Pm unit ii - feasibility study of project

Prepared By
Ghaith Al Darmaki
gm.al.darmaki@gmail.com
MBA for Engineering Business Managers
Manchester Business School

 Introduction
 Market Analysis
 Technical Analysis.
 Financial Analysis.

Project Management - Unit II Prepared By: Ghaith Al Darmaki 2

 Chapter one:
Definition of Project management and
impact of different elements on projects.
Discussed the tools and techniques used
to generate and screen the project idea.

Project Idea is selected.


Project Idea is selected.

“should we proceed with the proposed project idea?”
“ Is the idea Possible, Viable, Practical,”

Feasibility study


 A Feasibility study of project is done with a
goal to identify the existing strengths
and weakness of the project.
 A Feasibility study of project includes
Market analysis.
Technical analysis.
Financial analysis.
Economic.
Ecological analysis

 Market Analysis: The first step is to estimate the
potential size of the market for the product
proposed in the project and get an idea of market
share that is likely to be captured.
 Market and demand analysis are concerned with two
broad issues:
What is the likely aggregate demand for the
product/service?
What share of the market can be captured?


 The steps in market analysis:

Collection of Demand
secondary forecasting
information

Situational
analysis and Characterization
specification of of market
objectives
Market
planning

Market Survey


 Step (1) Situational analysis and specification of
objectives:
 Process stands with informal discussion with
customers, competitors, middlemen and others in the
industry.
 Analysis of situation generates sufficient idea to
measure the market and gives reliable information.
 The objectives should be defined clearly and
comprehensively.
 Questions not relevant to the market and demand
analysis should not be asked.


information

Situational
objectives
Market
planning

Market Survey


 Step (2): Collection of secondary information:
 Secondary information is the information that has been
gathered in some other context and is already available
provides a base point for market and demand analysis.
 Sources of secondary information are:
 National sample survey reports
 Peoples of planning commission
 Economic survey of industries
 Industry potential surveys
 Annual survey of industries
 Reports of CBO
 Reports of Muscat securities exchange.
 Reports from chamber of commerce and industries.

 Evaluation of secondary information:
 While this information is available readily , its reliability, accuracy and
relevance for the purpose under consideration must be carefully
examined.
 Who gathered the information?
 What was the objective?
 When the information was collected?
 How representative was period for which the information was
gathered?
 Are the terms was selected?
 What was the sample size?
 How representative was the sample?
 How satisfactory was the process of information gathering?
 What was the degree of misrepresentation by respondents?
 How accurate the information analyzed?


information

Situational
objectives
Market
planning

Market Survey


 Step (3): Conduct of market survey:
 The secondary information must be supplemented with
primary information gathered through market survey
specified to the project surveyed. Primary information
represents information that is collected for the first time
to meet the specified purpose on hand.
 The objectives of the market survey should be to sought
the information of any one or all of the following :
 Demand and rate of growth of demand
 Demand in different segments of market
 Income and price elasticity of demands
 Motives for buying
 Satisfaction with existing products
 Attitudes towards various products
 Socio-economic characteristics of buyers.

 Steps in a sample survey are:
 Define the target population.
 Select the sampling scheme and sample size.
 Develop the questionnaire.
 Recruit and train field workers.
 Collection information from the sample of respondents.
 Scrutinizing the information.
 Analysis the information
 Interpreting the results.
 Problems:
 Heterogeneity of the country.
 Multiplicity of language.
 Design of questionnaire.


information

Situational
objectives
Market
planning

Market Survey


 Step (4): Characterization of the
market:
 Based on the secondary sources and market
survey the market for the product may be
described in terms of :
Breakdown of demand
Price
Methods of distribution and sales promotion
Consumers
Supply and competition
Government policy

