Project management material from chapter one up to chapter four

Welcome
Project Management
By: Birhanu Diriba
Unit 1
Introduction to Project Management
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Defining a Project?
• The term project came from “PROJECTION” which means
looking into future.
• The term project in general means shoot forward, or to scheme,
or plan something to be done.
• Project means –one time job that has defined starting and
ending dates, a clearly specified objective, or scope of work to
be performed, a predefined budget, and usually a temporary
organization which disappear once the project has been
completed.
• A project is a sequence of unique, complex, and connected
activities having one goal or purpose and that must be
completed by a specific time, within budget, and according to
specification.
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Typical features of a project:
A start and finish: This shows that every project
has a beginning and certain definite end. It is not
like other ordinary course of business activities
which are having an indefinite term of existence –
going – concern. Projects have a specified
completion date. This date can be self-imposed by
management or externally specified by a customer
or government agency.
A life cycle: This means that, there will be a
beginning and an end, with a number of distinct
phases in between.
A budget: During the planning phase, adequate
budget allocation is mandatory for the smooth flow
of all project related activities.
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 Non – repetitive (Unique): All project activities are
essentially unique/rare and new. In a project, once a
certain activity is completed it would not be repeated.
Generally, projects may found to be similar but no two
projects are exactly alike. One project could be
different from another in the following respects:
1. Size and number of separate activities
2. Number of various skills, departments and people
involved
3. Amount of time involved
4. Number of different activities involved
5. Amount of money involved
6. Impact on the organisation and customers
7. Control procedures
8. Communication procedures
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Use of resources: The resources i.e. material,
human, financial may be coordinated from various
sources.
A single point of responsibility: All projects have a
well defined responsibility taken by the head or
manager of the project.
Team Roles: A project is a team work activity of
different professionals. In a project, team roles and
relationships that are subject to change need to be
developed, defined and established (team building).
Need-based/problem driven: A project is generally
initiated by a perceived need in an organisation.
The customer, or the recipient of the project’s
deliverables, expects a certain level of functionality
and quality from the project.
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COMMON PROJECT TERMS
• Deliverables: Tangible ‘things’ that the project
produces
• Milestones: Dates by which major activities are
performed.
• Tasks (Actions): Activities undertaken during the
project
• Risks: Potential problems that may arise
• Issues: Risks that have happened
• Gantt Chart: A specific type of chart showing time
and tasks.
• Stakeholder: Any person or group of people who
may be affected by your project
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Operational works Vs. projects
Operations Projects
Repetitive
Eternal (going concern)
Evolutionary
Equilibrium
Stable resources
Unique
Finite
Revolutionary
Disequilibrium
Transient
Similarities:
• performed by people
• constrained by limited resources
• planned, executed and controlled
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Types and classification of projects: based on
How new resources committed to them relate to existing economic
activities: 3 types of projects
1st New investment: New investments are designed to establish a
new productive process independent of previous lines of
production. E.g. new organization financially independent of
existing organizations.
2nd Expansion projects: which involve repeating or extending an
existing economic activity with the same output, technology and
organization.
3rd Updating projects which involve replacing or changing some
elements in an existing activity without major change of output.
Updating projects involve some change in technology but within
the context of an existing, though possibly reformulated
organization.
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• Based on its benefit: directly productive and indirectly
productive projects. Under directly productive projects the
immediate costs and benefits accrue to a single organization; a
consequence is that this organization is able to calculate and
commit any resulting surplus to new activities; Indirectly
productive projects: the benefits received from new resources
do not accrue to the organization responsible for carrying the
costs. In these circumstances, any resulting surplus is not
concentrated in the hands of a single organization. E.g. Most
infrastructure projects, such as roads are indirectly productive;
the benefits accrue to users and producers whilst costs are met
by government.
• Of course, several projects, especially large ones, may be a
mixture of directly and indirectly productive activities, for
example, a rural development project involving both increases in
agricultural output through farmer investment as well as roads,
schools and other infrastructure facilities.
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Type of Activity: industrial and non-industrial
projects. Industrial projects are set up for the production of
some goods. Non-Industrial projects comprise health care
projects, educational projects, irrigation projects, soil
conservation projects, highway projects etc.
Location: national and international projects. National
projects are those set up in the national boundaries of a
country, while international projects are set up by the
government or private sector across the globe.
Completion Time: normal and crash projects. In case of
normal projects there is no time constraint. Crash projects
are those which are to be completed within a stipulated
time, even at the cost of ending up with a higher project
cost.
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Ownership: public, private and joint sector projects.
Public sector projects are owned by the
Government. In private sector projects ownership is
in the hands of the project promoters and
investors. Joint sector projects are those in which
ownership is shared by the Government and private
entrepreneurs.
Size: small, medium and large (depending on
investment on plant and machinery requirements
and the category as small, medium and large varied
from country to country)
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Project versus Program
Project
• A project is temporary endeavor to create a unique product,
service, or result.
• Temporary mean a project has definite start and finish date.
• A project may take several years to complete depending upon
the complexity, scope, and context of the project.
Program
• A program is a collection of similar type of projects and are
collectively managed to gain the benefits of being managed
together over managing them individually. E.g. government start
reconstruction and rehabilitation program in the flood or earth
quake affected areas in a country. Projects included in the
program may be: construction and development of educational
institutions, construction and development of health care
facilities, repairing or new construction of roads, settlement plan
of displaced persons, and infrastructural development etc.
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• A program is a group of related projects managed in a
coordinated way to obtain benefits and control not available
from managing them individually. larger in scope and may
involve several projects.
• Projects in general need to be SMART.
S – Specific
• A project needs to be specific in its objective. A project is
designed to meet a specific objective as opposed to a
program, which is broad. A project has also specific and clear
