – Cost of Existing Equity
= 22.64-22.0%
= 0.64%
Flotation costs result in an increase in the cost of new equity by 0.64%.

This approach is not accurate and does not depict the actual picture since it
includes the flotation costs into the cost of equity. Issuance of new stocks in
the market involves a one-time expense and this approach only inflates the
cost of capital.
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

#2 – Adjustment in the Cash flow

In this approach, it is deducted from the cash flows
which are used for the calculation of Net Present
Value (NPV) instead of including the flotation cost in
the cost of equity. This approach of deducting
flotation cost from the cash flows is appropriate and
effective than directly including the costs in the cost
of capital since this is a one-time expense. Moreover,
the cost of capital is not inflated and remains
unaffected.
• The approach of adjusting the flotation cost from the
cash flow is arguably apt and results in a correct
representation of the one-time cost involved in the
issuance of new securities in the market.
 Ms. Amira Zainab Khanum. Faculty, MBA dept, TUT

Problem

XYZ Inc requires $10,000,000 for a new project and it

expects this project to generate cash flows of $4,500,000
for 3 years. It issues common stock in the market with a
price of $30 per share and decides to pay a dividend of
$1.25 per share next year. The flotation cost incurred is
9% of the capital raised and the growth rate is expected
to be 7%.
• NPV = [($4,500,000 / 1.1146) + ($4,500,000 / 1.11462)
+ ($4,500,000 / 1.11463)] – ($10,000,000) = $909,300
 NPV after Flotation Cost
= $909,300 – (9% x $10,000,000)
= $909,300 – $900,000
= $9,300