 Breakdown of demand:
 Nature of product: One generic name often subsumes many different
products: (e.g Commercial vehicles cover trucks, and buses of various
capacities.)
 Consumer groups:
Consumers may be divided into:
 industrial
These may be further subdivided industry wise.
 Domestic
These may be further subdivided into : income groups, age groups etc.
 Geographical division:
A geographical breakdown of consumers is helpful for products which have
small value to weight relation and for products which require regular after
sale service.
 Price: It may be helpful to distinguish different types of prices like
 manufacturers price as FOB price or CIF price
 Landed price for imported goods
 Average wholesale price
 Average retail price

 Methods of distribution and sales promotion:
 Different distribution channels depending on nature of
products
 Sales promotion (advertising, discounts etc.)
 Consumers: Consumers may be characterized based on
 Demographic age, sex, income, profession, social
backgrounds.
 Attitudes  preferences, habits, attitudes, responses.
 Supply and competition:
 It is necessary to know existing source of supply whether
foreign or domestic .
 Competition from substitutes and near substitutes should be
specified.
 Government policy: The government plans, policies have a
bearing on the market for a product.

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information

Situational
objectives
Market
planning

Market Survey


 Step (5) : Demand Forecasting:
After gathering information about various aspects of
the market from primary and secondary sources an
attempt may be made to estimate future demand.
 Demand Forecasting means estimating or predicting
the future demand or future sales for the product
of a firm. The various methods of demand forecasting
are:
Qualitative method
Quantitative methods
Time series method
Casual methods

 Qualitative method: Relies on judgment of experts to
translate qualitative information to quantitative
estimates. The important methods are:
Jury of executive method
Delphi method
 Time series method: This generates forecasts on the
basis of an analysis of the historical time series.
The important methods are:
Trend projection method
Exponential smoothing method
Moving average method

 Casual methods: These are more analytical than the
previous methods. They seek to develop forecasts on
the basis of cause effect relationship specified in an
explicit quantitative manner. The important methods
are:
Chain ratio method
Consumption level method
End use method
Econometric method


 Uncertainties in demand forecasting:
 Data about past and present markets: (Lack of standardization, Few
observations, Influence of abnormal factors.)
 Methods of forecasting (Inability to handle unquantifiable factors,
Unrealistic assumptions, Excessive data requirements.)
 Environmental changes: ( Technological, Governmental,
International scenario)
 How to cope with uncertainties:
 Conduct analysis with data based on uniform and standard
definitions.
 Ignore the abnormal observations.
 Choose method appropriate to the situation.
 Monitor changes in environmental factors.
 Consider alternative scenarios and their impact on market.
 Conduct sensitivity analysis to assess the impact on the demand for
unfavorable and favorable variations of the determining factor from
their most likely levels Prepared By: Ghaith Al Darmaki
Project Management - Unit II 24


information

Situational
objectives
Market
planning

Market Survey


 Step 6: Marketing plan:

A marketing plan usually has the following
components:

 Current market situation
 Opportunity and Issue analysis
 Objectives
 Market Strategy
 Action Programme.

 Current market situation
Market situation – Site, growth, consumer
aspirations, buying behavior.
Competitive situation – major competitions their
objectives, strategies, strengths etc.
Distribution situation – compare the distribution
capabilities of competitors.
Macro environment – effect of social, political,
economic, technological etc. factors.

 Opportunity and Issue analysis:
SWOT analysis is conducted. ( Strength, weakness,
opportunity and threat).

 Objectives: Clear cut, specific and achievable.
SMART Objectives (out of the scope):
Specific, Measureable, Achievable, Realistic, Time bound.


 Market Strategy cover the following:
 Target segment
 Positioning: How a product in placed in the mind of consumers
 Product line
 Price
 Distribution
 Sales force
 Sales promotion
 Advertising
 Action Programme: to enable the product to reach a desired
level of market penetration, a suitable marketing plan, covering
pricing, distribution, promotion and service needs to be
developed.