set of activities. Projects have well defined sequence of
investment and production activities and a specific group of
benefits. A project is also designed to benefit a specific group
of people.
M - Measurable
• Projects are designed in such a way that investment and
production activities, costs and benefits expected should be
identified and as much as possible be valued (expressed in
monetary terms) in financial, economic and if possible social
terms.
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A – Area bounded
• As projects have specific and identifiable group of beneficiaries,
so also have to have boundaries. In designing a project, its area
of operation must clearly be identified and delineated.
R – Real
• Planning of a project and its analysis must be made based on
real information. Planner must make sure whether the project
fits with real social, economic political, technical, etc situations
within the budget limit. This requires detailed analysis of
different aspects of a project.
T – Time bounded
• A project has a clear starting and ending point. The overall life of
the project must be determined. Moreover, investment and
production activities have their own time sequence. Every cost
and benefit streams must be identified, quantified and valued and
be presented year-by-year.
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• A program may have sub-program(s) and large projects
are not the part of program; these are called
megaproject.
• According to Project Management Institute (PMI), A
project may be categorized as mega project if it has a
cost of 1 billion US dollars or more, 1 million or more
people affected by the project, and a project having
lifecycle of many years.
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Project parameters
• Four constraints operate on every project: Scope ,
Quality , Resources (Cost or budget) & Schedule
(Time)
• These constraints form an interdependent set; a
change in one can require a change in another
constraint in order to restore the equilibrium of the
project.
• In this context, the set of five parameters form a
system that must remain in balance for the project to
be in balance.
• Because they are so important to the success or
failure of the project, it is better to discuss them
individually.
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Iron triangle
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A) Scope (document of understanding/scoping
statement/project request form)
• It is a statement that defines the boundaries of the
project (what will be done won’t be done) (functional
specification).
• Have all the project requirements (i.e., deliverables)
been completed?
• In the engineering profession, it is generally called a
statement of work.
• It is no secret that scope can change. You do not know
how or when, but it will change. Detecting that change
and deciding how to accommodate it in the project plan
are major challenges for the project manager.
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B) Quality for customer satisfaction
• Two types of quality are part of every project: product quality
(quality of the deliverable from the project) and process quality
(quality of the project management process itself). The focus is
on how well the project management process works and how
can it be improved.
• Continuous quality improvement and process quality
management are the tools used to measure process quality.
• A sound quality management program with processes in place
that monitor the work in a project is a good investment.
• Quality management is one area that should not be
compromised.
• The payoff is a higher probability of successfully completing the
project and satisfying the customer.
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C) Resources (Monetary and non-monetary)
1st cost or budget: refers to the monetary cost of doing
the project. This is particularly important for projects
that create deliverables that are sold either
commercially or to an external customer.
2nd other resources: are assets, such as people,
equipment, physical facilities, or inventory, that have
limited availabilities, can be scheduled, or can be leased
from an outside party.
• Some are fixed; others are variable only in the long
term.
• Is the cost of the project close to the amount the
customer has agreed to pay?
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D) Schedule (Time)
• The customer specifies a time frame or deadline date within
which the project must be completed.
• The time a project takes to be completed can be reduced, but
costs increase as a result. Time is an interesting resource. It
can’t be inventoried. It is consumed whether you use it or not.
• The objective for the project manager is to use the future time
allotted to the project in the most effective and productive ways
possible.
• Future time (time that has not yet occurred) can be a resource
to be traded within a project or across projects.
• Was the project completed on time?
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Examples of Projects
• Constructing a road, building or facility
• The expansion of primary education in a given
region/locality or reforming school curriculum,
• Case management, like social work or legal issue
• Working on solving organisational problems like
inefficiency
• Renovating an old house
• Restructuring a system
• Developing a new software application
• Creating a new radio/ media advertisement
• Conducting marketing research, etc.
• Running a campaigning for political office
• Building a water system for a community
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Causes of Project Failure
• Projects often fail for the following reasons:
1. Only the project team is interested in the end result.
2. No one is in charge.
3. The project plan lacks structure.
4. The project plan lacks detail with respect to all the
management functions and tools.
5. The project is under-budgeted.
6. Insufficient resources are allocated.
7. The project is not tracked against its plan.
8. The project team is not communicating.
9. The project strays from its original goals.
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What is Project Management?
• It is the application of knowledge, skills, tools and techniques to
project activities to meet project requirements.
• It’s a process of managing resources in such a way that a
project is completed within defined scope, quality, time, and cost
constraints.
• Applying both the science and art to planning, organising,
implementing, leading and controlling the work of a project to
meet the goals and objectives of an organisation.
• The process of defining a project, developing a plan, executing
the plan, monitoring the progress against the plan, overcoming
obstacles, managing risks, and taking corrective actions.
• The process of leading a team that has never worked together
before to accomplish something that has never been done before
in a given amount of time with a limited amount of money.
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In general, project management refers to:
• Identifying requirements: the issues the project
is attempting to address
• Establishing clear and achievable objectives
• Balancing the competing demands for quality,
scope, resources, time and cost
• Adapting the specification, plans, and approach
to the different concerns and expectations of
the various stakeholders.
Project Management
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END OF
CHAPTER ONE!
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Chapter two
An Overview of Project cycle
A project passes through a number of life
cycles called project cycle.
What is project cycle?
Project Cycle: Is the various stage through which
project proceed from inception to implementation.
• It is a stage which project advance from inception
to maturity stage
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Project cycle (cont…)
• Some authors (Choudhury, 2005) presents the projects
life cycle in to the life cycle curve
• Inception (concept, definition, organizing etc)
• Maturity ( implementation ) (85%)
• Decay (clean up) (3%)
Inception
Maturity or
Implementation
Decay (Clean
up )
Time
Level
of
effort

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Project cycle (cont…)
A project cycle covers all the steps
necessary to bring a project to the point
where
its technical,
economic and
financial feasibilities have been established
and it is ready for appraisal.
• Each stage follows the proceeding one and
leads to the next
• These different phases are identified by
different institutions and authors.

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The Baum Cycle (World Bank Procedures)
• Baum (1970) model is the first basic model of a
project cycle which has been adopted by the
World Bank.
• According to this model a project cycle
consists of the following five stages
• Identification
• Preparation
• Appraisal and Selection
• Implementation
• Evaluation

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An Overview of Project cycle (Cont…)
The European Commission/Europe Aid Approach
This approach consists of six phases and has been
considered as the most recent approach developed as
guidelines for development projects
– Programming
– Identification
– Appraisal
– Financing
– Implementation
– Evaluation

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However, in most literature and guide
books the stages or phases of projects
are divided into six phases and this
approach are preferred in this
discussion:
• Identification
• Pre-feasibility study.
• Feasibility study
• Selection and project design
• Implementation.
• Ex-post evaluation

THE PROJECT CYCLE: UNIDO PHASES OF THE PROJECT CYCLE
Phase 1 – Pre-investment
Opportunity
study
Prefeasibility
study
Feasibility
Study
Appraisal &
Decisions
Phase 2 – investment
Phase 3 – Operation
Phase 4 – Evaluation
Negotiation
and
Contracting
Engineering
Design
Construction
& Manpower
training
Commissioning
& start up
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THE PROJECT CYCLE:
1. Project Identification
 Sources of Project ideas
 Screening Projects
 Project Selection
2. Project Preparation and Appraisal
Market analysis
Technical analysis
Financial Analysis and
Environmental analysis
3. Implementation phase
4. Follow-up and evaluation phase
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I. Project Identification
• Project identification involves finding project’s idea,
which could contribute towards achieving specified
business/development objectives
• In many cases many projects start as a simple idea and
later on it may grown up into a full-fledged project
• Identification of promising investment
opportunities (projects) requires
imagination,
sensitivity to environmental changes,
And a realistic assessment of what the firm can
do.

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Generally, the idea for project may come from the
following sources:
 From the need to make profitable use of available
resources ( this is for resources based projects)
 Market based projects arise from an identified demand
in home or overseas market
 Need based project may arise from the need of
community (company) to make available some basic
materials (services) requirements.
.

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• Project ideas can also emanate from government policy
and plans
• From technical specialists like, entrepreneurs and local
leaders are also common sources of projects.
– Technical specialists and entrepreneurs can identify
many areas where they feel new investment might be
profitable.
In general, the sources of project ideas can be broadly
classified into,
1. Macro-level
• National policies, strategies, sectoral, sub – sectoral or
regional plans
• General surveys,
– resource potential surveys,
– regional studies,
– master plan and
– statistical publications, which indicate directly or
indirectly investment opportunities.

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• Constraints on the development process due to
shortage of essential infrastructure facilities
• Unusual events such as droughts, floods, earth –
quakes, hostilities, etc
• From multilateral or bilateral development agencies and
as a result of regional or international agreements in
which the country participate
2. Micro Level
• The identification of unsatisfied demand or needs
• The need to remove shortages in
– essential materials,
– services or
– facilities that constrain development efforts;
• The initiative of private or public enterprises in
response to incentives provided by the government;

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• The necessity to complement or expand investments
previously undertaken.
• The suggestions of financial institutions and
development agencies
• Study of new Technological Development
II. Pre feasibility study
After we have identified project ideas the next step is project
preparation and analysis.
• Project preparation includes both Pre-feasibility and
Feasibility studies
• Once a project idea is identified a preliminary project
analysis will be done ( i.e., pre-feasibility study).
• Which means the project idea must be elaborated in sort of
study.

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Why pre-feasibility study?
• Because, undertaking a feasibility study that
enables a definite decision to be made on the
project is a costly and time – consuming task.
• Therefore, before assigning larger funds for such
a study, preliminary assessment of the project
idea might be made in a pre-feasibility study.
In the pre-feasibility study stage the analyst
obtains rough estimation of the major
components of the project’s costs and benefits.

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Some of the main components examined during
the pre-feasibility study include:
Availability of adequate market (or
beneficiaries)
project growth potential
investment costs, operational cost and
distribution costs
demand and supply factors; and
social and environmental considerations
If the project is appeared to be sound the next
stages is a feasibly stage

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III. Feasibility study
A feasibility study should provide all data
necessary for an investment decision.
• The commercial,
• Technical,
• Financial,
• Economic and
• Environment

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• The major difference between them lies on the
amount of work required in order to determine
whether a project is likely to be viable or not.
• Once the project is decided as viable using pre-
feasibility study, a detailed analysis of issues
like, marketing, technical, financial, economic,
and ecological aspects is undertaken in the
feasibility stage.
• Feasibility study provides a comprehensive
review of all aspects of the project and lays the
foundation for implementing of the project and
evaluating it when completed.

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In the feasibility study, a team of specialists, like
Scientists, engineers, economists, sociologists,
environmentalists etc are needed to work
together
If the project is viable, the next step is project
design stage
Which means, in the feasibility stage more
accurate data need to be obtained in order to
proceed to the next stage
• Finally, the feasibility report should include (but
not limited) the following analysis: Market
analysis, Technical analysis, Organizational
analysis, Financial analysis, Social – economic
analysis, and Environmental analysis

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IV. Selection (project appraisal)
• The feasibility study would enable the project analyst to
select the most likely project out of several alternative
projects.
• Selection follows, and often overlaps with the feasibility
analysis.
• It addresses the question “is the project worthwhile?
• A wide range of appraisal criteria have been developed
to judge the benefits of a project.
• The criteria are divided into two broad categories.
• non-discounting criteria and
• discounting criteria.

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• After a project has been prepared, it is
appropriate to forward for a critical review
(external review)
• This provides an opportunity to re-examine
every aspect of the project plan to assess
whether the proposal is appropriate and sound
before large sums are committed
• projects, appraisals cover the following aspects,
a) Technical – here the appraisal concentrate
in verifying whether the proposal will work in
the way suggested or not.