 Example

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information

Situational
objectives
Market
planning

Market Survey


 Introduction
 Market Analysis


 Analysis of technical and engineering aspects is done
continuously when a project is being examined and
formulated.
 The purpose of the technical analysis is
 To ensure that the project is technically
feasible, that all inputs required for the project
are available.
 To facilitate the most optimal formulation of
the project in terms of technology, size, location
and so on

 Technical analysis would cover the following:
1. Manufacturing Process / Technology
2. Technical arrangements
3. Material inputs and utilities
4. Plant capacity
5. Location and site
6. Machineries and equipment
7. Environmental aspects
8. Project charts and layouts
9. Schedule of project implementation
10. Work schedule
11. Need for considering alternatives

1. Manufacturing Process / Technology
 Choice of Technology
 Plant capacity
 Principle inputs
 Investment outlay and production cost
 Use by other units
 Product mix
 Latest developments
 Ease of absorption
 Appropriateness of technology: These would refer to
those methods of production which are suitable to local
economics, social and cultural conditions. Whether
the technology protects ecological balance?


2. Technical arrangements:
Satisfactory arrangements must be made to obtain technical
know how needed for the proposed manufacturing process.
When collaboration is sought the following aspects must be
worked out:
 Nature of support from collaborators during each stage of
the project.
 Process and performance guarantees in terms of plant
capacity, product quality and consumption of raw materials
and utilities.
 License and royalty fee
 Benefit of collection agreement and manner of sharing
management control.

3. Material inputs and utilities:
 Technical analysis must define the materials ands utilities
required, specifying their properties and setting up
their supply programme.
 Material inputs may be classified into 4 broad categories:
 Raw materials classified into:( Agricultural products,
Mineral products, Livestock forest products, and Marine
products)
 Processed industrial materials and components. (Represent
important inputs and Analysis should cover the total
requirement, sources, prices etc.)
 Auxiliary materials and factory supplies chemicals, packing
materials, oils, grease etc.
 Utilities power, water, fuel, steam etc

4. Plant capacity:
 Plant capacity is the production capacity or volume of units
that can be produced during a given period of time. It may be
 Feasible normal Capacity – (FNC) Capacity attainable
under normal working conditions  calculated on the
basis of installed capacity, technical conditions of plant, shift
pattern, down time for maintenance and holidays.
 Nominal maximum capacity (NMC) - Capacity that is
technically attainable, corresponds to the installed capacity
guaranteed by the supplier of the plant.
 Factors affecting plant capacity decisions are: Technology
requirement, input constraints, investment cost, market
conditions, resources of the firm, and government policy.


5. Location and site:
 Location refers to Broad area like city, industrial zone and
 Site refers to Specific area or piece of land where the project would
be set up.
 The choice of location would depend on:
 Proximity to raw materials.
 Proximity to market
 Availability of infrastructure  power, transportation, water,
communication
 Labour availability
 Governmental policies
 Other factors (Climate, Living conditions, Pollution, Ancillary
units)
 The site selection would depend on the cost of site. Two or three
alternative sites must be considered and evaluated with respect to
cost of land and cost of site preparation and development.

6. Machineries and equipment
 The requirement of machinery and equipment depends on production
technology and plant capacity and also the type of project. To determine the
kinds of machinery required the following procedure may be followed:
 Estimate the likely levels of production overtime
 Define various machining and other operations
 Calculate machine house for each type of operation
 Select machineries and equipment for each function.
 The equipment required may be classified into the following types:
Process, Mechanical, Instruments, Control, Internal transportation, Others
 Constraints in selecting machineries and equipments may be:
 Limited availability of power
 Difficulty in transport
 Workers not able to operate


7. Environmental aspects:
 A project may cause environmental pollution in various ways
hence these aspects must be properly examined.
8. Project charts and layouts:
 Once the data is available on the principle dimensions of the
project, charts and lay out must be prepared. The important
charts and lay outs drawings are:
 General functional layouts
 Material flow diagram
 Production line diagram
 Transport layout
 Communication layout
 Plant layout


9. Schedule of project implementation:
 As part of the technical analysis a project implementation is
also prepared. Following information is required for this:
 List of all possible activities from project planning to
commencement of production
 Sequence in which various activities have to be performed.
 Time required for each activity
 Resources required
 Implication of putting more resources or less resource
than normally required.