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b) Financial – this will try to see
– if money needed for the project have
been calculated properly,
– their sources are all identified,
– reasonable plans for their repayment
are made where necessary.
c) Commercial –
– the way the necessary inputs for the project
are supplied
– the arrangements for the supply of the
products are verified

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d) Incentive – whether things are arranged in such
a way that all those whose participation is
required will find it in their interest to take part
in the project, at least to the extent predicted in
the plan.
e) Economic – the appraisal here tries to see
whether what is proposed is good from the
perspective of the national economic
development.
–The effects (positive and negative) are taken
into account and check if all are correctly
valued

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f) Managerial – this aspect of the appraisal examines if
the capacity exists for operating the project and see
if those responsible ones can operate it satisfactorily.
Moreover, it tries to see if the responsible are given
sufficient power and scope to do what is required.
g) Organizational – the appraisal examines the project
how it is organized internally and externally
These issues are the subjects of specialized appraisal
report.
And on the basis of this report, financial decisions are
made – whether to go ahead with the project or not.

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V. Implementation
The objective of any effort in project planning and
analysis is to have a project that can be
implemented to the benefit of the society.
• After the project prepared and evaluated the
next step is implementing the project
• Implementation is the most important part of the
project cycle.
• In this stage,
• funds are actually disbursed to start the
project and keep running
• contracts are signed

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A major priority during this stage is to ensure that the
project is carried out in the way and within the period
that was planned.
During the project implementation stage, the following
important points should be considered:
 All the stages of implementation should be completed
with in the time schedule allotted.
 The output stream should be the same as
contemplated.
 The physical targets are to be realized with in the
financial allocation.
 Project analysts (manager) must keep an eye over
changes in technology, taste, price, profitability etc.

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Problems frequently occur when the economic and
financial environment at implementation differs from the
situation expected during appraisal.
E.g. price or political environment may change and due to
these facts, project implementation must be flexible and
original proposals are modified frequently to capture
these changes.
• Generally, project analysts divide the implementation
phase into three time periods
– The investment phase, where the major investments
are made. This may extend from three to five years.
– The development phase which may also extend from
three to five years.
– The project life.

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The implementation phase for an industrial project
consists of several stages:
(i) project and engineering designs,
(ii) negotiations and contracting,
(iii) construction
(iv) training, and
(v) plant commissioning.

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VI. Ex-post evaluation
The final phase in the project cycle is evaluation.
• Once a project has been carried out the actual
progress with the plans should be evaluated in order to
judge whether the decisions and actions taken were
responsible and useful.
However, evaluation is not limited only to completed
projects.
• Ongoing projects could also be evaluated to find
solutions for problems when the project is in trouble.
• The evaluation may be done by ,
• the project management,
• the sponsoring agency,
• or other bodies.
• Moreover, evaluation should be undertaken when a
project is terminated or is well into routine operation.

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Some of the benefits which can be obtained from
evaluation are:
 The reality of the assumptions that were made will be
evaluated;
 It provides an experience that is highly valuable in
future decision making;
 It suggests corrective action to be taken in the light of
actual performance;
 It induces a desired caution among project sponsors.
 Generally, weakness and strengths should carefully be
noted so as to serve as important lessons for future
project analysis undertaking.

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CHAPTER THREE
Idea Generation (Project Identification)
The search for promising project idea is the first
step towards establishing a successful venture
• As traditional saying goes “the key to success lies
in getting into the right business at the right
time”
• Identification of meaningful project idea requires
imagination, sensitivity to environmental changes and
realistic assessment of what a firm or organization can
do

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• Identification is often the outcome of a triggering
(iterative) process rather than an analytical
exercise.
However, there are certain broad guidelines which
are helpful in the generation and screening of
project ideas
• Project identification commonly follows the
following procedure
1. Generation of ideas
2. Monitoring the environment
3. Corporate appraisal ( self assessment)
4. Preliminary screening
5. Project rating index.

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3.1. Generation of ideas
Most of the new projects ideas are a result of
– Once specialized technical knowledge or
– Marketing expertise or
– Some other competence
To stimulate the flow of project idea the following are
helpful:
i. Analysis of Strength, Weaknesses, Opportunities and
Threats (SWOT):
• SWOT analysis represents a conscious,
deliberate, and dynamic effort by an
organization to identify opportunities that can
be exploited.
• Periodic SWOT analysis facilitates the
generation of new idea

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ii. Clear articulation of objectives
The operational objectives of the
organization may help to generate ideas
The operational objective of business firm
for example,
•Cost reduction
•Productivity improvement
•Increase in capacity
•Expansion and growth can be helpful in
generating the project idea

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3.2. Monitoring the environment
• The organization must systematically monitor
the environment in which it will operate
• In other words the organization is expected to
monitor the following key environmental
factors in relation to each of identified ideas.
Economic aspects
 State of the economy
 Possible fluctuation in the economy
 The degree of integration with the world
economy

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National policy
• Sectoral policy
• Government program
• Tax policy
• Government support
• Financial policy
Technological factor
 Availability of technology
 Accessibility of the available technology

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Socio demographic factor
–Population size and distribution
–Education level
The nature of competition (for
business firms
–Number of firms in the industry
–Nature of entry
Nature of input supply
–Availability
–Cost of row material

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3.3. Self assessment and scouting the project idea
A realistic appraisal of the organization’s strength and
weakness is essential to select the best idea that can
be realized as a successful venture
To screen the project idea in terms of this aspect the
following suggestions are helpful
a) Analyze the industry (sector) and analyzing the
organization in terms of its capacity (i.e. whether
the organization has the capacity to implement
or to put into practice the proposed idea) and
the benefit (profit) that it will provide to the
society (firm)

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b) Examine the input or resources requirement
and firms ability to make it available
c) Review its innovativeness
d) Study government plan, outlays, and guidelines:
This analysis is important because it will help
to see if the idea is in line with the government
priority area and to check if there are guideline
that need to be followed if the project idea is
acceptable.
f) Suggestion of financial institutions and
development agencies (that is investigating
priority area of development agencies )

66
3.4 Preliminary screening
In some case it is possible to have a long list of project
ideas.
In such cases some kind of preliminary screening is
required to eliminate ideas which are not promising.
For that purpose the following aspects could be looked into
a) Compatibility with the promoter: The idea should be
compatible with the vision, mission, and goal of the
promoter
b) Consistence with government priority: Evaluate the
project idea in terms of the government priority.
Here we ask questions like,
 Is the project consistent with the national goal
and priority ?
 Are there any environmental effect ?
 Will there be any difficulty to obtain permission?

67
c) Availability of inputs
d) Adequacy of the market
e) Cost of the project:
f) Acceptability of risk level: The desirability of
the project idea depends upon the level of
risk associated with it

68
3.4. Project rating index
When a firm evaluates a large number of project
ideas regularly, it may be helpful streamline the
process of preliminary screening. For this purpose, a
preliminary evaluation may be translated into a
project rating index.
Steps involved in the process of the project
rating index are,
1st Identify factors relevant for project rating
2nd Assign weight to those factors (the weight are
suppose to reflect their relative importance)

69
3rd Rate the proposed idea on various factors using
a suitable rating scale (typically a 5-7 point scale
is used)
4th For each factor, multiply the factor rating with
the factor weight to get the factor score
5th Add all the factor score to get the overall
project rating index

70
Factors
Factor
weight
VG
5
G
4
A
3
P
2
VP
1
Factor
score
Input availability 0.25 X 0.75
Technical know how 0.1 X 0.40
Reasonableness of cost 0.05 X 0.20
Adequacy of market 0.15 X 0.30
Complementary relationship 0.05 X 0.20
Stability 0.1 X 0.5
Dependency on firm’s strength 0.2 X 0.2
Consistency with government
policy
0.1 X 0.1
Total 1.00 3.15

71
3.5 Who Identifies Projects?
There are quite large number of institutions and/or
groups that often identify investment opportunities
(or generate project ideas) in the society.
These entities may be private firms, public
enterprises, government units, local or international
development agencies, financial institutions, as well
as profit seeking or not-for profit organizations

72
3.6. Problems in Project Identification
1. Ambiguity regarding the Development Goals (Objectives)
of the nation
2. Priority Issues in the Existing Development Goals
(Objectives)
3. Limited Data and Obstacles in Information Flow and
accessibility
4. Conflict of Interest between Local Beneficiary Groups [as
some group(s) might bear the cost while benefits accruing
to others].

End of ch-3
2/28/2024 By: Birhanu D. 73

CHAPTER FOUR
PROJECT PREPARATION/
Project design/Project formulation/
Project write-up
2/28/2024 74
By: Birhanu D.

Project preparation follows identification of
promising project idea.
Project preparation is writing up and
processing of the project into a project
document, which can be presented to funding
agency.
Project formulation (preparation) involves the
analysis of a number of factors like,
 Market Analysis and Marketing
 Technical analysis
 Financial Analysis of Investment projects
 Economic and Environmental Analysis of
Investment projects
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By: Birhanu D.

A) Market Analysis and Marketing
 It is the study of identifying clients or
customers for the output (goods and
services) and how they can be approached.
 It is a systematic inquiry seeking to gain
information about the whole
environment in which the project is
expected to operate and to forecast the
future trends to which the project is
expected to adapt.
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Objectives of Market Analysis
 To measure and forecast the market in order to
determine whether the project will produce the right
product at the right time and the right place.
 The specific objectives of the market analysis
are to know:
 The market size and the growth rate
 The volume of output the project plans to
produce and sell in light of the competition
 The geographic or sectoral markets the project’s
product is expected to compete
 The method of distribution and marketing
policy
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By: Birhanu D.

Steps in Market and demand analysis
3rd Conduct
of Market
Survey
1st
Situational
Analysis and
Specifications
of objectives
2nd
Collection
of
Secondary
Information
4th
Characterizati
on of the
Market
5th Demand
Forecasting
6th
Market
Planning
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1. Market/Situational analysis and specifications of
objectives
 Here the project analyst may informally talk to
Customers, Competitors (in case of business
project), Middlemen, and others in the industry
(sector)
 It is also advisable to learn from the past experience
in the area. That is learn about preferences,
purchasing power, action and strategies of
competitors.
 Who are the potential customers of the product?
 What is the total current demand for the product in
the town/ in the region?
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 How is the demand currently distributed?
 What is the current price of the product and what price
will the consumers be willing to pay for the product?
 Do consumers need the new product as a substitute for
the product in the market?
 What is the nature of distribution and what market
channels are most suited for the product?
 What are the possible sales of the product ?
 If the satisfactory answer could be obtained from the
above analysis no further study is necessary as a part
of demand and market analysis.
2/28/2024 80
By: Birhanu D.

2. COLLECTION OF SECONDARY INFORMATION
 It provides the base and the starting point for market and
demand analysis.
 It indicates what is known and often provides leads and
clues for gathering primary information required for further
analysis.
 Sources of information are: General sources and/or
Industry specific sources of secondary information.
 Evaluation of Secondary Information
Although economically and readily available careful
examination in terms of reliability, accuracy, and relevance for
the purpose under consideration is essential.
2/28/2024 81
By: Birhanu D.

3.CONDUCT OF MARKET SURVEY
 The market survey can be a census or sample survey
 The important types of information to be gathered
through the market survey include:
 Total demand and rate of growth
 Demand in different segments of the market
 Motives for buying
 Purchasing plan & intentions
 Satisfaction with existing products
 Unsatisfied needs
 Attitudes towards various products …
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4. CHARACTERISATION OF THE MARKET
i. Effective Demand in the Past and Present:
ii. Breakdown of Demand into different segments
iii. Prices
iv. Methods of distribution
v. Suppliers
vi. Government policy
2/28/2024 83
By: Birhanu D.

5. DEMAND FORECASTING
i. Qualitative Methods
ii. Time Series Projection Methods
iii. Causal methods
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By: Birhanu D.

6. Marketing plan
The marketing plan has the following components:
Current market situation
The size of the market and customer buying behavior
Competitive situation
Distribution situation
Macro environment
Opportunity and issue analysis
Objective
Marketing strategy: Target segment, Product
positioning, Product line, Price, Distribution, Promotion
activity
Action plan (market program)
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By: Birhanu D.