10. Work schedule:
 The work schedule reflects the plan of work concerning
installation as well as initial operation.
11. Need for considering alternatives:
 There are alternative ways of transforming an idea into a
concrete project. These alternates may differ in one or more
of the following aspects:
 Nature of project
 Production process
 Product quality
 Scale of operation and time phasing
 Location


 Introduction
 Market Analysis


 Financial analysis of a project is carried out to ensure that
a satisfactory return is earned on the investment made
in the project.
 Financial analysis would cover the following aspects:
 Cost of project
 Means of Financing
 Estimates of sales and production
 Cost of production
 Working capital requirement and its financing,
 Estimates of working results (profitability projections)
 Projected cash flow statement
 Projected balance sheets.


 Financial analysis of a project is carried out to ensure that
a satisfactory return is earned on the investment made
in the project.
 Financial analysis would cover the following aspects:
 Cost of project
 Means of Financing
 Estimates of sales and production
 Working capital requirement and its financing,
 Estimates of working results (profitability projections)
 Projected cash flow statement
 Projected balance sheets.


 Cost of project represents the sum of all items of outlay
associated with a project which are supported by long term
funds.
 It is the sum of outlays on the following:
 Land and site development
 Building and civil works
 Plant and machinery
 Technical know how and engineering fees
 Miscellaneous fixed assets
 Preliminary and capital issue expenses
 Provision for contingencies etc.


 Means of Financing:
 To meet the cost of project the following sources of finance or
means of finance may be available:
 Share capital (Equity and Preference capital),
 Term loans
 Debenture capital (Non convertible and convertible
debentures)
 Deferred credit
 Incentive sources ( Capital subsidy, tax deferment and
exemption)
 Miscellaneous sources ( unsecured loans, public deposits
and lease and hire purchase finance).


 Means of Financing:
 To determine the specific means of finance for a
given project the following should be taken care:
 Norms of regulatory body and financial
institutions,
 Key business considerations namely cost, risk,
control and flexibility.


Estimating sales and production:
 The starting point of profitability projections is the
forecast for sales revenues.
 In estimating sales it is reasonable to assume that
capacity utilization would be somewhat low in the
first year and rise thereafter gradually to reach the
maximum level in the third or fourth year of
operation.


Cost of production:
 The major components of cost of production are: Material
cost, utilities cost, labour cost and factory overhead cost.
 The material cost comprises the cost of raw materials,
chemicals, components and consumable stores required
for production.
 The cost of utilities is the sum of the cost of power, water
and fuel.
 The labour cost includes the cost of all manpower
employed in the factory.
 Factory overheads refer to the expenses on repair and
maintenance, rent, taxes and insurance on factory assets.

Working capital requirement and its financing:
 In estimating the working capital requirement and
planning for its financing the following must be borne
in mind:
 The build up of current assets till the rated level
of capacity is reached.
 The maximum permissible bank finance and the
margin requirements against various current
assets.


Working capital requirement and its financing:
 The working capital requirement is the minimum
amount of resources that a company requires to
effectively cover the usual costs and expenses
necessary to operate the business.
 The working capital is the difference between current
assets and current liabilities
New working capital = Current assets – Current
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Estimates of working results (profitability projections):
 The profitability projections or estimates of working results are prepared based
on
 Total administrative expenses
 Total sales expenses
 Expected sales
 Gross profit before interest
 Total financial expenses
 Depreciation
 Operating profit
 Other income
 Profit and loss before taxation
 Provision for tax
 Profit after tax
 Dividend
 Retained profit
 Net cash accrual

 Different Performance Indicators:
Margin:
(gross, operating, net) margin = profit/sales turnover × 100
Return Ratios:

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 Projected cash flow statement: The cash flow
statement shows the movement of cash into and out
of the firm and its net impact of the cash balance with
the firm.
 Projected Balance sheet: The balance sheet
showing the balance in various asset and liability
accounts reflects the financial condition of the firm at
a given point of time.


THANK YOU


Pm unit ii - feasibility study of project

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