B) Technical analysis
Sales
programs
Production program
and schedule, Plant
capacity
Technology
selection
Equipment
selection, cost
estimates
Location and
site, Preliminary
Facilities layout
Production
process
engineering
Planning
production
process
Human resources,
plant organization
and overhead costs
Implementation
schedule
Product
analysis
Material
Inputs
EIA
The technical design process 2/28/2024
By: Birhanu D.

 Technical analysis is needed to select the optimal
plant design. e.g. plant capacity, material quantities
and qualities and production sequence.
 Technical aspect also includes the:
• Task of engineering to design the functional and
physical layout of the plant in order to produce the
needed output and
• The determination of the corresponding investment
expenditure and costs arising during the
operational phase
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 The trade – off between the capital and labor intensive
technologies:
 Countries which have more capital resources than labor,
capital – intensive technologies may be appropriate and
economically justified.
 Countries with excess labor resources, labor intensive
technologies may be appropriate.
 In addition the technology should also be evaluated with
regard to its environmental impacts.
Economic use of raw materials
Low emission technologies, and
Low – waste production processes must be considered
for the selection of suitable technologies
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By: Birhanu D.

 Raw material: Its availability through companies
supplying or producing them to avoid unnecessary
delay.
 Location study: Proper selection of site and its
possession. What to consider? cost of land, availability
of land, labor factors, approach to site and market, raw
material, transportation, availability of power,
incentives, drainage and effluent disposal.
 Plant Capacity: It refers to the given the projected
demand presented earlier in the estimation part of the
project , and the planned technology, the predicted
plant capacity is set to produce estimated amounts of
outputs.
 Production Program:
 Human Resource and Training Requirement: In spite
of problem of large unemployment the industry is still
on lookout for skilled manpower.
2/28/2024 89
By: Birhanu D.

 Power: Regular feature of irregular power supply will
not only cause heavy losses but may damage plant
machinery and equipment. If uninterrupted power
supply is not available company may have to resort to
standby generating systems.
Generally, the technical analysis is primarily
concerned with
Material inputs and utilities
Manufacturing process and technology
Product mix
Plant capacity
Location and site
Machines and equipment
Structure and civil works
Project charts and layouts
Work schedule
Position Qualification
level
Number
required
Monthly
salary
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CONSEQUENCES OF INADEQUATE TECHNICAL
ANALYSIS
 Approval of an ill-grounded project resulting in loss
of invested resources.
 Approving a viable project without complete and
competent technical analysis with consequent delays
in project implementation and lower than expected
profitability.
 Rejecting a viable project due to inadequate technical
analysis with resulting loss of anticipated profits and
development opportunities.
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By: Birhanu D.

Financial Analysis of Investment projects
Financial analysis of an investment project provides the
"bottom line" for investors, a prediction of what the
project holds in store in terms of financial benefits
and costs.
The primary purpose of doing a financial analysis of a
project is to evaluate the project’s profitability or cost-
effectiveness relative to some alternative project or
investment.
Or , the results of the financial analysis are used to
compare alternative projects to select which ones
should be implemented.
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By: Birhanu D.

Cost analysis: Cost analysis is composed of two
components: Initial Investment Costs and Operation
Costs
• FIXED ASSETTS
=
FIXED INVESTMENT
COSTS
+
PRE-OPERATION
EXPENDITURES
NET
WORKING
CAPITAL
FIXED INVESTMENT COSTS include:
 Land and Site development
 Building and civil works
 Machinery and equipment
 Lump-sums for patents and know-how
PRE-OPERATION EXPENDITURES include:
- Administrative and legal fees
- Salaries for personnel during the
implementation
- Travel expenses
- Training costs
- Interests on loans during the implementation
- Insurance costs during the implementation
- Trial runs, start-up and commissioning
NET WORKING CAPITAL =
Current assets (inventories, accounts receivable
and cash) – Current liabilities (accounts
payable)
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Operation Costs
 Operation costs should be calculated as total annual
costs (if the financial coverage is on yearly basis)
starting from the first year of operation of the project
and should include:
– costs for inputs and supplies
– royalties for use of technology
– overhead costs
– labor costs (including on-the-job training)
2/28/2024 94
By: Birhanu D.

Estimation of sales and production
This helps to estimate potential revenue of the project.
In estimating sales revenue the following issues
should be considered:
 It is advisable not to assume a high capacity utilization
level in the first year of operation.
 Gradually the level is increased year by year and at third
and fourth years of operation the full capacity utilization
can be assumed.
 Selling price considered should be realistic and the price
considered should be on the basis of the current price
2/28/2024 95
By: Birhanu D.

The cost of production
Given the estimated level of production, the cost of
producing the estimated amount can be worked out
The major components of cost of production are:
 Material Cost: These costs are comprise of the cost of raw
materials.
 Utilities cost: consisting of power, water, and fuel are
production cost components.
 Labor cost: this is the cost of all manpower employed in
the farm.
 Overhead cost: the expense on repairs and maintenance,
rent, taxes, insurance on firm’s assets, etc. are collectively
referred as farm overheads.
 Other costs
2/28/2024 96
By: Birhanu D.

Financial analysis is a process of evaluating an
investment proposal. It is comprised of the following
elements:
A. Cash-Flow Table: Shows the INFLOW and OUTFLOW of
cash through a period of time
The cash flow of a project usually has:
 The initial investment: represents the relevant cash
outflows when the project is set up.
 The operating cash inflows: are the cash inflows that
arise from the operation of the project during its
economic life.
 The terminal cash flow: is the relevant cash flow
occurring at the end of the project life on account of
liquidation of the project.
2/28/2024 97
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 Financial cash flow lists the difference between receipts
and expenditures against the years of project life.
 Usually the net financial cash flow is negative in the first
years of the project’s life, while in later years it becomes
positive.
Year 0 1 2 3 4 5 6 7 8 9 10
Receipts 1.0 2.0 2.0 1.0 2.0 2.0 2.0 2.5
Expenditures 1.0 2.0 2.5 0.6 0.4 0.4 3.0 0.4 0.4 0.4 0
Net (R-E) -1.0 -2.0 -2.5 +0.4 +1.6 +1.6 -2.0 +1.6 +1.6 +1.6 +2.5
2/28/2024 98
By: Birhanu D.

B. Income Statement: Shows the
Revenues and Expenditures for a
period of time.
REVENUES
Sales revenue +
Other revenues +
EXPENDITURES
Cost of goods sold -
Administrative costs -
Gross Profit (profit before tax) (- / +)
Net Taxes
=
NET PROFIT.
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By: Birhanu D.

C. Balance Sheet: Shows the ASSETS, LIABILITIES
and OWNERS EQUITY at a certain period of time
ASSETS = LIABILITIES
Liquid assets Short term Liabilities
Cash at Bank Accounts Payable
Bonds and stocks Short Term Credits
Inventories
Fixed Assests Long Term Liabilities
Building Loan
Mechinery +
Owner’s Equity
2/28/2024 100
By: Birhanu D.

Project Appraisal methods
The most common methods analysing the
financial feasibility of a project are:
• Return on Investment (ROI)
• Payback Period
• Net Present Value (NPV) method
• Benefit Cost Ratio (BCR)
• Internal Rate of Return (IRR)
101

Return on Investment (ROI)
• Rate of return on investment is the ratio of
average annual profits, to the capital invested.
It is the measure of profitability which relates
income to investment.
• The formula for computing the ROI is:
ROI = Average annual net income X 100%
Total Investment
• Decision criterion: the higher the ROI, the better the
project is.
105

Income statement
Year 1st 2nd 3rd 4th
Earnings After Tax (EAT) 11.2 35.2 36.8 38.4
Cumulative EAT 11.2 46.4 83.2 121.6
ROI = Average annual net income X 100%
Total Investment
Average yearly income = 121.6 million = 30.4 million/year.
4
ROI = 30.4 million X 100% = 30.4 %
100 million
Therefore, the return on investment is 30.4 % per year.
Exercise
106
Initial investment is 100 million

Payback Period
The payback period is the length of time required
to recover the initial investment.
• According to the payback criterion, the shorter
the payback period, the more desirable the
project is
• If the net cash inflow is uniform each year, then,
Inflow
Cash
Uniform
Annual
Investment
Intial
Period
Payback 
109

Exercise
A project whose investment outlay is 100 million
is expected to have a uniform annual net cash
inflow of 25 million for five years
.
4
25
100
Yrs
million
million
Period
Payback 

Inflow
Cash
Uniform
Annual
Investment
Intial
Period
Payback 
110

When projects generate inconsistent or uneven cash inflow
(i.e., different cash inflow in different periods)
In such situations, we need to compute the cumulative cash
inflow and then apply the following formula:
111

Example
An investment of $200,000 is expected to generate
the following cash inflows in six years:
Year 1: $70,000
Year 2: $60,000
Year 3: $55,000
Year 4: $40,000
Year 5: $30,000
Year 6: $25,000
Required: Compute payback period of the
investment. Should the investment be made if
management wants to recover the initial investment
in 3 years or less?

Net Present Value (NPV)
NPV is the difference between the present
values of the yearly net cash inflows and
the initial investment outlay
It is calculated using the following
equation
• CFt = cash flow of the tth period, k is the discount
rate, t is the number of periods
0
2
2
1
)
1
(
...
)
1
(
1
I
k
CF
k
CF
k
CF
NPV n
n








0
1 )
1
(
I
k
CF
NPV
n
t
t
t










 

115

The formula shows that we follow three steps to find
the NPV of the project:
• We multiply the cash flow of each year by the
discount factor of the same year to convert to its
present value
• We add the products to get the total value of the
project.
• We subtract the initial investment made at year zero
from the total present value to get the NPV
116
Decision : accept or reject and Ranking
If the NPV is positive, accept the project.
If the NPV is negative, reject the project.
If the NPV is zero, be indifferent
The higher the NPV, the better the project is

Year (t) Cash flow
(in Birr)
Discount factor Present Value
(In Birr)
0 -60,000 1 -60,000
1 6,000 0.909 5454
2 20,000 0.826 16520
3 30,000 0.751 22530
4 40,000 0.683 27320
5 4,000 0.621 2484
Total NPV 14308
Example:
The initial investment of the project is 60,000
Ethiopian Birr. Find the NPV of the project if the
discount rate is 10%.
t
k)
1
(
1

117
Decision: accept the project because the
result is positive

For uniform cash flows:
• Where CF is the uniform cash flow starting
from year one, k is cost of capital (discount
rate), n is the number of periods.
• Take our previous example of the 100million
initial investment. Find the NPV of the project if
it has an annual uniform net cash inflow of Birr
26million for five years and if the cost of capital
is 10%.
0
)
1
(
1
I
k
k
CF
NPV
n








 



44
.
1
100
1
.
0
)
1
.
0
1
(
1
26
5










 



NPV
Decision: reject the project
118

Exercise
Year Project “A” Project “B”
1 40,000 25,000
2 30,000 25,000
3 25,000 25,000
4 20,000 25,000
5 10,000 25,000
Initial investment 80,000 80,000
Discount rate 10% 10%
• Calculate the NPV and which project is preferable and
why?
• Calculate the payback period and make a decision? Is the
decision similar with NPV result?
120

Benefit Cost Ratio (BCR)
Benefit – cost ratio is also referred to as profitability
index. It is an extension of the NPV approach to
compare the profitability of investment alternatives
before arriving at investment decision.
There are two ways of defining the benefit cost ratio:
a) PV to initial investment
BCR =
Where PV is present value of benefits and I is initial investment.
b) NPV to initial investment
NBCR = BCR – 1 or
I
PV
I
NPV
121

Decision rules:
• When BCR > 1 or NBCR > 0, accept the
project
• When BCR < 1 or NBCR < 0, reject the
project
• When BCR = 1 or NBCR = 0, be indifferent
• if we compare two or more projects, the
higher the BCR/NBCR, the better the
project is
122

• Example: Consider a project with initial investment of Birr
50,000 and the following Cash inflows. Discounting rate is
12%
A) BCR
b) NBCR = 1.13 –1 = 0.13
Year 1 2 3 4
Cash inflow 12500 10000 30000 25000
I
PV
BCR 
50000
)
)
12
.
1
(
25000
)
12
.
1
(
30000
)
12
.
1
(
10000
)
12
.
1
(
12500
( 4
3
2




50000
15924
21428
8000
11160 


13
.
1
50000
56512

Decision: ???
123

Exercises
Year Project “A” Project “B”
1 30,000 25,000
2 40,000 40,000
3 45,000 40,000
4 50,000 50,000
Initial investment 110,000 100,000
Cost of capital 12% 12%
Find BCR and NBCR of the two projects ?
Decision ?
125

Internal Rate of Return
• IRR is the discount rate that makes the
present value of cash inflows equal to the
present value of cash outflows.
126










 

n
t
t
t
k
CF
Investment
1 )
1
(
It is the value of k in the following equation
CFt = cash flow at the end of year
K = internal rate of return
T = life of the project
Decision Rule for IRR is
 Accept :if IRR is greater than the cost of capital
 Reject: if the IRR is less than the cost of capital
 indifferent: if the IRR is equal to the cost of capital
 If we are comparing two or more projects, the higher
the IRR, the better the project is.
127

IRR = 𝑅1 +
𝑁𝑃𝑉1 − 𝐼
𝑁𝑃𝑉1 − 𝑁𝑃𝑉2
Example:
Find the IRR of a project with 20 million initial
investments, the cost of capital of 12 % and
with the following table of cash flows.
Year 1 2 3 4
Cash flow 6000 6000 8000 9000
128

Try to compute the NPV with 12% discount rate.
Since the NPV is still positive, (1603), try again
with a higher discount rate: 15%
(5217 + 4545 + 5263 + 5142) –20000 = 167
1603
20000
5732
5714
4800
5357
20000
)
12
.
1
(
9000
)
12
.
1
(
8000
)
12
.
1
(
6000
12
.
1
6000
4
3
2


















20000
)
15
.
1
(
9000
)
15
.
1
(
8000
)
15
.
1
(
6000
15
.
1
6000
4
3
2












129

Still the NPV is positive. Try again with a higher
discount rate i.e. 16%.
(5172 + 4444 +5095 + 4945) = 19656
= 19656 – 20000 = -344
• Thus, it can be concluded that the IRR is between
15% and 16%
20000
)
16
.
1
(
9000
)
16
.
1
(
8000
)
16
.
1
(
6000
16
.
1
6000
4
3
2












130

However, the exact percentage can be
computed using interpolation techniques as:
• Present value at 15% = 20167
• Present value at 16% = 19656
Difference = 511
The difference between the target present value
(discounted at 15%) is 167.
Therefore, we get the percentage difference of:
167/511= 0.33
• Adding this number to 15%, we get the IRR
approximately 15.33%.
131

Exercise
Year Cash flow
1 30,000
2 30,000
3 40,000
4 45,000
Initial investment 100,000
Discount rate 12%
Find IRR based on trial and error method ?
133

Economic Analysis of Investment projects
The economic analysis appraises the project’s
contribution to the economic welfare of the region or
country. It is made on behalf of the whole of society
instead of just the owners of the infrastructure, as in
the financial analysis.
In particular, the economic analysis can help to
 decide whether the private or the public sector
should undertake the project;
 estimate the project’s fiscal impact;
 determine whether the arrangements for cost
recovery are efficient and equitable; and
 assess the project’s potential environmental
impact and contribution to poverty reduction
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1. The purpose of the economic analysis is to ensure that
the project has a positive net contribution to society and
is therefore worth to be financed by financiers.
2. Since projects are considered from the perspective of
society as a whole, economic analysis differs from
financial analysis in that benefits are monetized and
market prices are converted into accounting prices.
3. The net contribution to society is measured, expressed as
a positive ENPV, as an ERR higher than the discount rate,
or as a B/C ratio higher than 1.
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The standard methodology for the economic analysis can
be summarised in four steps:
1st Estimation of benefits, with monetisation of
non-market impacts when necessary;
2nd Inclusion of additional indirect effects (if
relevant);
3rd Conversion of project costs from market to
accounting prices;
4th Calculation of the economic performance
indicators.
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Estimation of benefits
 Market prices are in some cases a good proxy to
calculate the benefits of the project to society.
Example: a project to increase water supply in a
region suffering with water restrictions.
 However, projects in the environment sector often
result in economic benefits like the “improvement of
quality of life” or the “improvement in ambient
quality”, which are difficult to quantify in monetary
terms.
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Conversion market to accounting (1)
The calculation of the project economic costs involves the conversion of
project investment and operating costs from market to economic prices,
which implies the breakdown of the project cost into the following
categories:
 Traded items: Goods and services included in the project cost that
can be valued on the basis of world prices
 Non-traded items: Goods and services that have to be procured
domestically, like for example domestic transport and construction,
some raw materials and water and energy consumption
 Skilled labour:
 Non-skilled labour:
 Land acquisition: Land implicitly used in the project, even when no
financial cost is included as part of the project cost (for example if the
land for the landfill was provided free of cost by the project beneficiary).
 Transfer payments: Indirect taxes (e.g., VAT), subsidies, and pure
transfers payments included in the market prices used to estimate the
project costs
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Calculation of the project’s ENPV (1)
Once the economic benefits have been quantified and the
project cost have been converted to their economic values, the
next (and final) step is to calculate the project’s economic
performance using the following indicators:
- economic net present value (ENPV): the difference
between the discounted total social benefits and costs;
- economic internal rate of return (ERR): the rate that
produces a zero value for the ENPV;
-B/C ratio, i.e. the ratio between discounted economic
benefits and costs.
The ENPV is the most important and reliable economic
indicator and should be used as the main reference for the
economic analysis.
The discount rate used for the economic analysis (i.e. the
social discount rate) is normally set by the Managing
Authority at the national level.
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END OF
CHAPTER
FOUR!
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